Levi bonds lower on CEO's departure plans; VNU, NTL slate big deals; funds see $98 million inflow

By Paul Deckelman and Paul A. Harris

New York, July 6 - Levi Strauss & Co.'s bonds were easier Thursday on the news that longtime chief executive officer Philip A. Marineau will step down from his leadership position at the venerable San Francisco-based apparel company late in the year.

Also on the downside were the bonds of San Antonio, Tex.-based petroleum refiner Tesoro Corp., which was reported to be in talks to buy the big Houston refinery jointly operated by Lyondell Chemical Co. and Citgo Petroleum Corp., perhaps for as much as $4 billion.

With the junk bond syndicate desks and trading floors working at half strength in some cases as a considerable number of participants have extended the Independence Day break into vacations, market activity remained light on Thursday, according to sources.

A buy-side source said that the market moved sideways, and possibly ended a little higher.

The high-yield primary market, which has been fairly quiet since the end of last month, priced no new deals during the session - but several big upcoming offerings were seen climbing onto the forward calendar, with none bigger than Dutch-based VNU NV's planned $1.6 billion equivalent sale of dollar- and euro-denominated bonds, expected to launch next week. Also seen coming out of Europe was a big upcoming offering of dollar- and sterling-denominated notes for NTL Cable plc.

H&E Equipment Services was seen launching a somewhat smaller, solely dollar-denominated deal next week.

And late in the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $97.5 million more came into the funds than left them. That broke a three-week streak of sizable outflows from the funds totaling some $1.181 billion, according to a Prospect News analysis of the figures, including the $379.3 million that hemorrhaged in the previous week, ended June 28.

Even with that inflow in the latest week, there have still been outflows in 11 weeks out of the last 13, for a net total outflow in that time of around $2.273 billion, the analysis indicated.

The inflow trims the year-to-date hemorrhaging to negative $3.541 billion among funds that report to AMG on a weekly basis, according to a source familiar with the data.

However, the source added, funds that report to AMG on a monthly basis are reporting $194.3 million of outflows for the most recent period, which reduces net inflows for 2006 to date to $1.813 billion among funds that report on a monthly basis.

Tallying the most recent data, year-to-date aggregate flows stand at negative $1.728 billion, the source added.

Outflows have now also still been seen in 21 weeks out of the 27 since the start of the year, against only six inflows, including this past week's, according to the Prospect News analysis, excluding distributions and counting only those funds that report on a weekly, rather than on a monthly, basis.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise between 10% and 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

Possibly a bigger week ahead

Although the primary market continued rolling up the zeroes on Thursday - that is, zero issuance thus far in the holiday-abbreviated week that began on July 3 - a break in the drought may be on the horizon, according to a market source.

Three deals, two of them sizable and all three expected to top the $250 million mark, could launch as early as next week.

Netherlands-based market research company VNU is expected to launch a $1.6 billion equivalent offering of notes in dollar and euro denominations.

The acquisition financing will be led by Deutsche Bank Securities and JP Morgan.

Meanwhile London-based NTL Cable is expected to launch a £600 million equivalent offering of senior notes in dollar and sterling tranches, with proceeds going to help take out a £1.8 billion bridge loan incurred in connection with NTL's reverse acquisition of Telewest.

JP Morgan, Deutsche Bank, Goldman Sachs & Co. and The Royal Bank of Scotland are in the deal.

And finally H&E Equipment Services is expected to launch a $250 million minimum offering of high-yield notes as early as next week.

Credit Suisse has the books for the debt refinancing from the Baton Rouge, La., heavy equipment manufacturing and services company.

Levi lower as CEO departs

Levi Strauss' bonds edged lower on the news that CEO Marineau plans to call it quits around Thanksgiving time, when the company ends its fiscal year, although he said he would stay on till the end of the calendar year if need be.

A trader described Levi's 9¾% notes due 2015 as weaker, pegging the bonds at 99 bid, par offered, down between ¾ point and a full point. At another desk, those bonds were quoted at par - but a trader said that was still down nearly a full point from earlier levels. Levi's 12¼% secured notes due 2012 were unchanged at 110 bid, 100.75 offered.

Another market observer saw Levi's 8 7/8% notes due 2016 retreat ¾ point to 94.5 bid, while its 7% notes slated to come due on Nov. 1 were off ¼ point at 97.25.

Marineau, who took over as CEO in 1999, is widely credited for leading Levi's turnaround effort over the past several years, which saw the company finally break out of a prolonged sales slide and return to profitability.

No successor is yet in sight, although one possible heir apparent might be veteran Levi's executive John Anderson, who was promoted to president and chief operating officer in conjunction with Marineau's announcement.

Tesoro on acquisition worries

Also on the downside was Tesoro, pushed lower by market fears that the company will take on a big load of debt should it make a deal to acquire the Lyondell-Citgo refinery, possibly for as much as $4 billion, according to published reports.

There was no official confirmation of such negotiations from Tesoro, from Houston-based Lyondell, or from Citgo, the Houston-based United States refining and marketing subsidiary of Venezuela's national oil company, Petroleos de Venezuela SA.

Tesoro's 6 5/8% notes due 2015 were seen down two points in morning trading to 93.5 bid, and held that level for a while before edging back, off their lows to end around 94.25, still down more than a point on the session, a market source said. Meanwhile, Lyondell's 9½% notes due 2008 were up by two points in afternoon dealings at 103.

Another trader saw Tesoro's 6 5/8s down 1½ points at 93 bid, 94 offered, but saw no movement in the Lyondell bonds.

At another shop, the Lyondell bonds were up, but only marginally - in the quarter-point range.

Lyondell owns 58.75% of the refinery joint venture and Citgo the remaining 41.25%. The two companies have been working together since 1993, refining Venezuelan crude, but the relationship has become strained in recent years, paralleling the deterioration of relations between the United States and Venezuela following Hugo Chavez's rise to the presidency of the Latin American nation in 1998. Chavez has claimed that U.S. energy companies take unfair advantage of Venezuela, one of the world's largest oil producers, a charge denied by Washington. Lyondell and Citgo said in April they would end their troubled marriage and put their major joint asset, the Houston refinery, up for sale.

The facility, located along the Houston Ship Channel, can refine up to 270,000 barrels of crude per day into distillate products such as gasoline, home heating oil, kerosene and jet fuel. Its addition to Tesoro's fleet of six existing refineries, should such a deal go through, would increase Tesoro's existing 560,000 barrel per day refining capacity by nearly half again.

The news reports on the talks quoted unidentified sources as saying that Tesoro wants a quick deal, hoping to take ownership of the plant between mid-August and late October. That would fit well with the plans of Lyondell, which hopes for a quick sale sometime this summer, although Citgo has said it anticipates a sale more toward the end of the year.

Tesoro, which previously had said it did not want to take on the amount of debt necessary to buy the Lyondell-Citgo refinery, bulked up during the late 1990s and the earlier part of the current decade by using debt to buy refineries being cast off by the major oil companies at that time, when refining was seen as a difficult and not-very-profitable sideline to their main business of energy exploration and production. In the process, its debt-to-capitalization ratio pushed as high as 69% in 2002 - although aided by the profits it has garnered over the past several years as energy costs have risen, it has been able to pay down debt and lower its leverage to 36% of capitalization by the end of last year.

GM down again

General Motors Corp.'s notes were lower for a second straight session, a trader said, quoting the Detroit giant's benchmark 8 3/8% bonds due 2033 at 79 bid, 80 offered, down about a point. The upside momentum seen on Friday and again in Monday's pre-holiday dealings from shareholder Kirk Kerkorian's efforts to get GM into an alliance with French carmaker Renault SA and Japanese manufacturer Nissan Motor Co. was seen to have completely dissipated.

While the prospect of such an alliance, outlined Friday in a Securities and Exchange Commission filing by 9.9% GM shareholder Kerkorian, gave the bonds a solid boost on Friday, in tandem with a stock surge, and again on Monday, the idea seemed to hit new obstacles Thursday, with GM chairman and chief executive officer G. Richard "Rick" Wagoner seen as likely to spearhead management's opposition to the alliance plan. The Wall Street Journal's on-line service was reporting that Wagoner and his team would make the case against such an alliance during a Friday conference call among members of GM's board of directors, at which the idea is to be discussed.

Kerkorian - whose Tracinda Corp. investment vehicle is GM's third-largest stockholder - has been critical of GM's Wagoner-led management, feeling it was not moving quickly enough to turn the money-losing company around. Published reports say that should Kerkorian's vision come true, Renault and Nissan - already interlocked via mutual ownership of a percentage of one another's shares - might take as much as a 20% stake in GM, which, combined with Kerkorian's holdings, would give the octogenarian billionaire shareholder activist the leverage to oust Wagoner and replace him with Carlos Ghosn, currently the CEO of both Renault and Nissan. Ghosn is considered responsible for bringing Nissan back from possible insolvency several years ago.

Vertis higher

On the upside, traders saw the bonds of Baltimore-based advertising company Vertis Inc. rise about a point or two, pushed up by sector consolidation speculation on the news that Valassis Communications Inc. plans to buy Advo Inc., the nation's largest direct-mail marketer, for $1.2 billion, plus debt assumption.

A trader saw Vertis' 13½% senior subordinated notes due 2009 jump to 86 bid, 87 offered from 83.5 bid, 84.5 offered previously, while its 10 7/8% senior notes, also due in 2009, were up a more modest point to par bid, 101 offered. Vertis' 9¾% senior secured notes due 2009 firmed to 102 bid from 101.375.

Traders meanwhile saw no activity in Valassis' split-rated senior unsecured notes, its 6 5/8% notes due 2009 last seen trading last week just north of 100.375. Moody's Investors Service put the ratings on review for a possible downgrade, while S&P cut the debt, already a "high junk" BB+, by one notch to BB.

Sirius gains on subscriber data

A trader saw Sirius Satellite Radio Inc.'s 9 5/8% notes due 2013 a point better at 94.5 bid, 95.5 offered, gaining altitude on the news that the New York-based satellite radio broadcaster added 600,000 new subscribers during the just-completed second quarter - a 64% jump from year-ago levels. That surge - largely attributable, observers said, to the continued popularity of ribald radio rabble-rouser Howard Stern, who joined its air staff in January - brought total subscribers to 4.7 million.

That still leaves Sirius well behind larger rival XM Satellite Radio Holdings Inc., the Washington-based industry leader - but gaining on its competitor. XM added 398,000 new subscribers during the quarter to just under seven million. But that was a 38% plunge from year-earlier additions, caused by shortages of receiver sets due to production problems. XM's bonds, like its 9¾% notes due 2014, were seen little changed; those bonds finished at 91.5 bid, 92 offered.

Trump up on N.J. budget deal

Trump Entertainment Resorts Inc.'s 8½% notes due 2015 were seen up about ¾ point to 96 bid, 96.5 offered, a trader said, given a boost by the news that the New Jersey state budget battle between freshman governor Jon Corzine and the state legislature has been resolved. That means the money will again be flowing to state agencies, including the Casino Control Commission, which closely supervises Trump's three Atlantic City casinos, and the nine other gaming palaces there. The city's casinos were forced to close on Wednesday and Thursday because the commission was unable to assign inspectors to the dozen casino floors, due to lack of funds. By some estimates, the casinos were collectively losing as much as $20 million in revenues for each day they were closed.

Traders said Trump really was the only one of the operators whose bonds were affected by the crisis, since all of its casinos are in Atlantic City - unlike such crosstown rivals as Harrah's Operating Corp., Boyd Gaming Corp., MGM Mirage, Aztar Corp., and Resorts International, all of whom have other gaming operations elsewhere, not affected by the Jersey problems. A trader said the Trump bonds returned to the levels they had held before the budget crisis got serious.

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