Conseco bankruptcy a non-story for junk market; Revlon up on new funding; Sanmina deal upsized

By Paul Deckelman and Paul A. Harris

New York, Dec. 18 - Conseco Inc. sought protection from its bondholders and other creditors early Wednesday - but like the recent Chapter 11 filing of United Air Lines, the Carmel, Ind.-based insurance and finance company's resort to bankruptcy had been expected for some weeks and was already factored in to the price levels of its bonds. Elsewhere, Revlon Inc. bonds improved on news that its chairman and 83% owner Ronald O. Perelman had offered the troubled cosmetics company up to $150 million of new funding.

In the primary market, Sanmina-SCI Corp. massively upsized its offering of seven-year notes and priced them in the middle of talk. As the only deal that remained on the 2002 new issuance forward calendar, the San Jose, Calif. electronics manufacturing firm's offering commanded the lion's share of attention during Wednesday's high yield primary session.

Sanmina-SCI increased its offering to $750 million from $450 million and priced the eight-year senior secured notes (Ba2/BB-) at par to yield 10 3/8%, in the middle of the 10¼%-10½% price talk. Bookrunner was Goldman Sachs & Co.

One sell-side source told Prospect News shortly after the Sanmina deal priced that the issue had broken into secondary trading at par, possibly meaning that everybody went home from the pricing with as much of the company's paper as they wished.

A trader saw the new Sanmina-SCI bonds quoted at 99.5 bid/100.5 offered, and then trading into a par bid when the new issue was freed for secondary dealings.

As the 2002 calendar cleared, with three sessions remaining before the holidays commence, one high yield syndicate official said that the year had come to an impressive close in the junk bond market.

"We've had a huge rally," the source commented, noting that the market bottomed on Oct. 9, at which point Morgan Stanley's Broad High Yield Index was at negative 8.5% for the year.

"Since then it has rallied up 10 percentage points," the source added. "We're up a point-and-a-half on the year. So high yield returns will probably finish the year in the black, at least according to the Morgan Stanley indexes.

"That's a great run."

Prescott Crocker, fund manager of the Evergreen High Yield Bond Fund, also told Prospect News on Wednesday that high yield had rallied.

"It's been a very strong high yield market principally because you had a competition to get invested from a point of large cash balances," Crocker said. "You had this two-pronged experience promoting the high yield market: too much cash on the books on the part of all the investors and substantial cash flow coming in from new money.

"So I think it's overdone in here, and a lot of stuff is too rich."

Crocker, who spoke with Prospect News prior to mid-day, specifying that he would not be taking part in the Sanmina-SCI deal, pointed to Lamar Media Corp.'s offering of $260 million 10-year senior subordinated notes (Ba3/B) which priced at par on Tuesday to yield 7¼%, at the tight end of the 7¼%-7½% price talk, via JP Morgan.

"That stuff is too rich," Crocker commented on the Baton Rouge, La. outdoor advertising firm's new notes.

"I played that deal," he added. "It's such a limited business and the company has such a lock on it that it really trades through the traditional high yield bond-pricing area. So it's a special situation."

Richer still, Crocker pointed out, was Ball Corp.'s upsized $300 million of 10-year senior notes (Ba3/BB) that priced on Dec. 5 to yield 6 7/8%.

"The darn thing went to a slight premium," Crocker said of the new Ball bonds. "I see an offer here for par and seven-eighths.

"Some of these are looking like high grades in an environment where there is no high grade new issuance and money is flowing in.

"I don't think the high yield players were buying too much of that," the Evergreen High Yield Bond Fund manager added. "I did not play Ball."

Back among the established issues, Conseco's debt was heard to have stayed around the same levels it has recently held following its Chapter 11 filing with the U.S. Bankruptcy Court in Chicago, although several desks were quoting it about a point better, with its unexchanged old bonds having risen to about 11 bid and its exchange notes trading at around 21.

(Earlier in the year, Conseco exchanged much of its then-outstanding bond debt for new notes with longer maturities; however, the new notes trade at around a 10-point premium to the old, shorter-dated notes because they rank higher in the company's capital structure).

Traders said that the filing came as exactly zero surprise, since Conseco had been talking with its bondholders and other creditors since August about a consensual restructuring that would take place under the auspices of the bankruptcy courts. With $51 billion of debt, Conseco's filing is the third-largest bankruptcy case in U.S. corporate history - only WorldCom Inc. and Enron Corp. were bigger

Conseco - once one of the darlings of Wall Street - bought itself a world of trouble in 1998, when founder and then-CEO Steven Hilbert masterminded the $6 billion acquisition of Green Tree Financial, a finance company that mostly loaned money to lower- and middle-income borrowers, the most risky portion of the credit spectrum, for mobile-home purchases. The acquisition not only saddled Conseco with huge debt - it exposed the company to numerous bad loans, with the number increasing as the economy struggled.

Conseco was also beset with questions about its accounting methods - a harbinger of the troubles that would later bring many other large companies, starting with Enron Corp., to grief.

By early 2000, things came to a head with the forced resignation of Hilbert and his replacement several months later by Gary D. Wendt, the highly regarded former chief executive of General Electric Co.'s finance arm, GE Capital. Wendt was greeted as a savior when he came aboard - after having received a $45 million signing bonus - and he began to aggressively slash debt and sell underperforming assets in an effort to turn Conseco around. For a while, the company's shares and bonds reflected the hope that Wendt could work a miracle and he actually managed to pare its debt load by nearly $3 billion. But the momentum slowed as Conseco saw income decline at its insurance and loan operations, and faced huge write-downs in its investment portfolios. Investor and media criticism of Wendt mounted.

In August, Conseco missed a debt payment and by October Wendt was forced to publicly acknowledge that Conseco's previous strategy was not working, and stepped down as CEO while retaining his chairman post.

As part of the restructuring plan, which Conseco has been negotiating for months with its various creditor groups, Green Tree - now known as Conseco Finance Corp. - will be jettisoned, turned over to an investor group in exchange for payment equal to the unit's secured debt burden.

The game plan calls for all $2.5 billion of Conseco's unsecured bond debt to be converted into equity in the revamped company, along with some $750 million of its bank debt. Equity holders are expected to be wiped out; however, the company's shares - which were de-listed over the summer and now trade on the over-the-counter Bulletin Board - rose two cents, or 50%, to close at 6 cents. They've lost more than 98% this year; as recently as 1998, the shares traded at $58.

Conseco hopes to exit bankruptcy protection by the end of the second quarter of 2003.

Elsewhere, Revlon bonds "were up a little bit," a trader said, on the news that the company could pick up as much as $150 million of badly needed new cash.

He quoted Revlon's 12% notes due 2005 as having firmed to 95 bid/97 offered, up a point, and its 8 5/8% subordinated notes due 2008 as having improved two points, to 46 bid/48 offered.

The catalyst for the improvement was the financing news. Principal owner Ron Perelman's investment vehicle, McAndrews & Forbes, will loan Revlon $100 million; the company would also sell $50 million of new shares to existing holders, with McAndrews & Forbes taking a pro-rata share of the new shares.

"Surprise, surprise, he [Perelman] is still around," a trader said, despite the troubles of companies in the flamboyant billionaire financier's empire such as Revlon and his own much publicized - and very expensive - marital and divorce woes.

At another desk, Revlon's 8 1/8% subordinated notes due 2006 were a point better at 48 bid.

Qwest Communications International Inc.'s holding company bonds were "up a couple of points," said a trader who cited news that a federal judge in New York had rebuffed the efforts of dissident bondholders to stop the company's recently proposed offer to swap new, higher-coupon and mostly longer-maturity debt for up to $12.9 billion face amount of its existing bonds. The bondholders had claimed the offer was inadequate and coercive but the judge denied a request for a preliminary injunction stopping the debt swap.

The trader quoted the Denver-based telecommunications operator's 7¾% notes due 2006 four points better at 70 bid.72 offered and its 7¼% notes due 2011 as having moved up to 62 bid/64 offered from 59 bid/61 offered.

Hollywood Entertainment Corp.'s 9 5/8% notes due 2011 slipped to 101.25 bid from prior levels about a point higher, in line with the drop of $2.77 (14.39%) in its shares Wednesday, which ended at $16.48 on volume of 16.1 million shares - about 16 times the norm. Hollywood fell despite the Portland, Ore.-based movie rental chain having affirmed its forecast for fourth-quarter profits of 38 cents to 40 cents a share. Home movie-rental leader Blockbuster's shares were meanwhile down 32.32%, or $6.27 at $13.13, after having issued an earnings warning that pulled the whole home entertainment sector lower.

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