Spheris stays weak; Leap slips, takes Sprint along; Smurfit to launch loan; Rite Aid declines

By Stephanie N. Rotondo

Portland, Ore., Feb. 5 - The distressed debt market held its ground Friday, even as the equities went back and forth during trading.

"We held our own for the most part," a market source said. "Spreads are pretty much unchanged."

The source added that while there was "not must for sale," the market was "pretty bid for."

Still, there was definite softness in some credits.

Spheris Inc. debt continued to drop weight, however. The bonds were on a losing streak that went back as far as last week, but more pressure came Wednesday when the company filed for bankruptcy.

Leap Wireless International Inc. was also a loser, slipping a point or 2. The losses came as an analyst downgraded the company's equity and noted that a sale could be difficult to accomplish. The news also resulted in some weakness for Sprint Nextel Corp., which has been called a potential buyer of Leap - or possibly a takeover target itself.

In bank debt news, Smurfit-Stone Container Corp.'s new term loan is expected to allocate next week, according to sources. The loan is oversubscribed.

Elsewhere, consumer-oriented names such as Rite Aid Corp. and Blockbuster Inc. were on the softer side, sources reported. There was no real news out to explain the weakness.

Spheris debt remains weak

Franklin, Tenn.-based Spheris has seen its bonds decline in value all week and Friday was no exception.

A market source said the 11% notes due 2012 traded as high as 10 and as low at 8¾ during Friday's session. That was "definitely lower than yesterday," he said, when the bonds were trading with a 13 handle. Early on in Thursday trading, the bonds had even been as high as 17. The "high of the week," he said, was around 30, which compared with levels in the 40s a week ago.

Another trader said the notes "continued to trade down," placing them at 8¾ bid, 9¾ offered, versus Thursday closing levels of 12½ bid, 13 offered.

On Wednesday, the medical transcription company announced it had entered into an acquisition agreement with Medquist Inc. and CBay Inc. According to the terms of the agreement, Medquist and company would purchase all of Spheris' assets. But to do so, Spheris had to file for Chapter 11 protections.

Therefore, Spheris filed for bankruptcy and secured a $15 million debtor-in-possession loan. An auction process will be held for the company's assets and, should the Medquist, et al, deal be approved, it is expected to close within the first quarter.

"Throughout the past year, Spheris has taken steps to strengthen its operations and customer service, and these initiatives are achieving solid results," said Robert Butler, chief restructuring officer, in a press release issued Wednesday.

"Spheris has also been engaged in constructive discussions with certain key constituents of the company to identify ways to enhance financial flexibility for our operations. We expect customers will continue to receive high-performing services through a company with a stronger capital structure."

Leap slips, takes Sprint along

Leap Wireless International's bonds went down in trading - and took rival Sprint Nextel with it - as a JPMorgan Chase & Co. analyst said that a possible sale of the prepaid wireless provider would be "very challenging."

A source saw about $6 million of Leap's 9 3/8% notes due 2014 trading around 991/2, which he said "looks a little bit cheaper, but nothing hugely meaningful." Another source quoted the issue at 99 bid, 99½ offered, down from 100 bid, 101 offered.

The first source also saw Sprint's debt trading softer, with about $15 million of the 6% notes due 2016 changing hands at 85 bid, 85½ offered.

"That down probably 2 points," he said.

The 8 3/8% notes due 2012 were meantime about half a point lower around 102, on about $10 million traded.

According to news reports, JPMorgan analyst Mike McCormack downgraded Leap's equity to underweight from neutral, citing concerns about the company's previously reported attempts to find a buyer. MetroPCS has been dubbed the most likely candidate, though that company has not expressed any interest. Sprint was also a name thrown into the ring as a possible buyer.

Still, McCormack thinks that, given "industry-wide pricing pressure, and deteriorating fundamentals, we believe that Metro would be unwilling to pursue a bid for Leap, even at current levels."

Smurfit loan set to launch

Smurfit-Stone Container is expected to allocate its oversubscribed $1.2 billion six-year term loan (B2) during the week of Feb. 8, according to a market source.

The term loan is talked at Libor plus 500 bps with a 2% Libor floor, is being offered at an original issue discount of 981/2, and includes 101 soft call protection for two years.

There is a $400 million accordion feature under the term loan, subject to, among other things, 25 bps MFN pricing protection.

The facility includes no maintenance covenants. However, there is a debt incurrence test of 2.0 times interest coverage.

JPMorgan, Deutsche Bank and Bank of America are the lead banks on the deal.

Smurfit-Stone also plans on obtaining a new $650 million four-year asset-based revolver, with proceeds from the entire $1.85 billion credit facility going toward exit financing.

Through the company's plan of reorganization, debt will be reduced by $2.9 billion. Pre-petition secured lenders will be repaid in full and there will be an equity distribution to about $3 billion face value of unsecured obligations.

Smurfit-Stone's pro forma capital structure as of March 31 is expected to include 2.5 times total debt and 2.3 times net debt. By comparison, the company's current structure as of Dec. 31 included 8.0 times total debt and 6.5 times net debt.

The company is expecting to emerge from Chapter 11 and fund the bank deal in April.

In the bonds, a trader said the 8¼% notes due 2012 remained under pressure, seeing them at 77½ bid, "left without an offer." At another desk, the paper was called more than one point weaker at 77¾ bid.

Smurfit-Stone is a Chicago-based manufacturer of paperboard and paper-based packaging.

Consumer-linked names drop

In the realm of consumer-centric companies, a market source said there were "lots of various trades" in Rite Aid's 9½% notes due 2017. He saw about $20 million of the issue trading "up and down" 78.

Another trader deemed the debt "down a couple points" at 78 bid, 79 offered.

The second trader also said that Blockbuster's bonds were going down, the 11¾% notes due 2014 around 67½ and the 9% notes due 2012 around "22-ish."

"That's kind of ugly," he said.

Meanwhile, Harry & David Holdings Inc.'s 9% notes due 2013 dipped to levels around 58, compared with levels late Thursday around 69. The company had released quarterly results in the previous session and one trader had speculated that the improved financials would give the bonds a boost.

"I didn't think the numbers were all that disappointing," a trader said. "But somebody puked some [bonds]."

Also, MGM Mirage's 5 7/8% notes due 2014 ended "kind of right where they have been," according to a source, at 82 bid, 82½ offered. He added that some "$20-odd million" had turned over.

Sara Rosenberg contributed to this article.

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