Tyco jumps as new CEO takes command; Williams boosted by Calif. settlement

By Paul Deckelman and Paul A. Harris

New York, July 25 - Tyco International bonds and shares jumped on Friday in response to the late Thursday announcement that the troubled Bermuda-based conglomerate had reached out and hired a respected executive to take the controls. Also seen on the upside was Williams Cos., which announced that it had reached a settlement with the state of California that should lead to a new long-term power contract and remove the risk of continued litigation and regulatory action against the company. But butter maker Land O'Lakes bonds melted in response to negative earnings news.

In the primary, Bank Mandiri was heard by syndicate sources to have sold $125 million of 10-year notes. Meanwhile, MedQuest was seen getting ready to take its proposed $180 million offering of 10-year bonds on the road.

Back in the secondary market, Tyco's investors were basking in the glow of the troubled company's coup in luring over Motorola Inc.'s president and chief operating officer, Edward Breen, who will become chairman and chief executive officer, filling the posts vacated by L. Dennis Kozlowski last month when he was ousted by the board shortly before his arrest on tax-evasion and evidence-tampering charges in New York.

Wall Street was surprised by the hiring of Breen, who was being groomed for the top spot at Motorola, the Schaumburg, Ill.-based electronics giant. This was especially so because, as the Wall Street Journal had reported last month, Breen had already turned down offers to head up both Lucent Technologies Inc. and Nortel Networks - reportedly because he did not wish to get involved with companies whose survival was in doubt.

Although some might put Tyco in that same category - the Bermuda-based company spent much of Thursday denying rumors that it was preparing for a bankruptcy filing - Breen's decision to come aboard is seen as a vote of confidence in Tyco's viability. And the jump in its shares and the rise in its bonds on Friday could be translated, in turn, as investors' vote of confidence in the company's new chief, who is generally lauded for his no-nonsense management style and ability to cut costs - both of which are badly needed at Tyco, suffering in the wake of the Kozlowski scandal and an earlier fiasco involving the company's ardent embrace and then abrupt abandonment of a strategy to unlock shareholder value by splitting itself into four pieces.

Tyco shares zoomed $3.78 (45.82%) in busy New York Stock Exchange dealings on Friday to close at $12.03. Volume of 77 million shares was about double the usual.

On the bond side, a trader said that Tyco's bonds had risen as much as five or six points in morning trading before coming off those peaks and surrendering some of their gains, but he still saw them up about two points on the session. Its 5 7/8% notes due 2004 pushed as high as 81 bid during the session before backing off a little to close at 78 bid/80 offered, about a two-point gain. He quoted Tyco's bonds maturing later this year as hanging in around 99 bid/par offered.

At another desk, a trader said Tyco's short paper was up a 1½ to two points, pegging its 4.95% notes due 2003 at 89 bid/90 offered - down a little from morning peak levels around 90.5 bid, but still up from Thursday's close around 88 bid/89 offered.

Also helping to encourage Tyco bondholders was CFO Mark Swartz's statement during Thursday's conference call that besides repaying the $1.25 billion of debt that will be coming due during this current quarter - the fourth quarter of Tyco's fiscal year - Tyco also plans to use some of its excess cash to repurchase about $2 billion of public debt during the quarter, at a $200 million discount. The Tyco executive declined to say which debt issues would be bought or under what circumstances, other than to say that it would be debt maturing November 2003 or before.

Elsewhere, Williams Cos., which had shown some upside in Thursday's trading, by pushing into the mid-30s, "got clocked [Friday morning] and gave up their gains, to the tune of three to four points. He quoted the company's 6 3/8% notes due 2003, which had pushed as high as around the 39 bid level on Thursday before falling back to around 36 bid/38 offered, as having drifted back down to around 33 bid/35 offered Friday. He saw other Williams issues which had ended Thursday in the lower 30s fall into the upper 20s. Williams debt, he said "was heavy as hell [Friday] morning."

But then Williams stock was halted on the NYSE, and the company announced its settlement agreement with California. "Right after that, the bonds popped," he said, quoting bonds that had been languishing around 27 bid/29 offered pre-news as having climbed back up to around 34 bid/36 offered.

Another trader, however, while noting Williams' fall to 29 bid/31 offered from Thursday's closing levels in the middle 30s, saw the debt pretty much staying around those lower levels even after the news. "They didn't get stronger that I saw," he declared.

Williams shares, which had been trading around 88 cents before the California announcement, powered up to a close of $1.06, a rise for the session of 18 cents (20.45%), on volume of 31 million, about five times the norm.

The Williams settlement with the nation's largest state is potentially good news for the company, which along with a number of other merchant energy producers and power traders has been accused by some critics of having taken advantage to the California energy crisis in late 2000 and early 2001 to unfairly jack up prices and manipulate the supply of juice. While any settlement might include refunds to California ratepayers or the state government, as well as lower rates in the future - the terms are not yet set in stone - reaching such an agreement could prevent Tulsa, Okla.-based Williams from being bombarded with, potentially, thousands of public or private lawsuits arising from the power crisis. And if California does sign a long-term pact with Williams, it would send a powerful signal to other potential customers who may have been reluctant to enter into any kind of long-term agreement with Williams due to the company's shaky finances.

Williams' recent troubles - which this past week cost it its former investment-grade status with the major debt ratings agencies - have also weighed heavily upon other players in that same industry, including AES Corp. The Arlington, Va.-based global power producer already has more than enough trouble of its own, between weak electricity prices here in the U.S. and its exposure to political and economic turmoil in Latin America. Those factors caused AES to report a second-quarter net loss on Thursday of $115 million (22 cents a share) - almost a mirror image of its year-earlier profit of $115 million (21 cents a share).

AES' recently weak bonds continued to retreat Friday, investor angst fueled by the earnings and by AES' indication that its liquidity had slipped to $360 million, down from earlier levels around $450 million.

AES' 8 3/8% notes due 2007 lost about two points on the day to end at 15 bid; its 9 3/8% notes due 2010 were 4½ points easier Friday, closing at 34.5.

In that same power-generating sector, CMS Energy Corp.'s 9 7/8% notes due 2007 closed seven points lower, at 64 bid, while Calpine Corp.'s 8 5/8% notes due 2010 and 8½% notes due 2011 lost more than three points to finish around 44 bid .

Outside of the power generating sphere, one high-yield name which suffered a sizable loss was Land O'Lakes, "down a lot" Friday, in the words of one market observer. The Arden Hills, Minn.-based dairy products company's usually seldom-traded 8¾% notes due 2011 were quoted 68 bid - well down from prior levels around 91.5, after the company released its second-quarter results. Land O'Lakes actually did better than it had a year earlier on a net income basis - $48.3 million in the latest quarter, versus $44.19 million a year ago - and on an EBITDA basis, where it made $56.9 million versus the year-ago $51.2 million. But most of its gains in the quarter just past were due to unusual items, including $32.7 million in legal settlements and a $6.3 million hedging gain. On an operating basis, the company suffered a $4.131 million loss in the latest quarter, versus a $30.28 million gain a year ago.

Another high yield issuer from the food producers seen lower Friday was Aurora Foods Inc., whose 9 7/8% notes due 2007 were at 68 bids, off from 74 bid earlier in the week. On Wednesday, the St. Louis-based maker of such well-known packaged food products as Mrs. Paul's Frozen Fish Sticks, Aunt Jemima Pancakes and Log Cabin Syrup reported a second-quarter loss of $31 million (44 cents a share) versus the year-earlier loss of $8.9 million (13 cents).

Rite Aid Corp.'s recently beleaguered shares pushed back above the $2 mark on Friday, ending at $2.03, a gain of 28 cents (16%) on the session, with no fresh news seen out on the Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator (behind CVS and Walgreen's). Most observers attributed the handsome advance to short covering, and said the stock had been oversold in recent sessions, particularly on Thursday, when it fell to $1.75 in apparent response to negative earnings news from another sector player, New York regional drugstore powerhouse Duane Reade. The rally did not extend over to the debt side of the pharmacists' counter; a trader said Rite Aid's bonds were little changed, quoting its 6 7/8% notes due 2013 remaining in a high 50s' lower 60s context, while its 7 5/8% notes due 2005 were steady at 72 bid/74 offered.

There was little activity in the usually fairly active high-yield telecom division; instead, market players were watching the travails of investment-grade long-distance and wireless giant Sprint Corp., whose stock and bonds sagged on market speculation that the company might be facing a liquidity crisis. Sprint roundly denied that any such thing could happen and tried to assure investors that its liquidity picture is strong. That helped its bonds come back, at least partially, from their early lows; for instance, Sprint's 8 3/8% notes due 2012, which had closed Thursday at 62 bid, fell as low as 50 in early dealings Friday on the liquidity scuttlebutt. After Sprint answered its critics, they were seen having bounced back to around the 56-57 area, as did Sprint's 7 5/8% notes due 2011.

Speaking of liquidity, traders noted yet another outflow in high yield mutual funds, which are seen by many market participants as a reliable gauge of overall liquidity trends. It was the seventh straight week in which more money left the funds than came into them. In the latest week ended Wednesday, AMG Data Services reported that outflows from weekly-reporting funds, excluding distributions, totaled $435.3 million. That's on top of a $242 million outflow in the week ended July 17. Over the past seven weeks, nearly $2 billion has flowed out of the funds, according to a Prospect News analysis of the AMG data, while total net junk fund inflows for the year have fallen to $3.45 billion from peak levels above $5.6 billion, seen back in mid-May.

"When it was just an outflow of $100 or $200 million, nobody was paying any attention," a trader said. "But now, it's been six or seven weeks of outflows. This is really starting to add up."

Even including the AMG fund flow figures, not a lot of news was heard Friday in the high yield primary. And like the mutual fund data, the preponderance of it was negative. Glass Holdings/GMBH & Co. KG (Gerresheimer Glas AG) cited present market conditions as it withdrew its eurobond deal from the market on Friday.

Meanwhile one new deal surfaced from Georgia-based medical imaging firm MedQuest Inc., and terms were heard on the emerging markets offering from the Indonesia's state-owned Bank Mandiri.

"The market ain't doing a whole helluva lot," one sell-side source lamented during a Friday conversation with Prospect News.

When the subject of Gerresheimer's pulled deal came up, in conjunction with the four failed transactions of July 16 and 17 - Casella Waste Systems, Inc., Graham Packaging Co., Marietta Corp. and Mobile Storage Group, Inc. - this source paraded out a metaphor from the Cold War.

"It's the domino effect," said the sell-sider. "And it's not doing much for our origination efforts.

"What do you tell people? Do you tell them that it's going to get better?!"

This official from a US investment bank mulled the failed transaction from the German pharmaceutical packaging firm Gerresheimer Glas and conceded that investors are thought to be notably selective on that side of the Atlantic.

On Thursday Prospect News had learned that Grief Bros. Corp. priced $250 million but abandoned its planned euro piece because, as company CFO Don Huml explained, there was some "pushback" from investors in the eurobond market.

So in light of the discarded Grief Bros. euro piece and Gerresheimer's pulled deal Prospect News inquired of a sell-side source in London whether the euro market is presently suffering from maladies similar to those in the US market.

"Times are tough," was this official's only response.

Gerresheimer Glas AG cited market conditions as it pulled its €150 million of nine-year senior subordinated notes (B3/B) on Friday, according to a syndicate source.

JP Morgan and Goldman Sachs were the bookrunners. Price talk was 10½%-10¾%.

One new deal came into view, Friday, as a syndicate source told Prospect News that Alpharetta, Ga.-based diagnostic imaging firm MedQuest Inc. will bring $180 million of 10-year senior subordinated notes via JP Morgan. The first-time issuer's roadshow starts Tuesday and is expected to price on Aug. 8.

Terms on an emerging markets deal from Indonesia's state-owned PT Bank Mandiri (Persoro) were heard Friday. The issuer did $125 million of lower tier 2 subordinated notes due Aug. 2, 2012 which priced at 99.148 to yield 10.85%, via UBS Warburg.

Looking ahead to the week of July 29 two deals are presently parked on the Prospect News forward calendar.

Mother's Work, Inc., the Philadelphia maternity wear company, is presently said to be laboring on the road with $125 million of eight-year senior notes (B3/B+) via Credit Suisse First Boston. The roadshow figures to wrap up on July 30.

And The Manitowoc Co., a Wis.-based crane-maker, is now on the road with $175 million of 10-year senior subordinated notes (B2/B+) via Deutsche Bank Securities Inc. and Credit Suisse First Boston, with pricing expected Aug. 1.

One sell-side source who spoke to Prospect News last Thursday said that the Manitowoc Co. transaction might provide a useful indicator with respect to whether or not the present high yield new issuance market is open to a good credit. This official added, however, that the forward calendar is not likely to undergo a conspicuous buildup until after Labor Day.

Another sell-side source, in a late Friday email message, also expressed doubts regarding meaningful new issuance volume during August.

"The equity market is killing everything right now," this sell-side official wrote. "The secondary high yield market is so depressed that the primary is going to have a tough time stabilizing. Equity values need to at least flatline or improve slightly in order to let the secondary high yield market reprice and provide a solid platform for issuance. I don't disagree that new issuance in the next three weeks will likely be minimal. Then, once you hit the third week of August, the market shuts down anyway, so we're probably going to have to pick up in September."

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