OM Group gains on planned divestiture; Calpine lower; XM, LodgeNet shop new deals

By Paul Deckelman and Paul A. Harris

New York, June 3 - OM Group bonds firmed smartly on Wednesday, after the Cleveland-based chemicals manufacturer announced that it would sell its precious metals business - a step greeted with enthusiasm by debt investors and at least one major ratings service. On the downside, Calpine Corp. debt was on the slide after Standard & Poor's downgraded the power generator's bonds late Monday.

It was another quiet day in the primary market, now catching its breath after the whirlwind of activity seen in late May. LodgeNet Entertainment Corp. began shopping a $185 million 10-year deal while XM Satellite Radio hits the road this week with a $125 million offering of seven year senior secured notes.

Traders said Triton PCS Inc.'s new 8½% senior notes due 2013 continue to head upward in secondary dealings; those bonds, which priced at par on Friday, were quoted Tuesday as having pushed upward to 104.5-104.75 bid levels, a point better than Monday's close.

"The bonds just continue to climb," a trader noted.

The AT&T Wireless affiliate's existing 7 5/8% subordinated notes due 2012 were seen having firmed to 70 bid/70.5 offered from 68 on Monday.

"All of the newer stuff seems to be better," another trader said, quoting the Owens Brockway Glass Container 7¾% notes due 2011 as having risen a point on the session to 104 bid. The packaging company's bonds had priced at par on April 29 and have managed to hover above par since then.

Back among existing issues, OM Group's 9¼% notes due 2011 were quoted up as much as six points during the session at 93.5 bid/94.5 offered, after the company agreed to sell its precious metals business and PVC heat stabilizer product line to Umicore SA, continuing its efforts to reduce debt.

The assets are being sold for $752 million, with the net proceeds expected to total around $700 million; the proceeds will be earmarked to pay down debt. Standard & Poor's said late Tuesday that it would consider upgrading the company's debt ratings.

Not only the bondholders and debt analysts were bullish on the move - even though the company also issued lower guidance for the second quarter equity investors took its shares up 80 cents (5.37%) to $15.69 in New York Stock Exchange dealings of 5.2 million shares, about seven times the norm.

Also on the upside, a trader said, "people are looking" for airline paper, the sector gaining a bid on apparent investor perception that the worst may be behind the sometimes beleaguered sector, with no other carriers expected to immediately follow US Air and United Airlines into bankruptcy and the prospect that with the Iraq war essentially over and the economy starting to show signs of recovery - however feeble - the carriers may be able to start digging themselves out of their collective hole.

In Tuesday's dealings, Continental Airlines 8% notes due 2005 were being quoted up more than three points, as high as 84 bid, while Northwest Airlines' 7 7/8% notes due 2008 were quoted a point-and-a half better at 75 bid.

Another trader saw little movement in Continental and said AMR Corp. Was "doing nothing," but he quoted Delta Airlines' 7.70% notes due 2005 up one point at 84.5 bid/85.5 offered and saw the Northwest bonds up about a point on the session.

Mirant Corp. bonds gyrated during the session in response to the Atlanta-based merchant energy company's announced plan to exchange new bonds for several series of its existing bonds, with its 7 5/8% notes due 2006 ending up two points on the session at 78 bid/79 offered, while its 7.40% notes due 2004 first retreating and then bouncing back to end up a point at 74.5 bid.75.5 offered (see Distressed Debt Review elsewhere in this issue for full details on Mirant's situation).

Traders and other market watchers who follow the utility/merchant power sector were more focused Tuesday on the fall in Calpine Corp. debt after Standard & Poor's cut the San Jose, Calif.-based power producer's senior unsecured rating to CCC+ from B+, citing its concerns about the company's heavy debt load and weak profit margins from electric sales.

Calpine "got crushed," a trader declared, pegging its 8½% notes due 2011 down more than five points to end at 65 bid/66 offered. At another desk, however, its 8¾% notes due 2007 and 7 7/8% notes due 2008 were only seen down around a point, at 69 bid and 66.75 respectively.

Elsewhere on the downside, IMC Global Inc.'s bonds weakened after S&P cut its credit ratings on Monday in response to an earnings warning. The ratings agency dropped its senior debt ratings two notches to B- from B+.

In Tuesday's bond price action, IMC's 10 7/8% notes due 2008 were quoted down as much as nearly four points on the day at 106.25 bid.

A trader at another desk, noting that "the bonds don't normally trade a hell of a lot," pegged its 10 7/8% notes down only a point at 108.5, while its 11 1.4% notes were at 108 bid/110, and its 6 7/8% notes at 91 bid/92.5 offered, all down about a point on the session.

A trader quoted Charter Communications Holdings's bonds - which have recently firmed on the assumption that the St. Louis-based cable operator and its lenders will clear the way for principal owner Paul Allen to make an additional investment in the company to keep it in credit compliance - as having "given back" some of the recent gains. He saw Charter's benchmark 8 5/8% notes due 2009 as having "run out of gas," ending down a point at 72 bid/73 offered, with other Charter debt down a point or so as well.

In the primary, sources reported that no transactions took place during the second session of June. However two new deals totaling just over $300 million were added to business on the forward calendar.

Meanwhile Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News that presently there is insufficient evidence to judge whether the high-yield market is continuing to rally or has turned.

Two consecutive outflows from the high-yield mutual funds, three pulled deals and deals seen pricing wide of their price talk don't necessarily add up to a market that is headed south.

"The jury is still out as to whether the market is going to turn," Difley said. "I don't think we're going to see a precipitous fall here. I think we could take a breather or go slightly down, but I think the market is waiting for some kind of catalyst to push it one way or another. That catalyst might be the economy or it might be a greater pace of outflows. But of course we may also see some inflows again.

"I don't think the outflows we've seen are unusual given how far we've gone, and how quickly the market has rallied."

One reason junk might hang in there, Difley said, is that investors looking for returns - having sniffed around the various market sectors - almost have to take a second look at high yield.

"Even though the absolute yield of high yield has come down so much with this rally, if you are looking for a yield you don't have a lot of alternatives," he said.

Difley told Prospect News on Tuesday that where he sees room for further rallying is in the lower tier of credits.

"Obviously if you price with a six-handle and you're a high yield company you don't have a lot of room to run," commented the American Century High Yield Fund manager.

"But as we have seen this year, the riskiest, yield-iest credits - the triple-C and below names - have outperformed. To the extent that those companies' finances are turning around, either because their fundamentals are improving or because they've taken care of their short term liquidity situations, you could see some more rallying in those names."

Having outlined the case for lower-tier credits, Difley specified that he would be taking a look at the new offering from Tulsa natural gas firm Williams Cos., which expects to price $500 million of seven-year non-call-four senior notes (Caa1 expected /B+) on Thursday or Friday, with Lehman Brothers, Citigroup, JP Morgan and Banc of America Securities running the books.

Proceeds from Williams' deal have been pegged for general corporate purposes and payment of maturing debt obligations including partial repayment of its 9¼% senior notes due March 2004.

"We already own some Williams bonds so we'll probably take a look at this deal," said Difley.

Asked whether he expected it to price with the existing Caa1 from Moody's he said: "That's a key question given where S&P has rated it and given the kinds of moves that the company made recently to shore up their liquidity. I'd be surprised if Moody's kept the triple-hooks. But you never know."

Asked whether decent execution on the deal hinges on an upgrade from Moody's Difley responded: "I don't think so. These days the market prices in the perceived credit quality of bonds so far in advance of what the rating agencies do that I think they're becoming less and less relevant.

"Williams bonds due 2012 trade close to par," Difley added, "and they yield in the low 8% area. So I don't see them having any problem pricing this deal, obviously subject to some decent level of price talk."

Asked what he expected price talk on the deal to be, he said: "All you can do is look at where their existing bonds trade. A lot of their outstanding debt is not callable, so there should be some premium for the lack of call protection on this deal."

Meanwhile during Tuesday's session in the primary market sources reported that no transactions were completed.

Two new deals for $310 million of prospective issuance were added to the forward calendar, however. And Bear Stearns & Co. will be running the books on both.

The roadshow started Tuesday for XM Satellite Radio's $125 million of seven-year senior secured notes. The Washington, D.C.-based satellite radio service expects to price its deal on June 11.

And the roadshow begins Thursday for Sioux Falls, S.D.-based broadband and interactive services provider to the lodging industry LodgeNet Entertainment Corp., which is looking to sell $185 million of 10-year senior subordinated notes on June 11.

Also on Tuesday price talk of 11%-11¼% was heard on Dayton Superior Corp.'s upcoming $150 million of five-year senior second secured notes (B3/B+), which are expected to price on Wednesday via Morgan Stanley and Deutsche Bank Securities.

Price talk of 7%-7¼% was heard Tuesday on Houston Exploration Co.'s $150 million of 10-year senior subordinated notes (existing ratings B2/B), expected to price Thursday via Wachovia Securities.

And finally, the market heard price talk of 12½% plus or minus 25 basis points on New World Restaurant Group, Inc.'s $160 million of five-year senior secured notes (B3/B-), expected to price at the end of the week, with Jefferies & Co. running the books.

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