Harrah's hitting the road with upsized deal, existing bonds slide; Countrywide, Georgia Gulf keep rising

By Paul Deckelman and Paul A. Harris

New York, Jan. 14 - Gaming giant Harrah's Entertainment Inc. was heard by high yield syndicate sources Monday to be preparing to go on the road Tuesday to market part of an upsized mega-deal offering which is part of the Las Vegas-based company's leveraged buyout financing. The prospect of almost $7 billion of new Harrah's paper coming into a currently less-than-vibrant junk market had some investors in its current bonds voting with their feet during the session.

Elsewhere, Countrywide Financial Corp.'s bonds continued to firm for a third straight session as the market got used to the idea, floated through the rumor mill on Thursday and formally announced on Friday, that Bank of America will acquire the troubled Calabasas, Calif.-based mortgage originator, heading off what could have been a slide into insolvency and bringing some badly needed stability to the problem-plagued mortgage business. But the gains were relatively small and volume relative restrained compared with the explosive Countrywide rally seen Thursday and the strong follow-through on Friday.

Georgia Gulf Corp.'s bond firmed for a second straight session, investors apparently impressed by the company's recently released progress report on its debt-cutting efforts.

On the downside, Quebecor World Inc.'s bonds continued to bounce around at lower levels, just hours before Tuesday's financing deadline. Those gyrations reflected market fears that the troubled Montreal-based printing company's lenders might reject a rescue plan put forward by its corporate parent and another investor Friday - a rejection which could leave Quebecor in default of lender demands that it line up $125 million of new financing.

Sources were marking the broad high yield market more or less unchanged, and very quiet, on Monday.

One investment banker said that the new Southwestern Energy Co. 7½% notes due Feb. 1, 2018 (Ba2/BB+), which priced at par last Friday in an upsized $600 million issue, held in above par in Monday trading, and commented that the apparent strength of this recent issue is a positive sign for the market.

Harrah's to start marketing

Meanwhile Monday's primary market news centered on the LBO backlog.

Harrah's Entertainment will begin a roadshow on Tuesday for a to-be-determined portion of its upsized $5.275 billion of senior unsecured cash-pay notes - part of the overall $6.775 billion of proposed bond financing which was upsized on Monday from $6.025 billion.

The proposed bond financing also includes $1.5 billion of senior unsecured PIK toggle notes, the size of which was left unchanged in the Monday restructuring.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch are leading the bond portion of the financing.

Harrah's also upsized its credit facility to $9.25 billion from $9 billion.

The bank meeting for its three-tranche Libor plus 300 basis points $7.25 billion term loan is also scheduled for Tuesday.

The bank deal is comprised of a $2.25 billion seven-year term loan B-1, a $3 billion seven-year term B-2 with a soft call at 103, and a $2 billion seven-year term B-3.

The commercial mortgage-backed securities portion of the financing was downsized to $6.5 billion from $8.0 billion.

The LBO deal also includes $6.096 billion of sponsor equity.

A lot riding on Harrah's

A high yield portfolio manager who spoke to Prospect News on Monday said that there is a lot riding on the Harrah's deal.

"You've been seeing lousy numbers out of Vegas, and some of the other [gaming] venues are weak, although not as weak as Vegas," the buy-sider said.

"This deal is going to put a lot of pressure on the market."

The investor also noted that Harrah's announced on Monday that the LBO is expected to close on Jan. 28, and added that given the Harrah's LBO financing is a "committed financing," underwriters will have to fund the amount of debt which they are unable to place by that date.

However, this source said that the market has been hearing about the Harrah's bond and bank deals for the past two weeks, and it stands to reason the underwriters already have built decent books.

The investor's take on the credit markets, at present, is that they are "very illiquid, with not a lot going on."

Prospect News asked whether there is cash on the buy-side which needs to be put to work.

There may be, the investor replied, "but given how bad the market has been over the past week or so, do you really want to stick it into the market?

"Or do you want to hold it in cash?"

This source, however, has not heard that the cash positions of the buy-side are going up.

"Whatever they're buying it's going to be high quality stuff," the investor said, alluding especially to the above-mentioned Southwestern Energy deal.

Natural resources space

This and others have noted that presently the natural resources sector has been well represented in the high-yield new issue market.

Aside from Southwestern Energy, Atlas Energy Operating Co./Atlas Energy Finance is in the market with a $400 million offering of 10-year senior notes (B3/B), via JP Morgan and Wachovia Securities.

And Petroleum Development Corp. will begin a roadshow on Tuesday for its $250 million offering of 10-year senior notes, via Morgan Stanley.

A senior high yield syndicate official told Prospect News on Monday that there is widespread market acceptance for deals from the natural resources sector.

"The question is pricing," the sell-sider said, adding that the new Southwestern Energy 7½% notes priced at a 368 basis points spread to Treasuries.

A year ago, in a mid-4% Treasury environment, Southwestern Energy would have come inside of 7%, the source asserted, adding that the levels at which the Southwestern Energy notes were priced last week set "a high hurdle for everything that comes after it."

Harrah's existing paper off ahead of new deal

The potential supply overhang of the upcoming new Harrah's bonds had a depressive effect on its existing paper. A market source saw the company's outstanding 6½% notes due 2016 down 2 points, slipping below the 70 mark.

At another desk, a source saw Harrah's 5¾% notes due 2017 down 1½ points at 64.5.

Market indicators point northward

Apart from bonds which have new-deal complications, Monday's market was seen mostly higher, though in fairly quiet dealings. A trader pegged the widely followed CDX index of junk market performance little changed at 92 13/16 bid, 93 1/16 offered on "a pretty quiet day."

The KDP High Yield Daily Index, down over the last several sessions, firmed by 0.13 to 76.04, while its yield tightened by 3 basis points to 9.08%.

In the broad market, advancing issues narrowly shaded decliners. Meanwhile, overall activity levels, as measured by dollar volume, were off about 10% from Friday's level.

A trader characterized the session as "kind of a slow day, with not a ton [of activity] going on, outside of "a bunch of trading in the late afternoon." Unlike Thursday and Friday, when there was a central, recognizable feature to the market - first, the rumored Countrywide acquisition talks and then, the fallout from the deal - no such trend marked Monday's session. "It was dead," he added.

Countrywide continues to climb

While dealings in Countrywide paper did not have the explosive bullishness seen on Thursday, when the market reacted to news reports that talks with Bank of America to acquire the troubled mortgage giant were taking place, or Friday, when there was actually an official announcement of such a deal, there was still a firmer tone to the paper. While volume levels in the credit were reduced from the heavy size dealings seen especially on Thursday and to a lesser extent, Friday, they were still on everyone's Top Ten list of busiest bonds.

Countrywide's 3¼% notes coming due this May were seen by a trader up a point at 96 bid, 97 offered, while its 5 5/8% notes due 2009 were also a point better at 91 bid, 93 offered, and its 6¼% notes due 2016 were unchanged at 84 bid, 86 offered.

Another trader saw the 31/4s at 96 bid, 98 offered and the 61/4s at 85 bid, 86 offered.

A market source elsewhere saw the company's 4% notes due 2011 up a point at 88.5, while its 4 1/8% notes due 2009 were nearly a ½ point better at around the 90.5 level.

The sector sympathy boost which fellow mortgage originator Residential Capital LLC seemed to derive over the previous two sessions from the resolution on the positive side of Countrywide's fate, however, seemed to have run its course. A trader saw ResCap's 6½% notes due 2013 losing ½ point to 59.5 bid, 61.5 offered.

Housing names seen mixed

The Countrywide deal news never did give a boost to the beleaguered homebuilding sector, even though it would make logical sense that anything having the possibility of bringing some stability and strength to a badly battered mortgage industry could only be a positive for housing, which relies on a steady flow of credit to would-be homebuyers to get its houses sold. And if it had no coat-tails on Thursday or Friday, it certainly had none on Monday.

Instead, most housing names looked mixed, although the exception to the rule seemed to be WCI Industries Inc., whose bonds and shares were roiled last week by negative rumors but firmed solidly Monday on expectations that its lenders either had granted or would grant further extensions of covenant compliance waivers, giving the Bonita Springs, Fla.-based company additional time to get its act together.

A trader saw the WCI 9 1/8% bonds due 2012 up 3 points on the session, even as "the deadline to extend their covenant waivers is coming up." But another trader quoted those same bonds down 2 points around the same 47 bid, 49 offered level.

On the equity side, WCI's New York Stock Exchange-traded shares soared 62 cents, or 32.63%, to close at $2.52. Volume of about 1.8 million shares was a bit higher than normal, but not by that much.

Standard Pacific Corp.'s bonds were mixed, as investors continued to digest the impact to the company's apparent hiring of turnaround specialist Miller Buckfire as an advisor. News reports of that hiring sank those bonds on Friday. But on Monday, a trader saw its 6½% notes due 2010 up 1½ points at 63 bid, 65 offered. However, another trader called its 7% notes due 2014 down 1 point at 61 bid, 63 offered. A market source at another desk called its 9¼% notes due 2012 up more than a point at 38 bid, but said that its 6½% notes coming due in October were down more than ½ point at just below the 81 level - after having fallen as low as 76 during the session.

With Miller Buckfire known as the kind of firm frequently hired by troubled companies to help them get their ducks in a row as they head for bankruptcy, Friday's news reports generated some speculation in the market that this was the direction Standard Pacific was intending to go.

However, in a research note Monday, JMP Securities equity analyst James Wilson cautioned that the reported move, in and of itself, does not necessarily mean that Irvine, Calif.-based standard Pacific plans to file. He called the hiring of a turnaround expert a prudent way to realign the company's costs declaring that it "is not in any way a reflection of Standard Pacific's current financial situation."

So confident is Wilson that there won't be a filing that he continues to relate Standard Pacific's shares - which would be hit hardest in the event of any bankruptcy filing - at "market outperform."

Among other housing names, Hovnanian Enterprises Inc.'s 6¼% notes due 2015 were down more than 2 points at 63.25, while recent fallen angel Lennar Corp.'s 7 5/8% notes due 2009, which lost 2 points on Friday, were down another 3 on Monday to the 90 level.

A trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 unchanged at 71 bid, 73 offered, while Tousa Inc.'s 8¼% notes due 2011 were down ½ point to 42 bid, 44 offered and its 9% notes due 2010 were up ½ point to 43 bid, 45 offered.

Another trader saw William Lyon Homes' 10¾% notes due 2013 rise 3½ points on asset sale news to close at 56 bid, 58 offered. The Newport Beach, Calif.-based builder sold 604 California homesites and 5 completed model homes to ORA Residential Investments I, LP, , a Resmark Equity Partners-managed fund, for $90.6 million. ORA also has an option to acquire 23 additional model homes.

Further upside for Georgia Gulf

Apart from the housing and mortgage names, Georgia Gulf Corp.'s 10¾% notes due 2016, which firmed smartly on Friday, moving up to around the 61 level from the mid-50s previously, added to those gains on Monday.

A market source pegged those bonds at 63 bid, up an additional 2 points.

Those gains over two sessions followed an announcement Thursday that the Atlanta-based chemical maker had reduced its term debt by $71.5 million during the 2007 fourth quarter. The balance-sheet cleanup was fueled by a sale-leaseback transaction, working capital reduction initiatives and an income tax refund.

More downside for Quebecor World

A trader saw Quebecor World Inc.'s 6 1/8% notes due 2013 down a point at 67 bid, 69 offered, but said that those bonds "were all over the place, at anywhere from 72 bid, 73 offered to 65 bid, 67 offered," gyrating on uncertainty over whether a C$400 million bailout package for the company arranged by its corporate parent, Canadian media conglomerate Quebecor Inc., would pass muster with the unit's banks, which have demanded that it come back with $125 million of new money by a Tuesday deadline.

An analyst for UBS Securities, Eric Mencke, warned in a Monday research note: "Even though [Quebecor World] has said this is the only financing solution on the table, we believe the banks may reject it."

He said that the offer by corporate parent Quebecor Inc and Tricap Partners, which would immediately inject $200 million into the struggling unit, with the rest coming later, "puts the $400 million above the banks, freezes the debt for two years and doesn't comply with the conditions of the Dec. 31 waiver" from the lenders, who must sign off on the cash infusion for it to take effect.

Quebecor World's 4 7/8% notes coming due in November dipped nearly 5 points Monday to just under 74 bid.

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