Homebuilders join new-deal calendar; three deals price; Calpine steady after downgrade

By Paul A. Harris

St. Louis, Mo., April 3 - The high-yield primary market managed to sustain its recent brisk pace of activity Wednesday. Homebuilders from Georgia and Texas built out the forward calendar two deals further. And terms emerged on three deals: a Regal Cinema drive-by add-on in addition to scheduled offerings from Fleming Cos., Inc., and Tesoro Petroleum Corp.

Meanwhile, secondary sources told Prospect News that in a quiet session Calpine Corp.'s bonds were basically unchanged on the heels of the downgrade to the company's debt by Moody's Investors Service late Tuesday.

"I don't think there was any news that people weren't expecting," a trader commented, noting that Calpine's 2008 and 2011 notes were "trading pretty much at yesterday's levels - 80-81.

"The bonds were pretty much left hanging. I guess it was a function of when Moody's would actually downgrade them," the source added.

Secondary market sources also said that Adelphia Communications Corp. bonds did not seem to be suffering any further damage from word that the Securities and Exchange Commission would have a look at the company's books in the wake of its disclosure of off-balance sheet financial activity.

The company's 10 7/8% notes of 2010 were reported down a point; the 10¼% bonds of 2011 were reported at 88, and the 10 7/8% notes of 2007 were down roughly 2.5 points, according to a source.

"Basically it's traded off its highs," a trader commented on Adelphia. "There wasn't a whole lot of strength exhibited today. It's a trickling news story, where you get more bad headlines that come out day by day.

"There had been some buying at these levels. But it's 50-50 whether or not this company will file [for Chapter 11]. There are some who think they will, and others who think they won't.

"We had a few buyers early this morning, basically at yesterday's closing levels. There wasn't a whole lot of flow in it.

"It's made to look like there's more flow in Adelphia than there actually is. I think that it's more people are sitting on their hands, waiting for Adelphia to disseminate all the news and waiting to see if there is anything more to it.

"The SEC inquiry into their debt is really nothing that's not to be expected with a situation like this. The SEC has no choice but to look into it. So that wasn't anything really bad.

"But I think there is a pretty balanced buy-sell ratio out there and not a whole lot of trading actually taking place. We haven't traded a lot of paper today at all."

The forward calendar in the primary market continues to build, meanwhile. As the week of April 1 crossed the top of the hump an even dozen new deals - some of them already priced - came into the market.

Arlington, Tex. homebuilder D.R. Horton, Inc. hammered its $250 million deal for 10-year senior notes to the beam. Salomon Smith Barney will run the books. The drive-by deal is expected to price Thursday and price talk is for a yield in the 8¼% area.

Atlanta, Ga. builder Beazer Homes USA, Inc., meanwhile, will go on the road starting Monday with its $350 million of 10-year senior notes. Pricing is set for April 11 via bookrunner UBS Warburg.

The market heard terms Wednesday on a drive-by add-on from Regal Cinemas Corp. It tacked on $150 million to its 9 3/8% senior subordinated notes due Feb. 1, 2012 (B3/B-) and priced the deal at 103.50 for a yield to worst of 8.743%, according to market sources. Credit Suisse First Boston ran the books. Regal will use proceeds to finance the roll-up of Edwards Theaters into Regal, a market source told Prospect News.

Texas wholesale food distributor Fleming Companies priced its $260 million of 10-year senior subordinated notes (B2/B+) at 98.436 to yield 10 1/8%. Price talk was 9 7/8%-10 1/8%. Deutsche Bank Securities ran the books.

And terms came through the pipeline on Tesoro Petroleum Corp.'s $450 million of 10-year senior subordinated notes (B1/B+) which priced at par to yield 9 5/8% via Lehman Brothers.

Also on Wednesday the market heard official price talk of the 10¼% area on American Seafoods Group's $175 million of eight-year senior subordinated notes (B3/B) via Banc of America Securities.

And official price talk of a yield in the 8 5/8% area surfaced Wednesday on Dura Operating Corp.'s $250 million of ten-year senior notes via joint bookrunners Banc of America Securities and JP Morgan.

Early in the week of April 1 Prospect News heard a sell-side source remark that the average deal size, year-to-date, is down significantly, largely owing to the absence from the market of the telecom credits which brought business to the high yield in the first quarter of 2001, with billion-dollar-plus deals from Nextel, Global Crossing and McLeod - a litany that few buy-siders chant these days with much enthusiasm.

The average deal size in 2001's first quarter was $350 million, whereas the first quarter of '02 saw a significantly shrunken average deal size of $255 million, according to data compiled by Prospect News.

The sell-side source who noted the lower average deal size wondered what the buy-side, having demonstrated in the not-too-far-distant past a preference for large liquid deals, is making of the smaller sizes it has seen thus far in 2002.

Hence Prospect News put the question to Timothy Collins, who along with Steve Swanson manages the Mason Street High Yield Fund and the Mason Street Asset Allocation Fund: Do you find the smaller deals of 2002 to entail more risk, compared to larger deals?

Collins responded by pointing out that the large deals of 2001, though they might have appeared quite liquid at the time, turned out otherwise.

"The issue of deal size is influenced by several factors," Collins stated. "A couple of years ago the average deal size was larger. And I think that was largely due to the teleco and technology sectors. They weren't necessarily a lot of large companies, from the standpoint of a P&L. But they had big business plans, big market capitalization and big demand for capital. You had companies like Global Crossing, and Williams, and XO, and Level 3, and WinStar, to name a few, that all raised billions of dollars in very large blocks of bonds and have subsequently fallen by the wayside or are trading for pennies on the dollar.

"So you've had some multi-billion dollar cap-structures fail. And I don't think that size necessarily makes for good investments.

"I come to high yield, and our other manager here and the head of our groups Steve Swanson, we were both trained on the private debt and equity side, for Northwestern Mutual. So we came to the public high-yield market with a background of looking at small- and mid-cap companies, underwriting things that you had to hold to maturity if you bought them.

"So I find it kind of interesting. I've never believed that you have as much liquidity in high yield, or even in the general corporate bond market as people would like to believe. And when you need liquidity is exactly when you don't have it.

"There's no substitute for good underwriting discipline. If you make credit mistakes, guess what, there is not somebody sitting by with a large bid for you.

"If you have a good credit and it's moving along and progressing well, lo and behold you really don't have a need for liquidity.

"Liquidity is great if there is some trading flow. It allows you, at the margin, to rebalance your portfolio in a way that perhaps gives you some total return. And if it helps you manage the marginal risk in your portfolio that's great.

"But I think you have to begin the whole investment process saying to yourself 'What if I have to hold this to maturity?' The notion that there's always a greater fool - that you can go out and do silly things, and then count on liquidity to bail you out because you'll see the problem before anyone else does, and there will always be some silly guy there with a big bid for you - is kind of a dangerous way to live."

Collins, whose Mason Street High Yield Fund and Asset Allocation Fund celebrated their fifth birthdays on March 31, further observed that high yield has not traditionally been the fountain of massive deals.

"Historically the high-yield market has been about smaller and mid-market companies," he said. "It's been about emerging growth companies - not in the sense that telecom became second-stage VC financing - but growth companies that have emerged and achieved profitability and positive cash flow.

"And then the high yield market is also populated by the fallen angels that rain down out of the investment-grade universe and leveraged buy-outs of more mature companies. So your larger deals, historically, in the traditional high-yield market have come from the big LBOs and the fallen angels.

"We still have fallen angels. So we're getting some big deals in the high-yield market. They're just not coming on the new issue calendar. They're downgrading out of investment-grade land.

"Leveraged buyouts, we're not seeing those big deals because the LBO market has been fairly cool the last couple of years.

"So the fallen angels are happening in the secondary market, not the primary market. The LBOs aren't happening as much as they were in a more generous credit environment. That leaves you with the components of the market that are composed of smaller emerging-growth companies and just traditional small mid-market leveraged companies.

"So not surprisingly the smaller companies are doing smaller deals. It doesn't mean they're bad. It just means they're smaller."

Not only does Collins dispute the liquidity of massive deals, he also said that they make a spawning ground for activity that creates volatility in the market.

"In some cases big deals embolden vultures on Wall Street desks to short things and front-run things that they wouldn't dare short five million bonds in a 100 million bond issue, but they will take predatory action on a billion-dollar issue," he said

"So large issues are often technically weaker and more prone to volatility. And that doesn't necessarily engender confidence or make more people willing to step up and give you a bid."

According to Collins, both of the Mason Street funds that he co-manages are top quartile performers, and the asset allocation fund is a top decile fund for five years.

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