Xerox bonds up on recapitalization news; MSW Energy prices seven-year deal

By Paul Deckelman and Paul A. Harris

New York, June 11 - Xerox Corp. announced plans Wednesday for a $3.1 billion recapitalization that will include the issuance of $1 billion of new seven- and 10-year notes, as well as equity and bank debt; traders said the Stamford, Conn.-based copier and document systems giant's existing bonds were all up around a point or two on the news.

In primary sector activity, although just one transaction was heard to have been completed by the end of Wednesday's session, the new issuance market kept up a vigorous pace through the hump-day of the June 9 week.

Sources reported various developments - announcements, launches, syndicate positions and/or timing - on nine transactions that have either been parked on the forward calendar or are about to take up spaces there.

However eight of those deals were more or less swept into the shadows late Wednesday as Xerox announced it would bring approximately $1 billion of new bonds in seven- and 10-year tranches of senior unsecured notes as part of a $3.1 billion recapitalization involving common shares, converts and new bank debt, all expected to be completed by the close on June 19.

Deutsche Bank Securities Inc. will lead the Stamford, Conn. copying company's bond deal, according to informed sources, with Citigroup, Goldman Sachs, JP Morgan, Merrill Lynch and UBS Warburg each running books. The roadshow starts Friday on the West Coast.

In addition to the notes Xerox also plans to offer 40 million commons shares worth roughly $434 million, $650 million mandatory convertible preferred and a $1 billion credit facility.

Only one deal was priced during Wednesday's session. MSW Energy Holdings LLC and MSW Energy Finance Co., Inc. sold $200 million of seven-year senior secured notes (Ba1/BB) at par to yield 8½%.

Credit Suisse First Boston ran the books on the transaction, with MSW's new notes pricing inside of the 8¾%-9% price talk.

In addition to Xerox, news emerged Wednesday on Alaris Medical Inc.'s $200 million of eight-year senior subordinated notes (B3/B-): the roadshow is set to run June 13-25, with Bear Stearns & Co., Citigroup and UBS Warburg running the books for the San Diego company, which develops solutions for medication safety.

Meanwhile the roadshow runs June 12-20 for Mobile Mini, Inc.'s $150 million of 10-year senior notes. The Tempe, Ariz.-based storage company's deal comes via joint bookrunners Deutsche Bank Securities and CIBC World Markets.

Also Worldspan LP, an Atlanta travel technology resource for travel suppliers, travel agencies, e-commerce sites and corporations, is expected to launch $315 million of eight-year senior notes during the week of June 16, via Lehman Brothers and Deutsche Bank Securities.

And from the eurobond market, premarketing is set to start Thursday for HeidelbergCement AG's €500 million of seven-year senior notes (existing ratings Ba1/BB+). Deutsche Bank Securities, Citigroup and Royal Bank of Scotland are bookrunners. Reds are expected to go out late in the week of June 16, with a roadshow to follow shortly thereafter.

Price talk of 8 7/8%-9 1/8% emerged Wednesday on Ipsco Inc.'s $150 million of 10-year senior notes (Ba3/BB+). The Regina, Saskatchewan-based steel producer's deal is expected to price Friday morning, via bookrunners UBS Warburg and RBC.

And price talk of a yield in the 12% area was heard Wednesday on XM Satellite Radio's $125 million of seven-year senior secured notes (Caa1/CCC+) via Bear Stearns. The company is a Washington, D.C.-based satellite radio service expects to price its deal on Thursday.

In addition to the above, the market also heard a few details on pending offerings from two other prospective issuers.

Citigroup will run the books on an upcoming $450 million senior subordinated notes deal (B3) to help fund Pharma Services' LBO of Quintiles, according to a market source. No timing or structural details were available.

Also American Color Graphics Inc., of Brentwood, Tenn., announced it will bring $280 million of seven-year senior second secured notes, in a press release issued Wednesday. No underwriters or timing were disclosed.

And Nextel Partners, Inc. disclosed on Wednesday that it intends to bring a new Rule 144A offering of $425 million senior notes to finance the tender offer for its 14% senior discount notes due 2009.

Credit Suisse First Boston and Morgan Stanley are the dealer managers of the tender, and are likely to emerge as participants in the bond syndicate, according to a company source who declined to identify the lead bookrunner. The tender offer expires on July 10.

On Tuesday, Prescott Crocker, the Evergreen High Yield Bond Fund manager, told Prospect News that at present the high-yield market is not overpriced and said that yields might be anticipated to tighten to 400 basis points above Treasuries, which he cited as their historic level.

"In an environment where the Fed is determined not to raise interest rates and in which there is tremendous stimulation, I don't think high yield is unduly overpriced," Crocker commented.

However, he specified, as investors venture further out along the risk curve the price the market does not remain cheap. "I think the triple-Cs are overpriced," stated the Evergreen PM. "Those have really been driving the returns in the marketplace. And they really depend upon fundamental change within their balance sheets."

Following up on Crocker's color, Prospect News contacted Martin Fridson, chief executive officer of FridsonVision LLC, on Wednesday, to inquire if, in Fridson's opinion, Crocker had it right.

"That perception is widely shared," Fridson wrote in a Wednesday email to Prospect News. "I hear complaints that institutions are inflating their orders (ordering $20 million in hopes of actually getting $5 million), and if the underwriter doesn't adjust accordingly, the pricing may get too aggressive because of the apparently huge excess demand.

"And some portfolio managers view the 'rescue financing' (issues by companies recently out of bankruptcy or hoping to avert bankruptcy through new financing) as overpriced because they view it as inherently very risky. This is not a universally shared view, but some take the view that if a company emerges from Chapter 11 with the same management team that got it there, it's a bad risk, even if its balance sheet has improved as a result of the reorganization in bankruptcy. It's not unusual for management to stay in place, because the Bankruptcy Code gives the incumbent management first crack at trying to reorganize the company.

"But the claim of overpricing of lower-quality issues is not a simple matter to verify quantitatively," Fridson added. "Determining what's a good quality or a poor quality deal is somewhat subjective, since the quantifiable part (financial ratio analysis) explains only about 55% of the variance in spreads on new issues. So you have to rely on anecdotal evidence, at least if you're talking about a relatively short period of time."

When the new MSW 8½% senior secured notes due 2010 were freed for secondary dealings, traders said they moved up to levels around 102.5 bid, 103.5 offered.

They also said that Tenneco Automotive Inc.'s new 10¼% senior secured notes due 2013, which priced late Tuesday at par and then shot up to around 103 bid from their par issue price, managed to firm up to 104 during Wednesday's session before dropping back to close at 103 bid, 104 offered.

"Most of the focus was on the new issues," a trader said, noting how the new Tenneco notes were "pretty well received" and quoting them north of 103.

The new issues "are trading to a decent premium" over their issue prices - usually around par - he said, adding "at least those that have decent coupons," like the Tenneco 10%-plus.

On the other hand, he said, "you have your deals at 6%, 6½% - and these mostly just stay around the par issue price," the implication being that the yields on these bonds are already so low relative to the junk market's usual standards that nobody is interested in putting money to work there by buying such bonds.

Another trader said the day was "mostly new-issue dominated." In fact, he added "it's been all new issues the last couple of days. The market is firm in the secondary - but dominated by new issues."

Be that as it may, however, the trader said that "the really big news" came out late in the session, when Xerox announced its plans for its $3 billion-plus recapitalization, including the $1 billion bond issue (see separate story on page one of this issue for details).

That, he said, caused the company's existing bonds to "all move up sharply," at least a point or two on the news, which he called "all very positive" for Xerox.

He quoted Xerox's 5½% notes coming due this November and the 5¼% notes maturing in December at 101 bid. Xerox's 5 7/8% notes due 2004 were bid at 101-101.5, while on the longer end of the curve, its 6¾% notes due 2026 were also around the 101 area, while its 8% notes due 2027 were at 89 bid "and looking" [for offers to sell].

Another trader saw Xerox's 9¾% notes due 2009 at 112; its 7.20% notes due 2016 at 98.25 bid, 99.25 offered; its 6.10% notes at 100.625-100.875 bid.

"We've been expecting this Xerox deal for quite a while," he said. "It's been rumored around - I first heard something about it at least a month-and-a-half ago, but nothing ever came of it."

Given the fact that it was not all that long ago that Xerox was beset with all kinds of problems, including accounting issues to be settled with the Securities and Exchange Commission, problems at its Mexican subsidiary, and loss of market-share in its bread-and-butter office machines business, and even talk in some quarters that a bankruptcy filing might be possible - not to mention a sizable debt load, which forced the sale of its profitable equipment leasing business - Xerox's turnaround since then under CEO Anne Mulcahy has been one of the success stories of recent years.

"This latest news is all very positive," the trader said, "very good for them."

At another desk, a market source noted that while the 8% notes due 2027 were up about a point Wednesday - "they had moved up a couple of points yesterday," in apparent anticipation that big news was on the way, especially since there were news reports with some information on the recapitalization package late Tuesday.

Elsewhere, EchoStar Communications Corp. debt was "up a little bit," a trader said, after the Littleton, Colo.-based satellite broadcaster substantially claimed victory in a Florida court case which pitted it against over-the-air broadcasters, who claimed that the satellite company's operations violated the copyright protections on the programs the broadcasters offer.

EchoStar's 9 3/8% notes due 2009 firmed half a point to 108 bid, while its 10 3/8% notes hovered at 111 bid, 112 offered, and its 9 1/8% notes were at 112.5 bid, 113 offered.

EchoStar's shares rose $2.04 (6.13%) to $35.34 on Nasdaq volume of 8.5 million shares, almost triple the norm.

EchoStar said that the court found that the company's current network channel qualification policies "are in substantial compliance with copyright laws."

It further said in a prepared statement that "we are also pleased that the court rejected the outrageous attempt by broadcasters to try to force EchoStar to terminate local and distant network channels to all customers. Importantly, the decision today does not impact any DISH Network customers who are receiving their local ABC, NBC, CBS or FOX network channels by satellite. No damages were awarded by the court."

But the company's win was not a total victory; EchoStar noted with some disappointment that the court "determined certain EchoStar methods are not allowed. Specifically, the court found that when qualifying distant network subscribers, EchoStar may only use one data base and that interference from other broadcast stations cannot be considered."

The bottom line is that EchoStar must re-qualify its distant network channel customers, which the company cautioned "may result in the potential loss of certain distant network channels to less than 10% of EchoStar's customer base."

EchoStar said it will appeal several portions of the court's decision.

Collins & Aikman Products Co.'s 11½% notes due 2006 were heard to have gained at least four points on the session to around 74 bid, although no fresh news was seen on the auto components maker.

And Allegheny Energy Supply Co. LLC's 7.8% notes due 2011 and 8¾% notes due 2012 were quoted at 85.5 bid - unchanged on the session, but up a point from where they were at the beginning of the week, after the merchant energy producer's announcement Tuesday that it had agreed to scale back a $1 billion contract to provide power to the California state water authority, which purchases power under the state's hybrid de-regulation system. While Allegheny warned that the change in the contract could have some impact on its results going forward, on the upside, the accord settles prior state complaints against the power generator.

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