Spectrum Brands debt structure hurt by termination of pet products sale; Six Flags bonds pressured

By Stephanie N. Rotondo

Portland, Ore., July 14 - Spectrum Brands Inc.'s debt structure took a tumble on Monday on the news that the sale of its pet products business had hit a dead end.

According to a news release, the more than $690 million sale of the unit to Salton Inc. was terminated on Sunday. Come the first day of the trading week, investors put pressure on the debt, sending its bonds down as much as 3 points and its term loan B down about a deuce.

Meanwhile, Six Flags Inc.'s bonds were also floundering. Market sources saw the amusement park operator's notes down at least 2 points on no news. According to one source, earnings are expected next week and could shed some light on the deteriorating picture.

"The market still seems tired," said one trader, who noted that Monday's trading volumes were thin. Another said investors had been scared away - again - by more news regarding the Freddie Mac/Fannie Mae debacle, along with the collapse and subsequent takeover of IndyMac.

"People are wondering who is next," he said.

Sale termination weighs on Spectrum

Upon learning that the sale of its pet business had been called off, investors pushed Spectrum Brands' debt structure down.

Traders saw the bonds off about 3 points on the day. One source pegged the 7 3/8% notes due 2015 at 58 bid, 60 offered and the 11% toggle notes due 2013 at 78 bid, 80 offered. Another saw the 7 3/8% notes at 78 bid, 79 offered and the 11% notes at 58 bid, 59 offered. Yet another deemed the 7 3/8% notes at 59.5 bid, down 2.75 points.

Spectrum's term loan B also headed lower after the news emerged. The term loan B was quoted by one source at 91¼ bid, 92¼ offered, down from 93 bid, 94 offered, and by a second source at 91 bid, 93 offered, down from 92 bid, 94 offered.

Spectrum's sale of its pet products business to Salton was called off on Sunday. Spectrum attributed the deal's dissolution to its senior lenders' refusal to consent to the sale. Late last month, Spectrum said it was unable to secure support from those lenders, but that the definitive purchase agreement was still in effect. The company also said it intended to comply with its obligations under the agreement in order to complete the sale.

Just last week, traders had reported that Spectrum's bonds had inexplicably begun to trade up, leaving some to opine that perhaps the sale would get done after all.

Spectrum planned to use proceeds from the sale of the business to repay a portion of the borrowings outstanding under its ABL credit facility along with other senior bank debt.

Salton was going to buy the pet business for $692.5 million in cash, plus additional consideration in the form of $98 million of Spectrum Brands' variable-rate toggle senior subordinated notes due 2013 and $124.5 million of Spectrum Brand's senior subordinated notes due Feb. 1, 2015, in each case taking into account the principal amount and any accrued interest.

"Despite our desire and diligent efforts to complete this transaction upon the negotiated terms, we have been unable to obtain the consent of our senior lenders necessary to close on a basis that would be in the best interests of our shareholders and the company," said Kent Hussey, chief executive officer of Spectrum Brands, in a news release.

"We will therefore continue to operate the global pet supply business and work to capture the strong market potential we see there. Additionally, our board and management team remain committed to finding and executing appropriate alternatives for reducing the indebtedness of the company," Hussey added in the release.

Spectrum Brands said that it believes it has sufficient liquidity to run its businesses being that at June 29, there was $72.7 million of cash on its balance sheet, and it expects growth in both sales and adjusted EBITDA for the full year fiscal 2008 versus full year fiscal 2007.

Furthermore, the company projects that its fiscal 2009 free cash flow from operations, which would be available to reduce outstanding debt, will range between $40 million to $50 million. This projection includes an estimate of cash flows from operating activities for fiscal 2009 of $75 million to $85 million less capital expenditures of $35 million.

Under the acquisition termination agreement, Spectrum will pay Salton within two business days $3 million as a reimbursement of expenses.

Going forward, some market players wondered what would happen next.

One trader said it was possible Spectrum would find another way to get the deal done, or perhaps find another interested buyer.

Fitch Ratings maintained its ratings on the consumer products company, believing the sale termination to be credit neutral. The outlook remained negative.

Spectrum Brands is an Atlanta-based manufacturer and marketer of consumer batteries; pet supplies; and electric shaving and grooming, electric personal care and portable lighting products.

Six Flags bonds under pressure

A trader said Six Flags' debt "continues to come in," though there has been no news to cause the move.

The trader quoted the 9 5/8% notes due 2014 at 47 bid, 49 offered and the 12¼% notes due 2016 at 86 bid, 88 offered The latter was priced at par about a month ago.

"They just continue to drift down," the trader said.

At another desk, a trader placed the 9¾% notes due 2013 at 48 and the 9 5/8% notes at 47.

The trader said he saw no news, but noted that the "stock has been getting hammered." The amusement park operator's equity closed down 11 cents, or 12.5%, to $0.77 on Monday.

Another source called the 9 5/8% notes down nearly 2 points to 48.5 bid.

One source speculated that, as the company's preferred shares are slated to come due next year, perhaps investors were concerned about what that might mean to the company's future.

The source also said that earnings are expected July 25. The numbers could shed some light on whether Six Flags' hopes that rising gas prices would keep consumers closer to home - and therefore Six Flags' parks - were worthwhile.

Last month, the company reduced its debt by about $130 million through a tender offer. The offer swapped the 8 7/8% notes due 2010, the 9% notes and the 9 5/8% notes for the 12¼% notes. In doing so, the New York-based company was able to extend maturities and see a modest reduction in its annual interest payments.

Broad market 'tired'

Retailers were once again deemed weaker, with Bon-Ton Stores Inc.'s 10¼% notes due 2014 at 68 bid, 68.5 offered and Michael's Stores Inc.'s 11 3/8% notes due 2016 around 76.

Trump Entertainment Resorts Inc.'s 8½% notes due 2015 extended their losses from last week, ending the session around 53.

A trader saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 down 1 point at 54 bid.

Korean high-tech manufacturer MagnaChip Semiconductor Ltd.'s 8% notes due 2014 ended up 3 points at 40 bid, although its 6 7/8% notes and floating-rate notes, both due 2011, were unchanged in the middle-60s.

Charter Communications Inc.'s 10% subordinated notes due 2014 were down 1 point at 52 bid, while its 8 3/8% notes due 2014 were unchanged at 93.25 bid, 94.5 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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