Oxford prices unusually structured 7-year deal; Solutia down on poor results, pessimistic guidance

By Paul Deckelman and Paul A. Harris

New York, Oct. 24 - Oxford Automotive Inc. was heard by high yield market sources to have priced a $280 million offering of seven-year notes Friday - structured so that only a portion of the issue represents new debt, with the remainder being directly exchanged for existing bank debt; the new-issue portion priced at a sharp discount to par.

In the secondary market, Solutia Inc.'s already beleaguered bonds were heard to have moved several points lower after the St. Louis-based chemical company posted a big third-quarter loss and issued bearish guidance. The company - which last week said that it had initiated talks with its bondholders aimed at restructuring its debt - later said on a conference call that it had not held any "substantive" talks yet with those bondholders.

Late in Friday's primary market session Oxford Automotive pulled away from the high yield pump having priced $280 million in a deal that came at a significant discount.

The company, a Troy, Mich. supplier of specialized welded metal assemblies and related services, priced its new 12% seven-year notes (B3/CCC+) at 85.0 for a yield to maturity of 15.6%.

According to a source close to the deal $113 million of the new notes were exchanged for the company's bank debt, with $167 million going to investors. The offering generated $142 million of proceeds.

"People said that the banks were squeezing them to get this deal done," commented one sell-side source not connected to the Oxford deal, as terms were heard.

"Oxford tried to get a deal done via Lehman Brothers and Credit Suisse First Boston in mid-August and it ended up getting pulled," added the source.

The previous $240 million senior secured second lien notes deal, which was yanked because of market conditions, was heard at the time to be running with price guidance of 12 5/8%. So Oxford's investors, who wound up Friday getting a yield of 15.6%, extracted a premium in the completed transaction.

The new deal was in line with a deal announced earlier this month by Oxford, under which its senior secured lenders and equity sponsor agreed on a refinancing that includes the injection of $75 million of new equity.

Under the terms announced, about half of the company's $225 million credit facility will be converted to seven-year bond debt and the remainder redeemed.

Oxford will receive $75 million of equity from its equity sponsor, MatlinPatterson Global Opportunities Partners.

Friday's session also produced news of the return of another high yield refugee, as Quality Distribution, LLC, which pulled a $175 million five-year deal last July, was heard to be headed back on the road, this time with $125 million of seven-year senior subordinated notes (B3/B-).

Credit Suisse First Boston and Deutsche Bank Securities will run the books for the new offering from the Tampa, Fla.-based transportation company.

In addition to Quality Distribution, Richmond, Va. coal company Masse Energy Co. will reportedly begin mining the high yield accounts on a roadshow set to start Tuesday.

The refinancing deal, via UBS Investment Bank, involves $360 million of seven-year unsecured senior notes, which are expected to price on Nov. 6.

Late Friday, as the equity markets were seen unmistakably slouching for the second consecutive day, one high yield sell-sider said that the junk market was perhaps a little less robust through the latter part of the Oct. 20 week.

"The secondary market weakened this week," said the source.

"Standard & Poor's warning that it might downgrade Ford bonds is putting pressure on the high yield area, I think.

"There has been a fair amount of auto parts and auto-related issuance this year. And we are seeing that pressure come to play in paper like ArvinMeritor and Tenneco and Metaldyne. They were all a bit lower this week.

"Of course one of the bigger questions is, if Ford and these huge auto companies would happen to eventually get downgraded into high yield status and you have a huge influx of high yield paper, can the market absorb that? And how does that dilute the whole sector if that happens?"

That being said, Standard & Poor's in its downgrade warning on Ford paper, specified that it did not anticipate lowering Ford to speculative grade.

When the conversation turned to Thursday's news that the high yield mutual funds had seen another substantial inflow of cash - $212.3 million for the week ending Oct. 22, following the $768 million inflow for the week ending Oct. 15 - this official somewhat reflected the sentiment of another sell-sider who said late Thursday that "there is a lot of noise in those numbers."

The official who spoke Friday allowed that the past two funds flow numbers "were pretty decent."

However, the source said, the numbers are "a little bit tricky.

"Those fund flow numbers are lagging indicators. You can't tell whether that money came in during the early part of that seven-day period or in the later part.

"Given how the secondary market seems to have traded this past week I won't be completely surprised if we see an outflow next week."

Back in the secondary market, Solutia's 7 3/8% bonds due 2027 were being quoted as low as 53 bid, well down from prior levels around 57, while its 11¼% notes due 2009 were seen three points lower at 83 bid.

A trader said the 111/4s, after having finished around 85.5 bid, 86.5 offered on Thursday, opened way down Friday at 80.75, a level he derided as "stupid" - meaning wildly oversold - before coming back a little to end around 84 bid.

A market source at another desk who saw the bonds in that same general area agreed that the fall was "pretty bad. They're dying."

Solutia's bonds had already been badly on the slide since Oct. 16, when the company announced that it had that it had initiated talks with its bondholders about restructuring its $1.25 billion of debt.

On Friday, the company announced that for the quarter ended Sept. 30, it lost $178 million ($1.70 a share), mostly due charges of $156 million ($1.49 a share) for various items, including its portion of a $700 million settlement that Solutia, former corporate parent Monsanto Co. and pharmaceuticals maker Pfizer Inc. entered into with the town of Anniston, Ala., where residents had sued the companies for billions of dollars of damages over decades of PCB dumping at a former factory site there. Without the charges, the company had a loss of 21 cents a share, somewhat above analysts' consensus expectations of about 19 cents per share of red ink. In the year-ago quarter, Solutia had lost $6 million (six cents a share) from continuing operations.

Besides the charges, Solutia blamed its poor results on a rise in energy and raw materials costs from year-ago levels. The company spent $22 million more on those items, or about 3% versus what it spent a year earlier.

Solutia said in its earnings release that "while some broad indicators have shown recent evidence of a domestic economic recovery, we, like many of our peers, have not experienced the recovery and we remain guarded as to its timing and pace. Given the recent rise in energy costs, sluggish demand and weak consumer confidence, we do not expect a meaningful improvement in operating results for the fourth quarter 2003 or first quarter 2004."

On its conference call later in the morning, Solutia, which hopes to alleviate its debt load problem via the proposed restructuring, said that "substantive" discussions with the bondholders had not yet taken place - because, it said, the bondholders need to create ad hoc committees, recruit advisers and sign confidentiality agreements with the company that would preclude them from trading in Solutia's bonds while the restructuring talks are going on.

The company's general counsel, Jeffrey Quinn, told analysts and investors on the call that this process would "take some time" - and that no serious restructuring talks could take place until then (see story elsewhere in this issue).

Also on the earnings front, AK Steel Corp. reported that It lost $277.5 million ($2.56 per share) in the third quarter, far wider than the year-earlier loss of $3.3 million (3 cents a share), although AK attributed much of the loss to things it had no control over - high energy and raw material costs.

The Middletown, Ohio-based steelmaker's 7 7/8% notes due 2009 were heard down about half a point at 67 bid, while its 7¾% notes due 2012 were a point lower at 65.

During the third-quarter, the company took two sizable non-cash charges - $101.2 million for the impairment of goodwill related to certain steel assets acquired by Armco prior to its 1999 merger into AK Steel, and $87.3 million for the write-down of a deferred tax asset.

Excluding the two non-cash charges, the net loss was $89 million, or 82 cents a share, actually beating analysts' expectations of an 85-cent-per-share continuing operations loss.

Looking ahead to the fourth quarter, AK said that it expected to post an operating loss, although it anticipates that the loss, excluding goodwill impairments will narrow by about $17 million.

AK later said on said on a conference call that it expects to be cash flow positive in the fourth quarter, excluding payments the company may make to its former chief executive, Richard Wardrop, or its ex-president, John Hritz. The two executives resigned abruptly last month, and were replaced by James Wainscott.

AK also said it would seek to tighten its belt in 2004; it announced a $200 million cost-cutting initiative, with half the cost improvements coming from operating cost reductions. AK sees the remaining savings coming from increased production, lower depreciation and an accounting benefit.

Separately, it said it would eliminate 475 mostly non-union jobs, or 20% percent of its salaried workforce, with the pink slips expected to start going out by the end of the month.

Elsewhere, Dana Corp.'s 7% bonds due 2029 firmed to 87.25 bid from prior levels at 86 while its 9% notes due 2011 rose to 109.75 bid from 107.5 on Thursday, after the Toledo, Ohio-based automotive components supplier reported third-quarter net income of $61 million (41 cents per share), versus its year-earlier net profit of $4 million (two cents per share).

It should be noted that the latest quarterly figures got a boost of $9 million in after-tax gains from the continued reduction of Dana Credit Corp. assets, and $9 million in after-tax gains from early retirement of debt; excluding these items, quarterly net income totaled $43 million, or 29 cents per share, while year-ago net income, excluding $40 million in after-tax charges associated with the company's restructuring plan and $6 million of after-tax income from divested businesses came to $38 million (26 cents per share).

Dana raised its guidance for 2003 full- year net income to a range of $210 to $220 million from $195-$215 million previously, and reaffirmed its prior projections that earnings in 2004 will be at least $300 million, or just over $2 per share - well above the $1.58 that Wall Street has been predicting.

Dana had been one of the names in the battered high yield auto sector which had declined Thursday after another auto components supplier, Tower Automotive Inc., took a big asset impairment charge and posted a sizable third-quarter net loss, versus a year-earlier profit.

The latter company's RJ Tower Corp. 12% notes due 2013, which had skidded down into the mid 80s from levels about 10 points higher, made a slight comeback on Friday, rising a point to close at 86.5 bid.

Bonds of other auto-linked names which had retreated Thursday, including parts maker Dura Operating Corp. and auto dealer United Auto Group Inc. were also better Friday, Dura's 9% notes due 2009 heard up more than two points at 91 bid and United Auto Group's 9 5/8% notes due 2012 up nearly two points, at 109.25.

Components maker Collins & Aikman Products Co.'s 11½% notes due 2006 were a point better than Thursday's levels, closing at 73 bid.

Apart from the auto names, another credit seen having come back - at least part of the way - after having been lower on Thursday was Tenet Health Care, whose 7 3/8% notes due 2013 were seen by a market source as having risen a point to 97.5 bid; its 5 3/8% notes due 2006 were up nearly a point at 96.25 bid; and its 6 7/8% bonds due 2031 rose a point to 87.5.

Tenet bonds had had finished down around two to three points on the session Wednesday after the company released bearish guidance and warned it might fall into a credit facility covenant violation and then continued to head south on Thursday, after Standard & Poor's downgraded the Santa Barbara, Calif.- based hospital operator's debt a notch to BB- .

A trader saw Nortel Networks Corp.'s 6 1/8% notes due 2006 up nearly a point on the session to 102 bid, 103 offered - a not unexpected development, since the Brampton, Ont.-based telecommunications equipment maker's debt usually moves more or less in tandem with that of sector peer Lucent Technologies Inc., which had firmed smartly over the previous two sessions after the Murray Hill, N.J. -based telecom equipment maker reported its first quarterly profit in three years, and said that it had bought back $500 million of debt at a discount during the third quarter, for a savings of $50 million in annual interest expense.

But on Friday, the trader said, Lucent "kind of petered out" after two days of gains.

He said that after its benchmark 7 ¼% notes due 2006 had risen to around par bid, 101 offered from prior levels of "94, 96, 97" earlier in the week, and after its long debt, like the 6.45% bonds due 2029 had firmed up to 76.25 bid from levels around 71 early in the week, "sellers were emerging" Friday.

After all, he pointed out, "some of the guys owned the [2029] bonds since they were around 60. There's going to be at least a little profit-taking there."

In emerging markets corporate action Friday, terms emerged on Petrobras Energia SA's $100 million of 9 3/8% 10-year notes (Caa1/B-/B-). The Argentinean energy company's deal, via Merrill Lynch, priced at 99.204 to yield 9½%.

And Indian conglomerate Reliance Industries was heard to be bringing an offering of $750 million of five-year bonds. The deal, via Credit Suisse First Boston, is expected to price during the week of Nov. 3.

One emerging markets source told Prospect News on Friday that the liquidity picture of the asset class at present appears healthy.

"We've seen people making tactical allocations to emerging markets," said the official. "Those tend to be a lot slower in happening, and as a result they are not responses to the latest two-month performance. Rather, they are responses to the past five-year performance.

"Those tactical allocations that are in process are going to continue to go through that process. So we feel pretty good about our market, technically."

This source, who also brought up the Standard & Poor's warning on the paper of Ford Motor Co., said that like junk, emerging markets can be susceptible to pressures exerted elsewhere in the capital markets.

"We've had a lot of supply in the last few weeks," said the official. "That, combined with what happened in high grades with Ford, and combined with some of the volatility in Treasuries and in equities - due to some profit taking or whatever you want to call it - can have an impact.

"Overall, though, the market is still at very tight levels."

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