Affinity Group prices 7-year deal; Smart Modular is retooled; Collins & Aikman keeps gyrating

By Paul Deckelman and Paul A. Harris

New York, March 21 - Affinity Group Holding Co. came to market Monday with an offering of new seven-year notes, which priced at a considerable discount to par. Meantime, high-yield syndicate sources heard that Smart Modular Technologies (WWH) Inc. has done some tinkering on its upcoming note offer, adding two years of call protection.

In the secondary market, Collins & Aikman Products Co. bonds went on the latest in a string of wild rides at mostly lower levels after the troubled Troy, Mich.-based automotive components supplier's debt ratings were downgraded by Moody's Investors Service. Its 12 7/8% subordinated notes due 2012 were heard to have dropped into the low 40s during the early part of the session, although traders said that those bonds, and the company's 10¾% senior notes due 2011, seemed to have come back off those lows later in the day to end - depending on whom you spoke to - either unchanged, or only modestly lower on the day.

Declining equity prices, a rising yield on the 10-year Treasury and continuing noise from the automotive sector made for a scarcity of investors as the junk bond jitters from last week carried over into the Monday session.

Only one new issue was completed. Affinity Group Holding Co., a Ventura, Calif., firm that provides services and information to America's recreational vehicle users, priced an upsized $85 million. However the bonds came 75 basis points wide of the price talk and priced at a significant discount.

Meanwhile electronic memory company Smart Modular Technologies (WWH) Inc., which had originally come out with price talk on its $125 million of notes late last week, upped that talk by 125 basis points on Monday and restructured its notes.

Investors push back

One sell-side source who spoke to Prospect News on Tuesday suggested that the early spring of 2005 does not appear to be promising halcyon days for high-yield issuers, and also mentioned that there is definitely a sense that investors are "pushing back" against the interest rates that companies have come to the market expecting to pay.

Exhibit A, the source said, is Affinity Group's upsized $85 million issue of 10 7/8% senior notes due Feb. 15, 2012 (Caa1/B-), which priced Monday at 96.377 to yield 11½%, 75 basis points wide of the 10½% to 10¾% talk. The deal was, however, increased from $75 million.

CIBC World Markets ran the books for the issue of notes which have a three-year pay-in-kind coupon. Proceeds from which are earmarked to fund a preferred share investment.

Meanwhile Monday's exhibit B came in the way of upwardly revised price talk and new structure on Smart Modular Technologies' $125 million offering of seven-year senior secured second-lien floating-rate notes (B2/B) via Citigroup and Lehman Brothers.

The company increased the price talk by 125 basis points area to three-month Libor plus 550 basis points area from the 425 basis points area.

Smart Modular Technologies also extended call protection on the notes to three years from one year.

The debt refinancing deal is expected to price Tuesday.

As quickly as possible

Another sell-side source said Tuesday that there is over $2.5 billion of new issuance expected to price during the present week.

And given the recent choppiness of junk, "Everybody's trying to get it done as quickly as possible.

"You get the sense that something is brewing," the sell-sider added. "It's just not as robust as it was in late January and a good part of February."

The source made mention of the late Monday yield on the 10-year Treasury: 4.5239%

"The GM news, combined with the entire automotive sector, has peoples' attention right now," the source added. "When [GM debt comes into high-yield from investment grade] it will be a landslide - the equivalent of a good half-year of new issue volume being added to the high-yield class.

"The bad news from that sector is coming left and right."

The sell-sider said that the existing bonds of high yield issuer Collins & Aikman Corp., which specializes in components for automotive interiors, were taking a hit after Moody's Investor Services downgraded the company by two notches early Monday.

The source also made mention of the Hayes Lemmerz International, Inc.'s €120 million note-offering that was withdrawn by the company last Thursday because, according to chief financial officer James Yost, "As a result of recent industry announcements, current conditions in the high-yield market are no longer attractive."

Also, the sell-sider said, independent wholesale tire supplier American Tire Distributors Inc. is presently in the market with $330 million in two parts (Caa2/CCC+). Although some high-yield observers had been looking for terms on the deal to emerge as early as March 18, late Monday afternoon, according to the sell-sider, there was radio silence on the deal.

Last Friday during a conversation with Prospect News Bear Stearns high yield strategist Mike Taylor estimated that approximately $48 billion of dollar-denominated fixed-rate unsecured General Motors paper could become included in some of the unconstrained high-yield indexes, if the company's debt is downgraded to junk.

The sell-sider who spoke Monday said that "$50 billion is a good working number."

The official then added: "Investors have to be thinking about that right now - whether or not they are going to own GM if it comes into the index.

"That could be the biggest force weighing on the primary market right now."

Abitibi to drive by Tuesday

One prospective issuer did brave the high-yield chop on Monday.

Abitibi-Consolidated Co. plans to drive through the high-yield Tuesday with $400 million of senior notes in two tranches via Citigroup and Credit Suisse First Boston.

The company is selling two bullet tranches. One will mature in 2012, the other in 2015. Tranche sizes remain to be determined.

The Montreal-based forest products company will use the proceeds to repay debt.

Collins & Aikman dives

In the secondary realm, Collins & Aikman's 12 7/8s were seen having dropped as low as 42, a market source said, pegging the bonds down at least 5½ points on the session from Friday's close in a 47.5-48 context.

He saw the 10 7/8s having fallen 2 3/8 points to about 81.75.

But another trader said later in the session that while the junior bonds had opened around 43-44, "they regrouped" later on in the day, and were back up to around a 47-48 context by the close, not much changed from where they had been on Friday. He meanwhile saw the senior bonds not having come back from their initial dip, pegging them at 81.5, down from around 84 on Friday.

Yet another trader did see the senior notes "bouncing a little," and although he had seen no real levels on the subordinated bonds, "it would make sense that they bounced off their lows as well."

The company's New York Stock Exchange-traded shares fell 20 cents (17.39%) to 95 cents - technically putting them into penny-stock territory - on volume of two million, about four times the usual.

The Collins & Aikman bonds and shares - already under pressure from the overall problems of the automotive industry, such as order cutbacks and rising raw materials prices - "got mowed" over several sessions last week, a trader said, after the company first delayed last Tuesday's scheduled release of its 2004 fourth-quarter and full-year numbers until Thursday, and then said Thursday that it had filed with the Securities and Exchange Commission for the automatic 15-day extension for filing - and still might not have its results done by then due to a newly discovered accounting problem that will likely cause restatements back to at least 2003.

On top of that, the whole sector has been reeling lately, and got a devastating body blow last week when the once-invincible General Motors Corp. said that it would post a 2005 first quarter loss of as much as $150 million instead of breaking even, as most observers had expected, and said that '05 profits will be, at best, $1 to $2 per share, well down from earlier estimates of $4 to $5 per share.

Collins & Aikman investors got more bad news Monday when Moody's cut the company's debt ratings by two notches, dropping the 10¾% notes to Caa1 from B2 and the 12 7/8s to Caa2 from B3.

The agency said the downgrade reflected "a series of challenging industry and company-specific developments are driving meaningful deterioration in C&A's near-to-intermediate-term revenues, margins, and liquidity."

While noting the fact that the company had refinanced a substantial portion of its debt facilities during August 2004, had extended the maturity of its $250 million accounts receivable securitization agreement to March 2006 with higher advance rates, and still receives "meaningful" accounts receivable support from at least two original equipment manufacturers, Moody's cautioned that its unused effective liquidity levels had dropped to $85 million or below during January, and further noted that Collins additionally plans to seek financial covenant amendments to its recently-executed credit agreement.

"Despite C&A's realization of meaningful improvement over the past year in plant-by-plant performance, the company's cash flow generation remains significantly challenged," Moody's warned, mostly due to weakening North American light vehicle production levels, delayed program launches, rising raw materials costs for resins and certain other commodities, and continued pressure from customers to grant price-downs "which cannot be fully offset,."

It also cited such other factors weighing down Collins & Aikman's finances as delayed tooling reimbursements, increased working capital requirements, substantial up-front investment requirements to support a high volume of future program launches, and residual restructuring expenses.

Dura lower

Elsewhere in the auto supplier sector, Dura Systems' 9% notes due 2009 were quoted down two points at 84, a market source said, although he saw the Rochester Hills, Mich.-based steering systems maker's 8 5/8% notes due 2012 unchanged at 95.5.

TRW Automotive Holdings Corp.'s 9 3/8% notes due 2013 were seen at 110, down ¾ point, while its 11% notes due 2013 were at 114.75, down half a point. The Livonia, Mich.-based automotive safety systems maker's executives, meanwhile, spoke at a Morgan Stanley conference and noted the strong progress the company has been making in reducing its debt levels (see related story elsewhere in this issue).

Toys "R" Us down again

Outside of the automotive sector, Toys "R" Us, whose bonds were in retreat last week after the Wayne, N.J.-based toy retailer accepted a $6.6 billion buyout offer from a Kohlberg Kravis Roberts & Co.-led syndicate, was still on the downside, although the losses seemed to have moderated, with its 6 7/8% notes due 2006 seen down 1/8 point at 102.125 and its 7 7/8% notes due 2013 half a point lower at 92.75. Bondholders are said to fear that LBO specialist KKR will load the company up with new debt - probably senior to the existing bonds - to finance the transaction.

L-3 weak on probe

A trader said that L-3 Communications Holdings Inc. bonds were "definitely softer" during the day, on the news that the New York-based defense electronics company is being investigated by the Pentagon for allegedly supplying defective parts for emergency radios to locate downed military pilots. The company said it is cooperating fully with the federal probe.

L-3's 6 1/8% notes due 2012 and 6 1/8% notes due 2014 dipped to 97.75 bid, 98.75 offered when the news hit the tape, but ended up closing at 99 bid, par offered, "pretty much unchanged."

All told, the trader said, "the market opened weak, maybe two points, depending on which issues. Some kind of slowed down and some just continued to be a little heavy till the end of the day."

He chalked a lot of it up to "limited activity - not many participants, and [Tuesday], the Fed speaks. So we didn't have much two-way flow - but it definitely was softer."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.