Dynegy a dynamo as bonds rise on pipeline deal completion; Levi rebounds from losses

By Paul Deckelman and Paul A. Harris

New York, Aug. 19 - Merchant energy provider Dynegy Inc. Was the most powerful name in the high yield field on Monday, as its bonds and shares rose sharply on the news that the Houston-based company had completed the sale of its Northern Natural Gas Co. pipeline for $928 million in cash and the assumption by the purchaser of another $950 million in debt - staving off a threatened near-term bankruptcy filing. Also on the upside, Levi Strauss & Co. - whose bonds had swooned badly last week after Moody's Investors Service downgraded its ratings - bounced off its lows to come part of the way back.

Dynegy - which had warned in a filing last week with the Securities and Exchange Commission that a Chapter 11 filing might be a necessity if the pipeline deal were to fall through - said late Friday that it had completed the sale of the pipeline to Mid-American Energy Holdings Co., which is controlled by Berkshire Hathaway Inc., the investment vehicle for legendary billionaire stock guru Warren E. Buffett. The ever-savvy "Oracle of Omaha" bought the pipeline unit for a cash price only two-thirds of what Dynegy had paid late last year when it bought the company from cross-town rival Enron Corp., currently reorganizing in Chapter 11.

Enron's collapse, amid revelations of bizarre accounting practices and further allegations of cooked books, dealt a severe body blow as well to competitors like Dynegy and other companies in the power generation and electricity and energy trading businesses. Dynegy - once considered financially sound enough that it emerged, briefly, as a possible suitor for Enron before the latter slid into bankruptcy, itself began to feel the pinch of dried up liquidity and a faltering industry, and saw its shares slide from around $47 last fall to around the $2 neighborhood currently. It also saw its former investment-grade debt ratings knocked down into junk bond territory by the major agencies, and warned of the danger that it might have to file if the sale of the 16,600 mile pipeline to Buffet did not go through.

Observers said that having nearly $1 billion of additional funds in the till and being relieved of an approximately equal volume of debt would buy Dynegy some time while it seeks to sell other assets and get back on a firmer financial footing.

Wall Street thought so too; Dynegy's New York Stock Exchange-traded shares were up as much as 50% during the session before coming down from those peak levels to sill end the day up 60 cents (35.30%) at $2.29.

On the bond side, "all of the Dynegys were better, by at least eight to 10 points on the session," one market source said.

A trader quoted the company's bonds, such as its 8 1/8% notes due 2005, as having moved up sharply from Friday's close in the mid-to-high 20s to around the 35 bid/40 offered level, and said he had heard other market players quoting bids perhaps as high as the upper 30s to around 40, although he stressed that he himself had not seen that.

At another desk, Dynegy's 8¾% notes due 2012 were quoted at 37 bid, a 10-point gain on the session.

Whether the good pipeline news gives Dynegy momentum is up for question. The company still has a sizable debt load, and may need to sell off further assets to meet upcoming maturities.

And its problems connected with last year's California power crisis have not been buried; on Monday, Bloomberg news reported that a California state energy official said that the state is likely to end up demanding $2.4 billion in refunds for power purchased during the crisis from merchant energy providers like Dynegy, Mirant Corp., Reliant Resources Inc, and Williams Companies - about $1 billion more than originally estimated. Erik Saltmarsh, acting director of the California Electricity Oversight Board, said the difference between the estimated $1.4 billion California was expected to ask for and what it likely will seek is based on errors in natural gas prices.

U.S. energy regulators last week recommended that refunds be based on gas prices different from those reported in trade publications during the state's 2000-2001 energy crisis, Bloomberg said. Hearings began Monday in San Francisco on California's claim that it was overcharged during the crisis, which left the state's two biggest utilities - the Pacific Gas & Electric Co. unit of PG&E Corp. and the Southern California Edison Inc. subsidiary of Edison International - close to insolvent. Pacific Gas ultimately sought Chapter 11 protection. Dynegy and the other merchant energy companies have denied allegations of wrongdoing leveled by politicians and consumer activists in the Golden State.

Also in California, the bonds of San Francisco-based apparel maker Levi Strauss & Co. firmed smartly on Monday, after having retreated on Thursday after Moody's cut its senior unsecured debt ratings to Caa1 from B2 previously. Those bonds had firmed a few points off their lows Friday, and that trend continued Monday. Moody's said that Levi would probably have to cut prices to remain competitive with lower-priced rivals, making its turnaround efforts that much more difficult.

But with Levi having been so badly oversold and not much else really going on in the market, traders said the Levi bonds were up solidly. A trader saw the blue jeans maker's 11 5/8% notes due 2008, which had ended last week quoted at a wide 73 bid/79 offered level, as having opened Monday bid around 79 and then having "moved up steadily" to end at 82 bid/84 offered. He saw Levi's 7% notes due 2006 which had ended around 70 bid last week, as having pushed to 74 bid/76 offered Monday, while the company's 6.80% notes due 2003, which had closed at 78 bid/82 offered Friday, moved up to 83 bid/85 offered.

While the gains over the past two sessions have been sizable, it should be noted that the Levi bonds are still well below the levels they held before the Moody's downgrade; the 7% notes, for instance, had been quoted around 81 bid pre-downgrade, while the 11 5/8% and 6.80% notes were both above 90 bid.

Also higher Monday was Gap Stores Inc. - like Levi, based in San Francisco. Gap has been beset by a multiyear month-by-month lengthy decline in same-store sales from year-earlier levels, and in fact last week reported - as expected - comparable sales and overall profit-levels were down in the latest quarter from year-ago figures. However, there seemed to be a little bit of a silver lining there, with overall revenues up a sliver to $3.3 billion from $3.2 billion a year ago. Analysts were also pointing to the start of the important back-to-school selling season and the fact that Gap seems to be concentrating more this year on basic denim and khaki clothing and moving away from some of the more far-out funky styles which were a flop last year.

Gap's 6.9% notes due 2007 were quoted five points better Monday, at 85.5.

Elsewhere, Nextel Communications Inc. - a solid winner on Friday, as shares of the whole wireless sector rose and mostly took wireless debt with them - was again on the upside Monday. A trader quoted its benchmark 9 3/8% notes due 2009 as having pushed as high as 71 bid/72 offered from Friday's 69 level; the bonds came in slightly from that point to still end a point higher at 70 bid/71 offered. The trader opined "they've had a nice run of late."

Meanwhile the primary market Monday, as widely anticipated, produced no new activity.

However one sell-side source, reflecting on the summer 2002 to date, told Prospect News that the 10 successive outflows from high-yield mutual funds have likely conspired to significantly reduce buy-side liquidity, which in turn raises the bar for any potential issuer thinking of bringing a junk bond deal.

And, the source said, in light of URS Corp.'s Aug. 15 offering potential issuers may be having second thoughts regarding the "now-is-better-than-later" strategy for issuance.

The mutual fund outflows and the preponderance of negative news on the financial pages are no doubt taking their toll on the buy-side's willingness, if not its ability to participate in the new-deal market.

"I think things are going to be very slow going forward," this source said. "My general take is that until money starts coming in in a meaningful way, you're going to continue to see people being pretty risk-averse. They will be willing to dabble in the double-Bs provided that it's a decent company in the right sector with decent trends. I can't imagine that you're going to see a flurry of single-Bs at this juncture.

"In order for the calendar to start building up with new deals I think the stock market needs to stabilize," the source added. "And you need some good announcements going forward.

"Two weeks ago the high yield market had some decent activity. You had new issues that got done. There was a better tone. Secondary trading was up slightly. Then last week US Airways announced they were filing.

"It's very difficult to get two good weeks in a row."

And even if the buy-side demonstrated a willingness to play, this sell-side official said, junk bond yields are sufficiently high at present that an issuer might reasonably question the "now-is-better-than-later" strategy.

The sell-sider pointed to URS' downsized $200 million of seven-year senior notes (B1/B) that priced to yield 12%, wide of the 11½% area price talk and 820 basis points over the seven-year Treasury.

"Here you have a company with $250 million of EBITDA coming at 12%," the sell-sider said of the only deal to price during the week of Aug. 12. "How many companies are going to line up to get that kind of execution?

"If I were a CFO I'd wait a couple of months just for the hell of it," the source added. "I don't think you'll ever see the high yield market getting to the point that (solid EBITDA single-B issuers) will be raising money in the 13%, 14% and 15% type yields. If everything's hovering at 11% now it will probably be hovering at 11% two or three months from now.

"That's why I think it's going to be relatively slow until enough money comes in to get the secondary market to rally up so yields start going down, spreads start compressing and it actually becomes a good deal for a company to do something."

Asked about Illinois Power Co., which reportedly faces a $300 million maturity next May and is mulling a junk bond deal in the wake of the $325 million investment-grade offering which it priced and subsequently pulled in late July, this sell side source said that such a company, needing cash in the intermediate term, would be well advised to not hurry but rather to be prepared.

"I think the spiel people are giving companies right now is 'Get all your ducks lined up if you need money. And if the market opens back up you need to be able to access it very quickly.'"

As to anything else that might on the so-called "shadow calendar," this official said, not much is likely to materialize until autumn is nigh.

"There might be some repeat issuers," the source said, "good companies in the favorite sectors like energy. You may see one or two drive-bys. But you won't see anything until mid-September.

"I think it's going to take a little while to get yields and spreads back to where companies are willing to jump at it."

One deal is presently parked on the Prospect News High Yield Daily new issuance forward calendar as business that will possibly be transacted during the month of August: the NCI Building Systems $50 million add-on, a refinancing deal via Wachovia Securities and Banc of America Securities.

When contacted Monday and asked whether it is appropriate to keep the NCI add-on listed as possible August business a syndicate source advised Prospect News to leave the deal as it is presently positioned.

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