Cott dives as Wal-Mart cuts space; Tenet up as loss narrows; Freescale firm on tech strength, debt forecast

By Paul Deckelman and Paul A. Harris

New York, Feb. 26 - Soft-drink maker Cott Beverages Inc.'s bonds and shares slid badly Tuesday on news reports that retailing industry leader Wal-Mart Stores Inc. has decided to reduce the amount of shelf space it will allocate to its private-label "Sam's Choice" beverages, which are canned and bottled by Cott.

However, most bond movement during the session was to the upside, including such names as Tenet Healthcare Corp., which reported improved fourth-quarter results from a year earlier, Levi Strauss & Co., which is teaming up with the makers of the equally iconic Air Jordan athletic shoe in a marketing venture, and Freescale Semiconductor Inc., whose incoming boss issued soothing words to the debt markets.

However, not so soothing was a research peace from JPMorgan Chase which suggested that as painful as the past few months have been for the junk market, in terms of falling bond prices and rising spreads and defaults, the worst is probably yet to come.

New-deal market activity - which has been a primary victim of the aforementioned junk downturn - remained virtually non-existent Tuesday.

Market indicators give positive reading

A trader said that the widely-followed CDX index of junk market performance - which jumped a full point on Monday - edged up another 1/8 point on Tuesday's session at 90 1/8 bid, 90 3/8 offered. Meanwhile, the KDP High Yield Daily Index rose by 0.32 to 74.49 while its yield narrowed by 9 basis points to 9.51%.

In the broader market, advancing issues led decliners by a nearly two-to-one margin. Overall activity, reflected in dollar volumes, jumped 55% from Monday's levels.

Cott falls on Wal-Mart shelf-space news

A trader saw Cott Beverages' 8% notes due 2011 fall to levels as low as 81 bid, 84 offered from Monday's close around 90, "down a good 8 points on the session on their bad news" relating to Wal-Mart's decision to allocate less shelf space at its roughly 4,000 U.S. stores to private-label beverages which Cott cans and bottles for the store chain.

Another trader saw the bonds trade down to 81 bid, 83 offered before going out at 83 bid, 85 offered, which he called a 7 point loss on the day, spurred by what he described as the "slight disagreement" between Cott and Wal-Mart over how much shelf space the latter will give to the former.

Another market source saw the bonds having tumbled to around the 83.5 level from prior levels around 90.5, in active large-block trading Tuesday. The bonds got as low as 81.5 during the session before coming up from those lows.

Cott's New York Stock Exchange-traded shares, meantime - which had nosedived some 18.35% on Monday on market rumors that Wal-Mart was taking away some of Cott's shelf space, making it the biggest percentage loser that session - picked right up on Tuesday where they had left off on Monday, tumbling another $1.51, or 37.28%, to end at $2.54. Volume of 4.6 million shares was about eight times the norm.

Cott on Tuesday morning confirmed that it had received notice from Wal-Mart that the world's largest retailer plans a reduction in shelf space and merchandising support for its private-label carbonated soft drinks in the United States, including "Sam's Choice," which the Toronto-based soda bottler admitted "would be significant to Cott's business plans, " since Wal-Mart is Cott's single biggest customer, accounting for as much as 38% of its annual sales by some estimates; Wal-Mart's business, in fact, is the primary reason why Cott is considered the world's largest producer of store-brand soft drinks.

Cott's statement said that it is "fully committed to deploying the necessary efforts to maintain a mutually satisfactory relationship for the long-term." At the same time, Cott said that it would "work hard to continue to diversify its customer base and to offset the potential impact on its profitability."

Even before its latest Wal-Mart setback, Cott was having problems, losing $76.8 million in the fourth quarter of 2007 despite a 3.1% overall sales gain. That growth came from overseas operations, boosted by foreign-exchange fluctuations, while its North American revenues were down 2.5% year-over-year.

UBS equity analyst Kaumil Gajrawala, in downgrading the company's shares to "neutral" Tuesday from "buy" projected that a reduction in its Wal-Mart shelf space at all of the company's stores could cut Cott's revenues by as much as $70 million annually, or fully 10% of what it grosses from its Wal-Mart business.

"Wal-Mart isn't kicking them out," one of the traders opined, "but they are cutting them significantly, since Wal-Mart is just about everywhere" with its stores - its discount stores, supercenters, Neighborhood Market and Sam's Club outlets coast to coast. "If they had gotten kicked all the way out, you would have seen [the bonds] drop like 15 points," at least.

How long Cott will have to do with its reduced foot-print on the shelves at Wal-Mart is anyone's guess. The trader observed that "right now, they are getting cut down. There's not necessarily a time frame on when they will be built back up, or if they're going to get more shelf space, or whatever it's going to be - there's no definite 'forever' that this is going to stay like this - but right now, [the bonds] are down 7 [points]."

Cott held out the hope that the Wal-Mart edict cutting its shelf space might not go into effect, or at least not too drastically, noting that the store's 2008 product placement programs "have not yet been finalized and Cott is still actively negotiating with Wal-Mart appropriate space allocation and other merchandising programs" associated with the "Sam's Choice" brands.

"Sam's Choice," named after the store chain's late billionaire founder, Sam Walton, is Wal-Mart's private-label line of soft drinks that it sells, often in economical bulk packages of 24 12-ounce cans at a considerable discount versus what it charges for major branded soft drinks such as those made and marketed by Coca-Cola Co. and PepsiCo Inc.

Cott further confirmed that Wal-Mart's notice did not indicate any potential shelf space reduction for the "Sam's Choice" bottled water line which the giant discounter also buys from Cott, which considers the product a potential growth area.

Tenet up on more robust numbers

While Cott was clearly the disaster of the day in junk-bond land, most names were seen heading for the upside.

One such credit was Tenet Healthcare, whose 7 3/8% notes due 2013 were seen up 2 points by a trader at 86.5 bid, 87.5 offered, while its 9 7/8% notes due 2014 were also up a deuce at 93.5 bid, 95 offered.

Another trader saw the 9 7/8s at 93.75 bid, 94.75 offered, which he called up 1¼ points, seeing all of the Tenet bonds up by a like amount.

Tenet's NYSE-traded shares were meantime up 62 cents, or 14.49%, to $4.90. Volume of some 27 million shares was almost three times the average daily turnover.

The bonds and shares improved after the Dallas-based Number-Two U.S. hospital operator announced a sharply lower fourth-quarter loss from a year earlier as well as its first increase in patient admissions in nearly four years. Tenet lost $75 million, or 16 cents per share versus a year-earlier loss of $386 million, or 82 cents per share - although analysts cautioned that excluding one-time items, Tenet lost 7 cents per share, a bigger loss than the 3 cents per share average being bandied about on Wall Street.

Revenue rose 6% to $2.25 billion from $2.12 billion, and slightly exceeded analysts' expectations. Besides posting its first admissions gains in nearly four years - they were up by 0.1% - Tenet also said that its revenue per admitted patient was up 3.9% from year-earlier levels.

On the downside, however, Tenet - like other hospital operators, large and small, public and private - continues to be troubled by the rise in uninsured or under-insured patients, which were up 10% from a year ago, forcing the company to increase its provisions for bad debt unlikely to ever be collected by 12.8%.

Tenet sector peer HCA Corp.'s 9¼% notes due 2014 were seen up 1 point at 102.5 bid, 103.5 offered, while its 9 5/8% notes due 2016 rose 1½ points to 103.75 bid, 104.75 offered. Community Health Systems Inc.'s 8 7/8% notes due 2015 were up nearly a full point at 99.5.

Levi lovers live it up

Levi Strauss' bonds pushed higher Tuesday, with the venerable San Francisco blue jeans maker 's 9¾% notes due 2015 seen up more than 2 points to the par bid level.

At another desk, a trader quoted those bonds at 98.5 bid, 100.5 offered, although he called that a 2 point rise in the bonds.

Levi on Tuesday announced a long-rumored and potentially lucrative marketing tie-up with Nike Inc.'s Jordan Brand division, which produces the famous Air Jordan athletic shoes endorsed by and named for basketball legend Michael Jordan.

The two companies plan to create what Levi called "a limited number of toe-to-head fashion packages for collectors and fans of both brands," to be called the Jordan Levi's Collection. Levi said that such a collaboration "will unite classic style with urban design flair, delivering freshly-interpreted takes on iconic flagship product from both leaders." The first fruits of the partnership, teaming the classic Jordan Retro 1 style sneakers with Levi's famous "501" brand Original blue jeans and a signature tee shirt featuring graphic artwork taken from both brands - all to be sold as a complete set - will hit the stores starting next month.

New Freescale chief looks on the bright side

A trader saw Freescale Semiconductor's 10 1/8% notes due 2016 up a point on the day at 74 bid, 75 offered. At another desk, a market source saw the company's 8 7/8% notes due 2014 rise a point to 84.5 bid.

Another market source saw the 10 1/8s going home a point better at 74.25 in fairly active large-block trading. At one point, the bonds had traded up more than 2 points on the session at the 75.5 level before coming down from that peak later on.

Freescale's incoming chief executive officer, Richard Beyer, said Tuesday that the Austin, Tex.-based computer chip manufacturer has enough of a cash cushion to make its debt payments, even though sales are down and the bonds are trading at distressed levels - a sign the market is wary about the company's prospects.

Beyer said in a Bloomberg News interview on Tuesday that the company which he will begin leading next month is "on very solid ground," able to "continue to service the debt, invest where appropriate and even do acquisitions where appropriate."

Beyer, formerly the chairman of Intersil Corp., is taking over the Freescale reins from Michael Mayer, whose unexpected decision to step down as chairman and CEO was announced on Feb. 8. Mayer led the company - originally the semiconductor division of electronics giant Motorola Inc. - through its 2004 spin-off and initial public offering, and remained at the helm following the 2006 leveraged buyout which vested control of the company in a private-equity consortium led by Blackstone Group LP and Carlyle Group.

He takes over a company with over $9 billion of debt on its balance sheet as a result of the LBO, with $750 million of annual interest payments, about the amount of cash the company had on hand as the new year opened. Its next bond interest payments are due in mid-June, on three series of notes maturing in 2014 and its 10 1/8% notes due 2016.

With annual sales of nearly $6 billion, most Freescale-watchers believe it should be able to make its debt payments in the near-term, but are concerned about the longer-term outlook. Sales to its biggest customers -Motorola and General Motors Corp. - have been trending downward, since both have been losing money on their own respective sales downturns. Freescale posted a $525 million net loss in the fourth quarter.

A trader attributed Freescale's gains in Tuesday trading more to a generally stronger tech market than to anything that Beyer may have said. He also saw high-tech solutions provider Unisys Corp.'s 8% notes due 2012 a point better at 87.5 bid, 88.5 offered.

Semiconductor testing and packaging services provider Amkor Inc.'s 7¾% notes due 2013 were up 1½ points at 93.

Nuveen bounces back from decline

A trader noted the recent rise in Nuveen Investments Inc.'s bonds "that everyone's been talking about in the last couple of days - they're up a couple of points."

A market source saw the Chicago-based financial services company's 5½% notes due 2015 trading around the 63 level, up 1½ points on Tuesday's session and up another 2 points from the lows seen at the tail end of last week. Although there wasn't that much activity, what there was mostly occurred in large-block trades.

The trader said that it was his sense was that "there's a big Street short" in the company's 10½% bonds, "and guys are holding them in, trying to buy them down at these levels. But that's a big coupon to be short. When bond insurer FGIC Corp.'s credit stance was downgraded by Fitch Ratings earlier in the month, he said, the Nuveen bonds "sold off about 5 points," to as low as 85.5. By now, he said, the bonds had moved up to about 90.5, "so it's kind of come back all the way" to the pre-downgrade levels, although activity in the credit was restrained.

Morgan warns of tough road ahead

The market was meanwhile digesting some bearish predictions from JP Morgan Chase, which warned Tuesday that junk is likely to deteriorate further over the next six months - and even that is only the beginning of what is expected to be a 12 to 18 month period that will see further capital constraints, escalating spreads versus Treasuries and more issuer defaults, which its analysts said in a research report will "cleanse the market of excess risk taken during the lending boom."

That report noted that as the market has priced in increasing expectations of corporate defaults and other bad news ahead, spreads, which move inversely to bond prices, have already jumped more than 450 bps to an average of 737 bps over the benchmark Treasuries from the all-time tight levels seen early last year - tights which most market participants acknowledged at the time were unsustainable.

Those bearish observers proved to be prescient, as the subprime mortgage market meltdown that began around the middle of last year and quickly spread to other credit areas killed off what up until that time was a respectable, if not necessarily spectacular, junk market advance, and brought high yield new issuance to a shuddering halt in the latter part of the year.

The changeover to a new year has not caused the bad karma to dissipate; despite recent moves by the Federal Reserve to boost a sagging economy by lowering interest rates and efforts by the government and major banks to stem the flood of subprime and other mortgage defaults, primary issuance remains mired in the mud, and most major performance indexes show a year-to-date secondary loss so far of between 2% and 3%.

The Morgan analysts said that as sizable as the spread widening since last year's tight levels has already been, those spreads "are only now reflecting the initial stage" of what is likely to be a year or more of further pain as the junk market shakes out. They cautioned that "given the volatility in the markets, dim prospects for the economy, tightening liquidity conditions and rising defaults, the high-yield market will surpass 800 bps in 2008 as defaults begin their ascent, likely sooner rather than later.

The analysts declared that the historically low default levels of the last year or so - the trailing 12-month default rate measured a microscopic 0.66% at the end of January - are "not relevant" and will not last; the widening spreads forecast an escalation in defaults. JP Morgan sees the default rate moving up to 2.25% by year's end, should continue moving up to between 4% and 5% in 2009 - and could zoom as high as 7% by next year should the economy slide into a recession.

Lagging stock rally

A high yield syndicate official said that the debt markets failed to rally with stocks on Tuesday, adding that the LCDX index was unchanged to slightly lower, while the high yield CDX was down 1/8 point.

"Stocks rallied because the monolines weren't downgraded," the source said, referring to Monday news that Standard & Poor's affirmed the triple-A credit ratings of bond insurers MBIA Inc. and Ambac Financial Group, Inc.

"People are looking for good news to rally behind," the official commented.

"The equity markets did rally but the debt markets were a little less enthusiastic."

This source said that the bank loan market has stabilized over the past couple of weeks, but the high yield market has been down a little over that same time period.

Building cash balances

When asked whether, given the total lack of a new issue calendar in the junk bond market, the high yield accounts have higher than normal cash balances, the syndicate source pointed out that, in the face of continuing coupon payments, balances are definitely building.

"But we haven't heard that they're getting out of control," the official said.

Later a source from the buy-side more or less concurred with this take.

The syndicate official reasoned that people who want to put cash to work in the leveraged markets would likely begin shopping not in the high yield primary or secondary markets, but rather in the bank loan secondary market.

This source, and others who have spoken recently with Prospect News, assert that the corrosive forces at play in bank loans are "technical" ones.

Loans have been hit with a technical double-whammy, market sources say. First of all there is a greater dollar amount of LBO-related risk overhang in bank loans than there is in junk bonds, creating excess supply. Second, with the CLO and CDO bids practically non-existent, that abundance of supply is playing to extremely limited demand.

"The last time I checked you could by TXU bank debt all day long," the syndicate official said.

"There are plenty of sellers.

"There is stuff to buy in the bank loan secondary at pretty attractive levels."

However the buy-sider, while agreeing that the bank loan market certainly is facing technical problems, suggested that there is also a fundamental force, namely deteriorating collateral, now weighing upon the secured debt secondary market.

All quiet in the primary

The high yield primary market generated no news on Tuesday.

One deal is on the road.

Norcross, Ga.-based packaging and paperboard concern Rock-Tenn Co. is marketing a downsized $200 million offering of eight-year senior notes (Ba3/BB-) on an investor roadshow which is expected to wrap up on Friday.

Banc of America Securities, Wachovia Securities and SunTrust Robinson Humphrey are joint bookrunners for the corporation-to-corporation acquisition deal in which Rock-Tenn will acquire Southern Container, a Hauppauge, N.Y., privately held containerboard manufacturing and corrugated packaging business, for $851 million in cash.

The bond portion of the financing was downsized from $400 million, with $200 million of proceeds shifted to the company's term loan A, which was upsized to $550 million from $350 million.

Also in the market is Ainsworth Lumber Co. Ltd. which is offering $50 million to $75 million of six-year senior secured first-lien notes.

Barclays Capital has the books for the offering which is being marketed without an investor roadshow.

Ainsworth brings the new notes to market concurrent with and exchange offer for $153.5 million of senior floating-rate notes due 2010, $275 million of 7¼% senior notes due 2012, $75 million senior floating-rate notes due 2013, $210 million 6¾% senior notes due 2014 and $110 million 6¾% senior notes due 2014.

The new notes offer is backstopped by some holders of the existing notes in return for warrants to purchase up to 7,887,998 of the company's common shares, representing approximately 35% of the currently outstanding shares.

Late last week Moody's downgraded Ainsworth's corporate family and probability-of-default ratings to Ca from Caa1.

Moody's said that the downgrade was prompted by the exchange offer which, according to Moody's, comes under distressed circumstances and at a significant discount to the face value of the existing notes.

Ratings on senior unsecured notes were downgraded to Ca from Caa1 and on the secured term loan to Caa2 from B2. The outlook is stable.

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