Xerox bonds up after Moody's revision; Horizon Holdings, Duerr deals price

By Paul Deckelman and Paul A. Harris

New York, June 30 - Xerox Corp. notes were seen up more than a point on the day as investors were apparently heartened by the announcement late in Tuesday's session by Moody's investors Service that it would consider upgrading the Stamford, Conn.-based copier and office machines giant's debt ratings.

Elsewhere, traders saw little real impact from Wednesday's announcement by the Federal Reserve of a 25 basis points rise in its target level for federal funds - the first such rise in well over a year.

In the primary sphere, Horizon Lines Holding Corp. and Duerr AG were heard to have priced new issues in an otherwise quiet session. Price talk was meantime heard on Belden & Blake's planned offering of eight-year notes.

But overall, market participants said, there was not much going on, with the approach of a three-day holiday weekend, the end of the month and the calendar second quarter, and the announcement that finally, the Fed is going to bump interest rates up slightly in order to keep inflation from becoming a threat.

"The Fed did what everybody thought they would do," a trader said, "and we got some disappointing numbers from the Chicago purchasing managers [the widely followed gauge of economic activity slid to 56.4 in June from the previous month's 68 reading, a 16-year high; Wall Streeters had only expected a smaller drop, to around 64]." However, he said that the equity market "responded pretty healthily to things," with the Dow Jones Industrial Average up 22.19 at 10.435.62, the Nasdaq index up 12.86 at 2,047.79, and the S&P 500 up 6.45 to 1142.65.

He saw the high yield market in general up about three-eights of a point, which "clearly lagged" the Treasuries market, which was up 25/32.

People "are going to wait and see how much resolve the Fed shows in keeping inflation under control. If they get the impression that the Fed doesn't have much resolve, I think the equity market will suffer and high yield will suffer along with it."

In the end, "they might have to take a much harder stand than they would if they dealt with things now."

But with the market generally expecting the Federal Open Market Committee to commit to only a gradual tightening of 25 basis points in the key rate, the rise was no great shock, and normally interest rate sensitive sectors, such as the homebuilders were not hurt.

Homebuilders outperform

In fact, said the trader, the homebuilders were up half a point to five-eighths of a point on average, "so they probably outperformed the generic high yield type of stuff."

A market observer saw the bonds of all of the homebuilders a little higher, opining that the Fed rate move "didn't seem like it had much [negative] impact" on the sector.

He quoted Beazer Homes' 8 5/8% notes due 2011 at 106 bid, up half a point; D.R. Horton's 7 7/8% notes due 2011 were at 109.5 bid, also up a half; and Hovnanian Enterprises' 6½% notes due 2014 moved up to 92.75 bid from prior levels at 92.

At another desk, Horton's 8% notes due 2009 were seen up half a point at 110.25 while KB Home's 8 5/8% notes due 2008 were a point better at 108.75.

Lodging names rise

Among lodging companies, traditionally seen as another interest-rate sensitive area, Starwood Hotels & Resort's 7¾% notes due 2025 were a point better at 96 bid, FelCor Lodging Trust's 10% notes due 2008 were at 106, half a point up, while its 7 5/8% notes due 2007 were unchanged at 102, as were most of the Irving, Tex.-based hotel industry real estate investment trust's other paper, a market source said.

Xerox jumps

A trader saw Xerox Corp.'s 8% notes due 2027 at 92.5 bid, 93 offered, up 2½ points, helped by Moody's statement that it may raise the company's ratings, currently a B1.

The agency cited "the prospects for continued improvement in equipment revenue and unit placements as well as follow on post sale revenue."

At another desk, Xerox's 7 5/8% notes due 2013 were seen up a point at 102.

Goodyear rising

The trader also saw Goodyear Tire & Rubber paper "starting to level off" after having retreated previously after the Akron, Ohio-based tiremaker sold $300 million of convertible bonds.

He quoted its benchmark 7.857% due 2011 at 91.25 bid, 91.75 offered, "up a solid half a point."

Kmart surges on sales

And the trader said word that Kmart Corp. will sell 54 stores to Sears Roebuck & Co. for $621 million has "everybody just scrambling to buy" the Troy, Mich.-based discount retailer's real-estate backed certificates. "All of them are up."

The trader said that "the factor [for repayment of principal] keeps being revised because they're selling off real estate at higher prices, ahead of schedule. So there's a scramble to buy all of this passthrough paper.

"So Kmart is just strong, across the board."

He saw the company's 8.99% passthrough certificates due 2010 at 51.75 bid, up from 48 bid, 49 offered a couple of days ago, while its 6.66% certificates due 2010 firmed to 74 bid from prior levels at 72 bid, 73 offered.

The Starfin D-R structured 9.35% passthroughs of 2019, "a weaker tranche," traded at 62 bid, up two points.

It was the second big real estate deal in the month announced by Kmart, which emerged last year from a Chapter 11 reorganization. Earlier in the month, Kmart said it would sell 24 stores to Home Depot for up to $365 million.

The exact stores to be sold to Sears and Home Depot have not yet been determined, and different tranches of the passthrough paper are secured by interests in different stores, so people familiar with that market say it's too early to see exactly which issues will profit the most in the form of payouts to holders from store sales - so all of them were up.

Scotts, Tenet rises

Other upsiders included The Scotts Co., whose 6 3/8% notes due 2013 were seen up a point at par, after the Marysville, Ohio-based maker of lawncare products raised its guidance for fiscal year 2004.

And Tenet Healthcare Corp.'s notes were firmer, although there was no fresh news out on the Santa Barbara, Calif.-based hospital operator besides its announcement that it had sold a medium-sized Texas hospital for $82 million.

Tenet's 9 7/8% notes due 2014 were two points better at 101.5 bid, while its 6 3/8% notes due 2011 were also up a pair to 88.5.

Primary quiet but not discouraged

The primary market remained relatively quiet on Wednesday, as high yield, along with the rest of the capital markets, watched the price of poker go up.

For the first time in over four years the Federal Reserve tightened credit in the United States, raising the overnight interest rate to 1¼% from 1%.

"It's already priced into the market," was the mantra that continued to echo throughout junk-land on Wednesday as the news surfaced, with both buy-siders and sell-siders indicating that the Fed move, having been previewed worldwide, played exactly according to the script.

Sources who spoke to the Prospect News primary market desk on Wednesday particularly focused on the Fed's pronouncement that its now-reversed policy of accommodation can be removed at a "measured" pace.

"They have to be pretty careful," said Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, when Prospect News asked whether she anticipated further increases in the short rate, through the summer and early fall.

Gaffney added that the further increases could depend on the strength of the summer's economic numbers.

"We'll see how they react to letting some steam out of the housing market," she said.

Meanwhile a sell-side source, also chanting the "already priced in" mantra, said that the Fed's indication that accommodation would be removed at a measured pace is good news for high yield issuers.

"It means that although the short rate has gone up, this period of low-cost financing has not come to a close.

"Rates are still very low."

Two deals price Wednesday

The month of June 2004 came to a close in the primary market with terms emerging on two deals.

Charlotte, N.C. container shipping company Horizon Lines Holding Corp. sold $250 million of eight-year senior notes (B3/B-) at par to yield 9%.

The acquisition deal, which was led by Goldman Sachs & Co. and UBS Investment Bank, came at the tight end of the 9%-9¼% price talk.

When the new Horizon Holdings' 9% senior notes due 2012 were freed for secondary dealings, the bonds were heard to have firmed smartly to 101.375 bid, 101.875 offered from their par issue price earlier in the session.

Also on Wednesday, Duerr AG sold €200 million of 9¾% seven-year notes at 96.331 to yield 10½%, well wide of the 9½% area price talk.

Deutsche Bank Securities ran the books for the debt refinancing deal from the Stuttgart, Germany-based automotive parts supplier.

YTD junk sales up 10.8%

Tabulating Wednesday's results, June came to a close with $76.87 billion of junk bonds having come to market thus far in 2004. That figure is 10.8% higher than the $69.4 billion which at priced during the first six months of 2003 (see report elsewhere in this issue).

€265 million to hit road Monday

The market got wind of a pair of roadshow starts during the mid-week session, both from German issuers.

The roadshow starts Monday for Almatis Holding BV's €150 million of eight-year senior notes, which will possibly price late in the July 5 week.

JP Morgan and ING are bookrunners for the debt refinancing deal from the Frankfurt, Germany alumina-based specialty materials and chemicals producer.

And the roadshow also begins Monday for an offering from Heckler & Koch GmbH's operating company for €115 million of seven-year senior secured notes (B1). Citigroup is bookrunner.

The Oberndorf, Germany-based small arms-maker is aiming to repay debt and fund capital expenditures with the proceeds.

Also on Wednesday Mexican glass-maker Vitro, SA de CV announced it would sell $150 million of 10-year senior secured guaranteed notes (B2/B+) through its subsidiary Vitro Envases Norteamerica SA de CV.

Citigroup will run the books, although the market source who spoke to Prospect News specified that no timing has been heard.

Two deals remain

As the market wends its way toward the July 4 holiday only two deals are expected to price before Friday's early close.

Price talk of 8¾%-9% emerged Wednesday on Belden & Blake's $192.5 million offering of eight-year senior notes (B3), expected to price on Thursday via Goldman Sachs & Co.

Meanwhile price talk of 11½%-11¾% was heard on Tuesday for Allied Security, Inc.'s $175 million of seven-year senior subordinated notes (Caa1/B-), also expected to price Thursday, via Bear Stearns & Co.

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