Reader's Digest, Seminole Hard Rock deals price; airlines nosedive; market softer as stocks slide

By Paul Deckelman and Paul A. Harris

New York, Feb. 27 - The Reader's Digest Association Inc. priced a downsized offering of 10-year senior subordinated notes Tuesday - one of two new deals which came to market in a downsized form. Also coming in a little smaller than originally anticipated was Valassis Communications Inc.'s eight-year senior notes issue, which was restructured into a single-tranche offering. But Seminole Hard Rock Entertainment Inc.'s floating-rate seven-year deal was upsized a bit from what had originally been shopped around the market.

Out of the combined total of $1.665 billion of U.S. dollar issuance in three tranches, one deal came inside of the price talk while the other two priced at the tight end of talk.

Interestingly, two of the three deals were downsized (the other upsized) as a combined total of $200 million of debt financing migrated to the bank loan market from the junk market on Tuesday.

Secondary traders said that aftermarket demand for the new issues was lackluster and weak, as each offering struggled to stay above its respective par issue price.

That came against the backdrop of a mostly softer market, with junk pretty much taking its cue from stocks, which slid badly in response to an earlier market meltdown in China. The bellwether Dow Jones Industrial Average fell as much as 546.20 during the session to touch an intraday low of 12,086.06, before recovering some ground in the last hour of trading to close down 416.02, (3.29%), at 12,216.24. It was the biggest plunge, in terms of points, since the first session back after the 9/11 terrorist attacks, and it left the widely followed index in negative territory for the year - the first time that has happened in 2007. Other widely followed market measures showed a similar steep drop on what one bond trader called "a pretty ugly day."

One of the ugliest areas was in the bonds of the bankrupt Delta Air Lines Inc. and Northwest Airlines Corp., which fell about 4 points across the board each, as crude oil prices - a barometer for future jet fuel price movements - pushed upward to a new high for the year.

Trailing the Tuesday close, a buy-side source told Prospect News that the broad junk market was down at least 1 point on the day.

In spite of that sell-off, the primary market continued to see notable deal executions.

Reader's Digest tight to talk

In Tuesday's biggest deal, Reader's Digest Association Inc. priced a downsized $600 million issue of 10-year senior subordinated notes (Caa1/CCC+) at par to yield 9%, at the tight end of the 9% to 9¼% price talk.

JP Morgan, Merrill Lynch & Co., Citigroup and RBS Greenwich Capital were joint bookrunners for the LBO deal.

The company downsized the bond offering from $750 million, shifting $150 million of the LBO financing to its term loan.

A buy-side source said that although the deal had gone well, the bonds finished the session at 99 bid, 99.25 offered.

"The market just overwhelmed them late in the day," the source commented.

Valassis on the tight end

Valassis Communications Inc. priced a downsized, restructured $540 million issue of eight-year senior notes (B3/B-) at par to yield 8¼%, on the tight end of the 8 3/8% area price talk.

Bear Stearns and Banc of America Securities were joint bookrunners for the acquisition deal, which was downsized from $590 million, with the company shifting $50 million of proceeds to its term loan. A proposed floating-rate notes tranche was dropped from the transaction.

Valassis is a Livonia, Mich., marketing services company.

Seminole upsizes, comes inside talk

Also completing a bond deal was Seminole Hard Rock Entertainment Inc. which priced an upsized $525 million issue of first-priority senior secured seven-year notes (B1/BB) at par to yield three-month Libor plus 250 basis points.

The yield came 12.5 basis points inside of the Libor plus 275 basis points area price talk.

Merrill Lynch & Co. ran the books for the acquisition deal, which was upsized from $500 million.

A senior high yield syndicate official, not in the deal, was not surprised by the way the Seminole transaction unfolded.

The source said that investors can't seem to get enough exposure to the sector, a fact that serves to insulate that sector from market turbulence of the kind seen on Tuesday.

The source also noted that the first-lien security of the notes gave the transaction more of a "loan" feel with regard to risk.

Shaw upsized to C$400 million

Also pricing a deal on Tuesday was Canada-based Shaw Communications Inc.

The company sold an upsized C$400 million issue of 5.7% 10-year senior notes (Ba1/BB+) at 99.767 to yield 5.731% in a quick-to-market transaction.

TD Securities led the debt refinancing deal, which was upsized from C$350 million.

The window

A buy-side source conjectured that Tuesday's broad sell-off would likely not "close the window" as far as the new issue market goes, but added that issuers might have to adjust their interest rate expectations upward by as much as 25 to 50 basis points.

"Things will price wider because obviously the risk-averse sentiment in the market has increased pretty significantly," the source said.

However a senior sell-side source said that it remains to be seen whether the Tuesday drop would continue to ripple through the primary market in days to come.

"Certainly if we see the global equity markets drop by another 2% to 3% you could see it bleeding over into high yield," the sell-sider said.

"We just have to wait and see."

Fiat plans benchmark deal

The market also heard on Tuesday that Fiat North America is marketing a benchmark-sized offering of euro-denominated bonds (Ba2/BB/BB) that is expected to feature a 10-year maturity.

An investor presentation, to be hosted by Fiat CEO Sergio Marchionne, is scheduled to take place at 9:15 a.m. London time on Wednesday.

BNP Paribas, Calyon Securities, UBS are joint bookrunners for the general corporate purposes including debt refinancing deal.

New issues struggle in aftermarket

When the three issues of new bonds were freed for secondary dealings, they were "all crap," a trader insisted, trading around or slightly below their issue price.

He saw the new Reader's Digest 9% notes due 2017 finishing the day at 99.5 bid, while he saw Seminole Hard Rock's floating-rate notes due 2014 "kinda hanging there for a while," at their par issue price.

He saw no trading in the new Valassis Communications 8¼% notes due 2014.

However, another trader did see those bonds, like the others, meandering lower at 99.5 bid, 100 offered. He saw the Reader's Digest bonds at 99.25 bid, 99.625 offered, while the Seminole Hard Rock bonds hung in at par.

The first trader also saw the new Allied Waste Industries Inc. 6 7/8% notes due 2017, which had priced at par on Monday, only to struggle in the aftermarket, continuing to have trouble, down about ¾ point from issue.

"There's nothing really sexy there - everything was weaker, as you would expect" on such a session, he said.

Soft, ugly trading

Overall, he said, "it's all lower, pal," with issues down a point or two pretty much across the board, in such diverse issues as retailing, homebuilders and gaming and lodging, all of which were "down a couple [of points]."

He said that even with stocks getting clobbered, for most of the day there was "no rush for the exits. But later on, there was "more selling, as people decided to hit some bids, and then continue to move on - which you could have expected."

He projected that for Wednesday, it was likely to be "more of the same; from what we're hearing, there's a lot more stock to be sold that didn't happen today, with a back log of built up "sell" orders left over.

"It should be heavy in the morning, and then we'll see what kind of follow-through."

Another trader said that the widely followed CDX junk market index ended about 1½ points lower on the day, with considerable spread widening.

For instance, he said, General Motors Corp.'s benchmark 8 3/8% notes due 2033 "went out about 50 basis points wider" than they had been on Monday, figured on a spread versus Treasuries basis, while rival Ford Motor Co.'s 7.45% notes due 2031 were about 45 bps wider.

On a dollar-price basis, the GM bonds - after falling as low as 89.25 bid during the session - ended the day at 92.25 bid, down 1¾ points. The bond was the most actively traded issue of the day.

The Ford bonds, meantime, ended a point lower at 80.5 bid, although that was off their early lows around 76 bid.

Delta takes a dive

Overall investor nervousness and rising oil prices prompted a heavy day in Delta's debt. A distressed-debt trader said the paper saw a lot of activity, with the 8.30% notes due 2029 closing the day at 58 bid, 59 offered. The trader added that the bonds started the morning trading at 62.25 bid, 62.75 offered, then fell off from there.

At another desk, a market insider placed the notes starting at 61 bid, 62 offered, with a closing bid of 59.75.

On a day where equity saw a sharp drop, traders were indicating the nervousness was extending into the distressed debt market. However, the bankrupt Atlanta, Ga.-based Number-Three U.S. airline's stock saw gains, rising 10.5 cents (19.09%) to 65.5 cents.

Oil prices were also a factor in the slide in the airline sector's debt. Light, sweet crude oil has been hovering over the psychologically potent $60 mark for the last few weeks. Tuesday's trades were volatile, as prices fell by more than $1 per barrel to $60.06, but then climbed up to a 2007 high at $62.25. The commodity settled for a 7 cents increase over Monday to $61.46 a barrel on the New York Mercantile Exchange.

Northwest Airlines crashes

Those higher prices also greased the skids under Northwest Airlines, which dropped 3 points, according to one trader, despite news that the company had received approval to buyout one of its feeder carriers.

The bankrupt Eagan, Minn.-based Number-Five airline's 10% notes due 2009 were slotted at 94.5 bid, 95.5 offered, down from the morning trades of 97.5 bid, 98.5 offered.

One trader pegged the 7 7/8% notes due 2008 at 93, down 4 points.

A market insider said the news that the airline had received approval to purchase Mesaba Aviation Inc. "did bring some activity early in the day."

Mesaba, a unit of MAIR Holdings Inc., has operated as a feeder airline with Northwest as its only customer. Under the approved terms of the plan, Northwest will acquire the smaller airline in exchange for a $145 million unsecured claim in Northwest's bankruptcy case. Mesaba will then become a subsidiary of Northwest.

Both airlines are in bankruptcy, with Northwest expecting to emerge from Chapter 11 by the end of June. The buyout is part of Mesaba's reorganization plan, which still needs approval by its bankruptcy judge in Minneapolis and the company's creditors.

Still, the insider said Northwest's dip was significant.

"Three points tends to get people's attention," he said.

Pathmark little moved by takeover talk

The news that Pathmark Stores Inc. was in talks that might result in its sale to The Great Atlantic & Pacific Tea Co. Inc. - the venerable A&P - didn't do much for the Carteret, N.J.-based Middle Atlantic States supermarket operator's bonds, traders said.

One scoffed "big deal - it's a $12.50 buyout, and the stock is trading around $12.20 or $12.30" - a sure sign that the financial markets remain skeptical.

He noted that the Pathmark 8¾% notes remained around 101.5 bid, 102.5 offered. "That's it - nothing sexy," he declared. "They've been trading higher, based on this rumor, for the past month or so. When they were 95-96, we'd have something to say [if they ever moved up to around 101.5]. But they've been north of par for about three months."

Another trader said he had seen the Pathmark bonds staying around 100.375 bid, 101.375 offered.

A&P's bonds were meantime not seen to have traded, with its 7¾% notes due 2007 and 9 1/8% notes due 2011 quoted around where they had ended last week, around 98.75 and 101.5, respectively

Stephanie N. Rotondo contributed to this report.

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