VeraSun, Readers Digest big gainers; Sbarro keeps sliding; split-rated Brunswick draws crossover buyers

By Paul Deckelman

New York, Aug. 12 - VeraSun Energy Corp.'s bonds firmed smartly on Tuesday after the Brookings, S.D.-based ethanol producer reported solidly better-than-expected second-quarter results.

Another upsider was Readers Digest Association Inc., whose bonds were seen having shot up on several large-sized trades.

Sbarro Inc.'s bonds continued to slide, down for a third consecutive session after the poor quarterly results the Melville, N.Y.-based Italian-themed restaurant operator posted.

In the primary market, the only actual new-deal was a split-rated offering for Brunswick Corp. that came off the underwriters' investment-grade desks - but junk traders said there was some crossover interest in the new bonds.

Elsewhere, terms emerged on Guitar Center Inc.'s recent conversion of bridge debt from its leveraged buyout last year into bonds - the latest in a series of such conversions aimed at putting bridge debt into a more convenient form for resale to investors.

And Ferro Corp. - which has been shopping a junk deal around for weeks, aiming to use the proceeds to take out an issue of existing bonds - said it would offer convertible debt for sale and use the proceeds for the same thing.

Market indicators mostly higher

A market source said that the widely followed CDX index of junk bond performance hovered just under the 93 level on Tuesday, down about ¼ point from Monday's close around 93 3/16 bid, 93 5/16 offered. The KDP High Yield Daily Index meantime rose by 8 basis points to end at 70.58, while its yield narrowed by 4 bps to 10.55%.

In the broader market, advancing issues led decliners by a five-to-four margin. Activity, represented by dollar volume, jumped 63% from the anemic levels seen Monday.

Brunswick's deal attracts some attention

On the new-deal front, Brunswick Corp., a Lake Forest, Ill.-based manufacturer of recreational equipment ranging from boats to bowling balls, came to market Tuesday with a $250 million split-rated issue of 9¾% notes due 2013 via Banc of America Securities, J.P. Morgan Chase & Co. and Merrill Lynch. The bonds - rated a low investment-grade Baa3 by Moody's Investors Service and a high junk BB+ by Standard & Poor's - priced at par, for a spread over comparable Treasuries of 657.2 bps.

Although the bonds were priced off the investment-grade desks, a junk trader said that he saw some high-yield interest in the issue as a crossover play. He said that after having been freed for secondary dealings, the bonds edged up to 100.25 bid, 101.25 offered.

He said that he had heard that allocations were "decent," and he said that "with this kind of yield, I saw some real crossover-type accounts playing in them."

Guitar Center rolls loans into bonds

Also on the primary scene, high yield market sources said Tuesday that Guitar Center had converted bridge loans used to fund its leveraged buyout last fall by Bain Capital Partners LLC into $777 million of junk bonds, the latest in a series of such transactions by recently bought-out firms.

The sources said that Guitar Center's LBO debt was converted into $375 million of 11½% senior cash-pay notes due 2015 and $402 million of 14.09% pay-in-kind notes due 2016. Both tranches priced at par, and were brought to market by bookrunner J.P. Morgan Chase & Co.

Guitar Center, a Westlake Village, Calif.-based musical instrument and recording equipment retailer, was taken private last year in a $2.1 billion LBO transaction with affiliates of Bain Capital, a Boston-based private equity firm.

Ferro slates convert

And Ferro Corp. - whose $200 million offering of eight-year bonds has been kicking around the market for over a month now and is considered to be day-to-day - moved to expand its financing options, announcing that it would offer to sell $150 million of new five-year convertible notes via Credit Suisse, Citigroup and J.P. Morgan, and use the proceeds for the same purpose that it said it would use the junk proceeds for - to take of its $200 million of 9 1/8 senior notes due 2009.

However, a spokesperson for Ferro said that the junk deal wasn't being pulled from the forward calendar - she said that the company would have "both out there as potential [financing] vehicles."

Mary Abood, Ferro's director of corporate communications, told Prospect News that which deal would be the "preferred" vehicle, "would depend on the market." She declined to give a time frame in which either deal might actually be completed.

However a syndicate source told Prospect News that the convertibles are set to price Wednesday after the market close. The five-year convertible senior notes are talked to yield 6% to 6.5% with an initial conversion premium of 60% to 65%.

VeraSun victorious on earnings

Back in the secondary arena, VeraSun's 9 3/8% notes due 2017 were seen having jumped 6 points on the session to a close of 59.75, pushed higher in the wake of the company's favorable earnings data. Most of the trading at those higher levels was in round-lot transactions. Measuring the distance between that close and the last previous round-lot close, back last Wednesday, the bonds jumped nearly 7 points.

The company's other issue, its 9 7/8% notes due 2012, pushed up to 89 bid in busy big-block trading - up 3 points from the last previous round-lot trade last week, and up almost 6 points from the last previous trade of any sort, also last week.

For the second quarter, VeraSun posted net income of $24 million, versus $15 million the year before. Total revenues increased nearly 500% to $1.015 billion, compared to $170 million in 2007.

The better-than-expected figures were largely due to a merger with US BioEnergy that became effective during the quarter. The merger added five facilities and 420 million gallons to operations, according to a press release. VeraSun also completed construction at several facilities, adding another 330 million gallons per year to its total output. Higher ethanol prices, and efforts to resell unused grain inventory, also helped to improve the company's balance sheet.

"VeraSun exceeded one billion dollars in revenues this quarter," said VeraSun's top executive Donald L. Endres. "More importantly, our large scale allowed us to capture $73 million in EBITDA, more than double last year, in a challenging operating environment."

Readers Digest on a roll

Another big winner, a market source said, was Readers Digest Association's 9% notes due 2017.

Those bonds, generally little traded, had moved up to 55 bid at the close Tuesday from prior levels around 48 a week ago on the strength of several big-block trades.

There was no fresh news out on the Pleasantville, N.Y.-based magazine publisher that might explain the rise - although the company did announce late last week that it had agreed to sell its QSP, Inc. school and youth groups fundraising company to Time Inc. for $110 million in cash.

GM upside ride continues

A trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 up a point to 54 bid. However, another trader saw those bonds unchanged at 53.5 bid, 54.5 offered, and saw sector peer Ford Motors Co.'s 7.45% bonds due 2031 down ½ point at 54 bid, 55 offered.

Another market source called GM's 7 1/8% notes due 2013 nearly 2 point gainers at 58.75 bid. The source saw GMAC's paper split, with its 8% bonds due 2031 down 1½ points at 58 bid, while its 6% notes due 2011 were up more than 2 points at 64.5

A trader saw GMAC LLC's 8% bonds unchanged at 58 bid, while another saw them up ½ point at 57.5 bid, 58.5 offered.

Continued indigestion from Sbarro

Sbarro's 10 3/8% notes due 2015 continued to take their lumps for a third consecutive session, as investors found the Italian eatery chain's most recent quarterly numbers, released last week, to be a constant source of agita. As if the numbers weren't bad enough, the company got another helping of bad news late Monday in the firm of a ratings downgrade from S&P.

A trader saw those bonds - which had traded in the low-to-mid 80s last week before the results came out - dropping to 72 bid, 74 offered, "down 4 points since yesterday's close." Another market source saw those bonds at 74, down nearly 5 points on the session, while a third saw them off more than 5 points at 73.5 bid.

On Friday, Sbarro's reported an increase in quarterly revenue to $85.4 million - but the net loss for the second quarter widened to $5 million from $2.4 million the year before. EBITDA fell to $5.5 million, versus $9.7 million previously. The company attributed the decline to an increase in product and labor costs.

For the six months ending June 29, Sbarro showed revenues of $168.6 million, a slight increase year-over-year. Net loss narrowed to $7.7 million, compared with a net loss of $35.6 million in 2007. However, $31.4 million in special event bonuses in conjunction with the company's merger attributed to the bigger loss in 2007.

"The reduction in profitability in the first half of the year was driven primarily by higher commodity costs versus the comparable period in 2007, said company chief executive Peter Beaudrault. "Commodity prices started to increase towards the end of the second quarter of 2007 and therefore we do not expect to see a corresponding negative impact on a year-over-year basis from commodity costs in the second half of 2008."

The CEO, trying to put the best possible face on the results, added that "furthermore, in recent weeks we have begun to see a decline in overall commodity costs which, if maintained, would favorably affect our year over year comparisons."

But on Monday, an apparently unconvinced S&P cut its corporate credit rating on Sbarro to CCC+ from B-. The rating agency also lowered its grade on the bonds to CCC- from CCC+.

Realogy bonds rock around

A trader said that Realogy Corp. "seemed to be the most active" name following its earnings.

He said "initially, they jerked down, but [now] they're actually coming up, coming better."

He quoted the company's 12 3/8% notes due 2015 at 44.5 bid, 45.5 offered, the 11% notes due 2014 at 46.75 bid, 47.75 offered, and the 10½% notes due 2014 at 59.5 bid, 60.5, and said it was "pretty much the main mover" of the bonds that he normally follows .

However, another trader later quoted the 101/2s as being down 1½ points at 58.5 bid, 60.5 offered, with the 12 3/8s seen down 1½ points at 43.25.

A market source at another desk saw Realogy's 101/2s down 3 points on the session to just under 60, while its 11s lost 2 points to end at 47.5. The 12 3/8s were unchanged at the 44 level.

The Parsippany, N.J.-based real estate and relocation services provider said that second-quarter net revenue totaled $1.4 billion; EBITDA was $161 million, and its net loss was $27 million.

"In the midst of a very difficult housing market, Realogy remains focused on increasing productivity and reducing our operating costs to enhance our ability to manage through this protracted downturn and, ultimately, be well-positioned to capitalize on the real estate market when it recovers," Richard A. Smith, Realogy's president and CEO, said.

Stephanie N. Rotondo contributed to this report.

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