Merisant bonds boosted on court settlement; Analyst calls Tembec weak; Fedders heavy

By Stephanie N. Rotondo

Portland, Ore., May 14 - Yet another court victory helped Merisant Co.'s bonds get better Monday, gaining as much as 4 points on the day.

The bonds were seen firming last week as a European court ruled in favor on the Equal brand sweetener manufacturer in its lawsuit against McNeil Nutritionals, a subsidiary of Johnson & Johnson, over its advertising campaign for Splenda sweetener.

Meanwhile, the company's U.S. battle turned to settlement, just as the jury had reached a verdict. A press release issued by the Sugar Association, which also has a pending lawsuit against the makers of Splenda, said it was clear that the jury had sided with Merisant.

"We know because of evidence presented at trial that it was greatly to Johnson & Johnson's advantage to mislead American consumers," said Dan Callister, with Squire Sanders & Dempsey, attorneys for the Sugar Association. "We know that Johnson & Johnson knew they were misleading consumers and did nothing. It is clear the jury was outraged and wanted to punish Johnson & Johnson and immediately asked for a calculator. We know Johnson & Johnson then rushed to court and paid millions to persuade Merisant to agree to a secret settlement."

Meanwhile, Tembec Inc.'s bonds are continuing its winning streak, but one analyst is not impressed.

The company's bonds have previously been seen gaining, presumably on a weakening Canadian dollar. But the analyst believes that nothing less than a sector-wide turnaround will help the struggling forest products company.

Fedders Corp.'s notes have stabilized a bit, after "getting clocked" according to one trader last week. Poor quarterly earnings prompted a 10-point loss in the bonds Friday, but traders saw the notes open the new week unchanged, but still heavy.

Merisant bonds boosted

The makers of Equal brand sweetener got another sweet taste of victory late Friday, as the company got a settlement offer from Johnson & Johnson, the maker of Splenda.

Merisant's bonds were boosted during trading Friday as a European court banned Splenda ads, stating the slogan, "Made from sugar, so it tastes like sugar" could mislead consumers into believing that the product was natural, or more natural than other artificial sweeteners.

As the jury in its U.S. case said it had reached a verdict, a settlement for an undisclosed sum was announced.

A trader said the news prompted a 4-point gain in Merisant's 9½% notes due 2013.

Another trader said the bonds were up as much as 4.5 points at 94.5 bid, 96.5 offered. He said the last trade he saw went as high as the 98 levels.

Analyst: Tembec notes underperform

Tembec's bonds were seen mixed on the day, following a week of gains that no one could really explain.

A trader saw the 8 5/8% notes due 2009 "not much changed" at 64 bid, 65 offered. He said the bonds were "settling" in that range after having "leaped from 60."

Elsewhere, a market participant said the 7¾% notes due 2012 started the morning trading at 55 bid, 57 offered but closed the day up at 57 bid, 57.5 offered.

"Looks like they got better toward the end of the day," he said.

He also saw the 8 5/8% bonds in the 64 bid, 65 offered context.

Despite recent gains in the forest products company's debt, an analyst with Gimme Credit LLC is pegging the issues at "underperform."

Analyst Kim Noland based the valuation on the fact that the company has posted poor operating results and continues to burn through its cash.

"We believe that poor operating results and cash burn of $30-$40 million per quarter will strain the company's resources, requiring Tembec to deleverage its balance sheet possibly before the maturity of $350 million of 8.625% notes in June of 2009," Nolan wrote.

A weak second-quarter EBITDA also contributed to the analyst's opinion, with the second-quarter consolidated EBITDA at $17 million.

"Tembec needs about $200 million annually to cover interest and capital spending," Noland said.

Fedders still heavy

A trader said Fedders' bonds were still "a little heavy" after last week's 10-point dive prompted by poor quarterly results.

However, he said the 9 7/8% notes due 2014 were "not much changed from Friday" at 41 bid, 43 offered.

The trader also noted that the Liberty Corner, N.J.-based company's preferred paper dipped, leaving the issue to trade at an "amazingly low price." The preferred fell 80 cents, or 22.86%, to close at $2.70.

Broad market weak

Movie Gallery Inc.'s bonds were called "weaker" by one market source, who pegged the notes at 81 bid, 82 offered, down from Friday's levels of 82.5 bid, 83.5 offered. He said the debt opened the trading day at 82 bid, 83 offered.

At another desk, a trader called the bonds "unchanged" at 82.5.

The market source said he also saw Danka Business Systems plc's 10% notes due 2008 offered at par and a quarter. He was not sure if that was better or worse.

PDVSA slides

Elsewhere Petroleos de Venezuela SA, weakened by the prospect that bondholders of a PDVSA joint venture project the government is taking over could declare a default and accelerate that debt, which PDVSA has said that it would assume.

PDVSA's 5¼% bonds due 2017 were being quoted down nearly ¾ point on the session in the mid-81 bid area, while the bonds' yield ballooned out a dozen basis points to just a shade under 8%. Spreads between the state-run oil company's bonds and U.S. Treasuries were also about a dozen bps wider at 324 bps.

At issue is $494 million of bonds issued by Cerro Negro, one of four joint oil ventures in Venezuela's Orinoco River Basin between the government and foreign oil companies. The government took over the operations of the four multi-billion-dollar heavy crude projects as part of President Hugo Chavez's ongoing effort to transform his country into a socialist state, by ousting private companies. Significantly, the takeover occurred on May 1, the traditional socialist holiday.

That takeover might be interpreted as a change of control by the bondholders, who could then demand that the debt be immediately redeemed.

PDVSA over the weekend sought to reassure investors that there had been no default, and said that it would continue to meet its obligations to the bondholders under the indenture's terms. By some estimates there might be as much as $4 billion of debt from the four projects floating around floating around - and some analysts have suggested that with its international reserves recently in the mid-$20 billion range, a two-year low, Caracas may have trouble servicing all of that debt. That caused spreads on CDS contracts protecting investors against events of default to widen out and the price of such contracts to rise for both PDVSA's bonds and the government's own sovereign issues.

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