Primary falls silent as year keeps winding down; Parmalat bonds swoon on missing money

By Paul Deckelman and Paul A. Harris

New York, Dec. 19- High yield primary activity, heretofore busy, finally fell silent Friday, traders said, as many new-deal players closed their books on the last trading day of the last full trading week of 2003. Barring any unexpected drive-by deals popping up over the next two holiday-shortened week, it's expected that this past week was it as far as 2004's primary goes.

The secondary market, meantime, was buzzing over the latest twist in what has become a financial soap opera - maybe a milk opera might be a more appropriate term - for troubled Italian dairy products producer Parmalat.

Its already battered bonds fell to new lows, after the company announced that some €4 billion which everyone thought was tucked safely into an account at Bank of America - isn't.

Parmalat said that B of A informed it that it had declared as false a document showing some 4 billion euros in investments at Cayman Islands unit Bonlat Financing Corp.

That startling admission caused Parmalat's bonds - which had already lost half of their value, down to the mid-40s, on investor liquidity concerns - to completely collapse, going from the 40s down to bid levels about 27-28 for its 6 5/8% dollar-denominated notes due 2008 and its various euro-denominated bonds, such as its 5 7/8% notes due 2007, its 6 1/8% notes due 2005 and its 6 1/8% notes due 2010.

"Paramalat just got mowed today," a trader flatly declared.

Another trader had seen the bonds trading even lower earlier in the session - down to the low-to-mid 20s - before firming off their lows to go to 27-28.

Standard & Poor's meantime dropped its credit rating on Parmalat to D (default), from CC, citing Parmalat's missed payment on a put option that was due on Dec. 17. Cash-challenged Parmalat was supposed to pay the minority shareholders in its Brazilian unit part of a $400 million purchase price for their 18% stake on Dec. 17, with the rest of the money due on Dec. 22, but instead convinced them not to exercise the put option.

S&P also withdrew its ratings on the company, declaring that "the reliability of all key information supporting a credit opinion is now questioned," following Friday's bombshell announcement.

The latest disclosure - coming on top of the ruckus kicked up when Parmalat failed to pay off €150 million of maturing bonds on Dec. 8, only making the payment four days later after getting an emergency loan - heightened investor fears of a liquidity crunch that might eventually plunge the company into bankruptcy.

Elsewhere, Georgia Gulf Corp.'s recently priced 7 1/8% notes due 2013 were quoted a point-and-a-half better at 104.5 bid. Other new (well, at least recent) issues seen around include Nexstar Finance's 7% senior subordinated notes due 2013 at par bid, 100.75 offered and Suburban Propane Partners LP's 6 7/8% senior notes due 2013 at par bid, 101 offered, " no great shakes there," a trader said.

There was no movement in FeCor Lodging, even after S&P cut its bond rating to B from B+, citing weaker than expected operating performance. Felcor's 7 5/8% notes due 2007 stayed at 103.25.

A market source said that some of the names in the wireless sector were better Friday, with Horizon PCS' zero-coupon notes due 2010 jumping to 22 from 19 and its 13¾% notes due 2011 rising to 25 bid from 22.

He saw US Unwired's 13 3/8% notes due 2009 at 72.5 bid, up from 71, while Ubiquitel's 10% notes due 2010 went to 75 bid from 73.5.

Other wireless names, however, were seen little changed; sector leader Nextel Communications Inc.'s bellwether 9 3/8% notes due 2009 were unchanged at 108.5, while Western Wireless's 9¼% notes due 2013 were likewise steady at 105.25.

Triton PCS' 8¾% notes due 2011 stayed where they were at 97.75 bid, while Alamosa PCS' 11% notes due 2010 remained at 107.75. AirGate PCS, which held a conference call for investors following the release of generally positive fiscal fourth quarter and fiscal year numbers (see separate story elsewhere in this issue) also stood pat, its 13.5% notes due 2009 unchanged at 71.

Sources around the primary market said Friday that no new business is expected until Jan. 5. No transactions priced during the session, and no news of any roadshow starts was heard.

That would bring year-to-date issuance to $138.48 billion, according to Prospect News figures, which covers dollar-denominated deals offered in the U.S. as public or Rule 144A offerings

At that level, it appears the total has fallen short of the all-time record set in 1998 - although Prospect News' data does not go that far back. Deutsche Bank Securities analyst put the 1998 figure at $143 billion. Thomson Financial had a total of $138 billion for 1998 but the firm's count for 2003 has been running several billion dollars lower than Prospect News'.

One buy-side source, surveying recent high yield issues, told Prospect News that auto retail, service and parts company Asbury Automotive Group's new 8% notes made sense.

The Stamford, Conn.-based company priced an upsized $200 million of the 10-year paper (B3/B) at par on Thursday to yield 8%, at the wide end of the 7¾%-8% price talk.

"We love the business model," the investor said. "The auto retailers make money four ways: new car sales, used car sales, repairs and parts.

"Cars are lasting longer and as they get older there are more repairs. There is an extremely high margin in these companies just in the parts business. That covers 75% of their fixed costs. So even if they don't sell a single car they have already covered a huge percentage of their fixed costs. And we know they are going to sell some cars."

The buy-side source looks for a stable auto retailing environment over "the next couple of years," and added that while car sales may not grow substantially, the parts and repairs sectors are expected to do so.

"This is such an unconsolidated business," the investor said. "The biggest company has around 3% of sales and the top 10 don't equal 10% of sales. So you have tons of room for consolidation. And if you buy a dealership for five times cash flow that's not bad, especially if in your first year out you can increase your cash flow by 10%."

When Prospect News pointed out that the Goldman Sachs & Co.-led deal came at the wide end of the 7¾%-8% price talk, the investor said that the company is shouldering its share of baggage.

"I think Asbury is perceived as the ugly stepchild of the sector," the buy-sider said. "Part of that is the Price One joint venture with Wal-Mart that they shut down this year.

"And Oregon has been another major headache. The platform went from $6 million EBITDA last year to a loss this year.

"If you have a platform that is underperforming or a high profile issue like Price One, those are negative perceptions.

"Asbury is the weakest name in the sector," the source said. "But the sector is attractive. And I think the worst case scenario for these guys is that they might stop growing and just generate free cash flow and use it to pay down their debt.

"The best case scenario is that they continue to make acquisitions and they do very well."

Late Friday a market source spotted the new Asbury notes trading at 102.75 bid, 103.25 offered.

The investor, meanwhile, also reported having taken an interest in the two-tranche issue from Belgian communications company Telenet.

On Wednesday the operating company, Telenet Communications NV, sold €500 million of 10-year senior notes (B3/B-) at par to yield 9%. The holding company, Telenet Group Holding NV, sold $558 million of 10.5-year senior discount notes (Caa2/CCC+) at 57.298 resulting in an 11½% yield to maturity.

"That deal went like crazy," said the investor. "And it has just been on fire in the secondary market, although I'm kind of at a loss to explain why.

"I think people are seeing it as a cable story in Europe that is not going to blow up because all the others have done awfully."

The investor played the discount notes, which priced at 57.298, and on Friday spotted that paper at 61.75 bid, 62.50.

"The discount notes, which are at the holding company level, are pretty deeply subordinated to the euro tranche," the buy-sider commented. "But a lot of the people seemed to say 'What the hell? I'm in on the senior piece, I'll buy a couple million of the zeros.'

"It was pretty easy to sell the subordinated piece given how oversubscribed the original deal was."

This investor also reported having taken an interest in the Hyundai Motor Manufacturing Alabama upsized $400 million of 5.3% five-year senior unsecured notes (Ba1/BB+), which priced Tuesday at 99.753 to yield 5.357%.

The source said that an earlier postponement of the Hyundai deal, which the company attributed to "market conditions" (reportedly causing some investment bankers to blow coffee through their noses) may actually have been caused by a family squabble.

"Whatever the reason, it turns out they were smart," said the investor. "They saved themselves money because it came tighter.

"They marketed it to investment-grade crossover buyers. They said 'This is going to be investment grade in a year. Look how well we have done. Get it now.'

"I'm a little worried about it even though we bought some of it," the investor added. "First of all there is the fact that it's Korea. Then there's the company, where you have an ownership battle going on. It's a family-controlled business that is publicly listed. But one of the brothers is moving against the rest of the family. We'll see how that shakes out.

"I don't think you can call a Korean corporate transparent."

Finally this buy-sider declined to get involved in the week's biggest deal, NRG Energy Inc. The Minneapolis company sold $1.25 billion of 10-year senior secured second lien notes (B2/B+) on Wednesday at par to yield 8%.

Proceeds from that deal will be used to help fund the Minneapolis power company's emergence from bankruptcy.

"That deal blew me away," said the buy-sider. "My analyst went and saw it and was horrified. And that was before he knew they were going to price it at 8%.

"They are emerging from bankruptcy as a substantially leveraged company. They are generating free cash flow but they expect their operations to continue to struggle. And the leverage, which is five-times, is expected to increase over the next three years. And you're getting 8% for that!

"This company is not turning itself into a world-beating utility. It's an average utility but it's now trading at 102.75 bid, 103.25 offered. So it's a 7 5/8%-type deal now."

A source from the sell-side, hearing this color on Friday, seemed to concur.

"This is quite a party we've had," the official commented, alluding to such "tight-pricing" deals as NRG.

"We've been scratching our heads for the past few weeks," the sell-sider said. "I got no hair left. The market is absolutely insane."

Prospect News asked this sell-side source whether the party can be expected to play on into the new year.

"We can probably keep it going until sometime in the second quarter," responded the source.

"We have to be very grateful to the Old Man [Federal Reserve chairman Alan Greenspan].

"We don't want to do anything to get him mad. If he raises rates the party's over."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.