Domtar bonds jump on Weyerhaeuser deal; Jean Coutu up as Eckerd deal seen near

By Paul Deckelman and Paul A. Harris

New York, Aug. 23 - Bonds of Domtar Inc. were seen up 3 to 5 points on the session, traders said, after the Montreal-based paper company announced that it will acquire the Fine Papers unit of U.S.-based forest products giant Weyerhaeuser Co. in a complex $3 billion-plus cash-and-stock transaction which will actually leave Weyerhaeuser's shareholders in control of a majority of the stock of the "New Domtar" which will be created by the deal.

Domtar's sector peers, such as Bowater Inc., Abitibi-Consolidated Inc. and Tembec Inc., were all also higher on sector sympathy.

Bonds of another Canadian name - pharmacy operator Jean Coutu Group Inc. - were also up, with rumors and news reports that Longueuil, Que.-based Coutu is on the verge of inking a $3.4 billion deal to sell its nearly 1,900 Brooks and Eckerd drugstores in the United States to Rite Aid Corp. The latter company's bonds were seen off modestly.

In the battered automotive supplier sector, Metaldyne Corp. - whose bonds have been getting hammered so far this week in reaction to Friday's big announcement by Ford Motor Co. of coming output cuts and Monday's warning from Standard & Poor's that Ford's move could harm the finances of a number of supplier companies, including Metaldyne - were seen bouncing around crazily, first firming smartly from their recently oversold levels in the morning, and then retreating later on, with traders citing the news that Metaldyne's biggest customer, DaimlerChrysler AG's Chrysler Group, will cut fourth-quarter production of its Dodge Durango sport-utility vehicles and its Dodge Ram pickup trucks, as the Number-Three domestic vehicle maker follows the example of larger rivals General Motors Corp. and Ford in trying to balance sagging sales and bloated inventories.

The junk bond primary market, meantime, remained stagnant, with new-dealers taking advantage of the mid summer lull and pushing off any potential new issues as post-Labor Day business.

Their absence was hardly missed, as junk players found plenty going on in the secondary sphere to focus on, particularly the Domtar-Weyerhaeuser deal.

Domtar rises

A market source saw Domtar's 9½% notes due 2006 jump to levels around 105, well up from the 99 area where the bonds had been languishing, with little trading seen, since early August. The source also saw Domtar's lightly traded 5 3/8% notes due 2013 trade as high as 87.5 bid before coming off that peak to finish around 85.75, still up more than a point from recent levels.

The company's more actively traded 7 1/8% notes due 2015 gained 3 points on the session to 93, while its 7 7/8% notes due 2011 were also seen up a trey, at 99.5 bid.

Another trader called the company "one of the most active things today," in quoting the 7 7/8s two points better at 99 bid, 99.5 offered, and the 7 1/8s at 92.25 bid, 92.75 offered.

Yet another trader estimated the company's bonds up 4 points on the day, seeing the 7 7/8s at 99 bid, par offered.

Under the terms of the transaction as announced by the two companies, Weyerhaeuser shareholders will get a 55% ownership in the "New Domtar" company that will be formed by the union of the existing Domtar and the Weyerhaeuser fine papers unit, which produces paper used in copier machines, brochures and books. Shareholders of the old Domtar will own 45% of the new company. Domtar will also pay Weyerhaueser $1.35 billion in cash, which the company will borrow under new credit facilities.

That cash payment, plus the stock valued at the closing price of Domtar stock on Aug. 22, results in a total transaction value of $3.3 billion, before considering resulting synergies.

Despite the fact that the transaction, if it proceeds as envisioned, will result in Weyerhaeuser shareholders taking control of Domtar, there will be no change-of-control offers made for most of Domtar's outstanding bonds, which were largely issued when the company was an investment-grade name and thus lack the standard protective covenants most junk bonds enjoy (see related story elsewhere in this issue). But even if such an offer is triggered for the sole original junk issue, the 91/2s, it is unlikely to find any takers - since those bonds are now trading well above the 101 level at which the company would offer to repurchase the bonds.

Other paper, forest names gain

Traders noted that other paper and forest product names were pushed up by the Domtar news, with one seeing Abitibi-Consolidated's 6% notes due 2013 up a point at 82.5 bid, 83.5 offered, while Bowater's 7.95% notes due 2011 were likewise a point better, at 96.25 bid, 97.25 offered.

Another trader, while seeing Domtar's peers a bit firmer, said "not really much is happening." He saw the Bowater 7.95s a quarter-point better at 96 bid, 97 offered, and its 9% notes due 2009 unchanged at 103.5 bid, 104 offered, while Tembec's 8½% notes due 2011 were half a point better at 52.5 bid, 53.5 offered.

Another market source saw those Tembec 81/2s unchanged at 52.5, but did see the Montreal-based forest products company's 7¾% notes due 2012 were ¾ point higher at 51.25.

Jean Coutu jumps on sale talk

Apart from the forest and paper names, Jean Coutu's 8½% notes due 2014 were seen up nearly 4 points at 96.5, while its 7 5/8% notes due 2012 gained nearly 2 points to 98.5.

Traders attributed the rise to market buzz that Rite Aid is close to reaching a deal with Jean Coutu to acquire the latter's Eckerd and Brooks drugstore chains for around $3.4 billion in cash and stock. The talk gained credence when The Wall Street Journal's online news service ran a story late Wednesday, citing two unidentified people familiar with the matter.

The Journal said that the deal would consist of $1.8 billion in cash and the rest Rite Aid shares, giving the Canadian company about a 30% stake in Camp Hill, Pa.-based Rite Aid.

A trader said the latter's bonds were easier on the news, but said that while the longer-term debt, like its 7.70% notes due 2027, was down ¾ point, at 85.25 bid, 86.25 offered for the 7.70s, "the shorter stuff is only down ¼ to ½ point," with the 7½% notes due 2015 half a point down at 98.5 bid, 99.

At another desk, through, Rite Aid's 9¼% notes due 2013 were actually seen up ¼ point at 99.75.

Bumpy road for Metaldyne

In the auto realm, Metaldyne's bonds "were volatile," said a trader, who pegged the Plymouth, Mich.-based metal parts manufacturing company's 11% notes due 2012 at 76 bid, 77 offered, up ½ point on the day. Those bonds "were up two points in the morning but later fell back" on the news of the DaimlerChrysler planned Dodge output cuts.

The trader also saw Metaldyne's 10¼% notes due 2014 at 95 bid, 96 offered, but added that "I don't know if any really traded. I'm not sure if it's as active as the 11s."

Young steady despite stock boom

Young Broadcasting Inc.'s bonds were little moved, even though the New York-based television station group owner's Nasdaq traded shares zoomed more than 15%, despite a lack of fresh news.

A trader saw the 10% notes due 2011 "up maybe a quarter [point]" at 92 bid, 93 offered, adding "the bonds jumped a couple of points when they reported" quarterly numbers earlier this month and held their conference call, "and it was probably priced in."

Broad market flat to weak

A high yield syndicate official, specifying on Wednesday that at present the broad market is difficult to read because trading is very "situational," estimated that junk was flat to slightly softer on the session.

Meanwhile the primary market remained in the horse latitudes through the mid-week session, with nary a whisper of news.

Avoiding the crowd

As has been true of his counterparts recently, a sell-side official who spoke to Prospect News on Wednesday morning said that the post-Labor Day new deal calendar is expected to be huge, although this source declined to furnish a number.

However with a slightly novel twist this official asserted that a lot of the post-Labor Day issuance is apt to come sooner than later in order to avoid the kind of crowding seen last December in the junk market.

The numbers in the Prospect News database would seem to bear out this source's color.

A total of $37.2 billion of issuance priced from Sept. 1, 2005 through Dec. 31, 2005 in 138 dollar-denominated tranches.

As the source suggested, much of that issuance was bunched up into the latter part of the year, with $22.6 billion, or close to 61% of the total for that four-month period, pricing in 79 dollar-denominated tranches during November and December.

Another sell-side official, hearing this color about deals being crowded into the latter part of 2005, recalled that December 2005 was the month that saw Hertz Corp. price $2.67 billion equivalent in three tranches, and remarked that a deal that size is bound to create a spike wherever it occurs on the timeline.

This official, when asked to comment on the suggestion that in order to avoid the crowd issuers might try to jump into the market rather quickly in September, agreed that it could happen.

However the source does not believe that it will happen.

Last September was a pretty big month, the sell-sider recalled, adding that the September 2005 burst of issuance (nearly $11.5 billion in 42 tranches) more or less "killed the market" by creating "indigestion."

As a result October 2005 issuance, by comparison with that of September, was puny: just over $3.1 billion in 17 tranches.

"That's another reason that November and December were so big," the sell-sider asserted.

The official went on to estimate that at present the September-October calendar is somewhere between $10 billion and $15 billion, and added that as long as that volume becomes spread rather evenly throughout that two-month period the primary market should not have difficulty clearing it.

"There is plenty of cash to put to work," the source said, pointing out that the middle and latter parts of August appear to be playing out with almost no issuance whatsoever.

Year-end bunching

Nevertheless, the year-end bunching that the first source described as having taken place in 2005 was even more pronounced in 2004.

That four-month period saw $47.5 billion price 193 dollar-denominated tranches. Of that amount, $30.8 billion, or nearly 65% of the four-month total, priced in 120 dollar denominated tranches during November and December.

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