Titan deal boosts bond levels; Nortel up, Levi off; Huntsman, Gazprom price

By Paul Deckelman and Paul A. Harris

New York, Sept. 16 - News that giant defense contractor Lockheed Martin Corp. has agreed to acquire Titan Corp. in a $2.4 billion deal that includes assumption of nearly $600 million of Titan debt had market participants quoting the San Diego-based technology company's bonds at sharply higher levels, but little actual trading was seen - with current owners hanging onto to that paper to see how high they can fly.

Elsewhere, Nortel Networks Corp. bonds firmed as the Canadian-based telecommunications equipment maker confirmed earlier news reports that France Telecom's wireless unit, Orange SA, had chosen Nortel as a major supplier to its next-generation network program.

In the primary sphere, European energy operator OAO Gazprom doubled the size of its issue of seven-year loan participation notes to €1 billion, while U.S. chemical maker Huntsman LLC sold $380 million of new seven-year notes.

Titan's 8% senior subordinated notes due 2011 "were flying," a market-watcher said, having heard quotes of as high as 116 for the bonds, well up from their recent levels around 105.5 bid, on the news of the proposed acquisition of Titan by Lockheed Martin.

(News of the merger deal also caused Titan to terminate a previously announced exchange offer for the Rule 144A bonds, although it plans a new exchange offer once the merger is consummated - see Tenders and Redemptions elsewhere in this issue).

But traders observed very little actual trading in the issue. "People are holding onto the bonds," one said. "I haven't seen it trade."

He noted that even with the bonds currently callable at around 104 bid, there had already been bids - even before the news - "north of 105.25 going around. It's still a pretty wide spread to Treasuries."

Informed that some market participants were valuing the bonds potentially as high as the 116-117 area, he agreed that "it could very easily" rise to that level. "It could be.

"117 is a spread of 150 (basis points) off Treasuries. It's still a 3.98% yield if they're going to tender for them, 3.98 to the '07 call if people are going to sell them and it's still a spread of 150 to Treasuries, so it could very well go."

He added that "nobody is gonna lighten up on this one - not right now. People are going to hold it as a cash equivalent is the way it looks."

Another trader said that he had heard of offerings for the bond as high as 121 - but said that the notes "didn't trade."

Titan's shares certainly did trade, jumping $4.33 (25.53%) in New York Stock Exchange dealings to close at $21.29, on volume of 16.8 million shares - about 20 times the normal turnover.

Standard & Poor's late in the session announced that it had put Titan's credit ratings, including the B rating on its subordinated bonds and its BB corporate credit ratings, on Credit Watch with positive implications on news of the coming merger with the much larger, investment-grade credit Lockheed Martin. And Moody's Investors Service put Titan on review for upgrade.

Elsewhere, Nortel bonds were better on the news that the Brampton, Ont.-based telecom equipment maker had been selected as one of three major suppliers for the Orange SA network, along with Alcatel and Nokia.

Awarding of the potentially rich contract - Nortel's actual likely payoff has not been determined yet, although news reports estimate it as high as €1 billion - comes just days after U.S. telecom giant Verizon's wireless operation - the nation's largest - signed a three-year agreement with Nortel to buy about $1 billion of gear for its next-generation, voice and data network.

Nortel's 6 1/8% notes due 2006 were quoted as much as a point higher on the session at par. Nortel shares meantime rose 35 cents (8.43%) to $4.50 on the NYSE, as volume almost tripled to 66.2 million shares.

While Nortel was going up, traders saw not much happening in the bonds of Lucent Technologies Inc. - the Murray Hill, N.J. -based telecom equipment maker whose bonds often move more or less in tandem with its Canadian rival's.

Lucent's notes "didn't change a hell of a lot," a trader said, quoting its 7¼% notes due 2006 up perhaps ¼ point, "no big change," at 95.5 bid, 96.5 offered, while its longer-dated issues, like its 6½% bonds due 2028 and 6.45% bonds due 2029, essentially unchanged around 68.5 bid, 69.5 offered.

Energy operator Aquila Inc.'s bonds were solidly higher on news that it had reached an agreement to sell its Canadian utility businesses to Fortis Inc. for about $990 million, including debt assumption.

Aquila's 7% notes due 2004 firmed to 98.5 bid, 99.75 offered from prior levels from 97.25 bid, 98.75 offered, a trader said, with its 8% notes due 2023 two points better, at 82 bid.

He said its 7 5/8% notes were at 90 bid, 91.5 offered, up from 85 bid, 87 offered, while its 7.95% notes due 2011 were 96 bid, 97.5 offered, up from 94 bid, 95 offered and its 14 7/8% notes due 2012 jumped from 117 bid, 118 offered to 122 bid, 124 offered.

Merrill Lynch & Co. analysts liked the Aquila deal; they said in a research note they were changing their recommendation on the company's bonds to neutral from an underweight, based on their view that the company's liquidity prospects have "improved substantially" following the announcement of the Fortis deal. Additionally, Merrill research director David Silverstein wrote, "liquidity should improve further with the expected sale of the company's QF portfolio by the end of 2003."

However, he also cautioned that even so, Aquila will likely remain free cash-flow negative for several years down the line, largely due to the amortization of its prepaid natural gas obligations and "significant debt burden relative to core EBITDA."

From that same energy producer sector, a trader said, Calpine Corp. bonds, which had retreated on Monday, continued "to get mowed" Tuesday, even though there was no fresh negative news out on the San Jose, Calif.-based independent power producer.

He quoted Calpine's 8½% notes due 2011 as having gone from 72 bid,74 offered on Friday to 70 bid,72 offered Monday and 68.5 bid, 69.5 offered Tuesday.

"They run, they crash, they run, they crash," he said, noting the lack of real news on the company. "Now the big boys come in and scoop them up."

Also on the downside, he said, Levi Strauss bonds - which had firmed Monday after the San Francisco-based apparel maker released the results of an internal audit of allegations of supposed improper income-tax related transactions (the audit found no such thing occurred) - "got smoked" Tuesday.

He saw Levi's 11 5/8% notes due 2008 down two points at 92 bid, 94 offered, its 12¼% notes due 2012 also two points lower at 89 bid, 91 offered, and its 7% notes due 2006 unchanged at 85 bid, 87 offered.

The dollar-denominated primary market produced very little news on Tuesday, as terms were heard on a new issue of 11 5/8% seven-year notes from privately-held Salt Lake City petrochemical firm Huntsman LLC, which came at a discount.

However in the emerging markets Gaz Capital SA, a funding vehicle of Russian natural gas giant OAO Gazprom, expanded its offering to €1 billion from €500 million, with the seven-year notes fetching an interest rate of 7.8%.

One sell-side source suggested that the market's attention might have been sidetracked by the Federal Reserve. In a Tuesday meeting the Federal Open Market Committee, in a reportedly unanimous decision, left its target short-term interest rate unchanged at 1%, a 45-year low, and commented that the low rates "can be maintained for a considerable period."

"It was a very quiet day," said the official who focuses on the new deal market.

"Maybe it was the Fed holding things up until around 2 and people just didn't care after that.

"I would say that things felt just a tad softer this afternoon."

Huntsman LLC sold $380 million of 11 5/8% seven-year senior secured notes (B2/B) at 98.815 to yield 11 7/8%.

The offering, which generated $375.497 million of proceeds, came at the wide end of the 11¾% area price talk. Credit Suisse First Boston and Deutsche Bank Securities ran the books.

Meanwhile in the emerging markets corporate sector, Gaz Capital upsized its deal to €1 billion from €500 million and priced the seven-year loan participation notes (B+) at par to yield 7.8%.

Deutsche Bank Securities and UBS Investment Bank were underwriters. The deal launched off of a $5 billion program for the issuance of loan participation notes.

The only other nugget of news from the primary market came in the form of revised price talk on Broder Brothers's offering of $175 million seven-year notes (B3/B-). According to market sources price talk widened to 11¼% from 10¾%-11%, and the deal was heard to have undergone covenant changes.

Pricing is expected on Wednesday morning, via bookrunner UBS Warburg.

Traders said the new 8 7/8% senior subordinated notes due 2013 priced Monday at par by Perry Ellis International Inc. moved up to 101.25 bid Tuesday. But then, a trader said, "that was it. They softened up, and we never saw them trade after that." He said he had seen no trace of the new Buckeye Technologies Inc. 8½% senior notes due 2013, which priced at par on Monday, nor any other recently sold paper.

A buy-side source who spoke to Prospect News on background Tuesday was the first, thus far, to broach the topic of New York Attorney General Eliot Spitzer's investigations into illegal or improper trading on the part of certain mutual funds.

Although this source specified that direct evidence of this most recent scandal having an impact on high yield has yet to be seen, he suggested that the $485.963 million outflow from high-yield funds reported for the week ending Sept. 10 is possibly related to the investigation, which in part alleges that mutual funds allowed hedge fund Canary Capital Partners to make improper after-hours trades.

The source said that the outflow could likely be laid at the feet "of market timers and hedge funds.

"With the investigation going on I would assume that they're getting a little nervous."

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