Compton Pete upsizes deal; WorldCom active; investors lose appetite for Aurora Foods

By Paul Deckelman and Paul A. Harris

New York, May 3 - Compton Petroleum Corp. closed out a busy week in the high yield primary market on Friday by slightly upsizing its offering of seven-year senior notes, while D&E Communications was heard stepping in with an upcoming $175 million issue.

In secondary dealings, traders said that most of the focus remained on WorldCom Inc. debt, just as it has pretty much been for the past week or so. Aurora Foods Inc. bonds were sharply lower, after the name-brand food products company reported a big loss in the latest quarter versus a year-ago profit, and saw cash-flow tumble sharply.

The week of April 29 came to a close Friday with a comparatively subdued level of business. One new deal, from D&E Communications, was heard to have started its roadshow, while the high yield odyssey of Canadian oil and natural gas company came to a satisfactory conclusion as terms were heard on Compton Petroleum.

Meanwhile on Friday news circulated around the market that $346.1 million had flowed into high-yield mutual funds for the week ending May 1, as reported by AMG Data Services. That marks the 11th straight week of inflows. Those numbers are considered by many in the market to be a reliable gauge of overall liquidity trends. In the previous week, $310.913 million of net inflows was recorded. So far this year, with inflows having been seen in 15 out of 18 weeks, inflows total a robust $5.575 billion - leaving market players with the not unpleasant task of finding places to put all of that liquidity to work.

Prescott B. Crocker, portfolio manager of the Evergreen High Yield Bond Fund, told Prospect News on Friday the string of inflows reflects a perception of relative stability in the present high-yield market.

"Investors are getting the word that relative to most other capital markets this is becoming a very low-risk market, which basically reflects the fact that everything that is going to blow up has already blown up," Crocker said.

"Blow-ups go through cycles. So you should have a reduced number of blow-ups in the market. And you probably should have some surprise recoveries. As the credit markets get freer, as easy money percolates through the system you will probably have more recoveries than blow-ups. Plus you've got the market itself which is still relatively inexpensive from a historical measurement.

"I think it's an easy investment and I'm not surprised that money continues to come in."

When Prospect News asked Crocker if the end of these inflows was in sight, his response was, not necessarily.

"I guess it will continue to come in until one of three things happens:

"One, the stock market reverses and becomes a convincing, attractive place to be. Then people will hold high yield to a higher standard of return.

"Two - and this is some way out - the yield curve starts to reverse and you have short interest rates rise, or the whole yield curve rises; in other words bonds go down in price reflecting the re-flation, or the re-inflation of the economy, or...

"Three, the whole expectation for the economic recovery dilutes itself into an expectation for a renewed recession-dash-deflation. The indicators against that are the trends in the dollar, which are rolling over. Notice how well gold prices are doing reflecting that. That means that the risks are moving from deflation to ultimate inflation.

"Inflation's not too bad for high yield bonds until it gets really bad," the Evergreen High Yield Bond Fund manager added. "With short rates down here around 2½% for six-month CDs and probably no more than 3% for a year-and-a-half CD, it's pretty easy to convince a lot of people to go into high yield, particularly when you can say 'Look, during the past six months these bonds have returned 9½%."

Meanwhile, the only deal that priced Friday in the high yield primary was Compton Petroleum Corp.'s upsized offering of $165 million, increased from $150 million. The offering of seven-year senior unsecured notes (B2/B) priced at 98.273 to yield 10¼% according to a syndicate source.

Lehman Brothers, BMO Nesbitt Burns, Scotia Capital and TD Securities were joint bookrunners on the deal.

Compton had been in the market back in late January with a 10-year senior subordinated deal that was ultimately pulled. This one, according to an informed source, went much more satisfactorily.

Compton joins a slew of oil and gas exploration and production deals that have come into the high yield primary during the past 30 days. Most notable among them are Cross Timbers and Pioneer Natural Resources, both of which priced during the last two weeks of April to yield 7½%.

Evergreen's Crocker specified that he had not played either of those E&P deals but he proceeded to outline a somewhat grim rationale for owning these energy bonds.

"What you want as a high yield investor is to build yourself a position which is going to benefit from the inevitable Iraqi war," Crocker said.

"There's no question in my mind that energy prices will spike at some point in time in the next 16 months," he added. "I think a lot of people say you'll get this inevitable war within the next year and when that happens there will be a terrible period of uncertainty. You'll see tremendous returns from the oil sector.

"It will re-value the whole sector, particularly in the two months leading up to the war. That's when you want to sell it."

Asked how high he thought a barrel of crude oil could possibly price at such a spike, Crocker said: "Forty-five bucks would be a do-able high."

Since he specified that he was not playing the energy credits, Prospect News inquired of Crocker what high yield products were finding their way into his shopping basket.

"We've had trouble, really, finding a lot of deals that are satisfactory," was his response. "A lot of this stuff has been too terribly priced.

"We're more focused on the secondary market to get ourselves reinvested," he added. "We recently bought Nextel and Nextel Partners in the secondary market, for example, because it's hard to get a full position of 10-15 million bonds in the primary market."

New product did appear in the primary market on Friday as Ephrata, Pa. integrated communications services provider D&E Communications hit the road with $175 million of 10-year senior notes (B2), via Jefferies & Co., according to a syndicate source. That deal is expected to price May 16.

Finally on Friday price talk of 11¼%-11½% was heard on Wise Alloys, LLC/Wise Finance Corp.'s $150 million of seven-year senior secured notes (B3/B+), which are expected to price Tuesday afternoon via Merrill Lynch & Co.

In addition to Wise, the market anticipates hearing terms emerge on at least three other deals during the week of May 6: Western Resources, Inc.'s $750 million via Salomon Smith Barney, Giant Industries, Inc.'s $200 million via Banc of America Securities and Trump Casino Holdings, LLC/Trump Casino Funding, Inc.'s $470 million via Deutsche Bank Securities for a total of $1.57 billion.

In secondary activity, investors just couldn't stomach Aurora Foods, after the St. Louis-based producer and marketer of such well-known brands as Duncan Hines baking mixes, Log Cabin syrup, Mrs. Paul's frozen seafood products and Aunt Jemima breakfast food products, after it posted a first-quarter loss of $107.8 million ($1.51 per share) Thursday, versus a year-ago profit of $7.8 million (11 cents per share).

Most of the loss was attributable to a charge of $94.9 million ($1.32 per share) to recognize the impairment in the value of its trade names in accordance with new accounting guidelines. EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of its cash flow generation potential and ability to service debt) sank 62% to $13.2 million from $35 million in the year-ago quarter.

Later Thursday, the company announced plans to close its Lender's frozen bagel factory in West Seneca, N.Y. with the loss of 204 jobs, a move which the company hopes to improve EBITDA by some $8 million annually starting next year.

In Friday's bond market dealings, though, Aurora's bonds were "down substantially," one market source said, pegging its 9 7/8% notes due 2007 down more than 20 points from its previous par levels at 79 bid. Its 8¾% notes due 2008 tumbled to 75 bid from prior levels at 95. Aurora's shares lost $1.53 (33.19%) to $3.08 in New York Stock Exchange trading.

Elsewhere, WorldCom bonds continued to dominate the attentions of many market players. "It's been the hot name for most of the past two weeks," one trader said, "and [Friday] it was just more WorldCom, WorldCom, WorldCom. Nothing else seemed to be trading."

He said that price levels were "pretty flat [Friday], with no real excitement, though there was lots of volume." Over the past few sessions, he continued, "we've seen more volatility than we saw [Friday], but this was still a pretty high-volume day in the name."

While price levels on WorldCom were essentially little changed for most of the session, the trader said, "they softened toward the end of the day, as people were trying to unload bonds ahead of the weekend." But on the whole, he surmised, prices were essentially stable.

The Clinton, Miss. telecommunications giant's bonds have fallen to distressed junk-bond levels - some dipping as low as the 40s - despite their nominally investment-grade rating (Baa2/BBB), amid investor concern over the company's crumbling stock price and the challenges it faces making enough money in a sagging telecom industry to continue to afford its giant-sized debt load, including $29 billion of bonds. Also ratcheting up the angst level for debt holders has been the threat of further ratings downgrades, perhaps even into real junk bond status, scrutiny of the company by the Securities and Exchange Commission and organizational turmoil in the wake of the ouster this past week of the man who built the company via massive acquisitions, Bernard J. Ebbers - who resigned from his CEO post under pressure from a board that had lost confidence in him.

"There was not heck of a lot going on [Friday]," another trader opined, except for trading in WorldCom, "watching that paper spin around a little bit. Other names were really quiet, while WorldCom continues to be the focus."

He quoted WorldCom's debt as "pretty stable, maybe a little soft at the end of the day," with the company's benchmark 7½% notes due 2011 as having opened Friday morning around Thursday's closing level of 45.5 bid/46.5 offered; by the end of the day, he said, it was "down a point or so" to around the 44 bid/45 offered level, with a "decent" activity level.

As for other credits, though, "it was really quiet, whether it was retail credits like Kmart or Saks, or telecoms, like Williams [Communications Group] or Level 3 or Globalstars, there really wasn't much activity. WorldCom continues to be the focus."

One other name which he did see a little activity in was Xerox Corp., whose bonds had initially traded off on Thursday in response to the multiple-notch ratings downgrade announced late Wednesday by Moody's Investors Service but then bounced off their day's lows to come most of the way back by Thursday's close. In Friday's dealings, he said, Xerox's 9¾% notes due 2009, which had closed Thursday around 89.5 bid/90.5 offered, opened softer, around 87 bid/88 offered, and then proceeded to fall as low as 84 bid/86 offered later in the morning. By the end of the day, the bonds had crept back up to around their opening levels. Xerox's 5 7/8% notes, meantime, "seems to be one of the issues that more people are looking for, for some reason"; he quoted it going home at 87 bid, with no offered levels, a sign holders are not willing to part with the bonds at current levels.

At another desk, Xerox's 9¾% bonds were described as having "widened out a little more on the day," quoted late in the session at 88.5 bid, off from their opening level at 90.5 bid, but up from lows in the 86-87 vicinity.

Adelphia Communications Corp. debt was heard reeling after Moody's downgraded the ratings on $19 billion of the troubled Coudersport, Pa.-based cable television operator's debt. Included in the downgrade was a drop in the ratings on Adelphia's senior unsecured notes (and Frontier Vision paper absorbed by Adelphia when it bought Frontier) to B3 from B2.

That downgrade followed by a day Adelphia's announcement that it would move some $1.6 billion of off-balance sheet debt onto its balance sheet, which, along with delays in reporting its financial results, could cause it to default on some credit agreement provisions.

Adelphia's 10 7/8% notes due 2010 were being quoted down around a point at 86 bid, while its 10 ¼% notes due 2011 had also lost a point, to 84.

Tesoro Petroleum - whose bonds and shares had slid Thursday after the San Antonio, Texas-based energy refiner reported a first-quarter net loss versus a year-earlier profit and then warned that it might not be able to complete its planned $1.13 billion acquisition of a San Francisco-area refinery from Valero Energy Inc. - continued to ease on Friday; its 9 5/8% senior notes, which had traded above par before Tesoro's Wednesday announcement, and which had then dropped into the mid-90s in response, were quoted going home Friday down around three points, at 91 bid.

On the upside, a market source said, Iasis Healthcare Corp. bonds were quoted up five points on robust fiscal second-quarter results, which included record net earnings and EBITDA. He saw the Franklin, Tenn.-based acute care hospital operator's 13% notes due 2009 jumping to 106 bid from 101 earlier. The company reported net revenues for the quarter ended March 31 of $244.4 million, up from $232.6 million a year ago; net earnings of $12.7 million, up from $5 million a year earlier; and EBITDA of $38.2 million, up from $35.6 million.

Also on the upside, LIN TV Corp.'s 8 3/8% notes due 2008 were a point better at 102 bid, even as the Providence, R.I. based television station group owner's shares jumped to $25, up $3 (13.64%) from the $22 per share issue price of Thursday's successful initial public offering, which raised $374 million.

Apart from selected "story" names though, market activity overall was muted, one observer commented, noting that "nothing earthshattering was going on." On Fridays, he added, "business winds down only because they get beat up all week, and they don't want to do it on Fridays too," and nobody wants to be too long on anything heading into the weekend. "So you may get some trading in the morning, but by late afternoon, its pretty quiet."

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