Crown Cork to sell $1.75 billion notes in refinancing effort; short bonds rise on news

By Paul Deckelman and Paul A. Harris

New York, Jan. 29 - Crown Cork & Seal Co. announced plans on Wednesday to sell $1.75 billion of secured bonds and line up $1.05 billion of new bank debt as part of an ambitious $3 billion refinancing which would extend the maturities of its debt out to at least 2006. Its short-dated paper, which would be taken out in the refinancing, was up around three points on the session, traders said.

With Crown Cork's eye-popping $1.75 billion - the biggest junk bond deal since Charter Communications sold $1.75 billion proceeds in a three-part deal that priced in early January 2001 - high-yield accounts, roundly reported to be "paper-hungry," saw major relief swim into view.

A syndicate source on Wednesday told Prospect News that the roadshow could start before the end of the Jan. 27 week for Crown Cork & Seal's $1.75 billion of Rule 144A senior secured second and third lien notes in two parts. The Philadelphia container maker will offer $1.25 billion of eight-year-non-call-four notes and $500 million of 10-year-non-call-five notes via Salomon Smith Barney and Deutsche Bank Securities.

The financing also includes a $550 million first lien revolver and a $500 million first lien term loan B, with proceeds going to refinance the existing revolver due Dec. 8, 2003, and approximately $900 million of senior notes, including all of the notes scheduled to mature in 2003 and approximately $300 million of notes due in 2004 and 2005.

Crown Cork will also sell $200 million of convertible bonds and exchange $125 million of debt for equity.

In addition to the refinancing plan, Crown Cork & Seal also announced better than anticipated fourth-quarter results.

Asked if Crown Cork & Seal's jumbo junk bond deal indicates that the current high-yield primary is red hot, one sell-side source said simply: "There's not a lot of product out there.

"The primary market's great," the source added. "There has been no back-up in the market place.

"High yield is performing better than most other asset classes and people are allocating more dollars to high yield because of that and because of the anemic returns you get in the high-grade market.

"And we continue to think that demand will outstrip supply."

Structure-wise, this sell-side official also noted that the Crown Cork deal involves "third lien paper."

One capital markets source told Prospect News on Wednesday that Crown Cork's new debt is structured in such a way - with first, second and third liens - to give investors added cushion in case of a distressed scenario.

"When a company files for Chapter 11 and there are asbestos claims, it's a senior unsecured claim," the source said. "All new issued debt will be senior secured to put [investors] in a better position should the company file."

Basically the company had to reassure potential investors that if a bankruptcy situation occurs, investors would come ahead of any legal claims, such as the asbestos claims that the company is currently dealing with, the source added.

"This solves their maturity issues for the next several years, to about 2006 or so," a buyside source told Prospect News. "It alleviates some of the concerns people had with refinancing risks in the company - although I'm sure that there are other risks that we'd find if we dug into the prospectus or did some analysis. There are [still] reasons why it's below investment grade."

Still, he acknowledged, "it's a pretty good sign if a deal as big as that gets done. Certainly if the guys who own the existing paper that's being refinanced all roll into the new deal, it'll be pretty easy to get done, I would think."

He noted that Crown Cork, which makes an estimated one-fifth of all beverage cans used in the world and one-third of all of the food cans used in this country, is "a pretty well-known name."

The buyside source also noted that the existing bonds had been "much lower a year or two ago, and had come back. They had gotten pretty stressed, if not distressed a while ago," pushed down in part, he said, by concerns about exposure to asbestos related litigation.

Crown Cork, in reporting its fourth-quarter numbers, said that it had lost $272 million ($1.71 per share), and that the need to increase the reserve for the company's asbestos litigation had been one of the factors behind the loss, along with costs associated with the sale of its Constar unit, and costs associated with restructuring actions.

Still that loss was far smaller than the $918 million ($7.30 per share) net loss reported in the year-ago quarter; strictly on a continuing operations basis, excluding such special charges, Crown Cork had a nine cent per share loss in the latest quarter, versus 35 cents a year ago.

Crown Cork paid $30 million in the fourth quarter to boost its asbestos reserves to $263 million and forecast 2003 asbestos payments of $70 million.

On the positive side, however, the company estimates that its total asbestos liabilities have declined to a range of between $263 million to $502 million, down from a range of between $347 million to $580 million at the end of 2001.

Observers said that the looming asbestos problems could complicate Crown Cork's efforts to interest bank and bond investors in taking on nearly $3 billion of debt, although if they thought the problem was manageable, it might not necessarily be much of a factor.

"Certain other companies have found ways to make investors comfortable with the potential magnitude of their asbestos exposure," the buy side source said, mentioning Sealed Air Corp. as one example of an entity which has been able to put "an actual limit on how much their exposure is. Maybe Crown Cork has a similar pie in the works or has already done it."

"Crown Cork," an analyst said, has always been, in his opinion, "a pretty decent company, which was unfortunate to have this large pimple on its face called asbestos

"I'm pleased for them," he added. "This will certainly be good for their existing bondholders."

He noted "all the money in the high yield market that's desperate for a place to go to work" and speculated that "there's a window here" before the expected military action begins in Iraq "that companies are just jumping on it."

He noted that he was "pleasantly shocked" at the way Georgia Pacific Corp., which he called "an OK credit," was able to upsize its bond offering last week to $1.5 billion from the originally anticipated $500 million. "I thought that this was driven by the demand side, everybody wanting to get something going. I wonder if the same factors will be at work here with Crown Cork?"

Among the company's existing issues a trader quoted Crown Cork's 8 3/8% notes due 2005 as having pushed up to 98.5 bid/99.5 offered, a three point gain.

At another desk, the company's 7% notes due 2006 were quoted at 88 bid, and its 7 3/8% notes due 2026 were at 74 bid/76.25 offered.

In other primary action, terms emerged late Wednesday on Sugarland, Tex. homebuilder Technical Olympic's $100 million add-on to its 9% notes due July 1, 2010 (Ba3/B+). The Salomon Smith Barney-led deal priced at 94.836 to yield 10%.

And price talk of 7¼% was heard on Cascades Inc.'s planned $325 million of 10-year senior notes (BB) which are expected to price Friday via Salomon Smith Barney and Scotia Capital.

Diane Keefe, portfolio manager of the Pax World High Yield Fund (which screens companies with regard to their performance on a range of social issues), told Prospect News that she had been considering the Quebec-based paper and packaging products maker's new notes.

"I actually pulled an order on the Cascades deal because I own the Paperboard Industries bonds," Keefe said. "They're pricing the Cascades deal at 7¼% which I'm sure works for a lot of high-grade accounts because there's not a lot of paper in that name, and Cascades has lower leverage than Paperboard Industries bonds that they were originally going to take out.

"There was originally a tender for the Paperboard Industries outstanding 8 3/8s. And they wanted to just swap people out of those into Cascades bonds and just increase the size of that deal. They wanted to put it under the parent company, Cascades. And apparently two accounts own about 50% of the Paperboard Industries bonds and said 'No, these bonds are callable at 104. You should pay us 104.' And the company said 'No thank you.'

"So they cancelled the tender for the Paperboard bonds and they're going to remain outstanding. At first I wasn't sure whether or not they were going to turn around and call them, so I had an order in for Cascades because I didn't want to lose exposure to the credit."

Keefe also said she would be having a look at Star Gas Partners LP's $200 million of 10-year senior notes due 2013 (B3/B) that are expected to price Friday via JP Morgan and Wachovia Securities, Inc.

"I think the leverage on that is a little higher if you include the working capital announced. I don't know what the price talk is but somebody put out a comp sheet that showed AmeriGas and Ferrellgas, all of them with 4-handles of leverage. But if you look at the amount of cash flow that is generated by relatively the same amount of sales in all three companies Star Gas produces less cash flow because the oil market is not as high-margin as the propane market.

"It's lower rated, and that's because it's a lower-margin business. So it's got to come quite a bit cheaper than where the other two are trading for me to get interested."

One sell-side source late Wednesday afternoon quoted Ferrellgas' 8¾% due 2012 at 102 5/8, yielding 8.27%.

Keefe professed the belief that the high-yield asset class would continue to attract money from institutional investors.

"I happened to catch (Pimco Total Return fund manager) Bill Gross on CNN yesterday saying 'Sell Treasuries. Buy high yield bonds.' So I think a lot of what we've seen in terms of cash coming into the high yield market and the rejuvenation in terms of the primary market is that there are a lot of institutions that agree with him.

"We're sitting down here at a 41-year low in the interest rates and they can't go up much because they don't want to spook the economy and create a double-dip and they don't want to decrease consumer spending or mortgages or anything else that relies upon interest rates. But on the other hand they can't go down much either because there's no place to go. So in terms of trying to make a decent total return in fixed income it's not mortgages, it's not Treasuries. It's got to be triple-B corporates and high yield.

"That's what I think and I think that's what everybody else thinks, too."

A sell-side official who spoke to Prospect News late Wednesday said that there are reasons to expect that the high-yield primary market will remain hot.

"The secondary is white hot right now but there are a lot of indications that there is not a lot of product in the secondary. That's why all of these primary deals are getting snapped up."

Prospect New quizzed this sell-side official as to whether high yield could continue to perform well even if the equity market continues to trade off.

"It depends on why the stock market is trading off," the source responded. "Is it because of no growth, or not enough growth? Or is it a reaction to what's going on in the Middle East.

"High-yield investors would rather have a company generate free cash flow and stay flat on the top line, than grow and consume cash flow."

Meanwhile a trader saw the new Premcor Refining Group Inc. bonds, which priced at par on Tuesday but then eased slightly, fighting their way back slightly above their par issue price on Wednesday. Premcor's new 9½% notes due 2013 had inched up to 100.125 bid/100.375 offered, while its 9¼% notes due 2010 managed to get to 100.375 bid/100.875 offered.

Elsewhere, a trader saw junk market conditions "generally weak, except for Xerox Corp." He quoted the Stamford, Conn.-based copier and office machines giant's 5½% notes due 2003 at 99.25 bid, while its 7.20% notes advanced to 81 bid/83 offered from 79 bid/81 offered.

On the downside, he saw United Airlines' 10.67% notes due 2004 remaining in the same 5.5 bid/6.5 offered context they've recently held - but said a story in the Chicago Tribune indicating that UAL might seek to abandon its maintenance facility in Indianapolis had sent municipal bonds secured by that facility skidding down to 40 bid from prior levels around 60. "They got shellacked," he declared.

UAL floated the idea of starting a low-cost point-to-point service, bypassing the traditional hub-spoke network. The pilot's union promptly attacked the idea, saying UAL was trying to break up the company - something the bankrupt air carrier denied.

Also on the airline front, another trader saw Northwest Airlines' 9 7/8% notes due 2007 quoted at 66 bid/68 offered, down from their recent 70 bid/72 offered, but said he had seen "no real trading" in the issue.

The trader also quoted Trump Atlantic City Associates' 11¼% notes due 2006 at 77.5 bid/78.5 offered, down a point on the session and two points over the past two days. He speculated whether the downturn might be a sign that parent Trump Hotels & Casino Resorts Inc. might be facing trouble getting its planned $470 million bond issue done. The Atlantic City, N.J. gaming operator recently revived the deal, after having shelved it last spring due to market conditions.

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