Junk muted as stocks swoon; Venture slides, Adelphia stable; Tyco tumbles on CEO ouster

By Paul Deckelman and Paul A. Harris

New York, June 3 - Wall Street kicked off the new month by going into a severe nosedive Monday, souring sentiment in the junk bond market and forcing most players to the sidelines; meantime, Venture Holdings Corp. LLC's bonds were sliding for a second straight session on indications of trouble in its European operations, while beleaguered Adelphia Communications Corp. - which survived the weekend without filing for Chapter 11 - was heard little changed.

In the primary market, H&E Equipment Services priced a downsized $200 million offering of 10-year bonds; AK Steel - one of the few steel junkers to actually be in decent financial shape - was heard by market sources preparing to take a $550 million 10-year deal on the road starting Tuesday, and Metaldyne Corp. was understood to be readying a $300 million 10-year issue.

One sell-side contact whispered in a scarcely audible voice, Monday, that the forward calendar may be getting a just "a little packed." Indeed, 15 U.S.-dollar denominated straight-up high-yield deals (excluding split-rated and euro offerings) are positioned on the forward calendar as business likely to be transacted before the end of July, for a total of $3.515 billion.

Monday's primary market activity saw an additional $850 million climb aboard.

AK Steel announced it would bring $550 million of 10-year senior notes (B1/BB) with a roadshow starting Tuesday. The company will use proceeds to refinance its $544 million of outstanding 9 1/8% notes due in 2006, extending the maturity for another six years.

Since Gary, Ind.-based mini-mill firm Steel Dynamics priced $200 million on March 14, sources have commented to Prospect News that the US steel tarriffs presently in place figure to provide more aid to the mini-mills than to the integrated operations such as AK Steel.

Indeed, in a release on Monday Standard & Poor's seemed to spell that scenario out: "Recent tariffs implemented by the U.S. government's section 201 investigation have led to lower supply levels, enabling the industry to implement needed price increases," the report stated. "Because only 25% of AK's sales (mostly cold-rolled steel) are tied to the spot market, the company is expected to benefit only slightly from these price increases during 2002."

Credit Suisse First Boston will run the books on AK Steel.

Monday also brought news of an offering from Plymouth, Mich. automotive industry metal parts supplier Metaldyne Corp. Its $300 million of senior subordinated notes due 2012 will go on the road during the week of June 3 and it will come to market via joint bookrunners Credit Suisse First Boston, JP Morgan and Deutsche Bank Securities Inc.

Terms emerged Monday on the retooled H&E Equipment Services, Inc. deal, which had been downsized and restructured on May 31.

The firm priced $200 million (decreased from $275 million) of senior secured second priority notes due June 15, 2012 (B3/B) at 99.263 to yield 11¼%, wide of the 11% area price talk.

Late Monday Prospect News learned that the $50 million senior subordinated mezzanine tranche that was also announced as part of the May 31 restructuring did not price. That transaction remains pending, according to a source, who characterized it as near-term business.

"It had a little trouble, there," commented one sell-side source who was not on the H&E deal. "I think folks were a little worried about the asset coverage."

Price talk of 102-103 emerged Monday on TransDigm Inc.'s $75 million add-on to its 10 3/8% senior subordinated notes due Dec. 1, 2008 (B3/B-), which is expected to price Tuesday via joint bookrunners Deutsche Bank Securities and Credit Suisse First Boston.

In addition to TransDigm the market anticipates hearing terms Tuesday on the deal from Dallas upscale lodging firm Wyndham International, Inc. Its $750 million eight-year senior secured notes (Caa1/B-) via joint bookrunners JP Morgan and Bear Stearns were initially expected to price late in the week of May 27.

David Eshnaur, portfolio manager of the Buffalo High Yield Fund, told Prospect News that he attended the Wyndham roadshow, although Eshnaur stipulated that he had not reached a decision on the credit.

The portfolio manager attributed Wyndham's credit rating (Caa1/B-) to its leverage situation.

"They need to sell some assets and pay some more debt down," Eshnaur commented. "They're saying they have 55 properties they want to sell."

Last Thursday Loomis Sayles vice president and portfolio manager Kathleen Gaffney told Prospect News that the firm's high yield accounts were currently "running somewhere close to 20%-25% in triple-Bs."

Eshnaur, who takes pains to reiterate the caution exercised by the Buffalo High Yield Fund when assessing business on the primary market forward calendar, told Prospect News that the Buffalo, too, has been running a significant amount of high grade.

"I've been buying higher quality stuff for a year and a half now," Eshnaur said.

"We're running 27% high grade," he continued, adding that the position has steadily gone up over the past 18 months.

"A year ago we got some bargains on the BBBs. We bought some Chrysler. We bought some Ford. We bought some Cummings Engine - those type-names."

In the secondary market, bond trading took a back seat to watching the stock market swoon, which became particularly pronounced toward the end of the trading day as the major indices punched below support zones and sell programs kicked in.

The Dow Jones Industrial Average fell 215.46 points (2.2%), to close at 9709.79, its lowest finish since Feb. 7. The Nasdaq Composite Index dropped 53.17 (3.3%) to 1562.56, while the S&P 500 dropped 26.46 (2.5%) to its lowest close since Oct. 1, at 1040.68.

"What an ugly end," a bond trader noted, "but then, look at the news - you had a suicide this weekend (El Paso Corp. Treasurer Charles D. Rice, whom Houston police say shot himself), and you had a major CEO forced out" (Tyco International Ltd. Chief Dennis Kozlowski resigned on news of New York state probe into his tax payments).

The shares of both companies were sharply lower, while their nominally investment-grade bonds widened out markedly.

"The start of the day was not so bad," the trader said, noting that WorldCom Inc. and Qwest Communications International Inc. paper "looked like they were going continue where Friday left off." The bonds of both formerly investment-grade telephone giants had risen in what one trader called "volatile" dealings on Friday.

He saw WorldCom's 7½% notes due 2011 starting out Monday at 49.5 bid/50.5 offered, around Friday's closing levels, but by the day's end, they had eroded down to 48.25 bid/49.25 offered, a point-and-a quarter lower on the session. WorldCom's 7 7/8% notes due 2002 opened around 84.5 bid/85.5 offered, but closed a point below that, so "even the short paper was off a point."

As for Qwest, its 6¼% notes due 2005 ended at 83 bid/84 offered, half a point down, as was most of the company's other paper.

The trader pointed out that even companies with no recent major negative developments (both Qwest and WorldCom had recently tumbled into junkbondland from investment grade) were easier; Nextel Communications Inc.'s bellwether 9 3/8% notes due 2009 lost a point to 64.5 bid/65.5 offered.

In the current investment environment, he declared, "there's just no reason to buy."

Another trader said of the stock market's last-hour swoon, which accounted for much of the day's losses, "sure, it'll kill the [junk market's] opening [Tuesday], but [Monday] was a non-event. Most issues were quiet, dead."

That even included Adelphia, whose 9 7/8% notes due 2005 were seen essentially unchanged at 70 bid/72 offered, he said. "There wasn't much happening there" - at least not in terms of bond activity.

At another desk, Adelphia's debt was seen about a point higher, in what a trader termed "lackluster dealings" as the market attempts to sort out the latest development in the sagging company's saga. Its 10 7/8% notes were quoted at 74 bid.

Over the weekend, the Coudersport, Pa.-based cable-TV system operator's board met and reportedly decided that it would look at all options, including asset sales and a possible bankruptcy filing. Adelphia had been reported in talks last week with Charter Communications on a large asset sale to raise money for its short-term cash needs, but that possible deal - which drew fire from newly appointed director Leonard Tow and several other sizeable holders - did not come to fruition, with Charter and Adelphia apparently failing to come to a meeting of the minds on a proper valuation for the latter's subscribers.

Adelphia was formally de-listed Monday by the Nasdaq, trading in its ADLAE symbol (recently assigned in place of its familiar ADLAC) for a pink-sheet listing under ADELA. That de-listing leaves the company vulnerable since it is required to offer to buy back $1.4 billion of convertible debt.

A trader noted that the 6% convertible notes were being offered at 40¼% and its 3¼% converts being offered at 41 - a sign that holders assume that Adelphia has no way of coming up with the full $1.4 billion it would need to redeem the notes and is likely to opt for a bankruptcy filing (Monday's Wall Street Journal reported that at Saturday's board meeting, the directors heard an informational presentation from a bankruptcy lawyer with Wilkie, Farr & Galllagher, although no decision was made whether or not to file).

"It looks like they've discounted the likelihood that this company is going to get its act together and free up liquidity any time soon," he opined. "People are trading these things at Chapter 11-type numbers. It's 'what's my 20% to 25% return for vultures [investors] doing the senior debt and what's a hit-it-out-of-the-park number for converts?' People have done that kind of homework."

Also in the communications arena, TimeWarner Telecom Inc. Bonds were higher, with one trader quoting its bonds as having pushed up to the 57 bid/58 area from Friday levels around 53 bid/54 offered, while a second quoted its 9¾% notes having risen a more conservative point-and-a-half to around the 55 bid area. At the same time, the Colorado-based facilities-based telecommer's shares jumped 32 cents (14.16%) to $2.38 on the Nasdaq, after financial giant Citigroup acquired an 8.4% stake in the company, according to a filing with the Securities and Exchange Commission.

On the downside, AT&T Canada bonds - which had pushed higher on Friday - "got weaker" Monday as "a size seller" came in, a trader said, quoting its 7.65% bellwether issue dropping back to 13.5 bid from 15 offered late Friday. Trading in the credit, he said was "volatile - because the arbs (arbitrageurs) came in and shorted the hell out of it." The Canadian based telecom operator's bonds have fallen into the teens on uncertainty over whether the company's corporate parent - U.S. telephone giant AT&T Corp. - would walk away from the debt, even as it fulfills a pledge to buy the 69% of the company it doesn't currently own. Ma Bell had indicated as much in recent statements.

Outside of the communications area, the bonds of Venture Holdings Corp., a Fraser, Mich.-based maker of plastic interior and exterior components for the automotive industry, fell badly for a second consecutive session on Monday, pushed down, as they had been on Friday, by unconfirmed market rumors that its German unit might be headed for bankruptcy.

Venture's 12% notes due 2009 dropped to 65 bid from the high 70s, while its 9½% notes due 2005 and 11% notes due 2007 moved down to 71 bid/72 offered from 80. Each of the latter two issues had an interest payment due June 1; there was no official word as to whether those coupons had been paid, but both were quoted by the trader as trading flat, or without their accrued interest.

Casino issues were generally easier, particularly those who have any kind of market exposure in Illinois, where the state legislature voted to sharply hike taxes on gaming revenues, with the top rate going to 50% from 35%. The bill awaits the signature of Gov. George Ryan, who was expressed support for the idea of raising the gaming taxes as a source of new state revenues.

That caused the shares of Argosy Gaming Co. - which has two casinos in Illinois - to plummet $5.16 (15%) in New York Stock Exchange dealings, to $29.24. Argosy's 9% notes dropped two points Monday to 103.25 bid, while its 10¾% notes due 110, which had been bid on Friday at 110, to be offered at that level Monday, with no bids. Another trader heard the Argosy bonds as low as 108 bid.

Another big loser was Hollywood Casino Corp., which operates one casino in the state. Its American Stock Exchange shares fell $2.13 (16.4%) to $10.90, while its 11 ¼% notes due 2007 were down two points, to 108. While Boyd Casino's shares fell $2.11 (14.44%) in NYSE dealings to $12.50, Boyd's 9¼% notes were unchanged at 103 and its 9½% notes stable at 104.

Among troubled investment-grade companies whose bonds have attracted the notice of junk players lately, Tyco's fell notably on Monday, even as its NYSE shares swooned $5.90 (26.88%) to $16.05, on the news of CEO Kozlowski's abrupt resignation. Volume of 127 million was six times normal.

A bond trader - noting that the departed CEO was being probed by the Manhattan District Attorney's office for his alleged failure to pay state sales taxes - remarked that "if this is how he handles his own finances, investors can't have too much confidence in his handling of company dealings."

Tyco was already reeling from Kozlowski's flip-flop on his previously announced grand strategy to break the conglomerate into four parts, which was later abandoned as "a mistake".

Tyco's 6¾% notes due 2004 went down to 88 bid from 89.5 on Friday. Its 9½% notes due 2022 went from 81.5 bid to 75 and its 8% notes due 2023 lost almost four points to 74. The 6½% notes due 2007 were three points lower, at 79.

The bonds of El Paso Corp. Were heard to have widened out in the wake of the suicide of treasurer Rice, its 7% notes due 2011 widening to a bid level of 285 basis points over Treasuries from 255 basis points over on Friday.

It was not immediately believed that Rice's death was related to matters at the company, which like many energy producers and power traders, has seen its shares and bonds retreat amid the scrutiny being focused on the rash of bogus "round-trip trades" recently discovered in the industry, in which some El Paso rivals have been implicated. Instead, it was believed his suicide may have been linked to health problems.

El Paso shares, however, fell $3.70 (14.42%) to $21.95 in heavy NYSE trading.

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