Rite Aid routed; Cott clobbered as Wal-Mart phases out supply pact; Chesapeake Energy, Intelsat plan deals

By Paul Deckelman and Paul A. Harris

New York, Jan. 27 - Rite Aid Corp.'s bonds fell badly on Tuesday, as investors' concerns about the Camp Hill, Pa.-based drugstore chain operator's liquidity picture flared up again in the wake of its recent ratings downgrade by Moody's Investors Service as well as a renegotiated credit facility that resulted in less availability for the company.

Another big loser was Cott Corp., whose bonds slid on the news that the Canadian soft-drink bottler's single largest customer, Wal-Mart Stores, Inc., has decided to terminate its 10-year-old agreement making Cott the exclusive supplier of Wal-Mart's store-brand sodas - which could leave Cott completely off Wal-Mart's shelves three years from now.

Elsewhere, Quiksilver Inc.'s bonds - which had shot dramatically higher in active trading Monday on market speculation that the company might sell one of its major units, or perhaps even sell the whole company - were seen having come down from Monday's peak levels, although they did keep most of the more than 20-point gains which they notched that session.

In the primary market, Chesapeake Energy Corp. announced plans to sell $500 million of six year notes, while Bermuda-based satellite communications operator Intelsat Ltd. was said to be shopping around a smallish offering of new notes that would mirror the terms on one of its outstanding issues. Meanwhile, Crown Castle International Corp.'s recently priced bonds continued to grind higher on the session.

Chesapeake to bring $500 million

Chesapeake Energy is expected to price a $500 million issue of senior notes due 2015 on Wednesday following an investor conference call.

Deutsche Bank Securities, Banc of America Securities, Credit Suisse, Goldman, Sachs, Morgan Stanley and Wachovia Securities are joint bookrunners.

Proceeds will be used to repay revolver debt, which the company anticipates reborrowing from time to time to fund drilling leasehold acquisition initiatives and for general corporate purposes.

The market should be open to Chesapeake Energy, a buy-side source said following Tuesday's close.

"There is a lot of production that doesn't make sense with natural gas at $4.51," the investor cautioned.

"Chesapeake has to increase their capital budgets, which they are doing," the buy-sider added.

In Chesapeake's preliminary estimate of year-end 2008, released just before the bond deal was announced, CEO Aubrey K. McClendon commented that the company has "added further downside protection to our attractive natural gas and oil hedging positions and ended 2008 with approximately $1.75 billion in cash and cash equivalents on hand.

"We will continue to carefully manage our corporate liquidity and capital spending levels to protect value and safely navigate the current challenging economic environment."

In addition to the Chesapeake Energy deal, market sources expect one other junk deal from the energy sector to surface before the end of the week, although no one volunteered either an issuer name or a syndicate name.

Intelsat launches $200 million

Meanwhile Intelsat Subsidiary Holding Co., Ltd. held an investor call on Tuesday afternoon for its $200 million offering of notes mirroring its 8 7/8% senior notes due Jan. 15, 2015.

The deal is expected to price late Wednesday or early Thursday.

Moody's Investors Service has a B3 rating on the existing notes. Standard & Poor's rates the existing notes at BB-.

Goldman Sachs & Co. is the bookrunner for the Rule 144A/Regulation S with registration rights offer.

Proceeds will be used to fund the tender for $200 million of Intelsat's outstanding 7 5/8% senior notes due 2012 and its 6½% senior notes due 2013.

The original $681.012 million of 8 7/8% senior notes due January 2015 was priced at par on June 24, 2008.

Market indicators again mixed

Back among the established issues, the widely followed CDX High Yield 11 index of junk bond performance, which gained ¼ point on Monday, was up by another 3/8 point on Tuesday, a trader said, quoting it at 74 7/8 bid, 75 3/8 offered, The KDP High Yield Daily Index meanwhile declined by 8 bps to 53.80, although its yield also came in, by 7 bps, to 13.60%.

In the broader market, advancing issues continued to improve, beating decliners by a margin of almost five to four. Overall market activity fell by 23% from the levels seen in Monday's session.

A trader said it was "kind of one of those pre-Fed days" - the nation's central bank concludes its two-day meeting Wednesday, but it is not expected to make any change in the historically low interest-rate levels it established at last month's meeting, which are seen as the catalyst for the junk market's rebound since then.

He also noted the start of earnings season, but said the overall impact of these factors had junk going "kind of sideways, if anything, at the end of the day, though maybe a smidge better in some of the go-go names."

Overall, though, "it had sort of a lazy tone - I'm surprised to see the Trace volume number where it is."

Street activity, he added "was pretty muted. I think people are waiting to see what happens [Wednesday]," with the Fed; in the meantime, "any excuse not to trade always seems a good one."

He chalked up the overall market as "pretty much unchanged - nothing earth-shattering."

"Just looking at the mood," another trader agreed, "I think it seems the market was drifting. There was a little more going on in some names, but no great shakes. There wasn't anything that grabbed my attention."

Active issues seen higher

Another trader, however, said that the market seemed to have "a slightly positive tone." He noted that Community Health Systems Inc.'s 8 7/8% notes due 2015 - regarded by some as a market bellwether issue because of the issue's large size, widespread holding and easy tradability - seemed to live up to that reputation Tuesday, rising ¾ point to 95.75 bid on respectable volume of some $16 million, about double its turnover on Monday.

Another sometime bellwether bond, First Data Corp.'s 9 7/8% notes due 2016, proved a disappointment on that score; while the bonds firmed about ½ point to 55.75, in line with the brighter market tone, volume was only $3 million, which "for a $2 billion issue, is unusually light volume."

However, there was more than enough activity in Freeport McMorRan Copper & Gold Inc.'s bonds to make up for the lack of same from First Data Corp. The Phoenix-based metals mining company's 8 3/8% notes due 2017 rose 1½ points to 80 bid, on volume of some $54 million. The company's floating-rate notes due 2015 gained ¾ point to 67, with $11 million traded, while its 8¼% notes due 2015 were quoted at 84, "quite a jump" from its prior levels at 81.25, a trader said, on turnover of $7.5 million.

Rite Aid in retreat

The day was not without its downsiders. A trader saw Rite Aid's bonds "getting hammered," with the company's most active issue, its 9½% notes due 2017 seen down 5 points at 23.5 bid on volume of $6 million. He also saw its 10 3/8% notes due 2016 drop to 59.5 bid from 63.5 on Monday, with $5 million traded, while easily the biggest loser in the capital structure was its 8 5/8% notes due 2015, which slid to a round-lot closing level of 20 from the most recent previous round-lot price of 34.5, recorded last week.

"Whoa," he exclaimed, viewing the carnage in Rite Aid's bonds. Even though the previous round-lot against which the latest level was compared took place last Thursday, "still, that's a red flag." There were $4 million of those bonds traded.

At another desk, the 8 5/8s were quoted having swooned about 8 points on the day versus Monday's late levels, going home at the 20 mark.

Another trader saw the 10 3/8s fall as low as 57.5 bid, 59.l5 offered from prior levels in the 60s, "down a few points, with some activity in those," while the 91/2s were "down 4 or 5 points" in a 23-25 context.

None of the traders saw any fresh news out about the company Tuesday that might have caused the bonds to plunge, but one said that "certainly, people are concerned" about the credit. "You don't have a drop across almost the entire cap structure, of multiple points, in one day," unless something was going on. "It obviously doesn't look good."

Analyst Robert Veno of KDP Investment Advisors Inc. in Montpelier, N.H., cited the Moody's Investors' Service downgrade of Rite Aid's ratings at the end of last week, as well as the company's recent renewal of an asset-backed revolving-credit financing agreement, although its borrowing availability under the facility was cut to $450 million from $650 million, making it "a case of good news-bad news." Rite Aid was forced to obtain a separate loan to make up for the difference.

The analyst pointed out for Prospect News that the Jan. 23 Moody's downgrade did not even address the changes in that asset-backed credit line and was instead focused upon Rite Aid's "availability under its traditional revolving line of credit, saying that they were losing money from operations, and if they weren't able to reverse that trend, they might eventually have some problems with liquidity because they were using their line of credit to support the cash deficit from operations going forward."

Those developments, he said, "might have prompted some questions about their liquidity." Veno, KDP's vice president in charge of analysis of retail and healthcare companies, said that "those two stories were sufficient to make enough people look at the company a little bit more closely."

He also noted that Rite Aid's bonds had recently risen "quite a bit," and suggested that "maybe some of that increase was a little bit too optimistic," and investors were now having some second thoughts.

"Maybe the recent increase wasn't justified." The bonds, he continued, "have actually fallen back to the levels where they were [before the rise began], not even a month ago" - a pattern which he said a number of high-yield issues had lately followed.

"There was either a little bit of optimism or some other market forces that drove the prices up recently, so now I think they are coming back down to where they might have been just a month ago."

While the bonds were sliding by multiple points, Rite Aid's New York Stock Exchange-traded shares - which have been hammered down to nearly worthless penny stock levels from the year-ago price of $3.25, 10 times their current value - lost once cent, or 3.23%, in Tuesday's dealings, to end at 30 cents a share. Volume of 4.3 million shares was slightly below average.

Wal-Mart worries wallop Cott bonds

Cott Corp.'s 8% notes due 2011 were seen by a market source to have plunged to around the 50 level from prior levels in the mid-60s, after the Canadian-based soda bottler's largest customer, Wal-Mart, informed Cott that it was ending the soft-drink maker's exclusive agreement to supply "Sam's Choice" private-label soda for Wal-Mart's more than 4,000 U.S. stores; Wal-Mart will have the right to go elsewhere for up to one-third of its requirements over the next year, an additional one-third over the following year, and can terminate the Cott contact altogether in January 2012.

Another market source saw the bonds fall to a round-lot level of 58, down over 6 points on the day.

Toronto-based Cott - the largest private-label soda bottler in the world - took pains to point out that the Wal-Mart action "does not terminate Cott's relationship as a supplier to Wal-Mart," and said that its conversations with Wal-Mart are "ongoing," although the impact of this decision on Cott's business is "unclear at this time."

CanWest Media mauled

Also notably on the downside was another big Canadian company, CanWest Media Inc., whose 8% notes due 2012 - after nearly two weeks of inactivity - were seen by a market source to have nosedived some 17 points down to the 28 level, from the mid-40s, although volume was a tepid $4 million.

There was no fresh news seen out on the company that might provide an immediate explanation for the slide in the bonds of the television broadcaster, a unit of Winnipeg-based media conglomerate CanWest Global Communications Corp.

CanWest Media's credit ratings were cut earlier this month by both Moody's and Standard & Poor's, with the agencies citing their respective expectations for declining revenues and operating profits in the face of a weakening advertising environment, as well as CanWest Media's high leverage, weak credit protection measures and tight liquidity.

Parent CanWest Global Communications, which released disappointing quarterly earnings at mid-month, warned at that time that it might be unable to comply with the total leverage ratio under its credit facility in the current 2009 fiscal year, based on its current revenue and expense projections. CanWest Global said that it was reviewing and implementing strategies to ensure compliance, including ways to improve profitability and reduce debt.

Smooth sailing for Royal Caribbean

On the upside, a trader saw Royal Caribbean Lines Ltd.'s 6 7/8% notes due 2013 at 67.5 bid, up 1½ points, on $8 million bonds traded, while the Miami-based cruise line operator's 8¾% notes due 2011 pushed up to 84, a ½ point gain on the session, also on $8 million traded.

He questioned why the bonds would be up, since "it seems like not that many people are booking cruises these days." Cutbacks in consumer vacation spending may be offset by reductions in the company's fuel costs due to lower world oil prices

The picture may become clearer on Thursday, when the company will release its fourth-quarter earnings. Analysts on average are looking for earnings of around 8 to 10 cents per share on revenue of about $1.45 billion. Royal Caribbean has predicted its quarterly earnings will come in somewhere between 5 and 10 cents per share.

Quiksilver holds most gains

Elsewhere, Quiksilver's 6 7/8% notes due 2015 - which had soared more than 20 points in very active trading on Monday, finishing in the mid-50s versus the lower 30s before, were seen having come down slightly from their peak levels, but they held onto most of those gains, which were linked to speculation about a possible asset sale by the Huntington Beach, Calif.-based maker of sports clothing and footwear - or even the possible sale of the whole company. However, an analyst said on Tuesday that Quiksilver appears to be making progress on its liquidity problems and is thus now less likely to pursue any such transaction.

A market source saw the notes fall more than 2 points in morning trading to around the 52.5 level, but then firm off those lows to 54.5, down only ½ point from Monday's finish.

Quiksilver's New York Stock Exchange-traded shares, meantime - which on Monday had jumped as much as 71% in intraday trading before settling in with a gain of over 46% on more than twice the normal volume - gave up some of those gains on Tuesday, finishing down 11 cents, or 4.98%, at $2.10. Volume of 2.1 million shares was just a little heavier than usual.

Quiksilver had shot up on Monday, on both the bond side and the equity, on speculation growing out of a story in last Friday's Women's Wear Daily, a clothing industry trade paper, which said the company was "close" to a sale of its DC Shoes athletic shoe unit to competitor VF Corp., and said it might consider an outright sale of the whole company to athletic shoe and sports clothing industry leader Nike Inc.

Several analysts said on Monday that a deal to sell DC could prove advantageous to Quiksilver, at least in the short run, as it looks to find a way to refinance its short-term debt, including $167 million which is uncommitted, and a $72 million facility due to mature in March 2009," although Citigroup also opined that the short-term benefits might be overshadowed by a negative longer term impact, since by selling DC, "we think Quiksilver could be losing its growth crown jewel."

However, on Tuesday, a KeyBanc Capital Markets analyst downplayed the notion that either DC Shoes or even Quiksilver itself, is going anywhere, citing Quiksilver's announcement late Monday that it plans to save as much as $40 million annually via belt-tightening, including the elimination of 200 jobs, and remains committed to its previously announced effort to restructure its $1.07 billion in debt, a process it said is on track to be completed in February.

KeyBanc's Brandon J. Ferro said the news means "an outright sale of Quiksilver or one of its brands is much less likely now than it was when we initiated coverage in early December," explaining that such news "helps to indicate the company has made significant progress in resolving near-term liquidity issues."

Quiksilver has said that it was in discussions with European and Asia/Pacific-region banks to refinance its short-term debt and was also negotiating a term loan to supplement its credit availability in the United States.

Neither Quiksilver, VF or Nike has commented on the media and analyst speculation about any such deal being in the works, or even in the talking stage.

Peabody powers up on profits

Another gainer was Peabody Energy Corp., whose 6 7/8% notes due 2013 were seen by a market source to have pushed as high as 99 in intraday dealings before finishing around the 97 level, still up some 2½ points on the session.

At another desk, the St. Louis-based coal company's bonds were seen up nearly 3 points on the day, around 98.

Peabody popped up as the company reported fourth-quarter net income of $293.3 million, or $1.10 per share -- more than eight times its year earlier earnings of $35.8 million, or 13 cents per share, although it should be noted that the year-ago total was affected by a charge which the company took related to its spin-off of Patriot Coal Co. However, the earnings did come in at nearly four times the 75 cents per share that Wall Street had been looking for.

Crown Castle keeps climbing

Among recently-priced issues, Crown Castle International's 9% notes due 2015 - an upsized $900 million of which priced last Thursday at 90.416 to yield 11¼%, and then began to immediately move up when freed for aftermarket dealings - remained on the rise on Tuesday, when the new issue was one of the most actively traded bonds of the day.

A market source saw the Houston-based communications antenna tower operator's bonds initially firm slightly to the 95 bid level from the mid-94s late Monday and then get as good as 97-plus, although there were only a few small outlier trades at such heights. The bonds settled back into around 95 later on. Trading was described as very active, and mostly consisting of round-lots.

A trader at another desk pegged the bonds at 95.25 bid, up a point on the session, continuing to "perform really well," on $29 million traded.

Another called them "up a smidge" at 94.75 bid, 95.25 offered.

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