Kodak, Smurfit among gainers, Isle of Capri off on numbers; primary set for September surge

By Paul Deckelman and Paul A. Harris

New York, Aug. 26 - Eastman Kodak Co.'s bonds were seen solidly better - though on somewhat limited volume - in line with a jump in the Rochester, N.Y.-based photography and imaging products giant's shares, although there seemed to be no fresh news out which might explain that rise. However, the seemingly unrelated departure of a top Kodak executive for another company in a completely different industry could - in theory - eventually prove to be the key unlocking the mystery.

Another upsider, traders said - and one called it "probably the best high yield gainer of the day" - was Smurfit-Stone Container Corp., whose bonds were seen up anywhere from 1½ to 5½ points, depending on the issue, amid new maneuvering in the company's Chapter 11 reorganization case.

A name which was seen lower was Isle of Capri Casinos, Inc., despite the St. Louis-based gaming company's swing to a fiscal first-quarter profit from a year-earlier loss - apparently because the company failed to meet Wall Street's earnings and revenue expectations.

Several issues of Royal Caribbean Cruises Ltd.'s bonds were seen among the volume leaders, but with no firm trend - some up and some down.

Junk was incrementally tighter on Wednesday, according to a high-yield syndicate official.

Meanwhile, there was no news in the primary market as the Dog Days of August continued to drag on.

However the new issue bazaar is apt to crank up quickly when players resume their posts post-Labor Day, the syndicate official advised.

"We could see a firestorm of issuance," said the banker.

The four-day week set to commence on Tuesday, Sept. 8, could see a possible $6 billion to $8 billion of issuance, the source imparted.

This official professed visibility on three deals likely to be teed up during the post-Labor Day week: one each from the energy, natural resources and telecommunications sector.

Market indicators stay mixed

A trader saw the CDX Series 12 High Yield index - which had lost 1/8 point on Tuesday - retreating another ¼ point on Wednesday to finish at 88 3/8 bid, 88 7/8 offered.

The KDP High Yield Daily Index, which had edged up by 2 basis points on Tuesday, added another 13 bps on Wednesday to close at 66.03, while its yield came in by 3 bps to 9.41%.

In the broader market, advancing issues - which led decliners for a sixth straight session on Tuesday, by around a seven-to-five margin, stayed ahead on Wednesday, holding an 11-to-10 edge.

Overall market activity, reflected in dollar-volume totals, declined about 11% from Tuesday's pace.

A trader said that there was "not much to report - it was very quiet. In fact, the most active bond today was a single-digit bond, trading below 10" - bankrupt Dallas-based telephone directory provider Idearc Inc.'s 8% notes due 2016, which were seen having moved up a point on the day to 8 bid, on volume of about $21 million. He did not see any fresh news out on the bond which might explain its sudden popularity.

It was, he said, "just one of those blah days."

He said that he did not see "a lot of retail selling, account selling. I think accounts are still better buyers, just looking for value in here with the tightening we've experienced."

Kodak climbs, though reason is unclear

One of the larger gainers on the day was Eastman Kodak's 7¼% notes due 2013, with a market source pegging those bonds at 78, a gain of more than 5 points.

At another desk, the bonds were seen up a more conservative 2½ points to around the 75 level. Yet another market source saw them get as good as the 79 level before coming down from that peak to end around 77, up a little more than 2 points, when all trades were considered, or at a round-lot close of 76, making for a 4 point gain from the previous day's final large-sized trade.

While there seemed to be a brisk amount of trading activity in the credit, most of those transactions were for small-sized pieces, with just a handful of round-lots traded.

Kodak's bonds climbed in line with a spike in its New York Stock Exchange-traded shares, which gained as much as 23.4% on the day before easing a little from that zenith but still finishing up 95 cents, or 20.83%, at $5.51. Volume of 29.5 million was about five times the norm.

The reason for the bond boom and the stock surge were not immediately apparent. The only fresh news out from the company seemed unlikely to be the catalyst for such a move - Tuesday's announcement of a multi-year contract, of undisclosed value, to put the company's Kodak Picture Kiosk G4 Digital Stations and Kodak Adaptive Picture Exchange thermal dry lab systems into all 70 stores run by Discount Drug Mart Inc., an Ohio regional drugstore operator. The contract does not represent new business for Kodak, but rather, an upgrade of existing Kodak technology already in the Discount Drug Mart stores, located in and around key Ohio cities.

With no other major developments coming out of Rochester, posters to investment-oriented internet bulletin boards speculated Wednesday that the stock surge - with the junk bonds presumably following along - may have been due to technical factors, or to institutional investors' desire to load up on the one-time blue-chip stock at near-historically cheap prices in anticipation that things will get better for Kodak when the economy improves.

There were also suggestions that with its shares not too far off their 52-week lows at $2.01, Kodak could be an acquisition target for some other technology company, with names like imaging product rival Canon cited, as well as Samsung and Hewlett-Packard. One poster noted another seemingly unrelated piece of news - Tuesday's announcement by clothing maker Levi Strauss & Co. that Kodak's chief operating officer for its Consumer Digital Group and managing director for global operations, Jaime Cohen Szulc, will leave Kodak after more than a decade with the company to become Levi Strauss' global chief marketing officer, with no immediate replacement named by Kodak. He suggested that this is "the type of news that can send up a stock already primed to move. Top executives often run off ahead of a merger that would leave them without a job - at least that is the way the rumor mill sees it."

Smurfit-Stone pushes upward

A trader said that Smurfit-Stone Container Corp.'s bonds, some of them issued under the company's old Jefferson Smurfit Corp. name, "were probably the best high yield gainers of the day."

He saw its 8¼% notes due 2012 move up to 62 bid from 56½ previously, on $5 million traded, while its 8 3/8% notes, also due 2012, ended at 611/2, up from 57¼ bid, on $4 million of turnover. Its 7½% notes due 2013 also ended at 611/2, up from 58, with $5 million changing hands. Its 8% notes due 2017 likewise moved up to 61½ from 571/2, on volume of $8 million.

The company's 7 3/8% notes due 2014 issued by its Stone Container Finance Co. of Canada II subsidiary gained 1½ points to end at 77½ bid, with $2 million traded.

Several traders noted the latest news about the Chicago-based packaging concern, currently reorganizing under Chapter 11; the company asked for a second extension of the exclusive right to propose a reorganization plan, even though discussions with creditors on a plan haven't yet begun. If the U.S. Bankruptcy court in Wilmington, Del., which is overseeing the restructuring, agrees at a Sept. 9 hearing, the new plan deadline would be Jan. 21.

Court paper say the company has scheduled a meeting on Sept. 14 to begin plan discussions with "key constituencies."

Meanwhile, a large preferred shareholder -- Caspian Capital Advisors, investment manager for holders of 14% of the preferred stock - last week asked the judge to appoint an official committee to represent equity holders. That idea will be taken up at another hearing, on Sept. 30.

Caspian said in its filing that the company - which filed for protection in January - is "likely solvent" and "far from hopelessly insolvent." When Smurfit-Stone filed, it listed assets of $7.45 billion against debt totaling $5.58 billion as of last Sept. 30, including five issues of unsecured junk bonds totaling $2.275 billion, and -- ahead of the bonds in the capital structure - $1.2 billion under secured revolving credit and term loan agreements.

In its latest filing, Smurfit-Stone described a $584 million cash position as of June 30, and said that it had not drawn from its revolving credit line.

A trader said he did not know what was driving the bonds up, whether it was the request for the exclusivity extension and its likely grant. At his shop, he said, they just "traded with the flow."

Isle of Capri craps out

On the downside, gaming operator Isle of Capri's 7% notes due 2014 were seen by a market source to have fallen more than 2 points on the session to 87½ bid, while at another desk, a trader had them going out at 873/4, down 1¾ points from 98½ on Tuesday. A second market source elsewhere endorsed that latter quote.

Isle's Nasdaq-traded shares meantime fell as much as 17% during the session, before finally ending down $1.83, or 15.26%, at $10.16. Volume of 2.45 million shares was about five times the usual turnover.

Isle of Capri - which runs casinos in half a dozen U.S. states - including the third-biggest gaming jurisdiction, Mississippi but not including Numbers One and Two, Nevada and New Jersey - reported that in the 2010 fiscal first quarter ended July 26 it got back in the black with a net profit of $905,000, or 3 cents per share, versus its year-ago loss of $3.6 million, or 12 cents per share. On a continuing operations basis, excluding unusual factors, earnings were $791,000, or 2 cents a share, versus $2.6 million of red ink, or 9 cents per share, in the year-ago quarter.

However, analysts, on average, had been anticipating ex-items earnings of around 12 cents per share.

The company said revenues for the quarter fell 6% to $259.9 million, from $277.4 million a year earlier, also undershooting Wall Street's forecasts of some $273 million.

The company's chairman and chief executive officer, James B. Perry, said in Isle's announcement of earnings results that "we continue to be well positioned to endure this period of economic uncertainty as we have focused during the past two years on fiscal discipline and creating a value proposition for our customers. Our results during the quarter make clear to us that the economy appears to be engaged in a slow, long-term recovery process, and consumers are being more discriminating about their leisure spending. Our operational focus has enabled us to either maintain or increase share in most of our markets.

"Based upon the company's experience in the fourth quarter last fiscal year, we believe our cost structure will enable us to increase flow-through and achieve solid margin improvement on incremental revenue when we see economic improvement."

Rocking around with Royal Caribbean

Also in the consumer entertainment and leisure area, Royal Caribbean Cruises' several issues of bonds were seen trading around somewhat actively.

A trader saw the Miami-based cruise-ship operator's 6 7/8% notes due 2013 having moved up to 88 3/8 bid from 87 earlier in the week, on $8.9 million of trading. He also saw its 7% notes due 2013 "going the opposite direction," falling to 89 5/8 bid from 92 previously, on about the same size volume, causing him to suggest that "maybe someone did a swap out of the 7s and into the 6 7/8s."

Royal Caribbean's 8 ¾% notes due 2011 gained ½ point to 100½ bid, on $3 million traded.

Michaels move continues

A market source said that Michaels Stores Inc.'s 11 5/8% notes due 2016 - which had firmed solidly in active trading on Tuesday on good fiscal second-quarter and first-half numbers - gained as much as 1½ points to end at 86 bid.

At another shop, a trader estimated those bonds up ½ point on the day at 851/2, on volume of $8 million.

The Michaels bonds had risen Tuesday after the Irving, Tex.-based art-supply retailer's numbers painted a pretty picture for investors, showing a swing back to the black, versus year-ago losses for both the fiscal second-quarter and fiscal first half ended Aug. 1.

Michaels - which held a conference call for investors on Wednesday afternoon on which its executives elaborated on the results - said Tuesday that it had a $2 million profit for the second quarter, versus $30 million of red ink in the year-earlier period.

Net sales for the quarter rose 1.4% from a year ago to $807 million, although same-store sales - a key retailing industry performance metric - were down by 0.8%.

Operating income for the quarter nearly doubled, rising $23 million to stand at $50 million, or 6.2% of sales, nearly double the year-earlier quarter's 3.4%.

Adjusted EBITDA for the quarter jumped by 16.4%, or $12 million, from year-earlier levels to $85 million.

Split-rated deals attract junk investors

One of the traders said that several of the Most Active names in Junkbondland on Wednesday were in fact split-rated five-B deals that attract investors from both the high-grade and high-yield precincts.

For instance, he saw Discover Financial Services Inc.'s (Ba1/BBB-/BBB) 10¼% notes due 2019 gain ¼ point to close at 109¼ bid, on volume of $20 million. The Riverwoods, Ill.-based credit card issuer and electronic payment services company priced that $4900 million of bonds at par on July 10.

He saw SLM Corp.'s 8.45% notes due 2018 edge up to 76 1/8 bid, from 76 3/8 on Tuesday. Some $20 million of the split-rated (Ba1/BBB-/BBB) Reston, Va.-based education financing company's bonds changed hands.

And he saw Toll Brothers Finance Corp.'s 8.91% notes due 2017 better by ¼ point at 111¼ bid, with $%14 million of the Horsham, Pa.-based homebuilder's (Ba1/BBB-/BBB-) bonds traded.

Watson remains a winner

Meanwhile, Corona, Calif.-based drugmaker Watson Pharmaceuticals Inc.'s $850 million two-part split-rated (Ba1/BBB-/BBB-) deal, which priced a week ago, was seen continuing to gain ground on Wednesday.

A trader saw its 5% notes due 2014 push up to 101 bid from 100 5/8 late Tuesday, with $5 million of the bonds traded. That $450 million of bonds priced last Tuesday at 99.589 to yield 5.095%, and has continued to gain pretty much since then, attracting some junk investors - in addition to the usual high-grade players - due to the complete dearth of any other new deals to play in.

He said the company's $400 million of 6 1/8% notes due 2019 at bid levels around 1021/2, unchanged on the day, with $6 million traded; those bonds had priced last Tuesday at 99.796 to yield 6.153%, and like the five-years, had firmed solidly in the aftermarket early on and continued to hold those gains in the subsequent days.

However, volume - which presumably includes both junk players and high-grade accounts as well - has fallen sharply this week from the $20 million-plus levels which both tranches had seen in aftermarket dealings last week.

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