Premcor bonds up as IPO finally nears; Service Corp. buried on cemetery problems

By Paul Deckelman and Paul A. Harris

New York, April 19 - Oil refiner Premcor Inc.'s bonds moved higher Friday after the company - which for months had been rumored to be doing an initial public offering - moved one major step closer to bringing the IPO to fruition via a price-setting filing with the Securities and Exchange Commission. On the downside, deathcare giant Service Corp. International's bonds and shares were heard getting killed on reports that Florida authorities looking into allegations of improprieties at two of its cemeteries had found unburied human remains.

In the primary market, a close ear to the rails brought news of just one new deal chugging its way toward a position on the forward calendar Friday. A syndicate source told Prospect News that Roundy's Supermarkets, of Pewaukee, Wis. will bring $200 million of new senior subordinated notes via Bear Stearns & Co. and CIBC World Markets to fund the LBO of the company by Willis Stein. That deal will launch in early May and price sometime during that month, the source said.

However most of the conversation Friday concerned what one sell-side official said was the ninth straight weekly inflow into high-yield mutual funds. According to this source, $317.254 million came in, as reported by AMG Data Services.

The reason for the money continuing to flow in, the source maintained, is an economy that continues to improve, but not at the pace it appeared to be doing so just a short time ago.

"A few weeks ago Treasury yields were pushing up toward 5.40% on the 10-year," this official observed. "In the beginning of March, around the third or the fourth, the Treasury really started to gap, the yield started to gap up from the 5% level, where it had been until the beginning of March, all the way to 5.405% within about two weeks.

"That was telling people that they thought growth was really starting to take hold and we were emerging from the recession quickly and the expansion was really quickening.

"Since that time numbers have come out - and the Fed has been talking about these numbers - that have shown two things: there is low inflation risk, which is going to allow them to keep rates low, and there is weaker than expected - but not negative - growth numbers.

"Those two things, together, basically tell the market that the Fed's not going to be raising rates on May 7 at the FOMC meeting; that they're going to wait now until June or maybe later before they raise rates from where they are now, down at 1¾%.

"That obviously makes bonds extremely attractive, high-yield bonds in particular. High-grade corporates were so tight that there's really nothing left there. So as Treasuries move up at all, you're going to lose out.

"That's why people have been gravitating toward high yield pretty consistently here. And that's why you're seeing bigger flows. People think this is the place to be."

This official drew the attention of Prospect News to the comparison of another set of numbers: Year-to-date, 2002 has seen $4.9 billion of inflows, the official said, versus $3.4 billion of inflows during the same period in 2001.

"Last year there was still significant risk of a recession, which is going to significantly increase default rates - which it did," explained the sell-side source. "But the problem is that typically the sweet spot of high yield is when you know that you're coming out of the recession and you know that your credit spreads are going to have room to compress so you not going to lose out on yield as the Treasuries go up.

"The risk to each company becomes less in an expansion than it was in a recession.

"There is no question that we are growing," the official stated. "The question is how fast is the expansion going to take hold, and is it really going to start moving. And it looks like it's going to be kind of slow."

Another sell-sider also cited an improving economy as the dynamo driving cash into high yield.

"If you look at the deals that were getting done last year, it was an improved year over 2000 in terms of overall issuance," this sell-sider said. "But the market was much more focused on double-B issuers. And I think money was flowing in because they were buying safety.

"Now in a period where the economy seems to have turned the corner, I think money's flowing in because people feel that the asset class in general has some positive characteristics to it and all signs point to a decent year of performance in high yield.

"As a result investors have been buying things besides double-Bs this year. There are a lot more single-B first-time issuers this year than we had last year. We've seen the acceptance of a broader type of credit than we had a year ago.

"I think the economy makes people more willing to go down the credit spectrum a little bit. And assuming that companies meet investors' credit criteria, they are willing to take a little more risk as the result of what they view to be the safety of a better economy, versus safety because they're buying a double-B instead of a single-B, which is where we were last year."

In light of the continued substantial inflows to high yield, Prospect News asked of these officials 1) would the market see more tight pricings such as the XTO Energy transaction that took place Wednesday yielding 7½% and 2) how much new issuance is all this cash likely to bring into the market.

The first official quoted above expressed doubts that the cash would result in a significant number of deals pricing as tight as XTO.

"I think those are few and far between," this source said. "It's an unusually tight deal that was done on the right day. That's a rare occurrence. I'm not sure how many more of those there will be.

"E&P is very hot right now," the source continued. "Spreads are extremely tight for the sector in the secondary trading. But you have to be the right company. Cross Timbers was that company."

Hence it fell to the second official quoted to answer the volume question. Can the market anticipate $10 billion having priced during the month of April 2002 when the dust settles, as one sell-sider predicted earlier in the week of April 15?

"So far in April we've had $7 billion," the second sell-sider said. "And the forward calendar for the next couple of weeks stands at over $2 billion. You could see a couple more drive-bys next week, and we could get to $10 billion.

"We haven't had a month like that in quite a while," the sell-sider reflected. "Last year January was huge, with $14 billion. May and June had $10.7 billion and $12.4 billion respectively. But for the most part last year saw $5-$6 billion months."

Although nothing was reported to have priced Friday in the high yield primary, the week of April 15 saw $2.112 billion in proceeds of new issuance transacted, bringing the year-to-date total to $24.6 billion.

Of the seven deals poised on the forward calendar as business expected to price during the week of April 22 six are dollar-denominated. They total an even $1.5 billion.

In the secondary, Premcor bonds "jumped," a trader said, after the St. Louis-based energy refiner said that it had filed an amendment to its previously filed IPO registration statement, in which it set the expected price for the upcoming equity offering. Premcor will sell 15 million shares of stock in an estimated price range of $22 to $24 per share, or total gross proceeds of between $330 and $360 million. The offering is to be lead-managed by book-runner Morgan Stanley, with Credit Suisse First Boston as co-lead manager and Goldman Sachs & Co., Salomon Smith Barney, Deutsche Bank Securities Inc. and Bear Stearns & Co. as co-managers. The underwriters have been granted an option by the company to purchase up to 2.25 million additional shares to cover any over-allotments. When the shares are finally sold, Premcor - the former Clark USA - will trade on the New York Stock Exchange under the ticker symbol PCO.

The pending IPO has been talked about in the market "almost forever," one observer commented - or at least for a number of months. Speculation that the equity offering was coming has been one of the main props underneath Clark/Premcor's bond prices, along with the recently more bullish trends in the world oil markets and anticipated stronger demand for refined products such as gasoline with the onset of summer and the recovering U.S. economy.

The trader quoted the company's 10 7/8% notes as having pushed up to 99 bid from prior bid levels around 97-97.5; its 8 3/8% and 8 5/8% notes were up as much as four points on the session to 97 bid. He said its preferred stock moved up to around $900 per share from the lower $800s. At another desk, however, the bonds were seen little changed from their lower levels, owing to the usual paucity of Friday afternoon trading activity.

Fitch Ratings on Friday affirmed the company's $650 million revolving credit facility at BB, its senior floating-rate term loans and senior notes at BB- and its senior subordinated notes at B. Fitch noted that since proceeds from the IPO will be used to pay down existing debt, "the IPO effectively serves as a de-leveraging event to improve credit measures." However, the ratings agency expressed wariness about Premcor's stated intent to enlarge the company via refinery acquisitions, and its relatively small asset base.

Elsewhere, the trader heard that Service Corp. bonds were down three points across the board in response to the latest developments in the Florida cemetery investigation. He quoted its 6% notes due 2005 as having dipped to 90 bid/91 offered from 93.5 bid/94.5 on Thursday. Additionally, the company's shares plunged $1.03 (22.25%) in NYSE trading Friday, to $3.60. Volume of 15.7 million shares was more than 15 times the usual turnover.

The Houston-based No. 1 U.S. funeral home and cemetery operator is so ubiquitous and was formerly so profitable that legendary Fidelity Investments stock fund guru Peter Lynch some years back jokingly dubbed it "McBurial," in an implied comparison with the equally far-flung and profitable McDonald's Corp. But Service Corp. has fallen on hard times the past few years, affected by the same negative deathcare industry dynamics which forced its biggest rival, Loewen Group, into a Chapter 11 restructuring in the late 1990s (the resurrected Loewen emerged from bankruptcy in January, considerably downsized and re-named Alderwoods Group Inc.).

On top of all of that, Service Corp. specifically has been roiled since December by allegations that workers at two of its Florida cemeteries had mishandled bodies, even allegedly smashing open burial vaults and digging up already interred corpses to make room for new bodies and throwing the dug-up remains into a nearby wooded area. Other allegations contained in a civil lawsuit filed by families of the deceased included misplacing coffins, burying bodies in the wrong plots and mixing body parts. Last month, the Florida state attorney general's office filed suit against the company, alleging violation of the state's Deceptive and Unfair Trade Practices Act and seeking thousands of dollars in possible penalties. On Wednesday, investigators from the Florida Department of Law Enforcement descended on the two cemeteries, looking for misplaced human remains; The Miami Herald reported Friday that the probers found bones from at least five different bodies in the woods near one of the cemeteries.

Service Corp., which has all along denied any wrongdoing on the part of the parent corporation, said in a statement Thursday that it was cooperating fully with the inquiry, and declared that "the acts behind this discovery are abhorrent to our company, and could not be more opposed to the policies, procedures and standards of decency that guide our operations." It urged "appropriate action" by authorities against the individuals responsible, none of whom have yet been identified.

Back in the land of the living, a trader said that long-haul fiber optic telecommunications operators like Williams Communications Group Inc. have recently been "a little bit better," although he said it didn't appear that industry fundamentals justified such a strengthening.

He quoted Williams' 10 7/8% notes as "back in the 20s - yipee," at 21 bid/22 offered. That was up from Thursday's close at 19.5 bid/20 offered, and at least four points higher from the 17 bid/18 offered levels seen several days earlier. Meantime, rival long-haul telecommer Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 went home Friday quoted at 49.5 bid/50 offered, up from levels a few days earlier at 46.5 bid/47.5 offered.

"Am I missing something?" he asked rhetorically. "Was there some news that the concerns about a glut of fiber capacity and pricing pressure on the sector are now gone?"

Even recent speculation that Level 3 might emerge as a buyer for the bankrupt global fiber optic network operator Global Crossing Holding Ltd. - and then presumably take some of its fallen rival's capacity out of the market, as a way of bringing supply and demand back into balance and thus boosting prices and revenues - would not be sufficient to explain the latest strengthening in the sector, he said.

"I see no evidence that they've worked out any of the issues [troubling the whole long haul sector]. We had the news a week or two weeks ago about the speculation about Level 3 making a bid for Global Crossing, and Flag Telecom Holdings Ltd. [restructuring via a bankruptcy filing], but I don't think it's moving up on that news. Maybe [these names are] up a little on consolidation - but I haven't seen anything fundamental which would cause these things to move up like this."

One other possibility, he acknowledged, was that the whole sector has been so badly beaten down, in line with the overall difficulties of the telecommunications industry, that some kind of bargain-hunters' bounce is inevitable.

"There's still more cash to be put to work than there is new issuance. Maybe people are dipping their hands deeper into the credit barrel, seeing what kind of stuff is down there, looking for yield. But I can't believe that a lot of people are plowing money in" on those grounds.

Also in the telecom sphere, wireless operator Nextel Communications Inc. - whose debt was buoyed during the week by speculation about possible consolidation in the cellular sector and by its own positive operating earnings and subscriber additions data for the most recent quarter - was seen lower. The Reston, Va.-based No. 5 U.S. wireless provider's bellwether 9 3/8% senior notes due 2008 retreated a point-and-a-quarter to 68 bid while its 9½% notes were three-quarters of a point lower at 66.

A trader said that the bonds of AT&T Canada Inc. were "moving up, with all kinds of rumors going around" about the troubled Canadian telecommunications company, although he had seen no specific news.

AT&T Canada is 31% owned by AT&T Corp., which has said it will honor a commitment it made back in 1999 to buy the 69% of the money-losing Toronto-based company that it doesn't already own for at least $3.2 billion. But while that's reassuring to ATTC stockholders, Ma Bell has pointedly refused to say that it will take responsibility for repaying its troubled Canadian child's $2.9 billion of long-term debt. This past week, bondholders with about a third of that debt said they had tried to set up a meeting with company officials, in hopes of finding out where they stood - but they said that they got the cold shoulder. The bondholders said that they are therefore "considering very carefully the various options available" to them.

Even so, the trader quoted AT&T Canada's bonds as having moved up three-quarter to a point, to levels in the mid-20s, "which is up a lot for a $23 [per $100 par value] bond." Amid overall light trading activity in the junk market, he added, "there was a lot of scrambling going on - from our desk, we saw a lot of buyers of AT&T Canada here."

Outside of the telecom sphere, the trader said, Northwest Airlines bonds "were very strong - really flying" on Friday, after the Minneapolis-based No. 4 U.S. air carrier reported a narrower-than-expected first quarter loss.

He saw Northwest's 7 5/8% notes up a point at 92.75 bid/93.5 offered.

Northwest on Thursday reported a net loss of $171 million ($2.01 per share), about the same as it saw a year ago, but far smaller than the $2.46 per share loss the analysts had been looking for.

He also saw United Air Lines' bonds firmer Friday after Chicago-based UAL - the nation's second-largest air carrier - also posted a smaller-than-expected loss. While the $510 million ($9.22 per share) first-quarter loss was the second-biggest red ink bath in the company's history - eclipsed only by the $1.16 billion lost in last year's third quarter in the wake of the Sept. 11 terrorist attacks - it still came in well below the $10.24 per share loss Wall Street had been expecting. On an operating basis, the actual loss for the quarter was smaller still; excluding $23 million in special items, its totaled $487 million ($8.81 per share).

Troubled textiles maker WestPoint Stevens Inc.'s bonds and shares were up for a second consecutive session in the wake of its surprise announcement Thursday that it had reported a first-quarter profit - something nobody had been expecting - and that it was sticking with its previous guidance for 2002.

WestPoint's 7 7/8% notes due 2005 and 2008, which had been heard to have improved as much as four points during Monday's session to 55 bid, continued to ride that rocket upward, with one desk quoting the '08s as high as 61 bid late in the session, up another six points on top of Thursday's gain.

The company's shares, meantime, were up 69 cents (18.351%) in NYSE dealings, to $4.45 - this on top of Thursday's jump of $1.36 (56.67%).

WestPoint reported Thursday that first-quarter net earnings totaled $2.02 million (4 cents per share), versus a year-ago loss of $10.9 million (22 cents per share), or $5.1 million (10 cents a share) excluding a special $5.8 million restructuring charge in the year-ago quarter. Analysts had been looking for a loss of about five cents per share for the latest quarter. First-quarter sales were $435 million, well up from $418 million last year.

Computer Associates International Inc.'s nominally investment-grade bonds - which have traded down to junk-bond-like levels and have been quoted in dollar terms in recent months on the Long Island, N.Y.-based software company's well-publicized regulatory problems - were heard Friday to be holding at the higher levels to which they had moved on Thursday after the company reported that the Justice Department had closed an inquiry into Computer Associates' 2000 acquisition of Sterling Software Inc. without taking any action.

Computer Associates' 6¼% notes due 2003 were at 98 bid, having moved up from 95.5; its 6 3/8% notes due 2005 were at 91, having risen from 88.25 bid; and its 6½% notes due 2008 held steady at 86 bid, up from 83.25 previously.

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