Market up; Ventas sells $225 million drive-by; Bally down on liquidity news; Seagate plans $1.25 billion

By Paul A. Harris

St. Louis, Sept. 12 - The high-yield market rallied smartly Tuesday, according to sources who spoke at the close of trading.

A trader said that junk was easily up half a point and added that, depending upon the marker's perspective, junk might have risen by as much as a point and a half.

Meanwhile, a more or less brooding primary market got up on its toes with the first drive-by deal in the post-Labor Day period as health care and senior care real estate investment trust Ventas, Inc. priced an upsized $225 million issue with a yield that came toward the tight end of price talk.

And hard disk drive-maker Seagate Technology announced a $1.25 billion three-piece deal that it expects to complete by the end of the week.

In the secondary market the bonds of Denny's Corp. sizzled on news that the company will sell properties and use the $67 million it will raise in the sale to pay down debt.

Elsewhere the existing bonds of Level 3 Communications, Inc. went higher after YouTube, the internet video bazaar, announced that it had selected Level 3 as its end-to-end backbone.

"The bond market was flying," one trader commented after the Tuesday close.

"Everything was up. People were buying stuff like it was going out of style.

"I haven't seen some of this stuff this tight in a long time."

But the bonds of Bally Total Fitness Corp. went sharply lower as the company warned its creditors of clear and present liquidity dangers.

Ventas $225 million drive-by

Sell-side sources who had been advising Prospect News that the post Labor Day primary market would be ripe for drive-by business - and have lately taken to wondering aloud why none had come even though a week had passed since the holiday weekend's conclusion - need wonder no longer.

The first post-Labor Day drive-by came Tuesday from Louisville, Ky., health care and senior care REIT Ventas.

Subsidiaries Ventas Realty, LP and Ventas Capital Corp. combined to price an upsized $225 million issue of 6¾% 10.5-year senior notes (Ba2/BB+) at 99.375 to yield 6.834%, toward the tight end of the 6 7/8% area price talk.

Banc of America Securities LLC and Citigroup were joint bookrunners for the debt refinancing related to Ventas's acquisition of properties from Senior Care, Inc.

An informed source said that the deal, which was upsized by $25 million, had been highly oversubscribed and had gone very well.

Seagate launches $1.25 billion

Meanwhile Scotts Valley, Calif. computer hard drive manufacturer Seagate Technology also got into the quick-to-market act on Tuesday.

Seagate Technology HDD Holdings (Cayman) launched a $1.25 billion offering of senior unsecured notes (Ba1/BB+) in three bullet tranches which are expected to price before the end of the week.

The offering is comprised of a three-year floating-rate tranche, as well as five-year and 10-year fixed-rate tranches.

Morgan Stanley, JP Morgan and Goldman Sachs & Co. are joint bookrunners

Seagate will use the proceeds to call out all of the company's 8% notes due 2009 and for general corporate purposes.

As news of the new issue and the expected call circulated, a trader saw the existing Seagate 8% bonds trade slightly higher than the 104 mark at which the company will be able to take the bonds out on Oct. 20.

The trader spotted them at 104 1/16 bid.

A source close to the deal explained that an investor might be inclined to pay a slight premium for the paper because that premium would be covered in the carry, or the interest that will accrue in the approximately one-month period between the new deal's settlement date, when the call is expected to be announced, and the Oct. 20 call date.

The informed source said that the deal would be transacted on the investment-grade desk.

The source also added that pro forma leverage for the Seagate deal is "essentially zero," and added that the company will have almost as much cash as debt after the offering.

After the call, the source added, Seagate will have $800 million available to buy back shares, noting that the company used stock to pay its acquisition of Maxtor Corp. which was completed in May of this year.

With this deal Seagate is "essentially mopping up the excess float," the source commented.

YouTube taps Level 3

News that Level 3 Communications Content Markets group has been selected by YouTube to support the company's online video entertainment service sent some of Level 3's existing paper higher on Tuesday.

Under the terms of the agreement, Level 3 will provide high speed internet access via multiple 10 gigabits per second ports, and will also provide wavelength service across a nationwide footprint connecting YouTube's data centers.

A market source, citing a report from JP Morgan, commented that the deal is a big win for Level 3 as it now has contracts to support the two largest distributors of video content on the internet, YouTube and MySpace.

That deal gives Level 3 a pivotal role in web-based video, which is expected to be the biggest driver of demand for bandwidth, the source added.

Early in the session a source spotted Level 3's 6% notes maturing in 2009 unchanged at 91 bid.

At mid-day another source had the company's 12¼% notes due 2013 at 110.50 bid, 111 offered, also unchanged.

Meanwhile Level 3's 11½% notes maturing in 2010 were at 101.25 bid, 101.75 offered, up 0.50, the source, added.

Denny's sizzles on sale news

Elsewhere the only issue of bonds outstanding from Denny's Corp. traded higher on Tuesday in response to news that the Spartanburg, S.C., restaurant chain will sell restaurants and use the money to repay debt.

The move followed an announcement that Denny's has agreed to sell the majority of its company-owned, franchisee-operated restaurant properties and will use the proceeds to reduce the outstanding balance on its $219 million first lien term loan.

The agreement has Denny's shedding 66 franchisee-operated restaurant properties to National Retail Properties, Inc. for approximately $67 million.

Denny's expects the sale to generate after-tax proceeds of $65 million and result in a gain on sale of assets of $38 million. After applying the net proceeds to reduce its debt, Denny's expects annual net income to increase by approximately $1 million as reductions in interest expense and depreciation offset the loss of rental income.

After completing this transaction, Denny's will have 13 franchisee-operated properties remaining for sale. It is expected to take up to 12 months to complete these sales.

Trailing the news, a source spotted Denny's 10% notes due 2012 at 102.75 bid, 103.50 offered, up 1.25.

After the close a trader commented that the paper had undergone "a big move" on the session, and spotted the 10% notes at 103 bid, 103.50 offered, up 2 points from Monday's close of 101.50 bid, 102.50.

The banana front

A trader who marked junk as much as a point and a half higher on the Tuesday session commented that reacting to lower oil prices the high-yield market was strong during the session.

This trader said that the bonds of Chiquita Brands International, Inc., of Cincinnati, which had lately been getting beaten up, rose as much as 2 points on the session, depending up which tranche was in the scope.

The company announced on Tuesday that although it faced depressed banana pricing in European and trading markets, it was seeing year-on-year improvements in its Fresh Express retail value-added salad prices as well as in North American banana prices.

One source summarized that although there were declines in the company's markets, the bond market had actually priced in declines that were significantly more dire.

Hence Tuesday's uptick.

The trader spotted Chiquita's 8 7/8% notes due 2015 closing at 95.50 bid, 96.50 offered, after opening at 93 bid, 94 offered Tuesday morning, for a gain on the session of 2.50 on the bid side.

Perhaps along for the ride, the trader said, were Dole Food Co.'s 8 5/8% notes due 2009 which closed at 99.50 bid, 100.50 offered, up 2 points.

Crunch time for Bally

Perhaps the most bantered about - and battered - name during Tuesday's session in the junk market was that of Chicago health-club operator, Bally Total Fitness.

In a 10-K document that the company filed on Tuesday with the Securities and Exchange Commission, Bally stated that owing to covenants in the credit facility it entered into on Oct. 14, 2004, including a five-year $175 million term loan in addition to its existing $100 million revolver, the facility will terminate on April 15, 2007 - more than one year ahead of the original maturity - if Bally is unable to refinance its senior subordinated notes which are due in October 2007.

Hence the entire balance, approximately $171.4 million, outstanding under the credit facility is considered due within the next 12 months, and therefore included in the current maturities of long-term debt on its balance sheet as of June 30, 2006.

Bally went on to state that if it is unable to refinance the senior subordinated notes prior to April 15, 2007, absent an agreement by the lenders to extend the maturity of the credit facility or a refinancing of the credit facility, it will not have sufficient liquidity to operate its business and will be unable to come up with the cash when the credit facility is due.

"If such events were to occur, the holders of the 10½% senior notes due 2011 and senior subordinated notes could accelerate the obligations under those instruments, and the company would be unable to satisfy those obligations," Bally stated.

Bond prices were already being batted about as the Tuesday session got underway.

Once source said that a significant number of the 9 7/8% due 2007, the senior subordinated notes, traded at 85.50, off 4 points.

Meanwhile the 10½% notes due 2011 were seen at 97 bid, 98 offered, down one point.

Bally's bonds continued to cascade throughout the session, sources said.

At the close a trader reported seeing a 78 bid on the 9 7/8% notes, but gave it little heed as "there was no right side."

Nevertheless this trader said that the subordinated paper was going out at 80 bid, 82 offered, down 6 points.

Another trader said that the Bally 9 7/8% notes due 2007 got as low as 82 bid, 83 offered, and rebounded a bit after the company's conference call to close at 84 bid, 85 offered.

The trader said that they had started getting weaker Monday but closed that session at 86.50 bid, 87.50 offered.

Another trader pointed out that the price renders the yield to maturity - only one year away - at 30%..."if you get paid."

Auto sector eases

Elsewhere in the secondary, sources were marking some bonds in the automotive sector lower.

One, speaking early in the morning, said that the paper of General Motors Corp. and Ford Motor Co. was down about a quarter of a point.

Four hours later a trader concurred with that price change and spotted GM's 8 3/8% notes due 2033 at 87.125 bid, and said that the same held true with regard to Ford's long maturity paper, marked at 80 bid.

Meanwhile in early trading Dura Automotive's 9% notes due 2009 were at 14 bid, 15 offered, down 0.50.

Dura's 8 5/8% notes due 2011 were at 70.50 bid, 71.50 offered, down a point.

Visteon's 8¼% notes due 2010 were at 100 bid, 100.50 offered, unchanged in early trading, while Visteon's 7% notes due 2011 were at 93.50 bid, 94 offered, down 0.25.

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