Directory names continue slide amid generally heavy market; casinos off; GM up ahead of quarterly results

By Paul Deckelman and Paul A. Harris

New York, Feb. 11 - Monday's session brought no relief for investors in the suddenly troubled bonds of such telephone-directory publishers as Idearc Inc., R.H. Donnelley Corp. and the latter's subsidiary, Dex Media Inc. All of them continued to slide in the wake of last week's disappointing earnings results from Dallas-based Idearc as well as more generalized fears that the current economic slowdown - which is expected to get worse before it gets better - is likely to continue to play havoc with companies like these which depend on advertising. Standard & Poor's issued negative assessments on both Idearc and Donnelley on Monday, adding further fuel to the downside fires.

The phone directory fall came amid a backdrop of a generally heavier market, taking its cue from the equity markets, at least in the early going when stocks pushed lower, although the latter turned upward later in the day; while there were some bids emerging in junk-bond land late in the day, most indicators still ended the day pointing southward.

Apart from the directory publishers, another recognizable grouping finding itself on the wrong side of many trades was the gaming sector, with names such as Boyd Gaming Inc., MGM Mirage and Trump Entertainment Resorts Inc. seen lower in the wake of bad industry news - a fall off in January revenues in Atlantic City, where those companies operate - as well as generalized fears that the worsening economy could cut into this most discretionary of consumer spending businesses. That also hurt the bonds of such non-Atlantic City operators as Isle of Capri Casinos Inc. and Station Casinos Inc.

Healthcare names like HCA Inc., Community Health Systems Inc. and Tenet Healthcare Corp. were seen lower.

On the upside, General Motors Corp. bonds were seen better, in line with a surge in the giant automobile maker's shares ahead of Tuesday's scheduled release of fourth-quarter numbers - helped by an analyst's suggestion that its automotive operations may have done better than expected. That momentum also helped to tow the bonds of domestic arch-rival Ford Motor Co. higher as well.

Sources marked junk ½ to 5/8 point lower on the day.

Yet, as dreary as the news has been in the high yield market, sources advise Prospect News that the leveraged loan market is presently in significantly worse shape.

Hence market observers closely noted Monday's extensive rejiggering of Axcan Pharma's $750 million LBO debt financing, with some sources suggesting that the Axcan changes could be a harbinger of things to come in the leveraged markets.

Market indicators are negative

Continuing the decidedly negative trend seen last week, a trader said that the widely followed CDX index of junk market performance fell about another ½ point to 87½ bid, 88 offered, while the KDP High Yield Daily Index tumbled another 0.40 to 74.26 and its yield widened out by 12 basis points to 9.59%.

In the broader market, declining issues once again topped advancers by around a five-to-three margin, for a third consecutive session. Overall activity, reflected in dollar volumes, fell by nearly 19% from Friday's levels.

Difficult market conditions persist

A trader called Monday's session "a weird day."

Another said that the market was "the same as the last week or so - the market was just very heavy. It seemed like toward the end of the day, late, that bids started to fill in at lower levels. Even Idearc - which has just been getting crushed - kind of stabilized down at that 72.5-73.5 zip code" - still well down from where it had begun the day.

He said "it seemed like when stocks kind of turned around, our market sort of firmed up."

However, he cautioned that "the problem is that the bank debt market is so cheap relative to everything else that the bid for secondary high yield - particularly on names that are far down in the capital structure, like subordinated notes or anything [rated] CCC - there's just no bid for."

With those kind of market conditions, "if it comes in for sale, it moves down points - and God forbid if you have bad numbers," he added, leaving unsaid the logical conclusion - that the bonds could in that case tumble significantly.

He said that at his shop, "we did have a couple of offer-wanted lists out the other day, and while stuff did trade at reasonably good levels, the market just kind of blew right through all of that." He said the buzz was that there were "a couple of big CDO unwinds last week, and just a lot of ancillary-type selling that's pushed things down."

Against such a backdrop, the trader said, "we'll have to just wait and see what develops here - but the market has been very quiet [lately], with flows down to a trickle. It's been very difficult to get anyone to pull the trigger on anything. The Street is very light, position-wise, I think, and not looking to take on [additional] paper. So anyone who is a seller is trying to work stuff - but it's difficult. Nobody cares, at this point."

More angst for Idearc, Donnelley

For yet another day, investors let their fingers do the walking away from the bonds of rival phone directory publishers Idearc and R.H. Donnelley.

A trader saw Idearc's 8% notes due 2016 at 72.5 bid, 73 offered, "down almost 5 points on the day," noting that a few days ago, the paper was in the mid-80s and had been trading above 90 at the beginning of the month, so "that's really ugly."

On the other hand, he did not see Donnelley's paper, such as its 6 7/8% notes due 2013, which had been falling badly over the last few sessions along with Idearc's.

A market source saw the Idearc 8s down 2 points at 73, while at another desk a trader opined that Idearc may have finally found a bottom down around that 72.5ish context - although he qualified that, saying "well, today they did. We'll see tomorrow [Tuesday]." At current levels, "they're going to start to look somewhat compelling down here."

R.H. Donnelly's bonds have been following Idearc's down over the last few sessions, since the Cary, N.C.-based company is affected by pretty much the same industry dynamics as Idearc.

The second trader said that its 8 7/8% notes due 2016 were languishing around 72.5 bid, 73.5 offered, well down from levels Friday around 77 bid, 78 offered, "and they were in the 80s before that," so the bonds are down 10 points in a little over a week. The Idearc bonds "are down more, like 15 points or 17 points" in that time, "a mighty big move."

Donnelley, he said "had already been getting crushed, and Idearc, after their numbers came out, just came unglued." Actually, the latter bonds had been falling in the session or two before the release of those fourth-quarter figures - but they fell even further on Thursday, when the numbers actually were released.

Idearc reported that fourth-quarter earnings totaled $100 million, or 68 cents a share, on revenue of $787 million, down from $107 million or 73 cents a share on revenue of $801 million a year earlier. While the per-share earnings actually beat Wall Street expectations by about a nickel, investors ignored that to instead focus on the $4 million gap between analysts' revenue projections and the actual sales figures. Not helping matters was the warning by company executives during their conference call Thursday that "cyclical economic headwinds" would continue to rein in revenues this year.

The bonds again fell on Friday, as the market digested all of that, and the slide continued on Monday.

Also lower were the bonds of Dex Media, now a subsidiary of Donnelley. Its 8% notes due 2013 were seen 2 points lower at 83.

During the session, Standard & Poor's, while affirming Idearc's current ratings at BB, lowered its outlook on the company to "negative" from "stable" previously. Analyst Emile Courtney said in a statement announcing the outlook change that the move reflected S&P's concerns that "the slowing economy's negative impact on revenue and earnings before interest, taxes, depreciation and amortization at Idearc will persist into 2008."

The analyst noted that revenue and EBITDA declined in the December quarter, at a time when Idearc has limited flexibility in its leverage profile, with a total debt-to-EBITDA ratio of about 6 times. S&P cautioned that the current rating reflects the company's highly leveraged financial profile, the mature nature of its incumbent markets and a growth strategy that includes acquisitions.

S&P also revised the outlook on R.H. Donnelley to "negative" from "stable," while affirming its BB- corporate credit rating.

The agency said that the downward revision reflects its concerns that the slowing economy could hurt operating performance at a time of limited flexibility in its leverage profile, which stood at around seven times total debt-to-EBITDA last fall.

S&P warned that the current rating reflects the company's substantial consolidated debt levels resulting from major acquisitions over the past several years, including Dex Media, although those negatives are somewhat offset by its incumbent market positions, stable cash flow generation and geographic and customer diversity.

HCA bonds not feeling so healthy

The phone directory publishers weren't the only ones who were being pushed around by less-than-stellar quarterly results. A trader said that HCA Inc.'s quarterly figures came out last week, and while the Nashville-based hospital operator's numbers "were OK, all of their metrics, like bad-debt expense [from uninsured patients who couldn't pay their bills] and number of beds, all of the things that people look at in these hospital credits, were on the softer side, and not really improving - so we saw those sell off."

He saw HCA's 9 1/8% notes due 2014 at 101.25 bid, 101.5 offered, and its 9¼% notes due 2016 at 101.75 bid, 102.25 offered, "which is probably down 2 or 3 points from this time last week," while its 9 5/8% notes due 2016 were likewise easier at 103 bid, 103.5 offered.

A market source at another desk saw the 9 1/8% bonds at 101.5 bid, the 91/4s at 102.25, and the company's 6 3/8% subordinated notes due 2015 at 82.625.

HCA announced on Thursday that fourth-quarter revenues increased 6.1% from year-ago levels to $6.883 billion, and it posted gains in net income ($278 million versus $122 million a year earlier).

However, adjusted EBITDA fell to $1.153 billion from $1.271 billion in the prior year, while the company's provision for what the hospital industry euphemistically calls "doubtful accounts" had to be increased to $912 million, or 13.2% percent of its revenues, from $710 million, or 10.9% of revenues, in the 2006 fourth quarter. In the latest period, allowance for such doubtful accounts - essentially, uninsured or under-insured patients unable to pay their hospital bills - represented some 89% of the $4.825 billion patient due accounts receivable balance - an increase from a year earlier, when the allowance for doubtful accounts was about 86% of a $3.972 billion patient due accounts receivable balance. Analysts have warned that the explosion in the number of uninsured or under-insured patients has been a key negative driver affecting industry finances, particularly over the last few years.

Other hospital companies are in pretty much the same boat; in trading Monday, Community Health Systems' 8 7/8% notes due 2015 fell more than 2 points to just under the 98 level, a market source said, while another pegged the bonds at 97.5 bid.

Tenet Healthcare's 7 3/8% notes due 2013 were seen down more than 2 points to the 84 bid level.

GM bonds, shares up ahead of numbers

Elsewhere, a trader said that amid the generally weaker market, one name stood out like an upside beacon - GM. He saw the Detroit giant's benchmark 8 3/8% bonds due 2033 up ½ point at 82 bid, 83 offered, while rival Ford's 7.45% paper due 2031 also gained ½ point to end at 72 bid, 73 offered. However, another source saw the latter bonds end down more than ½ point at that 72 level.

The first trader noted that Dow Jones Industrial Average component GM's New York Stock Exchange-traded shares rose "more than $1" - actually, $1.32, or 5.12% - to end at $27.12, ahead of Tuesday's scheduled release of GM's quarterly results. While GM is expected to post a loss, hurt by the drag which the ongoing subprime loan crisis has caused on the earnings of GM's 49% owned GMAC LLC financing unit, its securities got a lift Monday when JP Morgan Chase auto analyst Himanshu Patel opined that the results might be better than expected because of stronger performance from the company's core automotive operations, in South America and its North American production.

Gaming names prove to be a weak hand

Back on the downside, gaming names were falling across a broad front, including the Trump 8½% notes due 2015, seen down a bit more than a point at just under 69. At another desk, a market source indicated that the bonds lost nearly 3 points to end at 68.

Other names with Atlantic City exposure seen lower following Monday's report that revenues for the New Jersey city's seaside gambling palaces fell 10% in January, hurt by new competition in neighboring Pennsylvania and New York, including Boyd Gaming, whose 7¾% notes due 2012 were seen by a market source down more than 3 points at 87 bid; Boyd's Borgata partner MGM Mirage, whose 6 5/8% notes due 2015 lost nearly a point to around the 90 area; and Tropicana Entertainment LLC, currently in the process of a court-ordered sale. Its 9 5/8% notes due 2014 were seen by one trader off nearly 4 points to the 52 level, while another quoted them down 5 points on the day at 53 bid, 54 offered.

Other sector names, even without Atlantic City exposure, were on the downside Monday, including Isle of Capri, whose 7% notes due 2014 lost more than 2 points to end at 73, Wynn Las Vegas LLC, whose 6 5/8% notes due 2014 retreated to 95.375, and the troubled Herbst Gaming Inc., whose 7% notes due 2013 slid 3 points to 38 bid.

In the case of the latter names, especially, a trader suggested that macroeconomic concerns may be at play. "It's just market reaction - it's pretty split about whether the economy is in recession or not, and if we are in fact in a recession, how long that stays. Those businesses will suffer if the economy goes into a recession."

That having been said, he added that "the market in general was just heavy today. I don't think there's any particular news out that would cause gaming to be weak. Everything was particularly weak - not a lot but a point or so."

Axcan restructures

Facing an institutional loan market that is sidelined by technical forces, Axcan Pharma restructured its $750 million of LBO debt financing on Monday.

The Mont-Saint-Hilaire, Quebec-based specialty pharmaceutical company upsized the bond portion to $460 million from $240 million, replacing its institutional term loan B with a tranche of senior secured notes and a term loan A.

Underwriters, who had been marketing a single $240 million tranche of eight-year senior unsecured notes (B3/B-), downsized that tranche by $5 million on Monday, and added a $225 million tranche of seven-year senior secured notes.

Credit ratings for the new senior secured notes remain to be determined.

Meanwhile the underwriters withdrew from the market a $385 million term loan B, shifting those proceeds to the senior secured notes, as well as to a new $165 million term loan A.

Hence the entire bank portion of the financing, which also includes a $125 million revolver, is coming in two pro rata tranches, sources say.

Price talk on the notes is expected on Tuesday or Wednesday, with pricing expected before the end of the week.

Banc of America Securities LLC is the left lead bookrunner. HSBC and RBC Capital Markets are joint bookrunners.

Proceeds will be used to help fund the buyout of Axcan by TPG Capital.

Loan market volatility

The total withdrawal of the institutional portion of Axcan's credit facility is the result of volatility in the leveraged loan market, sources told Prospect News on Monday.

Sources not in the deal said that Axcan is targeting commercial banks with its new term loan A. One of these sources said that most of the new $165 million pro rata piece is expected to be taken down by Canadian banks.

A sell-sider who focuses on both the high yield and leveraged loan markets said that the Axcan restructuring is a reflection of the difficulties issuers and their underwriters now face in attempting to syndicate loans to institutional investors.

"On the one hand you have seen the decline in Libor, which has reduced the overall returns that investors can get in the loan market," the official said.

"Meanwhile the CLO bid has not been that strong.

"If you're a hedge fund, and you had been getting decent returns because of where Libor was, as Libor has come down that bid has dissipated somewhat.

"And there has been a lot of pressure from some of the market value-CLOs unwinding as the average price of loans drifts down to 90 cents on the dollar.

"That liquidation process has also led to some heaviness in the market."

Interesting alternatives

Sources also say that the Axcan LBO financing structure which underwriters hit upon, Monday - necessitated by an institutional loan market in tough shape - has two interesting facets.

One of these, according to a sell-side source who watches both the bond market and the loan market, is the introduction of the $165 million term loan A.

"It's rare for an LBO to have a pro rata term loan A," the source said.

"It's interesting to see that they have targeted commercial lenders as part of their loan syndication."

The other interesting facet, sources say, is the introduction of a senior secured notes tranche, partially replacing the secured term loan B.

With tough sailing in the high yield bond market, and even tougher sailing in the loan market, it is possible that either or both of these structures - the term loan and the secured notes - could be harbingers of things to come.

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