El Pollo Loco, Compton deals price; Targus pulled; Remy bonds slide on results, downgrade

By Paul Deckelman and Paul A. Harris

New York, Nov. 15 - El Pollo Loco Inc. and Compton Petroleum Corp. Finance Co. were heard to have successfully brought bond offerings to market Tuesday, primary-side sources said, with the "Crazy Chicken," as one trader referred to it, having restructured what originally was a straightforward one-part issue into a two-tranche deal.

While that was going on, Targus Group International Inc. withdrew its planned eight-year note issue, choosing instead to fund the leveraged buyout of the company with a larger bank debt facility, PIK notes and a greater equity contribution from the buyers.

In the secondary market, General Motors Corp. bonds continued to weaken, beaten down, along with its stock, by renewed bankruptcy buzz, and former GM unit Delphi Corp.'s bonds bounced a little from the lows they hit on Monday - but are still well below the levels at which they ended trading last week, due to technical factors connected with the credit default swaps market.

But it was another one-time GM subsidiary, Remy International Inc., that was easily the disaster of the day, its bonds skidding lower after the Anderson, Ind.-based maker of automotive starters and alternators filed its latest quarterly report with the Securities and Exchange Commission and was downgraded by Standard & Poor's, which dropped its corporate credit to CCC+.

Overall three different sources gave three different marks on Tuesday's junk market.

One, a high yield syndicate official at a New York investment bank, said that junk was pretty much unchanged, with volume still being driven by credit-specific news.

Meanwhile another high-yield syndicate official on the U.S. East Coast, but not in New York, marked the market "down a little."

And an investor in the Midwest saw junk off a quarter-point to half-a-point.

Jitters over Georgia-Pacific

One factor weighing on this investor's mind was Georgia-Pacific Corp.'s announcement early this week that the company will tender for approximately $2.6 billion of debt securities issued by Georgia-Pacific and its Fort James subsidiary.

The offer was made in connection with the announced acquisition of Georgia-Pacific by Koch Forest Products, Inc., a wholly owned subsidiary of Koch Industries, Inc.

Citigroup and Goldman Sachs are the dealer managers.

The buy-side source told Prospect News that Koch Industries is not perceived to be especially "bondholder friendly."

"They don't like to talk to investors," the source added.

"The bonds that will be left outstanding are the bonds that don't have covenants. Then you have to worry about whether or not you will get financials.

"It's going to get re-levered," the investor asserted. "You're going to get buried under more debt. Everyone is going through the covenants worrying about how much more leverage they can put on top of you. Citigroup is saying they can do five-times leverage.

"It's kind of a mess."

On the defensive

The buy-sider also owned to being on the defensive with regard to putting cash to work in new issues presently in the market.

That said, the investor did acknowledge taking part in Compton Petroleum Corp.'s $300 million issue of 7 5/8% eight-year notes (B2/B), one of three junk bond tranches that priced on Tuesday.

The Calgary, Alta.-based oil and gas exploration and production company priced the bonds at 99.26 to yield 7¾%, at the wide end of the 7½% to 7¾% price talk, with Credit Suisse First Boston and Morgan Stanley running the books for the debt refinancing deal.

The investor said that the Compton deal "evidently went well," and spotted the notes late Tuesday at 100.0 bid, 100.375 offered, up three-quarters of a point.

The buy-sider said oil and gas exploration and production continues to be a defensive play, in junk, "especially if it has a decent coupon."

Risk avoidance

Asked to peruse the new issue calendar and comment on deals expected to price during this week's final three sessions this investor said that it is in no way rife with defensive plays.

The source added that "whispered" pricing on some of the deals is in the 10% range, and added that during the first half of 2005 the same deals would have likely been marketed with yields of 8½% to 9%.

When Prospect News asked if such a widening of price talk points up diminished demand in the junk bond market the investor said probably not.

"It's risk avoidance," the buy-sider claimed.

"There is money out there but people are being cautious."

El Pollo Loco

Aside from Compton Petroleum, Tuesday's two other tranches came from Irvine, Calif., fast food restaurant chain El Pollo Loco, which priced $164.342 million of high-yield bonds in a downsized, restructured transaction that generated approximately $146 million of proceeds.

At the operating company-level EPL Finance Corp. priced $125 million of 11 ¾% eight-year senior unsecured notes (Caa1/CCC+) at 98.74 to yield 12%. The yield came on top of price talk that had been revised on Monday to 12% from 11¾%. The senior unsecured notes sale generated $123.425 million of proceeds.

Meanwhile, EPL Intermediate Finance Corp. priced $39.342 million of nine-year senior discount notes at 57.191 to yield 14½%, on top of price talk. The notes will have a 0% coupon until May 15, 2010, at which point they will become cash pay at 14½%. The discount notes sale generated $22.5 million of proceeds.

Merrill Lynch & Co. and Banc of America Securities were joint bookrunners for the acquisition deal which was downsized from $150 million.

E*Trade for Wednesday

Meanwhile hard information on the new deal calendar seemed hard to come by on Tuesday.

E*Trade Financial Corp. talked its $250 million issue of 10-year senior notes at 7 7/8% area, with pricing expected on Wednesday via Morgan Stanley and JP Morgan.

Targus opts for bank debt

Finally laptop computer case and accessories-maker Targus Group International Inc. shifted $150 million of its LBO financing to the bank loan market from the bond market, Tuesday.

The company scrapped its proposed $150 million bond offering (B3/CCC+), increased the size of its first-lien term loan by $25 million to $190 million from $165 million, and added an $85 million second-lien term loan.

In addition Targus plans to make a $25 million offering of PIK notes. However a source said late Tuesday that no further information was available on the PIK notes.

The restructuring of the financing also includes a $15 million increase in the equity contribution from the sponsor.

El Pollo Loco up in trading

When the new El Pollo Loco 11¾% senior notes due 2013 were freed for secondary dealings, a trader saw the bonds at 99.5 bid, up from their issue price earlier in the session of 98.74. He did not see any activity in the company's new zero-coupon senior discount notes due 2014.

The trader also saw the new Compton Petroleum 7 5/8% senior notes due 2013 at par bid, 100.5 offered, up from their 99.26 issue price.

GM volatile, lower

Back among the existing bonds, GM "was like a roller coaster," a trader said, particularly its General Motors Acceptance Corp. 8% notes due 2031, which on Monday had traded below par for the first time in recent memory. He saw those bonds having wound up on Monday at around 98 bid, then saw them opening Tuesday "up about two points off those lows" at par bid, 101 offered.

However, later in the day, the bonds gave back all of their early gains and then some to close at 97.5 bid, 98.5 offered, essentially unchanged to down a little.

At the same time, he saw GM's corporate benchmark bonds, the 8 3/8% notes due 2033, finishing at 67 bid, 68 offered, down half a point.

A second trader also pegged the GM bonds lower on the day, in line with the company's faltering New York Stock Exchange shares which fell by as much as $1.23 to an intra-day low of $22.51 - their lowest point in 23 years - before closing down $1.13 (4.76%) at $22.61, on volume of 15.5 million, about 1½ times the usual turnover.

With that somber example in the equities market, "there doesn't seem to be much bid for the bonds either," he said. "There's tons of odd lots for sale, that just keep coming out cheaper and cheaper."

He called the 8 3/8s "pretty active," seeing them close at that same 67 bid, 68 offered level as the first trader.

At another desk, a market source saw those 8 3/8s actually up a point at 68 bid, but said that GM's 7 1/8% notes due 2013 retreated to 69.75 bid from 71 on Monday, with most of the deterioration having taken place late in the day.

The GM bonds and shares have been pushed down as the company has recently been a renewed target of speculation about what was once unthinkable - that the world's largest automaker could go bankrupt.

On Monday, a Wall Street Journal story about what GM could do to get itself out of the doldrums suggested a bankruptcy filing now, rather than later, and also recommended that GM jettison current chief executive officer Rick Wagoner, contending that the ailing automotive giant is "suffering death by a thousand cuts under Wagoner's so-called recovery program . . ."

GM has said several times that it has ample cash - a cushion of about $19 billion - and absolutely no plans to follow former subsidiary Delphi into Chapter 11. But that's not the view of players in the credit default swaps market, where GM is being likened in some quarters to its now-bankrupt problem child. The prices that GM debt investors are paying to protect against a default having risen sharply recently, and those debt investors are now forced to pay much of the money up front - just the way Delphi CDS protection buyers were before the parts maker went belly-up last month. A holder of GM's five-year corporate debt can now expect to be charged as much as $12 annually per $100 of protected debt - or $120 on the standard $1,000 corporate bond - for a hedge against default, well up from the $8 or $9 per $100 range just a few weeks ago.

The once-mighty GM has lost nearly $4 billion so far this year, $1.6 billion of that in the recently concluded third-quarter alone, with most of the red-ink due to escalating costs for steel, petroleum-based plastics and other raw materials, as well as the burgeoning healthcare costs the company pays for its approximately 750,000 hourly workers, retirees and related dependents.

Although GM asked for - and received - some unusual mid-contract concessions on the healthcare costs from the United Auto Workers union, whose members voted 61-39 to OK a concession package that GM says will save it $1 billion before taxes and $15 billion over the long-run, the automaker's other problems remain numerous. GM last week announced that it would have to re-state its 2001 earnings, which were overstated by between $300 million and $400 million due to accounting errors, which the Securities and Exchange Commission is now looking into.

And sales of its vehicles have fallen sharply - down 23% year-over-year in October alone, with much of the drop-off coming in sales of its high-margin light trucks and sport utility vehicles, which have lately fallen out of favor with the car-buying public due to higher gasoline prices. That's forced GM - which cleared thousands of unsold vehicles off its dealer lots over the summer and early fall by offering big discounts to ordinary car buyers equal to those which GM's own employees enjoy - to revive discount pricing in a "red-tag sale" promotion from now through Jan. 3, for most models offered by its Chevrolet, Pontiac, Buick and GMC dealers, though not for any Cadillac, Saturn, Hummer or Saab models. While the renewed incentives will certainly make for more pleasant sales figures, giving the company a psychological boost, skeptics note that they will sharply cut into revenues, and could come back to thus decimate the bottom line even further.

Remy plunges

Elsewhere in the troubled sector, Remy's bonds, which already were headed downward on Monday, continued their slide on Tuesday, with a trader quoting its 9 3/8% notes due 2012 having tumbled to 22 - down from 30 on Monday, and "down from around 50 just three weeks ago, and from 60 and change a month-and-a-half ago.

"What a disaster."

At another desk - where the 9 3/8s were seen at that same 22 level, down eight points on the day - the company's 8 5/8% notes due 2007 were quoted at 72 bid, down from 78, while its 8.15% notes due 2009 and 11% '09 notes were seen down more modestly, off about 1½ points in each case, to 92.5 bid and 29 bid, respectively.

"The slide in Remy, the first trader said, is "more than just the [weakness of the auto] sector." He noted that the company had filed its 10-Q report with the SEC on Monday, and "obviously, it must have been pretty ugly - they're doing worse than everybody else in the sector."

Remy reported that in the third quarter ended Sept. 30, it swung to a net loss of $27.978 million from a profit of $37.563 million a year earlier, despite a jump in sales to $315 million from $254 million a year earlier. Much higher raw materials costs, as well as increased taxes, interest expense, restructuring costs and selling, general and administrative expenses combined to push the company deep into the red.

On the heels of those quarterly numbers, S&P cut Remy's ratings, dropping the corporate credit rating to CCC+ from B-, lowering its second-priority senior secured floating-rate notes to CCC from CCC+ and cutting its senior subordinated notes to CCC- from CCC, with a negative outlook all around.

The ratings agency said the downgrade reflects Remy's downward EBITDA trend, illustrated by its much weaker-than-expected $11.5 million third-quarter EBITDA. It warned that Remy's EBITDA for 2005, which the company estimates will be about $60 million, will fall "meaningfully below prior estimates and be insufficient to cover interest expense."

S&P further said that the ratings also reflect Remy's "very aggressive" leverage, with some $710 million of balance sheet debt as of the quarter's end, and its "vulnerable" business profile, characterized by its exposure to the cyclical and highly competitive automotive and commercial vehicle end markets and its relatively narrow product line.

Delphi weak

Remy thus joins the ranks of the distressed automotive sector along with fellow former GM unit Delphi, although at least two traders saw the latter's bonds actually up about a point Tuesday, at 55 bid, 56 offered. However, another trader saw those bonds somewhat lower, trading in a range of 52-53-54. He saw "a little activity in the morning, but it dried up late in the afternoon.

"It doesn't seem to be going too far."

While apparently bouncing off of the lows they hit on Monday, Delphi's bonds are at least three or four points lower than they were at the end of trading last week, the traders said, now that the artificial support that the bonds had gotten from short-covering by players in the credit default swaps market has evaporated.

At another desk, the bankrupt Troy, Mich.-based automotive electronics manufacturer's 7 1/8% notes due 2029 were seen having fallen to about the 55 level, down from around 58 on Thursday - the day by which single-name CDS contracts on Delphi debt had to be settled with the delivery of bonds.

Credit default swaps effectively function like an insurance policy against the likelihood of a company - in this case, Delphi - defaulting on its debt obligations by bankruptcy or some other specified credit event. Typically, the buyer of credit protection via a CDS contract - often a bondholder, though by no means always - makes periodic payments to the contract seller, much the way premiums on an insurance policy are paid. Should the company default, the protection contract buyer puts the bond to the protection seller, in exchange for the par value of the bond, which thus makes the bondholder or other CDS protection buyer whole despite the default.

Once Delphi defaulted on its obligations by filing for Chapter 11 over the weekend of Oct. 8-9, buyers of CDS protection on Delphi debt who did not actually hold the bonds - so called "naked shorts" - scrambled to acquire them so as to be able to put them to their protection sellers to fulfill their contracts. This caused a short squeeze in the notes that propped up their market value - at least for a while. The 7 1/8s, for instance, were seen trading as high as the 69ish area on Nov. 3, just before an auction the following day which set the value of the bonds for CDS contract settlements at 63.375 cents on the dollar.

With the setting of that price, CDS protection buyers who did not have the bonds to deliver to their protection sellers in exchange for a par payment could instead receive from them 36.625 cents on the dollar - the difference between the bonds' par value and the settlement price set at the Nov. 4 auction, in which 15 major derivatives dealers participated.

After that auction, Delphi's bonds tumbled below the settlement price, falling down into the upper 50s, reflecting the reduced demand for the actual bonds once the settlement formula had been worked out and most CDS contracts settled. However, while the majority of the contracts could be settled that way, holders of single-name contracts were still obligated to physically deliver the bonds to their protection sellers in order to get their par payments, and that demand continued to prop the bonds up, keeping the prices in the upper 50s. Delivery of the bonds under those contracts had to take place by Thursday - 30 days after the default, as required by the terms of the CDS contract - meaning that source of demand, which had been squeezing the bonds to a higher level, has now dried up, with the bonds then falling to the actual valuation level at which the market believes they should be trading.

A market source saw Delphi's 6½% notes due 2013 up a point, at 55 bid, but saw its other bonds - the 7 1/8s, the 6.55% notes due 2006 and the 6½% notes due 2009 - all lower by about a point on the day, trading in a 54.5-55 context.

ArvinMeritor lower

Also in the automotive area, a trader saw ArvinMeritor Inc.'s 8 1/8% notes due 2015 down half a point, at 83.25 bid, 84.25 offered - although at another desk, the company's 8¾% notes due 2012 were up nearly a point at 90.75, and its 6 5/8% notes due 2007 were little changed at 98.25.

The company on Tuesday reported a narrower quarterly loss versus a year ago - but the automotive components company, which is based in Troy, like Delphi, delivered weaker-than-expected earnings forecasts for the 2006 first fiscal quarter and the full year. It predicted that earnings from continuing operations would come in somewhere between 13 and 17 cents per diluted share before special items - surprising Wall Streeters, who had projected profits in the 22 cents to 26 cents per share neighborhood. It also anticipates sales from continuing operations during the quarter of $2.1 billion, below market expectations in the $2.26 billion area.

For all of the 2006 fiscal year, ArvinMeritor sees continuing operations sales of $8.6 billion and continuing operations earnings of $1.50 to $1.70 per share, excluding gains or losses on divestitures, restructuring costs, and other special items, including extended customer shutdowns or production interruptions. Analysts had been forecasting about $9.1 billion of sales and earnings of approximately $1.91-1.92 per share, excluding one-time items.

The company - which makes axles and transmissions for commercial vehicles and door and roof parts for consumer-market cars - said its forecast reflected continued tough industry conditions in both the domestic and European markets. It envisions heavy truck production falling about 6% in North America from prior-year levels and remaining flat in Europe, with light vehicle production, such as autos, flat in both North America and Europe.

The weaker-than-anticipated guidance overshadowed the company's relatively favorable results in the fiscal fourth quarter and 2005 fiscal year ended Sept. 30. Its net loss for the quarter narrowed to $19 million (27 cents per share), far smaller than the year-ago deficit of $153 million ($2.23 per share). Sales were up 5.6%, to $2.13 billion, from $2.01 billion previously.

While earnings from continuing operations slid to $12 million (17 cents per share) from $30 million (44 cents per share) a year earlier, excluding one-time items, continuing operations earnings were $29 million (41 cents a share), just under the 42 cents that analysts had predicted.

The latest quarterly figures included restructuring costs of $36 million, $33 million of which related to actions the company announced in May. Steel costs, net of recovery, were some $15 million higher in the fourth quarter than in the same period last year.

Jo-Ann lower on earnings

Also on the earnings front, Jo-Ann Stores Inc.'s 7½% notes due 2012 slid to 82.5 bid from prior levels around 91.75, after the Hudson, Ohio-based fabric and crafts retailer reported a loss of $4.1 million (18 cents a share), for the third quarter ended Oct. 29, a notable deterioration from its year-earlier profit of $6.9 million (30 cents a share). The loss was worse than analysts' forecast of a penny a share of earnings, although its $474.2 million of sales topped Wall Street's projection of $470.2 million.

The company its results were hurt by overall industry weakness and declining customer traffic, which led to markdowns that pulled down margins.

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