McDermott up on asbestos ruling, better-than-expected numbers; Premcor on rise

By Paul Deckelman and Paul Harris

New York, Feb. 11 - A favorable court ruling in an asbestos liability case and better-than-expected fourth-quarter numbers for its parent company gave the bonds of oilfield service operator J. Ray McDermott a boost on Monday; also on the energy front, refiner Premcor's paper "was hot," in the words of one trader.

In the primary a new drive-by deal from Mohegan Tribal Gaming Authority pulled into the high yield market on Monday, and terms on the American Media Operations add-on were heard.

Mohegan Tribal Gaming, a financing subsidiary of Connecticut-based casino company Mohegan Sun, will bring a drive-by offering of $200 million of 10-year senior subordinated notes, with pricing expected Wednesday according to a syndicate source.

The bookrunners are Banc of America Securities and Salomon Smith Barney. Official price talk is 8%-8¼%. The company intends to use the money to repay bank debt.

The authority filed a 10-Q form with the Securities and Exchange commission last Friday, on which it stated that as of Dec. 31, 2001 it had $340 million outstanding under a $500 million bank facility via a syndicate led by Bank of America NA.

Outstanding bonds include $200 million 8 1/8% senior notes due Jan. 1, 2006, $300 million 8¾% senior subordinated notes due July 1, 2009 and $150 million 8 3/8% senior subordinated notes due July 1, 2011.

Terms emerged Monday on American Media Operations, Inc.'s $150 million add-on to its 10¼% senior subordinated notes due May 1, 2009 (B2/B-). The deal priced at 100.50 for a yield to maturity of 10.157%, according to a syndicate source. JP Morgan ran the books. Price talk of 100-101 had been reported by market sources.

The Boca Raton, Fla.-based company, which suffered an anthrax attack last October, publishes supermarket tabloids including National Enquirer, the Star, and the Globe. It also publishes National Examiner, Weekly World News, Country Weekly, Country Music Magazine, Auto World Magazine and other publications, and has an aggregate weekly circulation of approximately 5 million copies, according to its press information.

Finally on Monday price talk of 10%-10¼% came out on Dalton, Ga.-based Collins & Aikman Floorcoverings, Inc.'s $175 million of senior subordinated notes due 2010 (B2/B), via joint bookrunners Credit Suisse First Boston and Banc of America Securities, with pricing expected late Thursday.

Back in the secondary sphere, "this was the slowest trading day since January 1," a trader said. "I can tell you that without any hesitation."

He noted that many portfolio managers and other buyside decision makers are in Boca Raton, Fla., for Morgan Stanley's always well-attended Global Leveraged Finance Conference, which is scheduled to take up much of the week, and said several other shops were also holding events this week; S.G. Cowen, for instance, is hosting a Global Aerospace Conference on Tuesday and Wednesday in New York.

Apart from that, the trader added, "half the people are out because this week and next week are big vacation weeks," especially with an early close (2 p.m. ET) recommended for Friday by The Bond Market Association ahead of the Presidents' Day holiday weekend, which will shutter U.S. financial markets next Monday.

"I think I did all of 10 trades by 2:30 (p.m. ET). We're reduced to sitting here making bets on which (Hudson River) ferry boat docks first," he quipped.

Among the few issues really doing anything Monday, New Orleans-based J. Ray McDermott's bonds were quoted up about four points, helped by favorable numbers from corporate parent McDermott International Inc. The builder of offshore oil-drilling platforms had a fourth-quarter net loss of $42.9 million (71 cents a share), widening from a $25.5 million (42 cents a share) loss a year earlier. But excluding a tax provision and gains on debt retirement and the sale of some units, the company beat analysts expectations of a 21 cent per share profit, reporting operating earnings of $16.1 million (26 cents a share). That compares with the aforementioned 42-cent-per share loss in the year-ago quarter, which did not include any kind of special gains or charges.

The relatively good news did not stop there - a federal court in New Orleans, hearing an asbestos liability case against McDermott's bankrupt Babcock & Wilcox unit, ruled that McDermott did not have to return $622 million to the subsidiary, which was driven into Chapter 11 by the asbestos litigation problems, as a number of other companies had been. Plaintiffs in the case argued that when B&W transferred those assets to its parent several years ago, it was already insolvent, making that a fraudulent transfer, but the court disagreed. Observers say the ruling holds out the prospect that McDermott may be able to isolate its asbestos liabilities an in effect build a firewall between Babcok & Wilcox and its other entities and assets - a potentially crucial ruling which could set a precedent in similar cases brought against other companies.

Equity analysts for both Merrill Lynch and Salomon Smith Barney liked what they saw in the results and in the court ruling, and upgraded McDermott shares, which jumped $1.84 (14.89%) in New York Stock Exchange trading to $14.20, on volume of 3.7 million shares, more than 10 times the usual activity.

McDermott's numbers "didn't look all that positive," the trader said, "but it looks like the company is going to be able to pony up the cash it needs and the bonds traded like they're going to be called, its 9 3/8% notes zooming to bid levels around 98-par from prior levels in the 94-96 range.

Another trader agreed, quoting J. Ray's 9 3/8% notes at 99 5/8 and its 8¾% notes due 2023 up three points on the day, in a "pretty wide" 65-75 context.

He saw no movement in the bonds of other bond issuers which have been mentioned as potential asbestos litigation targets, such as packaging maker Crown Cork & Seal, which actually are involved in asbestos litigation right now, such as Halliburton, or which have already fled into Chapter 11 under a barrage of claims, such as Federal-Mogul Corp., Owens-Corning or USG Corp.

Elsewhere, he saw oil refiner Premcor - the former Clark Oil/Clark USA bonds - "really hot," despite the general weakness in the energy sector linked to soft gas and oil prices. "Everybody's scrambling for their paper."

He quoted Premcor's 10 7/8% notes as having pushed up to 85.5 bid/86.5 offered, up nearly three points, on "big size, a lot of trading;" its 8 7/8% notes, which are rarely seen traded, were likewise up a trey, at 83.5 bid/85.5 offered.

The trader cited talk that the St. Louis-based refiner was about to go public with an IPO (oil industry publications reported last month that the papers for such an offering had already been filed. He also cited the confidence investors have in the recently installed management team at Premcor, which hired Thomas O'Malley - who built Tosco Corp. into the top U.S. independent refiner before it was acquired by Phillips Petroleum Co. - as its new chairman and chief executive officer. Other ex-Tosco executives migrating to Premcor with O' Malley include Jay Allen, Tosco's former president and chief financial officer, and Wilkes McClave III, Tosco's former executive vice president and general counsel, who will join Premcor's board. "The new management people seem like they are more financially savvy," he said.

The trader further saw "strong" activity in B/E Aerospace bonds, with its 9½% notes rising to 88¼ bid from levels around 87 on Friday, its 8% notes up a point at 84.25 and its 8 7/8% paper also up a point at 84.25. He theorized the Wellington, Fla.-based aircraft components maker's debt would get a boost from the rise in defense spending - it sells to such primary defense contractors as Boeing Co. - as well as expectations the company would favorably impress investors at the S.G. Cowen aerospace conference, where B/E is scheduled to make a presentation. The company recently made a well-received presentation to the financial community at a Bear Stearns Conference.

Among distressed issues, Enron's bonds were seen down a point at bid levels around 13-14, a distressed-debt trader noted. Elsewhere, he said, activity in Kmart Corp. debt, recently seen in the lower 40s, was "lackluster."

RCN Corp., whose B- rated bonds were put on negative credit watch by Standard & Poor's late Friday "has been constantly eroding" and are down in the mid-to-upper 30s. He saw the Princeton, N.J.-based telecommunications operator's 10% notes bid in the 35-to-38 range, its 10 1/8% notes around 34 bid/36 offered, and its 11 1/8% notes at 27 bid/29 offered.

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