Bombardier off as CEO is axed; Reliant downsizes $1 billion-plus bond deal

By Paul Deckelman and Paul A. Harris

New York, Dec. 13 - Bombardier Inc. dropped a bombshell Monday, announcing that its board of directors had voted to oust chief executive officer Paul Tellier. That caused the Toronto-based aircraft and railroad equipment manufacturer's bonds to fall as much as three points across the board.

In primary market activity, Bio-Rad Laboratories, Inc. priced a $200 million issue of 10-year notes late in the session. But the big news came earlier in the day, as Reliant Energy Inc. was heard by syndicate sources to have downsized what had originally been planed as a $1.1 billion bond offering, turning about a third of that planned borrowing into bank debt.

Bombardier's bonds fell after the company announced the abrupt ouster of Tellier, who also leaves the company's board. Two other board members also tendered their resignations in the shakeup. Laurent Beaudoin, son-in-law of company founder Armand Bombardier and head of the corporation's controlling family, will take over as CEO, and will head a new Office of the President, which will include his son, Pierre Beaudoin, president of Bombardier Aerospace, and Andre Navarri, president of the Bombardier Transportation rail-equipment division.

A trader said that he had seen the news and it was his guess that the bonds "dropped a point or two," although he had no specific levels.

A market source at another desk estimated that the bonds were down around three points, although he said that "the shorter ones weren't quite down three - but 10 years and out, they were all down three."

He saw the company's 6 1/8% notes due 2006 at par, its 6¾% notes due 2012 at 93, its 8 3/8% notes due 2013 at 105.5 and its 6.30% notes due 2014 at 88.75.

Another market source quoted the 63/4s as having fallen to 92.875 from prior levels at 95.5, while its 6.30s were down perhaps 1 1/8 points at just under 90.

Tellier was brought in just under two years ago to try to turn the company's fortunes around, and tried to do that with aggressive cost cutting, including headcount reductions aimed at bringing the company's total worldwide workforce down to 56,000 by 2006 from 75,000 in 2003.

However, even with those cuts, Bombardier is still wallowing in red ink, having lost $141 million (nine cents per share) year-to date on revenues of $11.04 billion; a year ago, it was showing a profit of $255 million (14 cents per share) on revenues of $10.63 billion.

Weakness in its core European markets is a factor, as is the tough competition it faces from Brazilian-based plane manufacturer Embraer, among others, in its markets for regional jets, used by airlines for relatively short hops between second-tier cities, or to connect those cities with larger metropolitan areas. Problems in the U.S. airline industry are also a factor in Bombardier's troubles.

Bombardier's once investment-grade credit ratings were recently lowered to junk-bond status, and Standard & Poor's said that it might cut its ratings on the company further still, as it placed its BB corporate credit and other ratings on CreditWatch with negative indications.

"The CreditWatch placement reflects new uncertainty about Bombardier's financial policies and strategic direction following the resignation of the company's CEO," S&P credit analyst Kenton Freitag wrote.

"The increased uncertainty adds to Standard & Poor's previously stated concerns, formerly reflected in a negative outlook, that adverse developments in the U.S. airline industry could further affect the company's profitability."

Freitag opined that the unexpected departure of Tellier "comes at a sensitive time for Bombardier, and raises several concerns, including possible reduced confidence by capital providers (banks, bond holders, surety providers, and equity investors); the potential for adoption of more aggressive financial policies; the potential for a derailing of cost reduction initiatives; and greater governance concerns. "

Tenet lower

Elsewhere, Tenet Healthcare Corp. warned that a combination of both industry and company-specific challenges would continue to slow its earnings recovery in the current fourth quarter and on into 2005. The challenges include reduced patient volumes, high levels of bad debt from uninsured and under-insured patients, the shift of a portion of the company's managed care business to contracts that provide lower reimbursement, and continued pressure on costs - particularly labor and supplies.

The Santa Barbara, Calif.-based hospital operator's bonds were "down a touch," one market source said, quoting its 6 3/8% notes due 2011 down a full point at 95, its 9 7/8% notes due 2014 and 5% notes due 2007 both down ¾ point, at 110.5 bid and 99 bid, respectively, and other issues, such as its 7 3/8% notes due 2013 down half a point at par.

A trader at another shop pegged the 7 3/8s going home late in the day at 99 bid, 100 offered, down from 100.75 bid, 101.75 offered. The 5 3/8% notes due 2006 eased to 100.5 bid, 101.5 offered from 101.265 bid, 102.25 offered. At the longer end of the curve, he saw Tenet's 6 7/8% bonds due 2031 down a whole two points to 94.5 bid, 96 offered.

Tenet, in issuing its guidance, said that it anticipates its results from continuing operations for the fourth quarter ending Dec. 31 to be below comparable third quarter results, with weak volumes and high bad debt expense as the primary drivers. In the third quarter, the company had a loss from continuing operations of 11 cents a share. Prior to the new guidance, analysts, on average, had been looking for a loss of about four cents a share for the fourth quarter.

The company said that, while it expects results from continuing operations for 2005 "to improve meaningfully compared to recent performance," it does not expect 2005 results from continuing operations to exceed breakeven, with likely performance to fall in a range between the company's recent performance and breakeven.

Tenet also said that it will likely need to record various "significant charges" in the fourth quarter, including a preliminary estimate of non-cash, long-lived asset and goodwill impairment charges that could exceed $1 billion as a result of its current financial trends, preliminary budgets and outlook.

The company, which had $1.3 billion of cash at Sept. 30, said it expects to have a similar amount at Dec. 31, after funding in the fourth quarter the repurchase of approximately $100 million of notes due in 2006 and 2007 and completing various hospital sales as previously announced. The company currently has less than $500 million of debt maturities between now and December 2011.

Tenet is in the midst of shedding some 27 hospitals that are either underperforming or outside the core geographic areas the company wishes to concentrate on. Within those areas, it is focusing its efforts on a core of 67 hospitals. So far Tenet has completed the sale of 11 hospitals, is in the process of selling 11 others, and is hopeful of finding buyers for the remaining five. ,

Trevor Fetter, Tenet's president and chief executive officer, said in a statement that while his company anticipated "a very challenging 2005," due to such factors as bad debt costs and ongoing probes by the regulatory agencies, "we are developing an aggressive internal operating plan to maximize performance within the reality of our current operating environment. In addition to precise execution of this plan, we need a return to sustained increases in volumes. For volumes to recover, however, we need to substantially resolve our open litigation and investigation matters."

Tenet plans to update investors in more detail on a Wednesday morning webcast.

Nextel up again

Nextel Communications Inc. bonds continued to get better, as the prospects for the Reston, Va.-based wireless operator's acquisition by Sprint Corp. seemed to grow increasingly stronger Monday - even though the two companies have yet to confirm all of the speculation. Monday's Wall Street Journal reported that an announcement could come as soon as Wednesday.

The prospect of a merger sent Nextel's bonds up modestly on Thursday and more powerfully on Friday. On Monday, the 7 3/8% notes due 2015 were seen having firmed to 112.5 bid from 111 bid, 111.5 offered earlier, while its 5.95% notes due 2014 improved to 105.5 bid, 106 offered from 104.625 bid, 105.625 offered.

Primary quiet

The primary market session passed Monday in a comparatively quiet fashion as only one issuer, Bio-Rad Laboratories, drove through the market, pricing $200 million of 10-year notes at the tight end of talk.

Also Reliant Energy trimmed $350 million from its bond deal, shifting that amount to its bank loan (also a hot market, one source reminded Prospect News on Monday).

Meanwhile the investment banks started setting the stage for what is forecast to be an active - if not hectic - Dec. 13 week in the high-yield new issue market.

One source suggested late Monday that the 2004 home runway lights may be finally coming into sight as far as the junk market is concerned.

Cash to put to work

Although evidence from the recent high-yield mutual funds flows numbers suggest that cash may be exiting the junk asset class, sources continued to insist on Monday that there is still a lot of money out there chasing yield.

In Monday's edition of The Situation Room daily newsletter, Banc of America Securities' head of debt research David Goldman and his team examine the possible reasons.

"High-yield mutual funds reported their third consecutive week of net outflows last week, as investors pulled $166 million from these funds during the week ended December 8," write Goldman and his colleagues.

"That outflow, combined with the previous two weeks' outflows of $5 million and $186 million, has now brought the four-week moving average of high yield fund flows down to $9 million. Nevertheless, the outflow did not seem to dampen overall demand for high-yield paper, as evidenced by the generally good reception for last week's heavy new issue supply as well as the solid performance posted by the secondary market."

Goldman asserts that one reason for the apparent lack of reaction to the outflow news is the tendency of the flows to follow market performance, not the other way around. Also he notes the relatively small size of the outflows - the $361 million over the last three weeks is "just 0.7% of the total par amount of $511 billion tracked by [the] BAS High Yield Broad Market Index."

And finally, he asserts, redemption activities are acting to keep investor cash levels high.

"As a result, the buildup in cash far exceeds the withdrawals from mutual funds," Goldman and company conclude.

Bio-Rad prices $200 million

Only one deal priced during the opening session of the Dec. 13 week.

Bio-Rad Laboratories priced a quick-to-market $200 million issue of 10-year senior subordinated notes (Ba3/BB-) at par to yield 6 1/8%, at the tight end of the 6 1/8% to 6¼% price talk.

Credit Suisse First Boston ran the books for the deal from the Hercules, Calif.-based manufacturer and distributor of life science research products and clinical diagnostics.

Bio-Rad Laboratories visited the primary market with an upsized offering of $225 million in August 2003, also pricing 10-year senior subordinated notes (also Ba3/BB-) at par to yield 7½%, wide of the 7 1/8%-7 3/8%. Goldman Sachs led that deal.

Reliant Energy trims bonds

Price talk of 6 5/8%-6 7/8% emerged Monday on Reliant Energy Inc.'s downsized and restructured $750 million offering of 10-year non-call-five senior secured notes (expected B1/confirmed B+), with the bonds seen pricing Tuesday afternoon.

The offering was downsized and restructured from $1.1 billion in two parts, with the company eliminating a planned six-year floating-rate tranche and shifting $350 million to its term loan B.

Goldman Sachs, Banc of America Securities, Barclays Capital, Deutsche Bank Securities and Merrill Lynch & Co. are joint bookrunners.

One investment banker suggested during a conversation with Prospect News that the bank loan market, like the high yield, is presently a hot one, with issuers getting rates and repayment options that might end up to be more tempting than the ones they would come with bonds.

Elsewhere price talk of 7¼% to 7½% was heard on Landry's Restaurants Inc.'s $450 million of 10-year non-call-five senior notes (B2), expected on Wednesday via joint bookrunners Wachovia Capital Markets, Banc of America Securities and Deutsche Bank Securities.

IWO Escrow Co. in conjunction with IWO Holdings, the parent of Independent Wireless One Corp., issued price talk Monday on its two-part $225 million total proceeds bond offering.

Price talk is Libor plus 400 to 425 basis points on $150 million eight-year non-call-two senior secured floating-rate notes (B3/CCC+).

Meanwhile the company's $75 million proceeds of 10-year senior discount notes are talked at 11% to 11¼%.

Pricing is expected on Tuesday morning via Bear Stearns & Co., Lehman Brothers and Merrill Lynch & Co.

Atrium announces roadshow start

Only one issuer came Monday with a roadshow announcement.

ACIH, Inc., the holding company for Atrium, will begin a roadshow Tuesday for $125 million proceeds of eight-year senior discount notes (B3/CCC+), which are expected to price late in the present week or early in the week of Dec. 20.

UBS Investment Bank and Citigroup are joint bookrunners for the debt refinancing deal from the Dallas-based manufacturer of aluminum and vinyl residential windows.

Fridson sees '04 junk quality "worst in history"

Meanwhile in the most recent issue of Leverage World, the weekly publication of high yield strategy, junk bond guru Martin Fridson makes an assessment of year-to-date new issuance in terms of credit quality, which he deems to be historically low.

"The year now ending will go down as the worst in history in terms of high-yield new issue quality. Through Nov. 30, 2004, according to Merrill Lynch, 33.9% of primary volume, by principal amount, has been issued by companies rated B- or lower by Standard & Poor's at the senior-equivalent level. The highest previous comparable was 29.4% in 2000. As recently as the more credit-conscious year of 2002, issuance by bottom-tier companies accounted for just 10.0% of volume."

Fridson outlines what he believes are the market forces that brought about the deterioration in quality: 1) liquidity in the financial system due to Fed policy and capital inflows from abroad, 2) declining interest rates on higher quality obligations driving capital into high yield, 3) demand for high-yield paper that exceeds supply, 4) opportunistic underwriters bringing to market issuers for which the market might not otherwise be open, and 5) portfolio managers forced to put cash to work must select from what is offered, even though the supply is extraordinarily infused with lower quality credits.

"This is a familiar pattern, aggravated in the current cycle by a near absence of issuance related to capital expenditures," Fridson adds. "With U.S. industry operating at just 77.7% of capacity, corporations are in no hurry to build more plants and equipment. Underwriters have partially replaced that missing supply with dividend deals on recently completed leveraged buyouts. To say the least, such transactions have not raised the tone of the primary market."

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