Junk quiet as stock roller coaster holds spotlight; Dave & Buster's pulled

By Paul Deckelman and Paul A. Harris

New York, July 15 - High yield market participants largely hugged the sidelines Monday, watching the extreme gyrations of the equity markets, which first plunged deeply but later roared back from their lows to recover most of their lost ground.

In the primary, as the week of July 15 got underway the market learned that the deal to finance the buyout of Dave & Buster's which priced at the end of June was pulled as the investors hoping to acquire the company announced a new, fatter offer for the company's shares.

And the only ripple on an otherwise still pond Monday came from Pope & Talbot Inc., which announced a $50 million add-on.

The market learned Monday that D&B Acquisition Sub, Inc. had increased its offer for the outstanding shares of Dave & Buster's, and had decided to pull the $155 million of seven-year senior secured notes which priced on June 28 via UBS Warburg and Deutsche Bank Securities Inc. and were scheduled to close Monday.

"The investors couldn't take on the risk of significant additional interest cost over the holding period, before the deal closes," said company spokesman Todd Fogarty. "And given that it's still dependent on shareholder vote the investors declined to take down the bonds today.

"They will revisit financing down the road"

Information surfaced Monday on an offering by Portland, Ore. pulp and wood products producer Pope & Talbot Inc. The company is bringing a $50 million add-on to its 8 3/8% senior notes due June 1, 2013 (Ba3/BB) via BMO Nesbitt Burns.

The add-on is under the same indenture as the $75 million deal that the company priced in May 1993, according to a syndicate source. The source added that this issue represents the company's first approach to the bond market as a high-yield issuer - at the time of the previous offering Pope & Talbot had investment-grade ratings.

The add-on is expected to price in the middle or late part of the week of July 22.

Price talk of 10½%-10¾% emerged Monday on Evansville, Ind. injection-mold plastic products company Berry Plastics' offering of 10-year senior secured notes (B3/B-). And the deal underwent a refitting as $25 million was taken off the bond portion of Berry's new financing and was added to the bank loan.

"The bank deal was several times oversubscribed and they were able to take pricing down by 25 basis points in the bank market," a syndicate source said, adding that the interest rate on the $330 million eight-year term loan B was reduced to Libor plus 300 basis points from Libor plus 325 basis points, which, the source said, will save the company approximately $1 million per year.

The notes portion of Berry's financing now stands at $250 million. The deal is expected to price Wednesday morning.

Finally a syndicate source told Prospect News that Gristede's Foods, Inc.'s $175 million of 10-year senior notes (B2/B+) via Deutsche Bank Securities Inc. and Jefferies & Co. remains in the market. Gristede's is one of two deals that had been expected to price before the July 4 break and was carried over into the post-holiday market. The other offering, from Workflow Management, was postponed last Friday, sources said.

Price talk of 11%-11¼% had been heard on the Gristede's deal. No timing was disclosed.

Meanwhile a sell-side official told Prospect News on Monday that the high yield market is presently open to higher quality credits. However lower-tier credits seeking to price new deals will find themselves traveling travel a rockier road than their counterparts faced earlier in 2002.

"There is certainly a preference for familiar names right now," the sell-sider said adding that an appetite on the part of investors for defensive credits and defensive sectors is easily discernible at present.

"Sectors such as health care and consumer products - the defensive sectors - are going to do okay," the source added. "However, I think the real small LBOs - the $40 million to $50 million EBITDA credits - are going to be challenged.

"And in many cases it's going to come down to price. I think the risk-return threshold for lower credit-quality paper is definitely going to shift in favor of investors at this point.

"There were highly-leveraged credits that were getting done with a 9% handle six months ago. That is not likely to be repeated."

Back in the secondary sphere, "it was fun watching the [equity] market drop almost 500 points, to close down 45 points," a trader observed ironically. Beyond that, he added, there wasn't much.

"Most people were watching the equity market. Even when our accounts called in, they were talking more about that than anything else."

After being badly battered most of the day, the bellwether Dow Jones Industrial Average recovered 394 points, to only end down 45.34 at 8639.19. If the Intel-led rally had not occurred, the widely-followed market gauge had been poised to end at its lowest level since Sept. 21 - just days after U.S. financial markets were roiled by the Sept. 11 terrorist attacks. Equity markets have recently been steadily eroding on investor concerns about corporate earnings and well-publicized accounting problems at a number of prominent companies.

One such company is Qwest Communications International Inc., whose shares have fallen to around the $2 level from heights around $30 a year ago on concerns over the slowing telecommunications industry, Qwest's own heavy debt load of some $26 billion, and accounting irregularities which have sparked a civil probe by the Securities and Exchange Commission and, more recently, a criminal investigation by the U.S. Attorney's office in Denver, the company's home base. Meanwhile, its once-investment-grade rated bonds are now firmly mired in distressed junk territory.

But while there was a report on the Wall Street Journal's website late Friday - really too late to have much market impact - that new Qwest CEO Richard Notebaert might consider re-stating the telecommer's 2001 results due to the accounting problems, potentially "erasing more than $1 billion in revenue in a bold but potentially risky bid to restore the company's damaged credibility," there was no sign of such a re-statement on Monday; some analysts were quoted in media reports as saying that such a re-statement could probably not be done and would have little market impact until the SEC finishes its scrutiny.

Qwest bonds "look like they mostly hung in there," a trader said, quoting the longer-dated paper of Qwest's US West operating subsidiary remaining around the 66 bid/69 offered level for US West's 7½% notes due 2023 and 6 7/8% notes due 2033. But while the operating company paper has remained pretty strong in the face of the company's troubles - the shortest dated US West paper continues to be quoted in a 90ish context - "the stuff that's really been getting beat up more are the Qwest Capital Funding and the US West Capital" holding company bonds, considered by investors to be a step removed from the company's assets, which are located at the operating company level, and thus potentially worth less should Qwest find itself in a restructuring scenario somewhere down the line.

The trader quoted Qwest Capital Funding's 2009 and 2010 paper, for instance, "just hanging in there" in a 40-45 range, down at least 10 points from their levels a week ago - before Qwest announced that the it was under investigation by the prosecutors.

"Not a lot of trading was going on [Monday]. Most of what you saw on Qwest was bid-wanted - there was not a ton of buyers," he said.

At another desk, an observer quoted Qwest paper "a little better," with its 7% and 7¼% holding company paper due 2009 and 2011, respectively, at 42 bid and 42.5 bid, up from their lows last week around 38, seen right after the announcement of the new investigation, while its 7 3/8% notes due 2031 had climbed to around 40 bid from its prior depths around 40.

Qwest meantime said that it has received at least two bids for all or part of its QwestDex phone-directory publishing business. Qwest gave no details on the bidders or on how much money might be involved, but said it was continuing to negotiate. News media reports however indicated that two bidding groups had emerged, one consisting of private equity concerns Welsh Carson Anderson & Stowe, Carlyle Group, Madison Dearborn Partners and J.P. Morgan Chase's private equity arm. The second group was said to be comprised of Thomas H. Lee Partners, Blackstone Group, Bain Capital and Providence Equity Partners.

Qwest, looking for a large cash infusion to trim its heavy debt load, had indicated earlier this year that it was seeking between $8 billion and $10 billion for the directory unit, although it is thought that the company's recently publicized troubles could render it vulnerable to an eventual lower winning bid. Also serving to possibly depress the value of the asset is the recent postponement of the initial public offering for Yell, the yellow-page business which buyout player Hicks, Muse, Tate, & Furst Inc. and Apex Partners & Co. Ltd. Acquired last year from British Telecommunications plc for about $3 billion.

Also on the telecom front, fellow troubled telecommer WorldCom, Inc. was reported to have not made a total of over $70 million of interest payments due Monday; while there had been some initial reports that the struggling Clinton, Miss.-based long-distance giant had made payments on two debt issues out of three which had payments coming due, those reports were later corrected.

If the payments were not made, WorldCom -weighing a possible Chapter 11 filing - apparently decided to hang onto the cash rather than dole it out to the holders of its 7 3/8% notes due in January 2003 and 2006, and the 8½% notes issued by its Intermedia Communications Inc. unit which come due in January 2008. WorldCom was scheduled to make about $36.9 million in interest payments on each of the 7 3/8% note issues, plus another $5.3 million coupon payment on the Intermedia bonds. It has a 30-day grace period within which to make each interest payment in order to avoid a default, but that may be moot; recently appointed CEO John Sidgmore said last week that WorldCom would decide within three weeks whether to restructure through a bankruptcy filing - probably prepackaged - or whether to go another route in trying to get its finances straightened out.

WorldCom's bonds, a trader said, "softened up at the end of the day" after the news was first reported, and then later retracted, that the coupon payments had been made on the two 7 3/8% issues. He saw them going home offered at 14.5, down a bit from prior levels for the parent company's senior debt in the 14 bid/15 offered area. Another trader agreed that WorldCom had hung in pretty much around the same levels, with the likelihood that the July 15 coupon payments would not be made already pretty much priced in. "If it gets done [the payment is made], you might see it tick upward. Otherwise, he said, it would probably remain in that 14.5-15 context.

At yet another desk, WorldCom had been quoted earlier - when it looked as though it had made the coupon payments on the 7 3/8% notes - as having pushed slightly upward to around 15 bid from 14.5 for its benchmark 7½% notes due 2011. WorldCom unit MCI's bonds, however, were being quoted off a bit, at 42 bid, from prior levels around 45.

Nextel Communications Inc. bonds, which had soared some 10 points Friday on reports that the Broomfield, Colo.-based long-distance telecom operator might release positively revised guidance when it reports its second-quarter numbers on Tuesday morning, were being quoted unchanged to slightly lower, but were still retaining most of those impressive gains. Nextel's benchmark 9 3/8% notes due 2009 were seen down a point at 60 bid/612 offered, but a trader allowed that "they had already run up quite a bit. At another desk, however, the easing a bit more pronounced, with Nextel's zero-coupon notes due 2008 seen off three points to 56 bid.

A trader saw Lucent Technologies Inc. "looking like it was moving up. " The tech sector, he said. "had been getting a bit oversold, and now, people are picking up some cheaper paper." He quoted the Murray Hill, N.J.-based telecom equipment maker's 7¼% notes due 2006 at 70 bid/71 offered, after having moved up from lows around the mid-60s within the past week or so.

SpectraSite Holdings' bonds were quoted down about three points on the session, in the wake of the late-Friday announcement by the Cary, N.C.-based communications antenna tower operator that it had ended its previously announced tender offer for a portion of its five issues of outstanding senior notes and senior discount notes, following a dispute with some of the noteholders over the tender offer that wound up in the courts and that has still not been resolved (see "Tenders and Redemptions" elsewhere in this issue).

SpectraSite's 10¾% senior notes due 2010 dipped to 40 bid from prior levels around 43, while its 12 7/8% senior discount notes due 2010 went from 22 bid to 19 bid.

A trader said that some of the crossover players who dabble in both higher-rated junk bonds and lower rated investment-grade issues have recently been watching the debt of the mighty Ford Motor Co., noting that the venerable giant's debt had widened out to bid levels around 300 to 310 basis points over Treasuries for its 2011 bonds from prior levels in the 265-270 bps over area, seen as late as Friday morning. One rule of thumb sometimes used to gauge whether an issue is heading for junkbondland - apart from its ratings, where Ford is on safe ground-is a spread of 350 basis points over the government paper as a dividing line.

Those kinds of levels, he said, "are where your 4B stuff - your Ba1/BB+ stuff trades. I like to call it the Cadillac of junk" - perhaps in this case, the Lincoln of junk might be a more appropriate metaphor.

"Some of that stuff still trades well," he said - "and they [Ford] are right now playing at these [spread] levels. They sold off a good 35 bps on the offering side just from there they were Friday morning. It got us to look in a different direction."

© 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.