Collins & Aikman lower on loss; Chesapeake, Newfield slate drive-by deals

By Paul Deckelman and Paul A. Harris

New York, Aug. 5 - Collins & Aikman Corp. - a name usually not heard trading around very much - was the big loser Monday in an otherwise mostly quiet, featureless high yield market, after it shocked Wall Street with a large and unexpected quarterly loss and reduced guidance.

In the primary market, a pair of energy exploration and production operators - Chesapeake Energy Corp. and Newfield Exploration Co. - were heard to be planning drive-by deals totaling $475 million of new business.

Oklahoma City. Okla.-based energy exploration and production company Chesapeake Energy could price its new $250 million of 10-year senior notes (B1 expected/B+) as early as Tuesday afternoon or Wednesday morning, a syndicate source told Prospect News on Monday.

Salomon Smith Barney and Lehman Brothers are running the books on the drive-by deal.

In a 10-Q filing with the Securities and Exchange Commission on Monday, the company stated it had $1.3 billion of senior notes at June 30, 2002, made up of $800 million principal amount of 8.125% senior notes due 2011, $250.0 million principal amount of 8.375% senior notes due 2008, $107.8 million principal amount of 7.875% senior notes due 2004 and $142.7 million principal amount of 8.5% senior notes due 2012. Chesapeake said it has no scheduled principal payments on any of the senior notes until March 2004, when $107.8 million is due. In the current quarter, the company added, it repurchased and retired $42.2 million of its 7.875% senior notes.

Meanwhile on Monday a syndicate official confirmed that another drive-by deal from Houston E&P Newfield Exploration figures to price on Thursday.

Newfield's $225 million of 10-year notes are senior subordinateds (Ba3/BB-) via bookrunners UBS Warburg and JP Morgan.

Sources familiar with both of the E&P deals characterized them as "defensive" plays that should get done in spite of volatility in the capital markets and wavering investor sentiment.

"Obviously the market itself is not doing that well but I think there's still a good bid out there for energy," commented one official.

Another sell-sider said that while the news in high yield has not been good, there is a case to be made that now is preferable to later with regard to the timing on these drive bys.

"If you don't go this week the market's closed for the rest of August," the source said. "Then you're in September and who knows what's going to happen in September?"

This official painted two post-Labor Day scenarios, both of which would indicate that the wisest course it to bring "defensive" credits now.

"The markets could recover a little and stabilize in September," the source said. "In which case every Tom, Dick and Harry will come into the market right after Labor Day and you'll get jammed.

"Or nothing could happen except that we get further evidence that the economy is going into a double-dip. And there's always Sept. 11 to think about. You could find the market shut.

"So this is a good window of opportunity."

Another subject that came up during conversations with sell-side sources Monday was the eight straight outflows from high-yield mutual funds reported by Arcata, Calif.-based AMG Data Services.

Late last week sources said that AMG reported an outflow of $313 million for the week ending July 31, bringing the sum of the eight successive outflows to $2.307 billion.

In the Deutsche Bank Weekly High Yield Report, high-yield strategists Andrew W. Van Houten and David Bitterman commented: "The ICI monthly fund flow numbers arrived for June 2002 and as expected from the weekly AMG data there were significant outflows. High Yield mutual funds lost close to $1.5 billion during the month and the continuing negative trend in the weekly flows, which had an eighth successive loss, makes it impossible to expect a better figure when the July numbers come in."

The loss was primarily the result of lower sales and negative net exchanges, Van Houten and Bitterman continued. While $440 million was moved from other funds (equity, high grade, money market etc.) into high yield, investors took out a massive $1.4 billion from high yield to invest into other types of funds.

"Once again mutual fund managers were reluctant to counteract this outflow by dipping into their cash reserves and consequently the market has seen a significant amount of net sales," the report stated. "While the liquidity ratio has gone down from 7.2% to 7.1% this decline was nowhere near enough to make up for the net outflows and the percentage of liquid assets held by mutual funds continues to stay at extremely high levels."

The Deutsche Bank strategists compared June 2002 to Sept. 1998 "where we had experienced a serious shake up in market fundamentals," in which both returns and flows "took a beating," similar to that of June.

"June too saw a shaky stock market and numerous nasty surprises from corporate America," the report continued. "During both of these months flows and returns took a beating. Thus it is difficult to tell from the data at hand if investors cashed out of High Yield first leading to a decline in bond prices or if the negative returns on their portfolios forced them to sell.

"While no one seems to have a perfect answer to this question it appears to us that both factors are at work simultaneously. The relatively good news, however, is that negative fund flows seem to have a very weak correlation with the return of the following month. This means that if the outflows stop and we start to see new money coming in we should experience an immediate positive impact on returns."

When the subject of the outflows came up, one sell-side official told Prospect News on Monday that the new money that came in during 11 successive spring and early-summer weeks of inflows, when Warren Buffett among others crowed that the market was poised to outperform, may have vanished in the succession of outflows leading up to the present.

"I think a lot of that money that came in this year, on the heals of Buffett saying he was buying high yield in the spring - I think a lot of that new money is now gone money," the official said

"That $5.5 billion we had going into June has been whacked down to $3 billion and change. I think a lot of that money has gone back out."

The official then began reciting a familiar litany of what he characterized as "bad apples": Adelphia, Global Crossing, WorldCom...

"The guys reporting those outflows had positions in those companies," the official said. "They all got whacked.

"So they're losing money in the portfolio from investments and people are saying 'My return on this is squat,' because they had a big position in WorldCom or Adelphia or Global Crossing, or all of them, and they're sitting it out.

"So they're getting hit on both sides.

"But other than those few bad apples that seemed to ruin the bunch, I think a lot of things are still holding in there."

Finally, late Monday Prospect News heard from a market source that a Rule 144A offering from Chukchansi/Gold Resort & Casino of $135 million seven-year senior notes is headed into the primary market.

According to reports the new casino will be located in Coarsegold, Calif., which is situated in close proximity to Yosemite National Park.

Construction was set to begin in July on a $167 million casino and hotel resort just outside the park border.

The complex will reportedly contain as many as 2,000 one-armed bandits, a 150-seat entertainment lounge, a 500-seat buffet and several restaurants and a 1,600-space parking lot.

Collins & Aikman, a Troy, Michigan-based manufacturer of convertible tops, flooring, trim and other automotive components, reported a second-quarter loss of $20.3 million (29 cents a share) - a far cry from the average analyst forecast of a 26-cent-per-share profit for the quarter.

The loss came about after the company took a non-cash charge of $36.3 million, or 52 cents per share, related to its $133 million repurchase of preferred shares.

Looking ahead, the company predicted full-year earnings of between $15 million and $20 million (20-to-26 cents a share), excluding restructuring and unusual items. That too is a far cry from the 74 cents a share analysts' consensus projection.

The large, unexpected loss weighed heavily on the company's shares, which lost $2.71 (49.09%) on Monday and the bonds were little better, its 11½% notes due 2006 dropping to 88 bid from 92 on Friday.

Elsewhere, "not many big trades transpired today," a trader said, as the market settled into its becalmed "dog days" mode, stilled as much by the usual mid-summer lassitude as by investor unease with the state of the equity markets, which were lower across the board.

Activity in Qwest Communications International debt, he said, "slowed down" ahead of the expected release of quarterly numbers by the problem-plagued Denver-based regional Bell operating company, which provides local and regional service over 14 Western states.

He acknowledged that while activity was sparse, there was "better buying on the RBOC side, so it's difficult to get a handle on that." He quoted Qwest's operating company longer paper in the 67-69 bid range, while its issues maturing in 2004 and 2005 were holding steady in a 75-80 context.

Also among the phone operators, Nextel Communications Inc.'s zero-coupon notes due 2008 were seen down almost three points on the session, to around the 60 bid level.

Charter Communications Holdings Inc. - whose name figured last week in market speculation, sparked by a news report, over whether billionaire founding father Paul Allen would take the St. Louis-based cable company private and/or buy a big chunk of its sizable debt load (an estimated $17 billion) - was in retreat Monday, as there was no further news on a possible Allen acquisition. Meantime, investors steeled themselves for an anticipated second-quarter loss in the 63 cents-per share range, with release of the figures and a conference call set for Tuesday.

Charter's 8 5/8% notes due 2009 were being quoted down almost five points, in light trading, to the 55 bid level. A trader saw the bonds - which had finished Friday at 60 bid - open around 59 bid Monday, then fall as low as 56 offered, and then go home at those lower levels. Charter shares lost 33 cents (11.11%) to end at $2.64.

Other cable sector names likewise were treading water; the bankrupt Adelphia Communications Corp.'s bonds were three points lower, at 25 bid, while Cablevision paper was seen a point to a point-and-a-half lower, its 7 5/8% notes due 2011 ending at 77 bid, off from Friday's 78.5.

Also in the communications constellation, urban-oriented broadcaster Radio One Inc.'s shares plunged $3.37 (23.22%) to $11.08 on Nasdaq volume of 14 million shares, about four times the norm, after Wachovia Securities downgraded its stock to a "buy" from a "strong buy" previously. But the company's 8 7/8% notes due 2011 remained at the same 101 bid levels they've held for the last few months.

The merchant energy sector - which had jumped last week after Williams Cos. successfully lined up a hefty package of new financing and asset sales, only to fall back before the weekend on disappointing results from sector player Calpine Corp. and utility giant PG&E Corp. - was seen lower pretty much across the board.

A trader quoted Williams' holding company senior debt as having "backed up substantially" to levels in the 58-62 bid area "down about three or four points from where they went home, but still well up from where they had been, " in the 30s, before the financing news came through.

Calpine Corp. bonds were described as having lost three points, to close at 42 bid, 44 offered, while AES Corp.'s 8 3/8% notes due 2007 were three points down, at 22.5. However, the latter company's 9 3/8% notes actually firmed half a point, to 42.5 bid.

Elsewhere, the trader said, the retail sector was "very quiet," with Fleming Cos. paper holding at the lower levels to which it had been "beaten down" over the past several sessions, while Fleming's biggest customer, Kmart Corp., currently in Chapter 11, has retreated to levels in the upper 20s-lower 30s from levels a week or so ago in the mid-30s-lower 40s, as recent weak economic numbers seem to be a harbinger of tough times in the chain stores.

In general, he said, "the whole market is softer by a point or two across the board, although depending on what issues you're looking at, you might see bigger drops."

With everyone who is long bonds looking to cut back, "bids are king right now. If you have a bid out there, you have a good opportunity to do something."

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