West Coast port intervention little help to Gap; Nextel off; Gazprom sells $500 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 8 - Presidential intervention to temporarily end the West Coast port lockout did little Tuesday to boost the beleaguered bonds of Gap Inc., which had fallen after the week-long labor dispute had brought importing activity to a virtual halt. Elsewhere, Nextel Communications Inc. bonds, which had recently enjoyed a strong run-up, were lower after a major investment bank criticized the company's financial reporting.

On the primary side of the ledger, Russian energy company Gazprom priced a $500 million offering of seven-year notes.

Gap's shares firmed smartly along with those of other retailers after President Bush asked a federal judge to end a 10-day lockout that has idled about 10,000 unionized workers at 29 West Coast ports since Sept. 29, although traders said that the bonds failed to come along for the ride.

Gap stock rose 75 cents (8.48%) to $9.59 in New York Stock Exchange dealings Tuesday on volume of 5.7 million shares, a bit more than the usual five million.

But a trader said that Gap's bonds were about where they had been Monday, or maybe even slightly lower, with the San Francisco-based apparel company's 6.90% notes due 2007 quoted in the 82-84 bid area and its 8.80% notes due 2008 at 93 bid/96 offered, "on no real action."

Meantime, he said Saks Inc.'s 8¼% notes due 2008 were "pretty much not moving" in the same 85.5-88.5 range they were holding on Monday.

That's when retailers' bonds were being quoted lower on fears the possible impact the labor dispute might have on the stores, who get much of their shipments of apparel and other goods made in Asia via ships arriving at West Coast ports like Los Angeles, San Francisco and Seattle.

The government filed court papers on Tuesday formally invoking the 1947 Taft-Hartley labor act, which gives it the right to impose an 80-day "cooling off" period during which the two sides can work toward a solution of the dispute.

The trader, however, opined that "that Taft-Hartley thing isn't going to do a damn thing, because [the union] said [Monday] that 'if you make us go back, we're not going to compromise on security,' which in turn is a nice way of saying 'we're not going to do anything.' So it might take 10 times as long to unload these boats. The backlog is tremendous. It's a step in the right direction - but what they're actually going to do with these ships remains to be seen."

The lockout - which began when the shipping companies closed the 29 California, Oregon and Washington State ports, claiming the dockworkers' union was staging work stoppages as a negotiating tactic - is estimated to be costing the U.S. economy as much as $2 billion per day. In addition to apparel, a large amount of electronic devices made in Japan, South Korea, Taiwan and the Philippines comes into the U.S. via the West Coast ports, as do auto parts and other manufactured goods, as well as fruits and other perishables.

It was feared that if the labor dispute were to go on, Gap and other retailers would be forced to get their merchandise shipments via air freight, which is considerably more expensive than maritime transportation and which would thus adversely affect their financial results.

The trader said that while the retailers were little changed Tuesday, "the supermarkets were getting killed, just getting walloped," including West Coast-based Stater Bros., whose 10¾% notes due 2006 are trading at 98 bid/par offered, well down from recent levels around 103.5 bid/104.5 offered.

He wondered whether the strike was impacting on the California-based food market chain, although he noted that the whole sector seemed to be down "four, five six points over the past week," including non-West Coast operators who don't import a lot of their perishables and other goods from the Orient. He named such companies as Ingles Markets, Marsh, Pathmark, Roundy's and Winn-Dixie as other high yield issuers in the sector whose bonds have recently fallen. "They're all taking it on the chin."

The supermarkets, he said "are in favor, then they kind of get beaten down. They might have been a little rich two, three or four weeks ago, when these guys were just looking at stuff to purchase and the supermarkets were in favor [they are considered by most analysts to be a sound defensive play]. Now they're not, and that's what we've seen happen."

He saw wholesale grocery supplier Fleming Cos. 10 1/8% senior notes trading around the 74.5 bid/76.5 offered range, down from around 80 recently, while its subordinated 9 7/8% and 10 5/8% paper were "very quiet."

And he saw Rite Aid Corp.'s short paper, such as its 7 5/8% notes due 2005, at 74 bid/76 offered, with "a couple of buyers there," while the Camp Hill, Pa.-based drugstore chain operator's longer-dated issues "getting beat up a little bit. They're selling the long stuff and buying the short stuff. People get nervous and want to shorten up their duration."

Outside of retailing and related areas, a trader said that "Ford's weakness was the dramatic story," with the investment-grade-rated (Baa1/BBB-) auto giant's shares and bonds both falling after Credit Suisse First Boston cut its investment rating on automotive sector stocks and specifically lowered its share price target on Ford to $10 from $20.

Ford bonds, in turn, were being quoted in dollar terms, as if they were junk bonds, even though both Moody's Investors Service and Standard & Poor's indicated that Ford was in no immediate danger of losing its investment-grade ratings.

Ford's 6 7/8% notes due 2006 were being quoted at 95 bid/96 offered, the equivalent of a 600 basis-point spread over Treasuries, having widened out from about 515 basis points on Monday.

"That led to weakness in the whole sector," he said, with auto seat maker Lear Corp.'s bonds down half a point and Dura Automotive Systems Inc.'s 9% notes due 2009 down five points at 86.5 bid.

The trader also said that "cable was weaker, although that was in line with the whole market being weaker. You could say that everything was [expletive] today."

He quoted Charter's benchmark 8 5/8% notes due 2009 at 51 bid/52 offered down around three or four points. "Mediacom [Communications Corp.] followed as well."

At another desk, cabler Mediacom's 8½% notes were quoted at 80 bid, and its 7 7/8% notes and 9½% notes were at 79, all unchanged.

Nextel Communications' bonds and shares were lower after J.P. Morgan issued a research note in which it criticized the Reston, Va.-based wireless operator's financial recording practices, saying Nextel was not recognizing a sufficient level of bad debt expenses. Also said J.P. Morgan analyst Thomas Lee, "the company exercises seemingly wide discretion in recognizing churn [i.e. customer turnover] and third, we believe second quarter 2002 results were somewhat artificially enhanced by timing benefits and one-time adjustments."

Nextel disputed J.P. Morgan's assertions in a news release.

Its shares lost 35 cents (4.52%) to close at $7.39, on Nasdaq volume of nearly 44 million shares, up from the usual 29 million-share handle.

Its zero-coupon bonds due 2008 dropped four points to 72.5 bid, while its bellwether 9 3/8% notes due 2009 fell as much as four points during the day, to around 74 bid, before trimming those losses to end down slightly more than a deuce at 75.25 bid/76.25 offered.

A trader noted that Nextel bonds "were probably fit to soften up a little, since they were the only ones recently who hadn't given up much ground."

From a primary perspective, Martin Fridson, chief high yield strategist for Merrill Lynch & Co., gave a qualified nod to market color heard recently which holds that the spread between single-B and double-B credits is relatively compressed at present.

Late in the week of Sept. 30 a sell-side source told Prospect News that the differential between single-Bs and double Bs is narrower than it had been earlier in the year, leading this official to believe that investors are being very extraordinarily credit-specific and perhaps paying comparatively less heed to what the credit rating agencies have to say.

When Prospect News ran this view past Fridson on Tuesday he responded that one factor which needs to be taken in consideration is the distortion caused by bonds coming into high yield from investment-grade.

"In general, investors have to be cautious about interpreting the BB/B spread right now because some large fallen angels are rated BB but have much higher yields than that rating would imply, introducing some distortion into the measurement," Fridson said in a Tuesday email to Prospect News.

Fridson specified that Merrill Lynch's analysis considers the BB/B spread as a function of the spread between the high yield index and Treasuries.

"When risk premiums in general are high, the premium for the incremental risk tends to be high too," he continued. "At (September's) end, the BB/B spread was only 37 percent of the high yield spread versus Treasuries. That's extreme versus the average ratio of 48.5 percent. So by our analysis, single-Bs are too tight versus BBs.

"I don't know that investors are paying more or less attention than usual to the ratings," Fridson commented with regard to the sell-sider's comments. "In general, a lot of relationships are out of line because portfolio managers have money to invest, few new issues are being created, and they are avoiding many of the names on the grounds that they're distressed.

"So portfolio managers must buy what they can where they can."

In primary activity Gazprom priced $500 million of putable notes due Oct. 21, 2009 (B+) at par to yield 10½%, at the wide end of the 10¼%-10½% price talk.

Credit Suisse First Boston and Salomon Smith Barney were joint bookrunners.

The Russian gas company's Regulation S notes will be listed on the Luxembourg exchange.

Also on Tuesday co-managers emerged on FMC Corp.'s $300 million of seven-year senior secured notes (Ba2/BB+) via joint bookrunners Salomon Smith Barney and Banc of America Securities. The co-managers are Wachovia Securities, ABN Amro, RBS and NatCity Investments, according to a syndicate source who added that the deal, set to price Wednesday, is proceeding well.

Price talk of 10½% area was heard Monday on the Philadelphia chemical company's new offering.

Also set to price Wednesday is Amerco Inc.'s deal: $275 million of seven-year senior notes (Ba2/BB+) via Credit Suisse First Boston and Merrill Lynch & Co.

Price talk of 12% area was heard Monday on Amerco's offering.

Finally on Tuesday sell-side sources continued to advise Prospect News that a meaningful buildup on the forward calendar hinges on stability in the equity markets.

"That is our read around here," one source said. "The volatility you're seeing in the stock market right now is causing lots of chop in high yield."

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