New Enron troubles rekindle junk market interest, Ingles plans $200 million

By Paul A. Harris

St. Louis, Mo., Nov. 19 - While the high-yield primary market continued to await terms on Vicar Operating Inc.'s $150 million of seven-year notes and a new $200 million deal from Ingles Markets emerged, much interest in the secondary market was focused on a resurgence in the misfortunes of Enron.

One high yield secondary market watcher invoked a well-known children's television host, as he commented about the pending Dynegy acquisition of Enron: "Can you say deal-breaker?"

Noting that Enron's stock price sank to $6.99, down $2.07 on the day, the source said: "There's a tremendous amount of volatility. You're seeing a lot of these customers get beat up, who were once investment grade, and now they are high yield guys."

Another high yield observer told Prospect News that Enron's most recent travails came to light in its 10-Q filing with the Securities and Exchange Commission, which included a reference to a $690 million limited partnership note which becomes payable by Nov. 27 following Standard & Poor's downgrade of the company last week unless Enron posts collateral. The company expects to receive $250 million from sale of one of the limited partnership's investments.

"The big question is 'How are they going to come up with the (hundreds of millions of dollars) to satisfy the terms of the limited partnership note?'" the source said. "If they don't, there is another series of negative events that transpires.

"That was why the stock got pounded further."

The source said that since the announcement that Dynegy will acquire Enron, Enron's bonds are trading down 20-30 points.

Some of today's quotes on Enron's bonds, which seem to still be trading off the investment grade desks although they are quoted in points like junk debt: the 6 5/8% due 2003, offered at 79; the 9 1/8% due 2003 offered at 80.

"The only bid I saw on Enron's bonds was 65 bid for the 7 7/8s of '03," the source said.

"Suffice it to say that you've now got a spread that's wide enough to fly a 747 through. These bonds were 87-89, yesterday, all the '03 maturities. Now there's just no bid in sight, except that 65 bid, which I hope is low. That's scary. That's real risk!"

Junk traders had been anticipating that Enron would move to their domain but the speculation was ended - briefly as it now appears - when Dynegy moved to buy the company. Standard & Poor's confirmed Enron's BBB- rating and kept it on negative watch Tuesday. Neither Moody's Investors Service, which rates it Baa3, nor Fitch, which rates it BBB-, had commented by late in the session.

In the primary market, news emerged late in Tuesday's session of new issuance from Ingles Markets, Inc.: $200 million 10-year senior subs, via Merrill Lynch and Banc of America Securities, with a roadshow to commence Nov. 27.

And conversation continued to circulate on both the primary and secondary markets regarding Monday's upsized Revlon Consumer Products Corp.$363 million four-year senior subs, which priced to yield 13 1/8%.

One primary market source who watched the deal told Prospect News "It was a blowout, highly over-subscribed."

That source also noted that with its 13 1/8% yield, the Revlon paper trumped the previous top yield in the post-September primary market: Terra Capital, which priced Oct. 3, yielding 13%.

Another observer noted that with its Caa1/B- ratings and its maturity of Dec. 1, 2005, the Revlon deal priced with the lowest rating and the shortest maturity of any of the post-September new issuance.

In the secondary, Revlon's new bonds traded up, being quoted at 99.5 after pricing Monday at 96.569.

"You saw how the deal was oversubscribed, and they boosted the size of it," one secondary market observer commented. "It looks like the Revlon's are up, pushing par now."

Although one secondary market source characterized Tuesday as "a lackluster day," apart from the Enron news, he noted that in the wake of Xerox Corp.'s upsized convertible deal, priced after the market close Monday, the company's high-yield paper performed well Tuesday. Xerox increased its convertible offering to $900 million from an originally planned $500 million.

"Xerox paper's been very strong," the source said. "The 8 1/8s of '02 are par-bid. The 5 7/8s of '04, 86-90 - kind of wide there.

"Even the 53/4s of '02: 98 bid. The 51/2s of '03, 88 bid. The '03 paper was in the low 80s before the news, before they priced this thing. So the Xerox bonds are much better across the board."

Also up in the secondary was Royal Caribbean Cruises Ltd., up on news early in the session that the company will combine forces with P&O Princess Cruises plc to form the world's largest cruise vacation group.

"The 81/4s of '05 are in the low-to-mid 90s, whereas they were probably in the low to mid-80s, yesterday," one source said.

Continuing softness in crude oil prices is conceivably making an impact on some secondary market trading of select energy credits, one commentator allowed.

"In the past two or three days a lot of the energy names, AES and Pride Petroleum and different names in that sector, are down two-, three-, four-points across the board," a market watcher commented.

"They seem to be getting a little bit weaker. The low dollar price on crude oil has had an impact on them, for the time being."

The source mentioned that the Organization of Petroleum Exporting Countries (OPEC) seemed to be hinging a quota strategy on the willingness of non-member nations (Russia, in particular) to abide by the same quota. The strategy, thus far, appears not to be working.

"Some want to do it, and some don't," the source said. "That's the problem we've always had. The only time everybody seems to rally together is when prices are above $25 a barrel, and everybody's happy. But when they're low they just try to pump it to keep their cash coming in, from what I can see."

A spot of good news emerged on telecom credits. Global Crossing Holdings Ltd., which made a Nov. 15 coupon payment that some in the market had doubted, traded up Tuesday, according to one source: "We had the 91/2s and the 9 1/8s all trading around 151/2," the source said. "Now they're all up to about 18 1/2."

But other telecom credits fared less well: TeleWest 111/4s dropped to 87 from 89; and its 11s dropped to 85 from 87.5.

NTL's 11 7/8s dropped to 49.5 from 51 and its 111/2s of 2006 dropped to 50 from 53.

Nextel's debt was "down about a half, across the board," the source said: the 9 3/8s were quoted at 81 and the 91/2s at 80.

The same source also noted a continuing decline in the bonds of Pinnacle Holdings.

"We keep taking them down every day," the source said. "We took those down another two points, today - the 10s - from 22 to 20.

Pinnacle said Monday it had sold two colocation facilities and obtained forbearance under its bank credit agreement of covenant violations.

He also saw McLeodUSA lower, including its 101/2s from 2000 at 18, down from 20, and its 11 3/8s at 21½ from 231/2.

Late Tuesday, the primary market still waited for the terms of Vicar Operating Inc.'s $150 million of seven-year notes via Goldman Sachs & Co.

"It was supposed to price yesterday (Monday)," one market source commented. "But because of the IPO it was pushed back."

Primary market observers now expect both the IPO and the bond pricing to take place after Tuesday's close.

Added to the calendar is an offering from Ingles Markets, Inc. The Asheville, N.C. supermarket company will go on the road with $200 million of 10-year notes from Nov. 27 through Dec. 5. Bookrunners are Merrill Lynch & Co. and Banc of America Securities.

End

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