Revlon lower on disappointing earnings; PetroQuest deal is priced, Premium Standard offering is iced

By Paul Deckelman and Paul A. Harris

New York, May 6 - Beauty-care products maker Revlon Consumer Products Co.'s bonds were looking "kind of ugly" Friday, in the words of a trader, after Revlon reported what the market took to be disappointing numbers, even through it managed to narrow its net loss from year-earlier levels.

Calpine Corp.'s bonds were seen languishing at lower levels, on the news that a dissident bondholder is suing the San Jose, Calif.-based power generating company, hoping to restrict what the company can do with the proceeds from the planned sale of its Saltend power generating facility.

The market spent most of Friday absorbing the news that its corner of the corporate debt universe will almost certainly become awash in the "fallen angel" paper of General Motors Corp. and Ford Motor Co., following Thursday's news that Standard & Poor's has downgraded both to junk.

Various sources suggested that high yield had rallied sufficiently before the Thursday announcement about the downgrades of the auto-makers' debt that there wasn't sufficient time for everything to fall all the way back.

Friday, however, was a different story.

One sell-side source said that volumes on the day were very light.

"GM and Ford are actually slightly better than Thursday," the official said, but added that in general the high yield was "flat, choppy, light and had an altogether bad tone."

In the primary market one deal priced, as PetroQuest Energy completed a downsized, restructured transaction of notes that were sold with triple-C ratings from both Moody's Investor Services and Standard & Poor's.

Perhaps notably, PetroQuest's notes priced within price talk, rendering them something of an anomaly in the presently primary market.

However one deal was postponed as Kansas City, Mo., hog operation Premium Standard Farms Inc. opted to fund its tender via sources other than the high yield.

PetroQuest downsized but within talk

Friday's sole transaction in the new issue market came from Lafayette, La.-based PetroQuest Energy, issuing in conjunction with PetroQuest LLC.

PetroQuest priced a downsized, restructured $125 million issue of 10 3/8% seven-year notes (Caa1/CCC+) at 98.783 to yield 10 5/8%, on the wide end - but within - the 10½% area price talk.

Credit Suisse First Boston ran the books.

The issue was downsized by $25 million from $150 million. The company also shortened the tenor of the bond to seven years from eight years.

PetroQuest also added an additional debt incurrence test covenant to the bond.

A less than $500 million week

The downsized PetroQuest transaction, however, failed to push the high-yield primary market over the half-billion dollar threshold for the first week in May.

The week beginning May 2 saw $493 million price in three dollar-denominated transactions, far less than half the previous week's $1.33 billion of issuance across nine dollar-denominated tranches.

At the May 6 close, the high-yield market had seen $37 billion of issuance in 148 dollar-denominated tranches so far in 2005, falling further and further behind 2004's pace. By the May 6, 2004 close, the market had seen $60 billion of new issuance in 239 dollar-denominated tranches.

Premium Standard Farms bows out

Beyond the PetroQuest deal, the primary market produced only one nugget of news, on Friday. And that was a negative one.

Premium Standard Farms postponed its $125 million offering of 10-year notes (B1/BB), which had been talked at 7¼% area.

The company announced in a Friday press release that it will use "existing borrowings and available cash" to fund the tender offer for its 9¼% senior notes due 2011, as opposed to proceeds from the sale of the notes.

Sources told Prospect News that the official price talk of the Morgan Stanley-led deal may have reflected an unrealistic expectation in light of the present sell-off in the high-yield market.

Since the middle of March sell-side sources have asserted that their most challenging task has been to acclimatize prospecting junk bond issuers to the new realities of the high-yield market, where those issuers can expect to pay interest rates that are considerably higher than the ones that prevailed in the late 2004 and early 2005 time periods.

Bad news but good timing

Meanwhile on Friday, Diane Keefe, portfolio manager of the Pax World High Yield Fund, told Prospect News that while the Ford and GM downgrades may be bad news for high yield, it's just as well that the market absorbed the news sooner than later.

"I thought that it was good that the ratings agencies did it before summertime because things get more illiquid during July and August," Keefe said.

"Things like that take a long time to work out, and would take a longer time to work out in late summer.

"So it's better that they did it now so that people can set themselves up knowing that it is extremely likely that General Motors will be junk, in terms of the indices, by July."

Keefe added that she is proscribed from owning either Ford or GM because both fail to pass the social issues screens to which the Pax World High Yield Fund submits the credits it analyzes: Ford because it has over 50 hazardous waste "superfund" sites, and GM because it is a weapons contractor.

Keefe also told Prospect News on Friday that she is presently not looking at any of the deals thought to be in the high-yield new issue market.

"I'm just looking at stuff in the secondary," she said. "Everything has gotten cheaper. Things that I used to buy at 8%, now I can buy them at 8½%.

"So I have gotten my shopping cart out."

Kerr-McGee bails

In addition to the above-mentioned postponed Premium Standard Farms deal, the high yield learned Friday that one other sizable piece of anticipated business will ultimately not be done in the junk bond market.

Kerr-McGee Corp., recently cut to junk by all three ratings agencies because of its plans to repurchase $4 billion of common stock, increased the total size of its new credit facility by $500 million to $5.5 billion.

The upsizing, combined with the fact that the company had over-funded the buy-back by $500 million, allowed Kerr-McGee to eliminate a proposed $1 billion unsecured bridge loan which it intended to take out with a bond offering.

Revlon lower on earnings

Back among the secondary names, a trader said that investors "didn't like [Revlon] too much" following the release of the New York-based cosmetics maker's first-quarter numbers; even though its net loss in the first quarter of $46.8 million (13 cents per diluted share) was an improvement over the year-earlier net loss of $58.2 million (63 cents per share), the company had lower EBITDA and swung into the red on an operating loss basis versus a year-ago profit.

Revlon, said another trader, had "pretty crappy numbers," and bond investors voted accordingly. He saw the company's 8 5/8% notes due 2008 retreat to 90.5 bid, 91.5 offered from prior levels around 93 bid, 94 offered, while its 9½% notes due 2011 dipped to 91 bid, 92 offered from 95 bid, 96 offered, finishing "pretty much on top of each other, as the prices start to compress a little."

The first trader, meantime, also noted that compression phenomenon, as both issues ended at 91 bid, 91.5 offered, from Thursday levels of 93 bid, 94 offered for the 8 5/8% notes. He said the 91/2s had recently been quoted as high as the 95.5 region.

Proving that it takes all kinds to make a world, yet another trader said he had no change from the bonds' prior levels in the 91-92 area.

Revlon's New York Stock Exchange-traded shares lost 33 cents (10.29%) to end at $2.89 on volume of 6.4 million, more than five times the usual turnover. Wall Street had been expecting a net loss of only seven cents a share, about half of what the company ultimately lost. The market was also apparently dismayed over the 2% drop in revenue from a year earlier to $300 million - when analysts were, on average, looking for revenues in the $314 million area.

Revlon executives on the company's conference call following the release of the numbers also noted the role that recent debt transactions had played in helping to reduce the company's net loss, by "significantly" reducing interest costs year-over-year (see related story elsewhere in this issue).

Star Gas helped by results

A set of numbers which took their company's bonds in the opposite direction came from Star Gas Partners LP, whose 10¼% notes due 2013 were seen up four or five points at 88 bid after the Stamford, Conn.-based distributor of home heating oil reported first quarter earnings.

A trader said those bonds - which had finished Thursday at 83 bid, 85 offered - actually got as good as 90 bid, 92 offered, "but then they tailed off at the end of the day" to finish in that 87.5-88 bid context.

While the earnings did not seem overwhelmingly positive on their face - Star lost $24.1 million (67 cents a share) for the fiscal second quarter ended March 31, versus a net profit of $80.7 million ($2.27 a share) a year earlier, revenues shot up to $555.3 million from $481.8 million, as higher prices for home heating oil offset lower volumes. And analysts said investors were reacting positively to a recent change in the company's top management.

Star's NYSE-traded shares jumped $1.03 (43.46%) to $3.40 on volume of 1.2 million shares, about three times the norm.

Calpine lower on lawsuit

Calpine found itself on the receiving end of a lawsuit filed in the Supreme Court of the Canadian province of Nova Scotia, seeking to force the company to devote any proceeds from the sale of its Saltend plant to fulfilling its obligations toward the holders of two series of bonds issued by Calpine's Canadian financing unit.

"Everything traded off," a trader said, "except their short bonds," the 8¼% notes due 2005. He saw those bonds at 93.5 bid, 94.5 offered, around where they had already been trading.

"Though '05," he said, "people believe the company has liquidity - kinda," noting that the fact that a bond slated to come due in such a relatively short time is still trading at a five-point point discount to par says something about the market's skepticism.

On the other hand, he said, the company's other bonds "definitely came in" on news of the lawsuit, which was filed Thursday at the Supreme Court in the provincial capital of Halifax.

He saw Calpine's 10½% notes due 2006 at 79 bid, 81 offered, down from prior levels at 83 bid, 85 offered, while its 8½% notes due 2011 retreated to 53.25 bid, 55.25 offered from Thursday levels as good as 57 bid, 59 offered.

However, another trader was not so impressed, saying that the Calpine bonds "had all their action [Thursday], when the 81/2s fell seven points." He said that they remained at those levels in the lower 50s, unchanged on the session.

The plaintiff in the suit, Harbert Distressed Master Fund Ltd., is the same company whose letter last month warning that Calpine's sale of the British plant could leave the company unable to fulfill its obligations to the holders of Calpine Canada Energy Finance II's 8 7/8% notes due in 2011 and of 8 3/8% notes due in 2008.

In the lawsuit, the fund repeats its assertions that Calpine might use the proceeds from the Saltend sale - it is now assessing bids it has gotten in an auction for the plant - for purposes other than backing the two bond issues, and asks that Calpine be directed to keep those proceeds at the Canadian financing subsidiary.

Calpine's vice president for public affairs, William Highlander, declined comment on the suit Friday, other than reading a prepared statement in which Calpine acknowledges having been served with the suit, says it is evaluating the Harbert claims, and vows to "aggressively" defend its actions.

Market quiet, GM unchanged

Elsewhere, a trader said that market activity was "very, very quiet. The general tone was focused early, early in the morning, as the traders wanted to know what [position] Europe was going to take" on Thursday's news that Standard & Poor's had lowered the ratings of General Motors Corp. and Ford Motor Co. to junk status.

"But in actuality, they really didn't do much. I think people maybe are expecting more Europeans in on Monday. So the result was the bonds didn't go anywhere. There was trading in GM for the first three hours, four hours." After that, he said, "the whole market took its tone from what was going on in those two names."

And it wasn't much.

GM's most widely quoted bond issue, the 8 3/8% notes due 2033, were seen unchanged at 74 bid, 75 offered.

Another trader, noting that the bonds of automotive supplier companies were getting slapped around Thursday after the GM/Ford downgrade, said that on Friday, they were mostly unchanged at those lower levels, and were just still "just idling in neutral."

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