PCA deal postponed; Calpine lower, Trump up while WorldCom, Tyco stabilize

By Paul Deckelman and Paul Harris

New York, April 26 - PCA International Inc. was heard by market players on Friday to have postponed its planned $200 million offering of seven-year notes while Giant industries Inc. unveiled plans to offer $200 million of 10-year notes, the only real activity in an otherwise quiet primary market.

The secondary market was likewise becalmed Friday, as, among the pure junkers, Calpine Corp. continued to erode, while Trump Atlantic City Funding bonds kept firming; meantime, nominally investment-grade credits Tyco International and WorldCom Inc - which have recently been trading like junk bonds - were heard to have stabilized after sliding earlier in the week.

As the week drew to a close in the high yield primary market no deals priced Friday. However one new deal - another energy credit - zoomed into play; the market learned that Scottsdale, Ariz. refiner Giant Industries will bring $200 million.

In a Friday conversation with Prospect News, Buffalo High Yield Fund portfolio manager David Eshnaur said that he has generally not been charging up on the recent tight-pricing energy deals.

"I've just given them a passing glance," Eshnaur said. "Energy is one of our strong suits, but we haven't played them.

"The only one we played was Magnum Hunter," he added referring to the upsized $300 million of 10-year senior notes that Irving, Tex. oil and gas exploration and production company Magnum Hunter Resources, Inc. priced on March 13 to yield 9.60% via Deutsche Bank Securities.

With regard to XTO, which priced April 18, and Pioneer, which priced April 25 - both yielding 7½% - Eshnaur said the Buffalo High Yield Fund had passed.

"I'm not buying that kind of stuff," he commented. "They're way too rich for me.

"Dole Foods did their drive-by, which was split-rated," he added referring to the Dole Foods, Inc. $400 million of seven-year bonds (Ba3/BBB-) that priced on April 25 to yield 7.343% via Banc of America Securities and Credit Suisse First Boston.

"I didn't play in that one either," Eshnaur said. "I listened to the conference call and it sounds like they're making progress. But I'm not going to let them get that rate (7.343%) by me. That's not my cup of tea."

Asked to comment on the mutual fund inflow of $310.913 million reported by AMG Data Services for the week ending April 24, Eshnaur said: "That's not a lot, but it's the 10th straight inflow and it definitely means cash will have to be put to work."

In general, the Buffalo High Yield Fund portfolio manager said, the present high yield market is not very enticing.

"I think they're bringing the deals way too fast and in the middle of reporting time I have to look at what I've got," he said.

"Hopefully one of these days the market's going to be more attractive than it is now. But right now it's a little scary to be putting money into eight- and seven-handle debt when you think that by the end of the year rates will gradually start going up.

"We're either going to stay flat or we'll go up. We're not going down," Eshnaur added.

"I don't think there's any more cuts coming."

One new deal emerged as the week of April 22 wound down. Giant Industries, Inc. announced Friday that it will start the roadshow Tuesday for $200 million of new eight-year senior subordinated notes (existing ratings B2/B+) via Banc of America Securities.

Also on Friday word circulated through the market that PCA International, Inc. postponed its junk bond deal for $200 million of seven-year senior notes (Caa1 stable/B- positive), via Goldman Sachs & Co.

The market also heard Friday that JohnsonDiversey, Inc.'s dual-currency dollar and euro offering of $500 million senior subordinated notes (B2/B/B+), also via Goldman Sachs, figures to price Monday. Earlier in the week the market had been anticipating hearing those terms Friday.

Price talk of 9¾%-10% was heard Friday on Western Financial Bank's $200 million of 10-year subordinated capital debentures (B1/BB-) via Credit Suisse First Boston, Bear Stearns & Co. and RBC. That deal is also expected to price on Monday.

Finally on Friday news of a deal from Cleveland, Ohio vision care company Cole National surfaced. Cole will sell $150 million of senior subordinated notes with proceeds to call its 9 7/8% senior subordinated notes of 2006. Lehman Brothers and CIBC World Markets are the managers of the company's tender offer, which expires May 9.

In addition to Western Financial Bank's $200 million and JohnsonDiversey's $500 million (which is the biggest deal on the forward calendar for the week of April 29), the calendar contains seven deals that are expected to price during the April 29 week. The total of new business expected to price is $2.125 billion and €405 million.

In secondary dealings Friday, there was no great movement in any recently sold new bond issues. Stoneridge Inc.'s new $200 million of 11½% senior notes due 2012 remained well bid for at 103.25, around the same closing levels to which they had risen on Thursday after pricing at par earlier in the session. Also well bid for was Corrections Corp. of America's new 9 7/8% senior notes due 2009, bid around 103-103.25, well up from Wednesday's issue price at par.

However, Pioneer Natural Resources Co.'s 7½% senior notes due 2012, which priced Thursday at par as a $150 million drive-by deal, were quoted around 100.25 bid/100.5 offered, and Vintage Petroleum Inc.'s new 8¼% 10-year seniors were "just dead," a trader said, finishing at 99.75 bid/100.25 offered, off slightly from Thursday's par issue level. Both were essentially unchanged from closing quotes later Thursday.

Among already established bonds, Calpine Corp. was weaker for a second consecutive session, its 8½% notes due 2011 quoted going home down two points on the session at 84 bid/85 offered, after trading as low as 83.5. Those bonds had been up in the 88 region around mid-week, but began falling on the San Jose, Calif.-based independent power producer's warning late Tuesday that it would fall short of analysts' first-quarter earnings projections, anticipating earnings in the 10 cent-per-share area, versus Wall Street expectations of 13 cents.

Compounding the company's situation is the fact, reported Friday in the Prospect News Bank Loan Daily, that Calpine still has not closed on the final $600 million of a $1.6 billion secured credit facility that it previously said it had closed upon - and it won't actually complete that financing for about another month. Calpine had initially predicted at the end of last year that it would have the financing in place by the end of January, and its bonds and stock weakened when that didn't happen. On March 12, it announced that it had closed on the $1.6 billion facility, consisting of a $1 billion credit revolver and a $600 million term loan. Calpine pledged assets worth at least $3.2 billion to secure the new facility and an existing, amended $400 million credit revolver. Now, however, it appears that the final $600 million loan won't close till the end of May.

"People are still waiting on pins and needles" for Calpine to finally get everything nailed down, a trader said. News that it's still not a done deal was "great, just lovely," he said, ironically. "When something like that happens, the market doesn't take chances."

Another independent power producer, AES Corp. - affected by many of the same industry dynamics as Calpine - was also lower on Friday, its 10¼% notes dipped to 72 bid from 73.5 on Thursday, while its 8 3/8% paper ended at 69 bid, likewise down a point-and-a-half.

On the upside, Trump A.C.'s 11¼% first mortgage bonds due 2006 "continue to move up," a trader said, quoting them bid without any offerings at 78.25, up from mid-week levels around 76. Later in the session, another trader quoted them as high as 81 bid, noting that "they're hard to find," as holders seem suddenly loathe to part with the bonds of the debt-laden Atlantic City, N.J.-based hotel and casino operator.

The bonds (as well as the company's shares) were seen having gotten a boost from the release at mid-week of first-quarter earnings, which the company called the best first quarter since it went public and began reporting. Also helping was the announcement that Trump plans to sell $470 million of new junk bonds - the timing and structure of the deal still to be determined - and use the proceeds to take out its existing 15½% holding company notes due 2005 and Trump Castle Funding 11¾% notes due 2003.

Adelphia Communications Corp.'s bonds, which had been weakening over the previous few sessions, were quoted a bit higher, its 10¼% notes firming to 84 bid from 83.5, and its 10 7/8% paper up a point at 86.5.

And Lyondell Chemical "came back a point," a trader said, its 9 5/8% notes closing at 99.25 bid/par offered from 98 bid/99 previously.

A trader saw WorldCom bonds "a little better" Friday amid a trading environment where "everything else was ugly, sloppy and slow. There was not a lot going on." He said WorldCom's short-end paper "definitely felt better" while the longer-dated bonds were mostly unchanged.

The Clinton, Miss.-based telecommunications giant's nominally invest-grade bonds and its shares have recently traded off - the bonds declining to junk bond-like levels - on signs that the overall slowdown in the telecommunications industry would badly affect its results.

The slide was particularly pronounced this past week after the company predicted a week ago Friday that its WorldCom Group data and Internet services unit's 2002 revenues would total between $21 and $21.5 billion, down from previous guidance of $22.2 to $22.6 billion, and its EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of a company's cash flow generation potential and ability to service debt) would be between $7 billion and $7.5 billion, well down from prior forecasts in the $8.4-to-8.5 billion range. On Wednesday, WorldCom reported that consolidated first-quarter earnings slid 78%, to $130 million, from year-ago totals of $594 million. Revenues fell 8% to $8.1 billion, as sales of long-distance phone services and data services fell.

But the shorter-dated WorldCom paper seemed to have a better feel to it, the trader noted, while the paper of Intermedia Communications - a Florida-based high yield telecom operator, bought by WorldCom last year - was also in demand, ending bid without any offerings.

He opined that "people are trying to figure out where Intermedia's paper fits in the WorldCom capital structure - some people see them as obligations of WorldCom and some people see them as sub debt." Despite WorldCom's own barely investment grade ratings (Baa2/BBB), Intermedia paper is two notches lower, and is thus still technically a junk bond.

Intermedia's 9½% notes due 2009 closed at 80 bid. Its 8.60% notes due 2008 were at 78 bid, while its zero-coupon/11¼% step-up notes due 2007 were at 80 bids. Its 8 7/8% notes due 2007 were bid at 78, while its 12½% notes due 2009 were at 55 bid.

Meanwhile, Tyco's paper "traded off [Thursday] but then stabilized [Friday]," a trader said. "There were pretty decent bids again in the short paper. The long paper was definitely offered without most of the day and looking for bids. Then late in the day, in the intermediate area, like the 6 ¾% notes due 2011, some bids did show up and you had two-sided markets, with 'only' a two-point spread." He saw those bonds going out at 81 bid/83 offered, up a point on the session.

Tyco this past week announced that its much-touted plan to break itself into four separate units - introduced with much fanfare in January as the solution to unlocking the company's value for its investors - was now being abandoned as "an ill-timed mistake." Instead, Tyco said it would close 24 factories and abolish 7,100 jobs, and would spin off its CIT Group financial unit.

Tyco bonds "definitely traded off when they first mentioned that news [of the demise of the breakup plan], which was two evenings ago," the trader said. "On [Thursday], it definitely got killed and traded off, but it kind of stabilized [Friday] - it didn't go up, but it kind of stabilized," clearly better news for longs than "a continued bleed." Tyco's 10-year notes were being quoted at 80 bid, unchanged on the session but down about seven points from the levels they held at mid-week, before the demise of the breakup plan was announced.

The attention being paid by junk marketeers to issues like Tyco and WorldCom, which are still trading off the investment-grade desks at most shops (along with such other names as Qwest Communications International and Computer Associates) could be motivated by nothing more than a desire to get ahead of the curve in spotting the next likely fallen angel before it actually falls, or it could be due to a paucity of real interest in what's going on in the junk market itself.

There, several key sectors, such as energy, most gaming credits (Trump paper the main exception) and homebuilding, have run up so much over the past few weeks and are now trading at such tight levels - often at or above par - that they are considered to essentially be out of further upside room, while their yields have fallen to such levels that they are no longer of much interest to junk bond portfolio managers.

In the homebuilding group, for instance, a trader noted that despite positive earnings numbers during the week from such credits as Toll Brothers and D.R. Horton, "there just wasn't much upside left in them, unfortunately."

While he acknowledged that some of the homebuilders' bonds "have come in a little bit, pricewise, just a touch, not a hell of a lot, maybe a point or so over the last couple of weeks, because they had been so tight," most of the names in the sector seemed to be trading at or near levels that could be seen as fully priced.

Toll Brothers bonds were pretty much unchanged this week, with its 8¼% notes due 2011 around 100.25 bid/101 offered and its 8% notes due 2009 at 99.5 bid/100.5 offered. The luxury homebuilder's 8 1/8% notes due 2009 hovered around 100.5 bid/101.25 offered, pretty much unchanged,

As for D.R. Horton, its recently priced 8½% notes due 2012 were in the 99.25 bid/par offered area, while its 8% notes due 2009 were at 98.5 bid/99.5 offered, and its 9¾% notes due 2010 were at 104.25 bid/105.25.

As a sector of the economy, homebuilding has performed almost in a manner that could be called spectacular. The latest government figures on new home sales, for instance, showed March sales down 3%, to an 878,000-unit annual pace, a little off the 890,000-unit rate analysts' consensus. But February's figures were meantime sharply revised upward, to a 906,000-unit annual rate from an 875,000-unit pace initially.

With those kind of numbers, the trader said that it's almost as though there's no such thing anymore as an upside earnings surprise in this sector. "Believe me," he asserted, "it doesn't matter what the consensus is, it seems these guys just blow right through those estimates, quarterly."

The downside of all of this strength, of course, is that the bonds have traded up to such high levels that "there's just not enough yield [to justify buying the bonds]. A lot of these builders trade inside of 8%, and if not inside 8%, then right at 8% or a little wider, depending. There's really nothing left, as far as yield. They're an attractive sector, yes. But if I didn't own any of them, I wouldn't go into 'em now. If I were absolutely flat builders, I don't think I would be buying them at these lows [yields]."

With prices and yields at current levels, "they don't move. I don't even really trade 'em any more. I just quote them and sit there. It's pretty boring. The flows are not there."

Several homebuilders, including Horton and Beaer Homes USA have recently priced new issues, he noted, but "when the new deals come [in the sector] we do swaps, but other than that, it's just not a very active sector."

The trader also raised another concern: how long can the homebuilding bubble last before it inevitably bursts?

"What if you [buy homebulders' bonds now and] hold onto them for a couple of quarters and the economy decides not to do what everyone thinks it will do? I think some of these forecasts are too rosy for the second half of the year - homebuilders will be one of the first sectors that will get hit. You can pass on spending 200 grand on a house if you have to, but you can't pass on buying food or energy. "

In Friday's dealings, another trader said, "it was just a poor day" for high yield bonds in general, "pretty freaking sleepy."

There seemed to be little secondary market reaction to the news that high-yield mutual funds - usually considered a reliable gauge of overall market liquidity trends - scored their 10th consecutive week of inflows, as $310.9 million more came into the funds in the week ended April 24 than left them, according to statistics released by AMG Data Services. Besides being the 10th straight week of inflows, it marked the 14th week out of 17 so far this year in which inflows have been seen. Since the start of the year, it is estimated that net inflows have totaled a hefty $5.229 billion.

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