Duane bonds soar, Rite Aid notes up on Walgreens bid; General Growth notes still 'creeping up'

By Stephanie N. Rotondo

Portland, Ore., Feb. 17 - The distressed debt market ended the midweek session on a firm note, helped in part by a nearly 20-point gain in Duane Reade Inc.'s bonds.

The hefty gains came as Walgreens made a more than $1 billion bid for the pharmacy chain that provides services in New York. The price includes the assumption of more than $50 million in debt, though one market source wondered if Walgreens would keep some of that debt on the books.

The news also gave Rite Aid Corp.'s notes a boost, according to traders.

Meanwhile, General Growth Properties Inc. debt continued to inch up, with some issues improving by about 2 points - in addition to the 3 to 4 points earned in Tuesday trading. There was no word on whether Simon Property Group - which made a $10 billion bid for General Growth on Tuesday - would respond the company's rejection of the proposal.

Blockbuster Inc. bonds seemed little fazed by a rating downgrade, a trader said. He noted that the company's bonds had steadily moved up during trading, ending up about 2 to 3 points stronger.

Duane soars on Walgreens bid

Duane Reade bonds were "a notable one," a trader said, following news that pharmacy chain Walgreens had made a bid for the New York-based company.

The trader said the 11¾% notes due 2015 traded up to the 124 level as a result of the news, a nearly 20-point gain on the day.

"That's what happens when an investment-grade company buys you," he quipped.

Another trader quoted the issue at 124 bid, 125 offered, up 18 to 19 points. He noted that the issue has a "make-whole" clause at Treasuries plus 50 basis points.

"I don't see Walgreens wanting to keep those outstanding," he said.

Walgreens will acquire Duane from its owners, Oak Hill Capital Partners, for $618 million in cash and will assume $457 million in debt. In a letter posted on its web site, John Lederer, Duane's chairman and chief executive officer, said he was pleased with the "exciting news."

"As you may have already heard, Duane Reade has accepted an offer to become part of Walgreens - the largest and most respected drug store chain in the U.S.," Lederer wrote. "We are delighted to become a vital part of Walgreens, and pleased that we will continue to serve you as Duane Reade, a name New Yorkers know well."

In its own press release, Walgreens also commented on the pending transaction.

"Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drugstore market in the U.S.," said Greg Wasson, president and CEO. "In addition, Duane Reade's recent initiatives in urban retailing, customer loyalty and private brand products support and accelerate Walgreens strategy to enhance the customer experience in our network of more than 7,100 stores across the country.

"This transaction is consistent with the capital allocation objectives we outlined last fall, which included investing in strategic opportunities that reinforce the company's core strategies and meet return requirements," added Wasson. "By combining the strengths of our two companies, we can improve our position as the most convenient provider of consumer goods and services, and pharmacy, health and wellness services in the country."

Others also expressed positive sentiments about the acquisition, including Gimme Credit analyst Evan Mann, CFA. Mann upgraded his view on Duane to "improving" from "stable." Moody's Investors Service meantime placed its rating on Duane on review for a possible upgrade.

"Moody's review will focus on the companies' success in completing the transaction on the terms and conditions proposed, which include the assumption of Duane Reade's outstanding debt obligations," said Bill Fahy, senior analyst, in a statement. "Upon the successful completion of the transaction and full repayment of all of Duane Reade's rated debt securities, Moody's will likely withdraw all of its ratings for Duane Reade."

The deal is expected to close by Aug. 31.

Rite Aid helped by Duane news

The Walgreens/Duane Reade news also gave fellow pharmacy chain operator Rite Aid a boost.

A trader said both the 9 3/8% notes due 2015 and the 9½% notes due 2017 inched up to around 80 from the high 70s. Another quoted the 9 3/8% notes at 82 bid, 83 offered, compared with 79 bid, 80 offered on Tuesday.

Another source saw the 8 5/8% notes due 2015 improving by about 2 points to 81 bid.

Rite Aid is based in Camp Hill, Pa.

General Growth still 'creeping up'

In other acquisition news, General Growth Properties' debt was "active again" and "creeping up," a trader said.

The trader said the 7.2% notes due 2012 traded up to around 112. However, the 8% notes that were to have come due in 2009 were "not all that different" around 110.

Another trader pegged the 8% notes at 109¾ bid, 110 offered.

"That's probably been the context," he said.

On Tuesday, it was learned that Simon Property Group - the largest mall operator in the United States - had made a $10 billion unsolicited bid for bankrupt General Growth. Market chatter had been speculating for some time that such a scenario would play out, especially when the Chicago-based company filed for Chapter 11 protections.

But after the market closed Tuesday, General Growth finally responded to Simon Property, rejecting the proposal as insufficient.

Simon has not yet responded to the rejection nor offered a follow-up bid.

Blockbuster gains despite downgrade

Back in the world of retail, Blockbuster's 11¾% notes due 2014 were seen improving throughout the day's session, according to a trader.

The trader said the bonds moved up 2 to 3 points to 69 bid, 70 offered. The gains came despite a downgrade from Standard & Poor's.

"I didn't see much reaction" to the rating cut, he said.

S&P dropped the Dallas-based movie rental chain's corporate credit rating to CCC from B-. The senior secured debt also got a CCC rating.

"The downgrade reflects our view that performance will remain very challenged and our concern that Blockbuster will not be able to transform its business model over the near term, as we had expected, given the competitive pressures in the rapidly evolving domestic media entertainment industry," said Jayne Ross, S&P analyst, in a statement.

New Six Flags loan begins trading

Six Flags Theme Parks Inc.'s credit facility freed up for trading on Wednesday, with the term loan quoted just under par, according to traders.

The $730 million six-year term loan was seen by two traders at 99¼ bid, 99¾ offered and by a third trader at 99 1/8 bid, 99 5/8 offered.

Pricing on the term loan is Libor plus 375 bps with a 2% Libor floor and it was sold at an original issue discount of 99. There is 101 soft call protection for one year.

During syndication, the term loan was upsized from $680 million, pricing was lowered from Libor plus 425 bps and the soft call protection was added.

Six Flags' $830 million credit facility (B1) also includes a $100 million five-year revolver that downsized from $150 million when the term loan was upsized.

Proceeds from Six Flags' credit facility will be used to repay $1.147 billion of pre-petition bank debt upon the company's emergence from Chapter 11. The revolver will also be available for general corporate purposes.

JPMorgan, Bank of America, Barclays and Deutsche Bank are the joint bookrunners and joint lead arrangers on the deal.

Covenants contained in the credit agreement include a maximum senior secured leverage covenant, a minimum consolidated interest coverage covenant and a maximum consolidated capital expenditures covenant.

Six Flags is a New York-based regional theme park company.

Sara Rosenberg contributed to this article.

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