Upsized American Railcar deal prices; GMAC slides on sub-prime concerns; Tembec tumble continues

By Paul Deckelman and Paul A. Harris

New York, Feb. 23 - American Railcar Industries, Inc. was heard by high-yield syndicate sources to have successfully priced an upsized offering of seven-year notes on Friday.

Meantime, Huntsman International LLC, a subsidiary of Huntsman Corp., priced a $147 million add-on issue to its 7 7/8% notes due 2014, the original tranche of which was sold back in November.

Also on the primaryside, pre-deal market price talk emerged on Seminole Hard Rock Entertainment Inc.'s upcoming half-billion-dollar seven-year secured notes deal, while Building Materials Corp. of America slated a new eight-year offering.

In the secondary market General Motors Acceptance Corp. bonds continued to ride in the breakdown lane, heading lower on investor concern about the sub-prime mortgage sector, an area in which the financial giant is active through its Residential Capital Corp. unit.

Also continuing on the downside were the bonds of Tembec Inc., pushed downward by a confluence of factors including the strengthening Canadian dollar, the prolonged strike against the country's largest railroad and - perhaps - investor restlessness, now that recent strong gains seem to have plateaued.

Sea Containers Ltd.'s bonds were seen a little better, apparently pushed up by investor expectations that even though the troubled transportation company has lost its franchise to run an important British railroad line by defaulting on its franchise payments, it might still be able to keep at least a slice of the lucrative pie when a new operator is selected.

A syndicate official said late Friday that the high yield market was up a little on the day.

Meanwhile in the primary market, "tight execution" remained the watchwords as American Railcar Industries, Inc. priced the day's only issue - upsized and tight to the price talk.

American Railcar upsizes

UBS Investment Bank was the conductor as American Railcar priced an upsized $275 million issue of seven-year senior unsecured notes (B1/BB-) at par to yield 7½% on Friday, at the low end of the 7½% to 7¾% price talk.

The St. Charles, Mo., firm's general corporate purposes deal was upsized from $250 million.

$2.4 billion week

For the second consecutive week, the primary market turned out roughly $2.4 billion of issuance.

At Friday's close, 2007 issuance stood at $25.65 billion in 77 dollar-denominated tranches, as 2007 has now streaked significantly ahead of the record-breaking year of 2006, both in dollar amount and in deal volume.

At the Feb. 23, 2006 close the market had seen $20.5 billion of issuance in 51 tranches.

Building Materials launches $325 million

The generally quiet Friday primary market session heard news of one roadshow start.

Building Materials Corp. of America will start a roadshow on Monday for its $325 million two-part offering of eight-year senior secured notes (Caa1/B) - a deal that is expected to price before the Friday close.

The Wayne, N.J., company's acquisition deal, which is being led by joint bookrunners Deutsche Bank Securities, Bear Stearns and JP Morgan, features tranches of fixed- and floating-rate notes.

Seminole talks notes

Also on Friday Seminole Hard Rock Entertainment Inc. talked its $500 million offering of first-priority seven-year senior secured floating-rate notes (B1/BB) at Libor plus 275 basis points.

The Merrill Lynch-led deal is expected to price on Tuesday.

In addition to Building Materials and Seminole, the February-March crossover week is expected to produce terms on the following:

• Univision Communications Inc.'s $1.5 billion offering of eight-year senior unsecured notes (B3) via Credit Suisse, Banc of America Securities LLC, Deutsche Bank Securities, Wachovia Securities, RBS Greenwich Capital and Lehman Brothers, expected to price late week;

• Reader's Digest Association, Inc.'s $750 million of 10-year senior subordinated notes (B3/CCC+) via JP Morgan, Merrill Lynch, Citigroup and RBS Greenwich Capital, expected to price in the early part of the week;

• Valassis Communications Inc.'s $590 million proceeds two-part offering of eight-year senior notes (B3/B-) via Bear Stearns and Banc of America Securities;

• NSG Holdings LLC (Northern Star Generation Services Co. LLC)'s $514 million offering of amortizing senior secured notes due 2025 via Lehman Brothers and BNP Paribas; and

• American Cellular Corp.'s $425 million issue of senior notes - a transaction being led by Morgan Stanley and Lehman Brothers.

Soft market diverges from firm Treasuries

A trader said that overall, the junk market "opened up a touch softer, in spite of Treasuries being up today." The government paper was solidly higher, largely on a "flight-to-quality" scenario in light of investor jitters over weakness in the market for bonds backed by sub-prime mortgages. The 4 5/8% 10-year Treasury yield fell 6 basis points on the session to 4.67%, and at one point brushed 4.66%, its lowest point since early January. The benchmark bond's price rose 15/32 to 99 20/32.

But the softer junk secondary, he said took a back-seat to the new-deal arena, where "most of the action was." The overall market, he said, was "unchanged to down a little bit."

American Axle gains continue

He saw the new American Axle 7 7/8% notes due 2017, which had priced at par on Thursday and which then had moved up to 100.75 bid, 100.25 offered, continuing to firm, to around 101 bid, 101.625 offered. "We traded a fair amount" of the bonds, he said. "It came at a decent discount to the [company's existing] 5¼% bonds, and the BB market is cheap overall."

Another trader saw the Detroit-based automotive component maker's bonds at 101.125 bid, 101.625 offered.

The first trader saw American Railcar's new 7½% senior notes due 2014 quoted up in the gray market at 101.875 bid, 102.25 offered, but said that the new issue at that point "kind of died. There were a lot of players in that deal, they had a hard time allocating it, and a lot of guys didn't know what their allocation was till late this afternoon," when the market was pretty much wrapping up. He said he had not seen "any [aftermarket trading] in the Street. It got close to 102 and died - all just quotes."

However, another trader said he had seen some actual secondary dealings in the new bonds in the 101.375 bid, 102.25 offered area.

GMAC continues retreat

GMAC's bonds remained among the most actively traded issues on Friday - and continued to head lower as investor worries about the sub-prime mortgage-backed market that GMAC's Residential Capital arm plays in caused them to take the auto lender's bonds lower.

A trader saw its benchmark 8% notes due 2031 fall 1½ points to 110 bid, 110.5 offered, on top of about a 2 point retreat in Thursday's dealings.

Its 6¾% notes due 2014, which on Thursday had fallen a point, were down another ½ point Friday to 100.5 bid.

General Motors Corp. - which still owns 49% of GMAC - was also lower, accordingly. Its benchmark 8 3/8% notes due 2033, which eased on Thursday, were down another point Friday to 94.5.

Tembec gets hit again

Elsewhere, Tembec's bonds continued to tumble, with a trader seeing the Canadian forest products company's 8 5/8% notes due 2009 dipping 2 points to 84 bid, 86 offered, its 8½% notes due 2011 also 2 points lower at 74 bid, 76 offered, and its 7¾% notes due 2012 likewise down a deuce at 70 bid, 72 offered.

Another trader called the company's bonds down 3 points at 73.25 bid, 74.25 offered for the 81/2s. He blamed the continued slide on the effects of the strengthening Canadian dollar and the ongoing strike by 2,800 conductors and yard workers against Canadian National Railway Co., which has disrupted operations at Canada's biggest railway operator and North America's fifth-largest since Feb. 10. The strike has interrupted Montreal-based Tembec's lumber shipments.

Besides the railroad strike, the rise in the Canadian dollar has been blamed, since it makes Tembec's exports of lumber and other forest products to the United States and other export markets more expensive. In Friday's currency dealings, the Canadian dollar shot up to a closing level of US$0.8627 - the loonie's highest level in about two months - from US$0.8611 on Thursday. One U.S. dollar now buys C$1.1591, down from C$1.1613 Thursday.

But another trader - while seeing the Tembec 8 5/8s off another point to 84.5 bid - now well below the 87.5 level that they had held "for the longest time," was skeptical about the stronger Canadian currency being the primary factor behind Tembec's retreat over the last few sessions. He noted that "we're still about four cents away" from the psychologically important US$0.90 mark that he said would be the point at which the higher Canadian dollar would really begin to cut into exports and hurt the company's bottom line.

"I think the Canadian dollar has got to go up another five cents before it really starts affecting these guys. Ninety [U.S.] cents really is the inflection point. Then, when you get to 91, is when they start losing money on the currency."

He noted that there has been no corresponding slide in the bonds of larger Canadian forest products operator Abitibi-Consolidated Inc. "There's been no Abitibi follow-through - even though the rising [Canadian] dollar should affect Abitibi as much if not more because of its larger export volume."

Instead, he said that investors were "bored" with Tembec - having bought it at lower levels, and seen it rise to the upper 80s on a combination of the settlement last year of a long-running U.S.-Canada softwood tariff dispute and earlier weakness in the Canadian dollar when oil prices were lower. With that upside ride now having apparently stalled, for whatever reason, "now they want to take some profits. They don't want to just sit there - they want to move on to something else."

He said that there were some investors who "went into it at par, and rode it down to 40 or 50 and are taking it back up - guys who never sold it at the bottom, and always believed they were par bonds. There's a whole core group of people - then you get the fast money guys who get in and out, start rumors and are pushing it around on headlines. It doesn't mean anything - they're in it to just make the [quick] money, not long-term investors.

"So that's why you see things trade off - because they're taking their profits."

Sea Containers catches a wave

A trader saw Sea Container Ltd.'s bonds "up a couple of points" Friday, quoting the Bermuda-based maritime and railroad transportation operator's 10¾% notes that were to have come due last year at 91 bid, 93 offered, up 2 points on the session.

The bonds rose even as the company's British railroad unit, GNER, said it was in talks with several of the four parties whom the U.K. government selected to submit bids to take over the running of GNER's lucrative and prestigious East Coast Main Line that connects London and Scotland, in hopes of still keeping a piece of the action.

GNER had the franchise taken away late last year when it defaulted on its £1.3 billion 10-year contract to run the rail line, which still had about eight years to go. The Sea Containers' subsidiary blamed its inability to hang onto the contract on the strains on its finances from high energy costs and the downturn in the British rail industry in the aftermath of the 2005 7/7 terrorist bombings. Observers also note the role that its corporate parent's slide into bankruptcy doubtless played.

Although it lost the franchise, GNER is still running the railroad on a management contract basis until a new operator emerges - and it says it may yet have a hand in it even after that. GNER said this week that it is in talks with several of the four potential would-be operators - British transportation operators First Group, National Express and Arriva and a joint venture between transportation operator StageCoach and billionaire airline entrepreneur Richard Branson's Virgin Group. GNER did not say exactly how many of the potential buyers who made the government's short list it has been talking to - though several of them have explicitly declined holding talks with GNER. The latter said that it would be prepared to take as much as a 29.9% stake in the new franchise, and to transfer its brand, which it called "distinctive and well-regarded" to the new franchisee. The government would have to approve GNER's participation as a junior partner in any new franchise arrangement.

Chiquita rise a red flag

Chiquita Brands International Inc.'s 7½% notes due 2014 came back down a little Friday, losing a point to end at 92.5.

The debt had been seen trading up more than a point Thursday to around the 93.5 bid level despite a wider quarterly loss versus a year ago, as the Cincinnati-based fruit and vegetable importer posted sales gains for the quarter and the year, and said that it expects to reduce its debt level during the current fiscal year.

A trader said that the opinion at his shop was that "it was ridiculous that they traded up," given the wider loss and expectations of continued weakness in the international banana market this year. "It was an unbelievable bid."

He speculated that the issue may be unrealistically high because "a rising tide lifts all boats," adding that overall, "there's too much money chasing no paper."

With even distressed bonds largely trading in the 80s and 90s nowadays and regular junk issues at or above par - even for troubled companies - "everything just goes up. It's scary. I don't know what the event is going to be that makes people pull in their horns a little bit - maybe another Long-Term Capital [debacle like the one that shook the market some years back], but it has to happen. We cannot continue to have an average spread of 200 bps off Treasuries. It's just not high yield."

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