Georgia-Pacific bonds sharply split on Koch merger, tender; GM skids; El Pollo Loco deal restructured

By Paul Deckelman and Paul A. Harris

New York, Nov. 14 - News that Georgia-Pacific Corp. has agreed to be acquired by Koch Industries Inc. for $13.2 billion in cash, with Koch also assuming $7.8 billion of debt, caused a radical split in the performance of Georgia-Pacific's bonds Monday, traders said, with those selected issues that are to be taken out via a tender offer firming smartly - but the remainder of the company's bonds falling sharply on investor fears about the big debt load that the combined company will assume to finance the deal.

General Motors Corp.'s bonds, and even those of its General Motors Acceptance Corp. financing subsidiary were lower, despite Friday's news that the ailing automotive giant's unionized workers had voted to give it some relief from burdensome healthcare benefit costs. A sharp widening of credit default swaps and a Wall Street Journal article suggesting that GM bite the bullet and declare bankruptcy now rather than later caused the carmaker's already skidding bonds to veer that much further off the road, and to tow most of the automotive supplier sector names along with it.

Overall an official on a high-yield syndicate desk marked the market unchanged to slightly lower on the Monday session.

In the primary market, EPL Finance Corp. was heard by syndicate sources to have restructured and slightly downsized its upcoming bond deal, which will help fund the buyout of the El Pollo Loco grilled chicken restaurant chain. Meanwhile, price talk emerged on Compton Petroleum Corp. Finance Co.'s upcoming issue of eight-year senior notes, which is expected to price on Tuesday.

No deals were priced in the primary market as one source made note of a significant difference in the credit ratings between the deals that priced last week and those on the forward calendar as this week's business.

The source, a high-yield syndicate official, said that the average Standard & Poor's rating of the notes priced last week was BB-. This week, the source added, the average rating is B-.

The source commented that there is "definitely a bifurcation" between last week's deals and this week's.

Meanwhile a buy-side source commented that at present the high-yield market is "heavy."

"These deals are all low-rated," the source asserted. "There's not a double-B deal out there.

"It's not going to be easy to get these deals done."

The approach ramp

Information emerged Monday on two of the deals expected to price this week.

Calgary, Alta.-based oil and gas exploration and production company Compton Petroleum Corp. talked its $300 million offering of eight-year senior notes (B2/B) at 7½% to 7¾%.

The Credit Suisse First Boston and Morgan Stanley-led deal is expected to price on Tuesday.

Meanwhile EPL Finance Corp. (El Pollo Loco) downsized to its offering of eight-year senior notes (Caa1/CCC+) to $125 million from $150 million and revised price talk to 12% from 11¾% to 12%.

The Irvine, Calif.-based restaurant chain added a $22.5 million tranche of notes that are to be issued at the holding company level, and will shift $2.5 million to its credit facility.

The bonds, via Merrill Lynch & Co. and Banc of America Securities, are expected to price Tuesday.

Later in the week

Among transactions expected to price mid-to-late this week, some whispered guidance circulated during the Monday session.

Market sources told Prospect News that the guidance on E*Trade Financial Corp.'s $250 million offering of 10-year senior notes (expected B1/B+) is 7¾% to 8%. However a syndicate official declined to comment on those levels, and specified that official price talk is expected to emerge on Tuesday morning.

Morgan Stanley and JP Morgan are the bookrunners for the deal that is expected to price on Wednesday.

Elsewhere, a buy-side source said that preliminary guidance is 10½% on Team Health Inc.'s $265 million of eight-year senior subordinated notes (Caa1/B-) via JP Morgan, Lehman Brothers and Merrill Lynch. The roadshow wraps up Wednesday.

The same buy-sider said that preliminary guidance is 9½% on Orchard Supply Hardware Stores Corp.'s $235 million offering of eight-year senior notes (B2/CCC+). The roadshow for the Lehman Brothers, Citigroup and JP Morgan led deal is expected to wrap up on Tuesday.

Two more for the road

Two prospective issuers were seen headed for the starting line as the market began in earnest its run-up to the Thanksgiving break.

Chaparral Energy, Inc. began a roadshow Monday for its $325 million offering of 10-year senior notes (B3/B) via JP Morgan. The Oklahoma City oil and gas producer will use the proceeds to refinance debt.

And Gibraltar Industries, Inc. will begin a roadshow this week for a $200 million offering of 10-year senior subordinated notes, with JP Morgan in the lead.

Proceeds will be used to repay debt incurred in funding an acquisition.

Georgia-Pacific up - and down

Back in the secondary arena, the news that Georgia-Pacific is going to tender for four series of its bonds, as well as for three other series of bonds issued by its Fort James Corp. subsidiary, sent those bonds solidly higher, with Georgia-Pacific's 8% notes due 2014 up four points to 112 bid, its 8 7/8% notes due 2010 and 9 3/8% notes due 2013 moving up from 110.5 bid to 113.125 and 112.5, respectively, and its 7 3/8% notes due 2008 firming to 105 bid from 104.125.

The rise was even more dramatic in the former Fort James bonds, a market source said, quoting the unit's 9¼% debentures due 2021 as having jumped all the way up to 138 from pre-news levels around 114, while the company's 7¾% notes due 2023 zoomed to 129 bid from 107.25, and its 6 7/8% notes due 2007 appreciated more modestly to 103.5 bid from 102.75.

After announcing the planned acquisition of the Atlanta-based paper giant by Koch, Georgia-Pacific separately announced its intention to buy back some $2.6 billion of its bonds via a tender offer that will be officially launched between now and Friday. Koch will provide the funding to pay for all bonds tendered under the expected offer, which will be conditioned, among other things, upon the completion of the merger of Georgia-Pacific and Wichita, Kan.-based Koch, following the consummation of Koch's all-cash tender offer for Georgia-Pacific's common shares. As part of the tender offer for the bonds, Georgia-Pacific also will solicit consents from the bondholders to the elimination of the principal restrictive covenants in the indentures governing the notes and debentures.

But it was a case of feast or famine Monday for Georgia-Pacific's bondholders, because while the bonds that will be tendered for were heard heading upward, the roughly $3.5 billion of bonds not scheduled to be tendered "got annihilated" on investor worries about increased debt, a trader said.

He saw the company's 8 7/8% notes due 2031, "which are not at this juncture subject to any tender conversation," collapse to 102 bid, 103 offered from levels around 115 bid, 116 offered seen during trading Thursday, before the junk market adjourned for the three-day Veteran's Day break that kept the market closed on Monday.

"The concern [of the market] is, how is this thing going to eventually be structured," he said. "There's obviously not a lot of covenant protection, since GeorgiaPac used to be an investment-grade credit, and the feeling is there's going to be a lot of debt larded on, maybe at a senior or more secured level, and they [the bonds not being tendered for] got destroyed."

At another desk, a market source saw those 8 7/8s decline a bit more conservatively to 108.625 from 115.5, but he also saw the company's 7¾% notes due 2029 swoon to 93.625 from 103.5, while its 7.70% notes due 2015 nosedived to 98 from 108.75, its 8% notes due 2024 plunged to 101.875 from 107.5, and its 9½% notes due 2011 dropped to 107 from 115.5.

The source saw a slightly more restrained fall in some other Georgia-Pacific notes not scheduled to be tendered, with the 7¼% notes due 2028 easing to 98.5 from 99.625 and its 7½% notes due 2006 off a relatively modest two points at 100.5.

"There's a lot of blood on GeorgiaPac," the trader reiterated. "The Street is looking at this like it's an old-fashioned LBO, which it may turn out to be, even though Koch is a reputable entity. They're going to have to raise some money to pay for it."

Koch Forest Products, a unit of the Wichita, Kans. conglomerate, has lined up a commitment from Citigroup for bank financing for the Georgia-Pacific acquisition, sources in the bank debt market told Prospect News on Monday.

Standard & Poor's said that it would consider cutting Georgia Pacific's credit ratings, currently at BB+, as well as the AA+ rating of Koch's primary subsidiary, Koch Industries LLC, citing the increased debt load the combined company might have to have.

The planned $48 per share acquisition of Georgia-Pacific, which makes such well-known consumer product names as Brawny paper towels, Dixie paper cups and Quilted Northern and Angel Soft tissues, in addition to building products such as plywood, lumber and gypsum wallboard, by the privately held Koch - which is involved in energy refining and pipeline transportation, commodities trading and paper and pulp manufacturing - would create the nation's biggest private company.

The trader noted the sharp rise in the bonds that are scheduled to be tendered for - but said that those gains "were overshadowed by the demise of the rest of the company's capital structure, except for the equity."

While the prospective deal got decidedly mixed reviews from the debt community, depending on which bonds an investor was holding, equity holders were unanimously enthusiastic, taking Georgia-Pacific's New York Stock Exchange-traded shares up $12.63 (36.45%) to finish at $47.28, on volume of 42.9 million, almost 19 times the norm.

Paper names mixed

The high-yield paper sector, apart from Georgia-Pacific, was mixed, with Stone Container's 8¼% notes due 2012 ending half a point better at 95.25 bid, 95.75 offered, but Tembec Industries' 8½% notes due 2011 opened at 62 bid, 64 offered, and dropped to 59.5 bid, 60.5 offered at the close. "There was no real news," the trader said, "but their quarterly results are due out on Thursday. People are nervous because they have dramatically disappointed the last couple of quarters."

On the upside in the packaging sector, Pliant Corp.'s bonds were "up a lot," he said, on the news that the Schaumburg, Ill.-based maker of packaging film products had received a commitment for a $140 million credit facility, "which means they'll be able to make the Dec. 1 coupon payment on their 13% bonds."

Those notes, due 2010, were seen up seven points to 26 bid, 27 offered, while its 11 1/8% notes due 2009 were five points better at 88 bid, 89 offered.

GM plunges

Elsewhere, he saw GM was "ugly," with the carmaker's 8 3/8% notes due 2033 ending down 3½ points on the session at 67 bid, 68 offered. Even GMAC's flagship 8% notes due 2031, which as recently as the past two weeks had been trading in the 109 bid, 110 offered area, on the possibility GM would sell a controlling stake in the unit, were "trading below par for the first time in a long time," dropping as low as 97.5 bid, 98.5 offered intra-day, before coming off that low to end at 99 bid, par offered.

He blamed bankruptcy jitters spurred by a Bloomberg news report indicating that credit derivatives - CDS protection - rocketed higher, and were inferring that a near-term bankruptcy was coming. So I think that got everyone unnerved, as they watched Bloomberg TV or listened to the radio.

"That was un-nerving - and then, GM came out and said 'we're going to have to do more incentives to sell our models,' which is also a bit un-nerving," as both a signal that sales are in trouble and a potential cut in revenues, "and net-net [on the day] there were really no buyers, just sellers."

GM announced late Friday that it was instituting a new "red-tag sale" incentive program aimed at spurring the lagging sales of its vehicles, particularly its SUVs - formerly the big-selling reliable cash cows of GM's vehicle lineup, which have recently fallen out of favor with buyers due to higher gas prices. From now through Jan. 3, customer discounts that let anyone in the United States buy vehicles at the same price employees of GM's auto parts suppliers pay will be available on all 2005 and 2006 Chevrolet, Pontiac, Buick and GMC models except the Chevy Corvette and Pontiac Solstice sports cars and the Buick Lucerne luxury sedan. It is believed that the new promotion the new program offers buyers of covered models at participating dealers even bigger savings than the "Employee Discount For Everyone" program that spurred sales in the late summer and early fall, because it includes larger overall discounts. GM's other divisions - Cadillac, Saturn, Saab and Hummer - are meantime running their own separate year-end incentive promotions, the company said, with Caddy and Saab offering buyers $500 bonus cash, Saturn giving buyers a $500 Target gift card, and Hummer offering special pricing on a rear entertainment system.

Even as GM was moving to put more cash in the till by spurring sales with its latest incentive plan, a trader at another desk also cited renewed bankruptcy buzz about the carmaker.

The concerns moving the credit derivatives market - where participants last week were demanding up-front payments, in addition to annual premiums for CDS contracts that protect owners of GM's debt should it miss a payment or declare bankruptcy - were further exacerbated by a Wall Street Journal article that declared that with GM "suffering death by a thousand cuts under [CEO] Rick Wagoner's so-called recovery program . . . [i]t would be far better if GM bit the bullet, filed for protection under federal bankruptcy law and got a new boss. That would give the world's largest car maker its best chance for the future."

The Journal article said that although GM claims a book value of $22 billion, "that is based on optimistic accounting assumptions, some of which are being investigated by the Securities and Exchange Commission." GM meanwhile has heavy pension liabilities, with at least one estimate showing a $31 billion pension plan deficit, and it could be on the hook for as much as $12 billion more in pension and healthcare obligations related to the recent bankruptcy filing for former subsidiary Delphi Corp.

"Mr. Wagoner's salami-slicing of benefits won't solve the problem," the article concluded. "It will just delay the inevitable. By contrast, a Chapter 11 filing would focus workers, pensioners, lenders, shareholders and the government on the need for sacrifice."

The latest bankruptcy jitters completely overshadowed Friday's news from the United Auto Workers union, which announced that 61% of its roughly 110,000 GM hourly employee members had agreed to a tentative company proposal to make retirees and hourly workers pay more for their health care. The changes in the automaker's contract with the union must still be approved by the U.S. District Court for the Eastern District of Michigan.

Soaring healthcare costs have been a large factor in the carmaker's slide deep into the red, and the accompanying slide in its debt ratings deep into junk territory this year. In the recently concluded third quarter, GM posted a net loss of $1.6 billion - a sharp deterioration from its year-earlier profit of $315 million. It has recorded more than $3 billion of red ink over the first nine months of the year. GM - which expects to spend some $5.6 billion this year to provide healthcare for 750,000 hourly employees, retirees and their dependents - said the new agreement would cut its annual health care expenses by $1 billion after taxes and over the long run would shave $15 billion, or 25%, off its $60 billion in long-term retiree health care liabilities. The retirees - who currently pay no monthly premiums and just a small fraction of their other health care costs - will now be paying up to $752 annually for families and $370 for individuals for their health care, although they will have some help, with current hourly workers kicking $1 per hour in future scheduled pay increases through 2007 to a new fund to help pay for retirees' coverage, and the company itself contributing $3 billion to that fund over the next six years.

Auto sector down with GM

The second trader said that despite the relatively positive developments that came out of GM while the junk market was closed for Veteran's Day, the renewed bankruptcy jitters that pulled GM's bonds down also dragged the bonds of the various automotive supplier companies lower.

"The whole sector felt ugly," he said, quoting Dura Operating Corp.'s 9% notes due 2009 down a point at 55 bid, 56 offered, and the Rochester Hills, Mich.-based components supplier's 8 5/8% notes at 80 bid, down half a point. He also saw Delphi's bonds at 53.5 bid, 54.5 offered, down more than a point from Thursday's close.

At another desk, an observer pegged Delco Remy International's 9 3/8% notes due 2012 go from 35.5 bid to 30, while the former GM unit's 8 5/8% notes due 2007 dipped to 78 bid from 83.75, and its 11% notes due 2009 tumbled to 30 bid, from 39.

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