Tyco bonds firm on management change, other developments; third funds inflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 12 - Tyco International Ltd. bonds were on the rise on Thursday as its new chief financial officer took command, its old CFO, former CEO and ex-general counsel were marched into court in handcuffs to face the music connected with the company's problems and most of the board members were essentially handed their walking papers. Meanwhile, junk market trading returned to a semblance of normality, following Wednesday's extraordinary events.

In the high-yield primary market, officials presented evidence Thursday of what they contend is an improving set of market conditions.

For exhibit A they point to a third consecutive mutual funds inflow following on the heels of an infamous string of outflows that dragged through mid-summer.

Exhibit B is the tight-pricing Jefferson Smurfit Corp. (U.S.) deal, which immediately took off in the secondary market following last Tuesday's $700 million transaction. The 10-year senior notes (B2/B) priced to yield 8¼%, in the middle of talk.

And one source offered, as exhibit C, Intrawest Corp.'s upcoming deal. Price talk, according to this official, points to a deal that should come at a rate that is just about the best the company could hope for.

Intrawest is not the only deal expected to price on the last day of the Sept. 9 week, however. And sources in high yield and beyond say that the other deal, Swift & Co., may be getting inordinately hauled over the coals.

For the third straight week, high-yield mutual funds have seen an inflow of money, according to one sell-side official who late Thursday told Prospect News that AMG Data Services reported an inflow of $186.6 million for the week ending Sept. 11.

It comes on the heels of a $284 million inflow for the week ending Sept. 4, which was itself preceded by the previous week's record-setting $1.56 billion inflow.

One sell-side official told Prospect News late Thursday that there are several prominent names putting money back into high yield.

"People have realized that things were a little too overblown in the high yield market, with these 11 consecutive outflows," the official said.

Meanwhile Intrawest's $125 million add-on to is 10½% senior notes due Feb. 1, 2010 (B1/B+) is set to price Friday afternoon via Deutsche Bank Securities Inc.

Price talk of 9 7/8%-10% was heard Thursday.

"The existing notes were being marked around the 102-level," the official explained. "When you plug in that price talk of 9 7/8%-10% it comes out with a price somewhere in the range of 102 - right around the level where the bonds are currently being marked.

"That's a good indication that the company hasn't had to take any kind of a concession. It looks like they're going to price the bonds right around where the existings are trading. And from what I've heard they don't exactly trade hands a whole lot. So they're not being penalized for any kind of illiquidity."

This source also pointed out that the talk is "somewhere in the neighborhood of 50 basis points tighter" than the coupon on the Intrawest existing notes.

Of course Intrawest is one of a pair of deals set to price Friday. The other is Swift's $250 million of seven-year senior notes (B1 /expected: B+) via Salomon Smith Barney and JP Morgan.

Swift's deal is to help fund the leveraged acquisition of 54% of ConAgra's U.S. and Australian beef, pork and lamb operations by Hicks, Muse, Tate & Furst and Booth Creek Management. It was pulled off its roadshow in mid-July, in the wake of ConAgra's massive recall of E. coli-tainted ground beef.

Earlier this week price talk of 11½%-11¾% was heard on the Swift deal - price talk that sources have been telling Prospect News is wide, even taking the beef recall into consideration.

"Price talk struck us as being high," one fixed income official said Thursday. "All this meat recall occurred while ConAgra was watching the store, and that was months ago.

"Hicks Muse definitely had a right to go back to ConAgra and squeeze them - for indemnities and a lot of other stuff. And apparently they've done a lot in terms of consultant reports and upgrading the inspection and cleanliness and so forth.

"But it's hard to be in the meat business without having that issue pop up every once in a while."

In secondary activity, Tyco was the focus of news for a second straight session. On Wednesday, it had announced that David FitzPatrick, heretofore the respected chief financial officer of United Technologies Corp., had been hired away to assume that position with Tyco, which is trying to rebuild its credibility with investors after the once high-flying company's fall from grace in the wake of slowing growth, much debt, and questions about its accounting and about allegedly improper spending by former CEO L. Dennis Kozlowski.

FitzPatrick moved into the job that up until now had been filled by Mark Swartz, who had held the position since the mid-90s, and who was closely linked in the minds of investors with Kozlowski's business strategies. Just a day after his replacement by FitzPatrick, Swartz, Kozlowski and former general counsel Mark Belnick were charged by the federal prosecutors with having committed massive fraud. Kozlowski, 55, and Swartz, 42, were charged with enterprise corruption and grand larceny, while Belnick, 55, was charged with falsifying business records.

The Securities and Exchange Commission's director of enforcement, Stephen Cutler, said the three former Tyco officials had "treated Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors," charges which each man denied through his lawyers.

The three disgraced ex-execs were brought to the federal courthouse in Manhattan in handcuffs and arraigned, with all three pleading not guilty. If convicted, Kozlowski and Swartz could get up to 25 years in prison and Belnick faces up to four years. The judge set a personal recognizance bond of $100 million each for Kozlowski and Swartz, to be secured by $10 million apiece in personal funds, while Belnick was released on an unsecured personal recognizance bond of $1 million. All three had to relinquish their passports and are due back in court next Thursday. Kozlowski already faces New York State charges of alleged sales-tax evasion in connection with his purchase of costly art treasures for his plush Fifith Avenue apartment.

While all of this was going on, Tyco - which was recently embarrassed by press disclosures that it had spent as much as $135 million in payments, forgiven loans and other goodies for Kozlowski - announced that it was suing its former chief to get back $100 million of that money. It accused him of having improperly used the money to fund a lavish and glamorous lifestyle, including construction of a spectacular $30 million hideaway in pricey Boca Raton, Fla.

Tyco also announced that its board voted not to nominate or support for re-election at its annual meeting any of the nine board members who were on the board before this past July, and had nominated five business leaders from outside the company to fill expected vacancies on its 11 member board. That means of the current directors, only recently appointed Chairman and CEO Ed Breen, and director Jack Krol, will be nominated and supported for re-election.

Breen's efforts to clean house since taking over Tyco in July, following Kozlowski's abrupt departure the month before, have pushed the stock up from its lows, and have also been well received by Tyco bondholders. In Thursday's dealings, the Tyco news "was well received," a trader said, quoting the company's 6 3/8% notes due 2011 as having firmed to 86 bid/87 offered from prior levels Tuesday - there was virtually no trading seen Wednesday - around 82 bid/83 offered. "They certainly got some big guns," he said, referring to the arrests by the authorities of Kozlowski, Swartz and Belnick.

Another trader said that he had seen Tyco bonds "all up a couple of points" across the board on the installation of FitzPatrick as CFO by Breen and their efforts to distance Tyco from the discredited Kozlowski regime by suing the ex-CEO and by moving to push out most of the current board, which had pretty much approved Kozlowski's activities, including his grand plan to "unlock shareholder value" by splitting Tyco into four parts - a scheme which Kozlowski was later forced to abandon as "an ill-timed mistake."

The trader quoted its 6 3/8% notes due 2006 as having firmed to 91 bid/93 offered and its 4.95% notes due 2003 as having risen to 95 bid/97 offered, all up at least two or three points on the session.

Tyco stock, which had fallen more than 70% so far this year but which had doubled off its lows since Breen's ascension to the top spot, had closed at $17.80 on Wednesday and opened sharply higher, at $18.40, but after having firmed to $18.51 early in the session on the barrage of news, it dropped back from those peak levels, surrendered all of its gains and went home unchanged, at $17.80, on volume of 30 million shares, about average.

Meantime, Qwest Communications International's shares were up 42 cents (13.21%) to $3.60 on volume of about 21 million shares, slightly more than usual, even though there was no fresh news out on the embattled Denver-based telecommunications company. Junk bond traders saw its bonds likewise improved, with its 7¼% holding company notes due 2011 having improved to 52.5 bid/53.5 offered, about a point higher on the session. A distressed-debt trader said that Qwest bonds "stayed right up there," and quoted its 7 5/8% operating company paper up slightly at 97 bid/98 offered, while its 7.20% operating company debt due 2004 was also a bit better, at 90 bid/92 offered.

On the downside, a trader said Fleming Cos. bonds "were still getting slapped around" after having been dropping steadily recently. He quoted the Dallas-based wholesale grocery supplier and retail supermarket operator's 10 5/8% notes due 2007 as having fallen to offered levels around 69 from the lower 70s earlier in the week, while its 9 7/8% notes due 2012 were being offered at 61, down from prior levels around 60 bid/65 offered.

The trader also saw Georgia Pacific debt offered at lower levels after Standard & Poor's put the precariously investment-grade-rated forest products company's ratings on Credit Watch, warning of a possible downgrade from their current BBB- level.

He saw its 8 5/8% notes due 2025 which had been offered at 80.5 late Tuesday, were 79.25 on Thursday, while its 2011 paper was offered at 92. "The offered levels were down about two points from Tuesday," he said, "and no bid sides were seen."

© 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.