Doral structure mixed on buyout news; Technical Olympic stagnant; Transeastern JV loan up

By Stephanie N. Rotondo

Portland, Ore., May 17 - Market players could stop holding their breath Thursday as Doral Financial Corp. announced that it had, after an exhaustive process, secured a definitive stock purchase agreement from a group of investors.

The news sparked movement in Doral's structure, but in very different directions. Traders saw the bank's debt move higher, its equity sink and its various preferred issues moving in opposite directions as well.

Market sources were also mixed in their views regarding the new plan, with some wondering if the deal will even get done.

Technical Olympic USA Inc. is making deals of its own, announcing Thursday that it had received a commitment for $500 million in term loans. On the news, however, the homebuilder's debt stagnated, trading in very light volume.

But, Transeastern, Technical Olympic's joint venture with Falcone Group, saw its term loan go higher on the news, gaining almost 2 points.

Meanwhile, Winn-Dixie Stores Inc.'s first-quarter profit is continuing to be a good thing for its stubs. A trader saw the issue firming and market buzz renewing on the post-bankruptcy grocery chain.

Doral structure mixed on buyout

News that San Juan, Puerto Rico-based bank Doral had secured an equity infusion prompted major movement in the financial institution's structure.

Earlier in the day, a trader said the floating-rate notes due 2007 were trading in the 99 levels. Another trader echoed that number at the close of market, while another said he saw the bonds around 97.5 bid, 98.5 offered.

On the equity side, however, the shares took a tumble, as the company prepares to sell the bank for $610 million in common stock, valued at 63 cents per share. The stock was hit hard earlier in the day, then regained some of its losses. Still, the equity closed down 24 cents, or 19.35%, to $1.00 - almost 40 cents more than the buyout amount. One trader speculated that bondholders such as Bear Stearns and Goldman Sachs are trying to keep the stockholder vote in check by making sure holders of the other 10% of the company's shares will vote to support the deal.

The preferred paper also saw a wild ride. A trader quoted the 4¾% convertible preferred in the 147 levels, but the paper came off its highs to still end the day up $20, or 15.97%, at 145.25. Another trader said the issue has been in the 115 bid, 130 offered neighborhood for weeks. After the news, he began to see bids in the 140 to 150 area, though traffic, he said, was light.

According to a press release, the Bear Stearns-led buyout will create Doral Holdings, a bank holding company that will own 90% of the bank's common stock, with current shareholders owning 10%. The investment is expected to help pay off the $625 million in floating-rate notes that mature in July, as well as to fund a settlement in the company's class-action lawsuit.

The transaction is subject to the usual conditions, including shareholder approval - the release stated that current shareholders had agreed to support the deal - as well as regulatory approvals. The company also stated in the release that, if the deal is not completed by July 20 - the maturity date for the bonds - it would be unable to repay the debt, which could then lead to a course of events that "would materially negatively impact the value of the company's outstanding common stock."

Market participants have mixed views on the bank's new plan.

One trader called it a "prisoner's dilemma for equity [holders] - get zero or cut your legs off."

"I like the plan," he added, "but I think they should have given the equity [holders the] ability to buy in at 63 cents with a rights offering and if I was an equity holder I would fight like crazy."

As far as the bonds, another trader said, "in my view you sell [or] short these [at] 98.75. [There are] a bunch of hurdles to get this done by July, [and I] think the downside risk far outweighs the little upside."

Still others think the deal will get done.

"If somebody decided they want to take a chance at a turnaround, that's the only way out for these guys," said Tom Carroll, an analyst with Imperial Capital LLC. "It's too close to go time for them to reject this. Something is better than nothing."

Carroll was surprised that the takeout was for under the previously thought levels of $700 million to $800 million but said it could not be a surprise that shares would go for less than a dollar.

"They had to know it was going to be below a buck," he said. "It's hard to believe that anyone was caught off guard by this."

And, he said, the bondholders and preferred holders will end up the big winners, adding that, based on the bonds' current 10% yield, the market seemed to have faith.

"That's a pretty strong indication that the market thinks this is going to get done as well," he said.

As far as all the hoops the company now has to jump though to meet its July deadline, Carroll said he sees the deal closing in time.

"I don't think the regulators want to be the reason why this gets held up," he said.

Technical Olympic called inactive

Technical Olympic's bonds were "surprisingly inactive," a trader said, after the homebuilder announced it had received a $500 million term loan commitment from Citigroup Global Markets Inc.

The trader said the 10 3/8% notes due 2012 were up 2 points at 78 bid, 79 offered, "not an awful lot considering what I think is big news," he said.

The funds, which will come in two separate loans, will be used to pay potential settlements relating to its Transeastern JV.

Still, market players are not yet banking on the deal.

"It's not even 100% sure that the deal gets done," a trader said.

"There is a lot of speculation still," said another.

"Who knows, these guys could end up another Fedders," the first trader quipped.

Transeastern loan gains

Transeastern, a joint venture between Technical Olympic USA Inc. and Falcone Group, saw its term loan head higher as Technical Olympic announced a $500 million term loan financing commitment that would be used to pay off Transeastern's senior debt if a settlement is reached, according to a trader.

The Transeastern term loan ended the day at 96¼ bid, 97¾ offered, up from Wednesday's levels of 95 bid, 96 offered, the trader said.

As was previously reported, Technical Olympic has been engaged in discussions with Transeastern's lenders for quite some time regarding defaults and demand for payments from the administrative agent on the Transeastern debt.

As part of settlement discussions, the company has proposed a structure in which either Transeastern or the successor to some or all of its assets would become Technical Olympic's wholly or majority owned subsidiary. The proposal also contemplates paying Transeastern's $400 million of senior debt in full through the proceeds from the new term loans.

On Thursday, Technical Olympic said that it got a commitment for a new $250 million first-lien term loan and a new $250 million second-lien term loan from Citigroup to fund the settlement proposal.

As a condition to the new deal, the Technical Olympic's existing revolving credit facility would be amended and restated to reduce the size to $700 million from $800 million, incorporate the terms and conditions of the first-lien term loan, and allow for the new bank debt.

Technical Olympic has until May 28 to execute the commitment letter for it to become effective, and will only execute the letter if satisfactory settlements with the Transeastern creditors have been reached.

If the commitment is executed, the company has until July 31 to execute definitive documentation.

Winn-Dixie stubs up

A trader saw Winn-Dixie's stubs trade higher at 11.75 bid, 12.25 offered.

The stubs have traded higher ever since the grocery chain posted its first profit since exiting bankruptcy. Now, according to the trader, buyout buzz is popping up again.

Talk that different grocery chains, including Kroger, would buy the company had swirled around for months, even picking up steam when the market mulled a European private equity bid. The buzz has died down, but the trader said he heard someone mention again a European buyout.

"If they continue having numbers like they did, somebody is sure to take a good hard look at them," he said.

Broad market mixed

A trader said Calpine Corp.'s 8½% notes due 2011 were up a couple of points at 124 bid, 125 offered, but he was not sure why.

The trader also said MedQuest Inc./MQ Associates Inc.'s bonds were "somewhat active." He quoted the 0% notes that trade under the MQ Associates moniker at 18 bid, 21 offered, down from the previous day's offer of 25.

At another desk, a trader said IMAX Corp.'s 9 5/8% notes due 2010 were firming at 102.75, though he said volume was light.

Also light in volume was Hines Horticulture Inc. The 10¼% notes due 2011 were up in the 81 levels, the trader said.

The trader said he also saw 155 East Tropicana LLC, also known as Hooters, bonds moving, with its 8¾% notes due 2012 at 98.

Sara Rosenberg and Ronda Fears contributed to this article.

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