Pan AmSat, Intelsat bonds fall on merger news; Salton better on asset sale announcement

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - The news that Intelsat and PanAmSat Holding Corp. will merge in a cash transaction valued at $3.2 billion - with about a similar amount of PanAmSat debt to be either assumed or repaid by Intelsat - was greeted with dismay by bond investors Monday; they took the notes of both companies down several points, apparently wary of a combined company with much higher debt leverage and much lower debt ratings.

In the primary market, in fact, word began to circulate that the deal - under which Bermuda-based Intelsat will acquire PanAmSat, of Wilton, Conn. - will likely result in the issuance of a lot of new bond debt, according to market participants. Intelsat has also lined up bank financing for the big deal, having gotten commitments from four institutions.

Primary market activity was otherwise very quiet, as befitting the final week of August - the traditional unofficial end of the summer season. This week, the junk market will see an early pre-holiday close on Friday ahead of the Labor Day Holiday, followed by a full market closure on Monday.

In the secondary arena, news of another acquisition deal - the impending $840 million purchase of Doane Pet Care, which under normal circumstances would be the big M&A news of the day - was overshadowed by PanAmSat - but traders said there was little or no movement in the Brentwood, Tenn.-based dog food maker's bonds from prior levels.

Traders also saw little or no activity in the bonds of energy companies with operations in the Gulf of Mexico or gaming companies with casinos in Biloxi or other areas along the Mississippi or Louisiana Gulf Coast as a result of Hurricane Katrina, which stormed ashore Monday morning somewhat east of New Orleans, packing 150 mile-per-hour winds and a 15-foot storm surge.

There was some movement in the bonds of Salton Inc., which first announced that it had completed its recent debt-for-debt exchange offer and now would look at other options to improve its liquidity; then, later in the session, the Lake Forest, Ill.-based small appliance maker announced that it had agreed to sell its 52% stake in Amalgamated Appliance, an entity which sells appliances outside the United States, for about $89 million.

But the big deal of the day was the early-morning announcement that satellite communications rivals Intelsat and PanAmSat will merge.

While the equity market gave the deal a rousing cheer, taking PanAmSat's shares up more than 20% on the day on twenty times the normal volume, the debt markets were none too pleased with the combination, even though, ostensibly, some $3.2 billion of the latter's debt will be assumed or paid off by the buyer. However, given that Intelsat's bank debt is only rated at B1/BB+, versus PanAmSat's Ba3/BB+, and its bonds carry a B2/B rating, versus PanAmSat's Ba2/BB+ (subordinated at B1/B+), it seems clear to the market that the debt of the combined entity will have a lower rating, not a higher one.

Standard & Poor's said that it has put the ratings for both companies on CreditWatch with negative implications, citing the elevated financial risk of the combined entity, including a debt-to-earnings before interest, taxes, depreciation and amortization ratio in the mid-7x area.

The ratings agency also cautioned that industry growth prospects are mature, contract lengths are shortening and newer services important to growth are less profitable than traditional business areas.

A trader saw PanAmSat's 9% notes due 2014 falling to 106.75 bid, 107.75 offered, from Friday's levels at 109, and saw the company's zero-coupon notes due 2014 retreating to 70.75 bid, 71.75 offered, from prior levels at 72.

"The news put a little pressure on them, especially the zero-coupons," he said. "With the two of them [together], "you're going to have a more highly leveraged company." He also noted the sharp disparity between PanAmSat's currently higher ratings and Intelsat's lower ones, which will result in a combined entity carrying a rating that is at least lower than PanAmSat's current status.

On the upside, however, he brought up the idea that in the opinion of many observers the combination "is going to push Intelsat to be profitable - so it's a good thing."

At another desk, a market source saw PanAmSat's 9s falling to 107 from peak levels as good as 111, and quoted the zeroes at 70.5 bid, down from 73.75. He saw Intelsat's 7 5/8% notes due 2012 drop to 88 bid from 90.25, while its 6½% notes due 2013 were a full five points lower at 78.5.

Another trader saw the 7 5/8s at 88.5 bid, 89.5 offered, down three points, and the "SPOT" 9s [i.e. PanAmSat, still popularly known by the company's former ticker symbol] at least 1½ points down to 107.5 bid, 108.5 offered.

Doane little moved

The day's other big merger deal, Doane's planned sale to the Teachers' Private Capital, the private investment arm of the Ontario Teachers' Pension Plan, rated barely a nod from bond investors.

A source saw the company's 9¾% notes due 2007 and its 10¾% notes due 2010 both unchanged, at 99 bid and 108.25, respectively.

Airlines, Gulf drillers little changed

The effects of Hurricane Katrina - while traumatic to anyone in and around the New Orleans area - were not seen having too much of an impact on junk bond trading, market participants said.

A trader noted that even though intraday crude oil prices on the NYMEX spiked above $70 per barrel on fears that the big storm would cause massive disruptions to oil operations in the Gulf and the southeastern United States, by the end of the day, those prices had retreated from those peaks to end only moderately above Friday's closing levels (light sweet crude for October delivery settled at $67.20 a barrel, an increase of $1.07).

He saw little impact on the bonds of airlines - even though the carriers' fuel costs are closely linked to crude price trends.

Northwest Airlines Corp.'s 8.7% notes due 2007 were seen at 52.5 bid, unchanged on the day. A market source saw the Eagan, Minn.-based Number-Four U.S. based carrier's 7 7/8% notes due 2008 perhaps half a point down, at 45.

Meantime, companies with regional exposure were seen little moved, such as Gulf energy driller Swift Energy's 7 5/8% notes due 2011, unchanged at 105, and Premier Entertainment Biloxi's 10¾% notes due 2012, which lost perhaps half a point to 101.5, even as S&P put the Mississippi-based gaming concern's ratings on watch, pending assessment of total storm damage in the area.

Salton higher on sale

From the distressed market, the word that Salton has entered into a definitive agreement to sell its 52.6% ownership interest in Amalgamated Appliance Holdings Limited to a group of investors led by Interactive Capital (Proprietary) Ltd. for anticipated net proceeds after expenses of approximately $80 million pushed the troubled small appliance maker's remaining outstanding 10¾% notes due this Dec. 15 up to bid levels around 85-86, well up from prior levels around 75, while its 12¼% notes due 2008 were seen little traded, but were being quoted offered around 70, with estimated bid levels around 66, up from prior levels around 60.

Salton announced earlier in the session that it had completed its debt exchange offer, which took out $75 million of the Dec. 15 notes, leaving $50 million still outstanding, and it said it would consider various liquidity moves - presumably aimed at coming up with the $50 million that the cash-strapped company doesn't currently have - including the possible sale of assets or businesses, creation of new foreign debt, a repurchase of debt or further cost cuts.

However, by the afternoon, Salton announced the sale of the Amalgamated Appliance stake. Leonhard Dreimann, chief executive officer of Salton, said that the maker of the George Foreman electric burger grills would "continue to aggressively explore other ways to improve our liquidity."

Delphi lower

A trader said that "it was a quiet day today. I guess autos suffered a little bit, and underperformed generally, although the rest of the market was up on the day on governments and strong equity prices."

He noted that "late in the day, one of the papers came out with an article about how the unions are balking at these drastic cuts sought by [General Motors Corp.] That got people thinking a little bit."

Late Friday, the United Auto Workers union issued a call for GM to take back some 7,000 workers from its former subsidiary, Delphi Corp., which has warned that it could be forced to file for Chapter 11 - perhaps before the Oct. 17 change in the federal bankruptcy code - if it does not get some labor cost relief from former parent GM and the UAW.

Delphi's 6.55% notes due 2006 were seen having retreated to 87 bid, 89 offered from 90 bid, 92 offered, while its 6½% notes due 2009 lost two points, ending at 82 bid, 84 offered.

New bonds seen in Intelsat-PanAmSat deal

A market source told Prospect News that Intelsat Ltd.'s $3.2 billion acquisition of PanAmSat Holding Corp., announced Monday, is likely to produce new issuance of high-yield bonds.

Financing is being provided by Deutsche Bank, Citigroup, Credit Suisse First Boston and Lehman Brothers.

The source said that Intelsat would likely have to take out some PanAmSat's senior notes due Aug. 15, 2014, as well as its 0% senior discount notes due Nov. 1, 2014.

The source added that all the bonds were off on both entities on Monday, with Panamsat faring slightly worse.

Cash to put to work, says Citi

In the most recent issue of Citigroup's weekly Bond Market Roundup, that institution's high yield strategist John Fenn allows that last week's $9.4 million inflow to the high yield mutual funds, as reported by AMG Data Services, is the first positive weekly flow in seven weeks, but adds that the influx of cash "impressed virtually no one."

"We still adhere to the belief that there are large cash balances as most investors we talk with are seeking to put those balances to work - and not willing to part with their existing paper, which further squeezes the market liquidity," Fenn adds.

He also reports hearing rumors that the new issue calendar is about to "fire back up" after Labor Day.

"Most of the time it is true, but we have been somewhat disappointed by September in the past couple of years," writes Fenn. "It does seem as though the hype is real this year. Interestingly, assuming that not much will change in the last few days of August, we will still be comping negatively in new issue volume to each month last year. Maybe September will snap the trend?"

According to data compiled by Prospect News, issuance in September 2004 totaled slightly less than $9 billion in 33 dollar-denominated tranches. September 2003 was stronger at slightly less than $11.5 billion in 38 tranches. Meanwhile September 2002 saw an anemic $2.4 billion price in just 10 tranches.

Pipeline building, says sell-sider

Elsewhere, however, Prospect News heard Monday that there is indeed a conspicuous post-Labor Day pipeline building.

"There will definitely be people trying to get things done during the first two weeks after Labor Day," the source said.

"People are expecting a flood of issuance because everybody has been out for so long."

The source added that the stock market, which held a positive footing on Monday despite the dire headline news out in front of Hurricane Katrina, seems to be doing fine, and that record crude oil prices "have not really hurt the high yield too much."

The source also professed knowledge of merger and acquisition-related issuance - one deal in particular in the $300 million to $500 million range - that is to be announced during the first couple of days after Labor Day. However the source declined to provide any issuer names.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.