Xerox gains on earnings, but Tyco, energy fall; Greif prices dollar deal, drops euro tranche

By Paul Deckelman and Paul A. Harris

New York, July 25 - Xerox Corp., whose bonds had eased Wednesday ahead of what was expected to be worse-than-expected second-quarter earnings, instead beat the Street Thursday, and its stock and debt turned higher. But most names seemed to be on the slide as Wall Street's rally fizzled out; among the issues heading lower was beleaguered Tyco International, which battled bankruptcy rumors, and the whole embattled merchant energy sector.

In the primary market, the only hard news came from Ohio industrial packaging firm Grief Bros. Corp., which priced a $250 million 10-year offering, with the euro tranche lopped off.

Grief Bros.' senior subordinated notes (B2 /B+) priced at 99.186 to yield 9% via bookrunner Salomon Smith Barney.

Although the market also anticipated a euro tranche - the deal was announced as a two-currency offering with mirror tranches to total $300 million - a syndicate source said the company backed away from the euro piece and shifted $50 million to its bank loan.

When contacted after the transaction and asked whether in the light of four postponed junk bond deals Tuesday and Wednesday Grief Bros. was not just a tad on edge going into the pricing, chief financial officer Don Huml said the company would have been at liberty to walk away had the terms not been to its liking.

"This is really a transaction that was being done to better match the duration of our assets and liabilities and improve our financial flexibility further," Huml said. "We already have a reasonably strong balance sheet.

"If this deal for some reason did not get done we have an existing credit facility that would have accommodated our needs. So there wasn't a great deal of anxiety.

"But we're certainly very pleased that the deal was done on terms that are very attractive to the company."

When asked about the euro piece Huml suggested that price talk might have been a little rich for investors in Euroland.

"There was some pushback on the pricing," he commented regarding the euro tranche. "We decided to focus on the U.S. dollar-denominated tranche."

As to moving $50 million out of the high-yield bond portion and into the bank loan, Huml said: "We had very strong demand for the term loan C. And that really made it attractive to change the mix to substitute $50 million of term loan against the bond.

"We were still able to accomplish our objective of extending the maturity of our debt portfolio. But it did result in reduced transaction fees and interest expense."

Grief Bros.' yield of 9% was wide of the 8 5/8%-8 7/8% price talk. So Prospect News asked Huml if the volatility that has been reported to have beset some of the capital markets - especially equities - at present might have cost the company as it brought its high yield deal?

"Our timing would have been better if we would have launched a month ago," he conceded. "But we're really very satisfied with the terms.

"It's a transaction that strengthens our capital structure. And when you look at the rates on more of a historical basis it really remains at an attractive level."

The Grief Bros. transaction notwithstanding, a preponderance of the sources on both the buy- and sell-sides who have spoken to Prospect News over the past week have questioned whether the new issuance market is open at present.

Even in the wake of the Grief Bros. pricing late in Thursday's session one sell-sider was loathe to take a contrarian view.

"It's really sloppy out there," this official said.

"We hear that people are sitting on cash but with things as volatile as they are right now they're just afraid to put it to work."

Alluding to the completed Grief Bros., deal this source said that what the market needs in order to regain its footing is for quality credits "without any hair on them" to tap into the high yield.

When asked if any of the deals parked on the present forward calendar answer that description, this official suggested that the only deal that might actually be IN the US high yield market, as present, is The Manitowoc Co.'s $175 million of 10-year senior subordinated notes (B2/B+), via Deutsche Bank Securities Inc. and Credit Suisse First Boston.

Now on the road, the Wisconsin-based crane-builder's offering is expected to price on the first day of August.

"If Manitowoc does well that will be a very positive sign," the source said, "a sign of some stability on the new issuance side of the market. It might start to attract some cash back into the funds."

Alluding to the coming Dog Days of summer, this official also suggested that if in fact the new issuance market might be suffering from the volatility in the US capital markets, August - a month in which new issuance is traditionally not expected to emerge in significant volume in any event - might provide a meaningful respite as Summer 2002 begins to wind down.

"Things may be a little quiet until after Labor Day, which may not be a bad thing," the official said.

"Maybe that will let all of this volatility wash itself out."

When the new Greif bonds were freed for secondary trading, after having priced at 99 and change, "they traded right there," a trader said. "An eighth, a quarter, an eighth, a quarter. No pop. No anything. There was nothing special about the deal, no great activity in the paper."

Back among established junk names, Xerox had been generally expected to report a loss of about a penny per share on revenues of about $3.88 billion - but the Stamford, Conn.-based copier and office machines giant shocked the socks off of many in the market when it instead announced that earnings for the quarter totaled $93 million (12 cents a share), on revenues of $3.95 billion. Excluding costs related to restructuring and unhedged currency, the second-quarter profit was an even better 19 cents a share.

Those numbers not only beat analyst estimates, but they represent a notable turnaround from the year-ago loss of $101 million (14 cents a share), although the latest-quarter revenue figures were down 7.7% from $4.28 billion in 2001.

Analysts said the improved results - the first since the Securities and Exchange Commission pressured the company to change its accounting practices - were largely driven by better margins; Xerox posted gross margins of 42.5% in the latest quarter, an increase of 3.4 percentage points over last year. At the same time, CEO Anne Mulcahy's cost-cutting strategies brought selling, general, and administrative costs down $110 million, or 9%, from a year ago. Xerox's game plan calls for at least another $1 billion in expense cuts, meaning more job cuts are likely.

The unexpected profit - Xerox's first in a year - sent its stock shooting up 85 cents (15.89%) to $6.20 in Thursday's trading on the New York Stock Exchange; volume of 21.8 million shares was about four times the normal turnover.

On the bond side, a trader said the Xerox numbers were "a little bit of good news" in an otherwise gloomy picture. He quoted Xerox's 7.15% notes due 2004 as having pushed up to 80 bid from prior levels around 77.5 bid/78.5 offered, while its 5½% notes due 2003 firmed to 84 bid/85 offered from Wednesday's levels in the lower 80s. At another desk, Xerox paper was pegged about a point higher, with the 51/2s quoted at 83 bid.

But another trader minimized the gain, saying that "based on the numbers, there really wasn't a run-up. Really, nothing at all was running up like crazy, like wildfire, because it was a seller's market [Thursday]. If you put a bid out on something, it got hit. If you had an offer, it stuck out there all day long. From telecom to retail to packaging to gaming to leisure, it didn't matter. Not that there was any heavy selling, scary selling. It seemed like there were ten sellers for every buyer."

Spreads, he continued "were really wide. Most of your activity happened in the morning, before ten o'clock (ET) and then it died, and there was a little flurry at the end of the day."

Junk players watched with some disappointment the failure of the equity markets to extend Wednesday's big rally, which had seen the bellwether Dow Jones Industrial Average recording a 488.95 gain - its second-biggest point gain ever - while the Nasdaq and the S&P 500 also jumped. On Thursday, however, volatile uncertainty was the prevailing mood, as the Dow at one point was up 118 points, down as much as 245 points, and ended down 4.98, or 0.1%, at 8186.31.

Revelations of federal probes into Dow components Citigroup Inc. and J.P. Morgan Chase & Co. helped to drag the DJIA down, and SEC scrutiny of media giant AOL Time Warner Inc., added to equity investors' sense of unease. Meantime, Microsoft Corp. helped to push the S&P 500 down 4.75% (0.6%) to 838.68, while the Nasdaq lost 50.15 (3.9%) to finish at 1240.08.

Against that somber backdrop, junk issues which had already been seen as in trouble were regarded as even more so. "Every day a specific credit starts it and then the entire sector gets squished," a trader lamented.

One such segment being "crushed" unmercifully, he said, was the merchant energy sector. He noted an article in a major publication headlined "Merchant Generators: Facing Extinction?" and said this was typical of market sentiment about the power producers and energy traders - a segment which has been reeling even since last fall, when the once-mighty Enron Corp. began to run into trouble.

"It's across the board, it's all the energy producers. People aren't convinced that [all of] these guys are gonna be around."

He saw newly minted junker Williams Companies as having gone from levels around 35 bid/37 offered to being offered at 33, "pretty much across the board." Dynegy Inc. - also finally lowered to full junk bond status this week - was likewise lower, its 7 1/8% notes heard offered at 32, down from previous bid levels in the mid 30s. He also saw AES Corp. debt, which had gone home Wednesday quoted in the low-to-mid 40s, was being offered at 38. The Arlington, Va.-based independent power producer's 9 3/8% notes due 2010 were seen down four points on the day, at 39. But at one desk, AES's 8 3/8% notes due 2007 were heard to have traded as much as 10 points lower during the session, dipping below the 20 mark.

But there seemed to be at least a little bit of bounce here and there among the power names; at another desk, CMS Energy Corp.'s 9 7/8% notes due 2007 were seen having improved three points to 68. While Calpine Corp.'s 8 5/8% notes due 2010 were up a deuce to 48. A trader saw Williams' paper having "popped a little bit" from bid levels in the 33-36 area to as good as the 38-40 region, before the paper backed off from those highs later on. He observed that "there wasn't a hell of a lot of activity" in the name.

Outside of the energy generation and trading sphere, a trader saw United Airlines paper in the 30s "across the board," down from levels in the mid-to-high 40s before United and other major U.S. airline carriers recently reported huge losses for the quarter, collectively adding up to $1.4 billion, and made gloomy forecasts for the third quarter, which includes the all-important summer vacation season for the airlines. He quoted UAL's 10¼% notes due 2021 at a wide 25 bid/35 offered, with "nothing really trading, just offered lower. You see a lot of bid-wanteds on that stuff."

Purely junk-rated issues weren't the only bonds being pushed lower amid the mostly negative tone; investors in several (still) nominally investment-grade names were heading for the door as their debt headed south in the wake of negative news.

Even though AOL Time Warner Inc. on Wednesday had reported second-quarter earnings of $394 million (9 cents per share) versus a year-earlier loss of $734 million (17 cents per share), stock and bond investors seemed more focused on the company's statement that the SEC is looking into the way it accounted for some advertising sales at its America Online unit (it should also be noted that the swing to profitability in the latest quarter versus a year-earlier loss was largely due to a change in accounting rules, with the elimination of amortization of goodwill).

AOL's shares plunged $1.76 (15.44%) to finish NYSE dealings at $9.64. Volume of 150 million shares was six times normal. On the debt side, AOL's 6 7/8% notes due 2012 were being quoted at 78.5 bid, about a five-point drop on the session.

And embattled conglomerate Tyco International spent the day batting away rumors that it was about to file for bankruptcy, even holding a conference call to reassure investors and analysts. The company's chief financial officer, Mark Swartz, asserted that "[t]he rumor we have engaged bankruptcy or reorganization attorneys is irresponsible and false."

Tyco shares at one point were down $3 before firming somewhat off those lows to close down $1.75 (17.50%) at $18.25, on NYSE volume of 144 million shares, more than triple the usual volume.

In the bond pits, Tyco "was going nuts," a trader said. He saw the company's 4.95% notes due 2003 having gone from 85.5 bid/88 offered early in the session, but then, watching the common stock "getting killed," he saw the bonds offered at 85, with no bids. "What's going on? It's being driven by fear right now."

Other Tyco bonds which had been around the 70 bid level were seen around 65, a five point slide.

Tyco moved to calm investor concerns on several fronts - after the market had wound down, it announced the hiring of Edward Breen, the respected president of Motorola Inc., as chairman and chief executive. Breen thus fills positions which had been vacant since the ouster over a month ago of disgraced CEO L. Dennis Kozlowski, who was later indicted on tax evasion and evidence-tampering charges.

The company also was reported to have said on the late-afternoon conference call that it plans to buy back debt worth $2 billion at an overall discount of $200 million.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.