Comstock deal prices; NTL's £1 billion heads calendar building; El Paso, Dobson markedly lower

By Paul Deckelman and Paul A. Harris

New York, Feb. 18 - Comstock Resources Inc. priced an offering of new eight year notes on Wednesday, and there was chatter about other upcoming deals, such as those for Isle of Capri Casinos and Nebraska Book Co. - plus two big European cable offerings including £1 billion from NTL Inc.

But the major focus seemed to be the secondary, where El Paso Corp. bonds fell sharply as did those of Dobson Communications - the former after reveling that it had slashed the amount of its natural gas reserves by a whopping 41%, the latter after the company reported poor fourth-quarter numbers and guidance.

El Paso's 6.95% notes due 2007 dipped to 92.25 offered, 92.75 bid from prior levels at 95 bid, 97 offered, while its 7¾% bonds due2032 moved down to 80.5 bid, 82.5 offered from prior levels at 85.5 bid, 87.5 offered.

A trader said that "everything was down across the board" for the Houston-based energy operator, which said that it had cut its earlier estimates of natural gas reserves by a breath-taking 41%.

El Paso had cautioned investors back in December that it would be re-stating its gas reserve numbers downward, although it released no figures at the time.

"The market was expecting something - but not like this," he declared.

Another trader said that El Paso was "on a bit of a roller coaster - they opened down about three or four points," he said," and tried to rally but didn't succeed. "

However, he said that the deterioration in the bonds was seen early in the day, and that they managed to hold their own and not go further down after both Moody's Investors Service and Standard & Poor's cut El Paso's rating and those of several subsidiaries.

S&P cut El Paso's Corp.'s corporate credit rating to B- from B. The long-term outlook for the company's ratings remains negative. S&P also cut El Paso Production Holding Co. to B- from B.

Moody's meantime cut El Paso Production Holding senior unsecured rating to B3 from B2. The ratings agency also said it may cut El Paso Corp.'s ratings, including its senior unsecured rating of Caa1, and its B3 senior implied rating.

A market source pegged El Paso Corp.'s 7 7/8% notes due 2012 off three points, at 92 bid, while its 7¾% bonds due 2032 likewise were a trey lower at 81 bid, El Paso Production's 7¾% notes due 2013 were pegged down four points at 94.5 bid, while bonds of another El Paso subsidiary, Coastal Corp. were five points behind at 89 bid.

"They got killed across the board," the source opined.

Equity investors agreed with bond players in their displeasure over El Paso's news; the stock fell $1.55 (17.59%) to $7.26 in busy New York Stock Exchange dealings of 57.2 million shares, about eight times the norm.

Dobson loses big

Elsewhere, Dobson Communications; bonds and shares were even bigger losers than El Paso was on Wednesday after the Oklahoma City-based provider of telecommunications services reported a fourth-quarter loss of $70.3 million (53 cents per share) versus a year-earlier profit of $25.6 million (28 cents). It reported $58 million of EBITDA for the quarter, well down from expectations of $69 million. The company also reduced its 2004 guidance.

That sent the bonds into a tailspin. A trader quoted its 8 7/8% notes due 2013 as having fallen to 92 bid, 94 offered from 101.25 bid, 102.25 offered, "maybe not 10 points on the day - but pretty close."

A market source saw the Dobson 8 7/8s dropping to 94 bid from 101.5 and saw its 10 7/8% notes due 2010 three points easier at 104.5. Dobson unit American Cellular's 10% notes due 2011 were at 102.5 bid, well down from 110 previously.

He also saw some fallout elsewhere among peer telecommers like Rural Cellular, whose 9¾% notes due 2010 dropped three points to 94 bid while Western Wireless' 9¼% notes due 2013 managed to hold their own a little better, down just half a point at 107.25 bid.

Dobson shares swooned $2.65 (36.55%) to $4.60 on Nasdaq volume of 44 million shares, about 35 times the norm.

But despite such dramatic shortfalls as Dobson and El Paso, a trader characterized the overall market at "lackluster," and "earnings driven."

Fund flow jitters

He suggested that "people are a little nervous" whether there will be another big outflow from high-yield mutual funds reported Thursday - there have been two such outflows of over $1 billion in each of the past two weeks, as reported by AMG Data Services.

That having been said, however, and noting that market performance - as measured by indexes put out by the major investment houses - has recently picked up - he went out on a limb and predicted that after the two weeks of big losses, "I personally think we may see a reversal."

One new deal, drive-bys ready

While the primary market rolled out terms on only one deal, Wednesday, the investment banks continued to prepare new offerings including a pair of drive-by deals totaling $975 million that figure to price on Thursday.

Meanwhile bells went off Wednesday in the European high yield as cable firms NTL Inc. and Cablecom were spotted heading to market with big junk deals as part of bank and bond debt refinancing packages that collectively come to $7.5 billion.

Pax World's Keefe does the math

Pax World High Yield Fund portfolio manager Diane Keefe told Prospect News on Wednesday that even in light of two successive outflows from high-yield mutual funds it should come as no surprise that the new issue pipeline continues to build.

"We had $27 billion come in last year, and we've seen $2.5 billion of outflows over the past two weeks," Keefe said. "So we still have a ton of money that we did not have a year and one month ago.

Keefe went on to express the opinion that the two recent outflows might be laid at the feet of investors attempting to time the high-yield market.

"I think there is fast money that tried to pick the bottom and is trying to pick the top," she said.

"But I think that high yield is a legitimate asset class and that over time market timers do not do too well," Keefe added.

"It makes sense to be a part of an asset class that is not correlated to other asset classes and that performs differently. As more institutional investors get comfortable with that idea, valuations in high yield will probably have more stability than they have had historically.

"I thought it was really stupid that the market ever got as cheap as it got in July of 2002 and in October of 2002. The levels were just stupid.

"And it doesn't make sense that there would be a bunch of intelligent people in the capital markets that would be buffeted by technical forces, as they have been. What makes more sense is that institutions will recognize that, on balance, this asset class makes more sense, which should dampen the volatility over time."

Comstock loads up with deal

Wednesday's sole new transaction in the junk market was completed quite late in the day by Frisco, Tex.-based independent energy company Comstock Resources Inc., which sold $150 million of eight-year senior notes (B2/B) at par to yield 6 7/8%.

The Banc of America Securities-led deal came at the tight end of the 6 7/8%-7% price talk.

AMC, Isle of Capri drive-bys appear

Two drive-by offerings totaling $975 million were unveiled during Wednesday's session. Both figure to be finished before Thursday's close.

Price talk is for a yield in the 7¾% area on AMC Entertainment Inc.'s $550 million of 10-year senior subordinated notes (existing ratings Caa1/CCC+), according to a syndicate source.

Citigroup is the bookrunner for the Kansas City, Mo. movie theater company's deal.

Also expected to price Thursday is Isle of Capri Casinos Inc.'s $425 million of 10-year senior subordinated notes (B2/B).

The price talk is 6 ¾%-7% on the Biloxi, Miss.-based casino company's deal that is being led by Deutsche Bank Securities and CIBC World Markets.

Reader's Digest, Nebraska Book plan deals

Two roadshow starts were head during the Wednesday session.

The roadshow starts Thursday for The Reader's Digest Association, Inc. $300 million of senior notes due 2011 (Ba3), which is expected to price on Feb. 27.

JP Morgan will run the books on the offering from the Pleasantville, N.Y.-based publisher of the Reader's Digest.

Meanwhile Lincoln, Neb.-based used textbook distributor Nebraska Book Company will start the roadshow Thursday for two tranches of high yield notes with which it intends to raise approximately $240 million of proceeds, according to market sources.

The roadshow is expected to wrap up on Feb. 27.

Nebraska Book Co., Inc., the operating company, is offering $190 million of senior subordinated notes due 2012 (Caa1).

NBC Acquisition Corp., the holding company, will offer $50 million proceeds of senior discount notes due 2013 (Caa2).

JP Morgan and Citigroup will run the books on both offerings. Fleet Securities will be the co-manager.

European junk bristles with megadeals

News of two offerings from cable firms operating in Europe circulated the high-yield market on both sides of the Atlantic on Wednesday.

NTL Inc. has mandated four banks to market its offering of £1 billion of high yield bonds as part of a £3.2 billion (approximately $6 billion) debt offering, according to market sources.

Credit Suisse First Boston, Deutsche Bank Securities, Goldman Sachs & Co. and Morgan Stanley Dean Witter have the mandate on the bonds.

The same banks are expected to take part in the syndication of a £2.2 billion credit facility.

NTL set a European record when it defaulted on $17 billion of bonds in 2002.

And Swiss cable TV company Cablecom Holding AG is expected to bring CHF450 million of high yield bonds as part of an overall CHF1.85 billion (approximately $1.5 billion) of new debt offerings, according to market sources.

Also included will be a CHF1.4 billion credit facility to be led by BNP Paribas, Credit Suisse First Boston, Deutsche Bank Securities, Goldman Sachs & Co. and JP Morgan.

Apollo Management LP, Goldman Sachs Capital Partners and Soros Private Equity Partners reportedly bought a majority stake in Cablecom last November from NTL Europe under a debt restructuring plan.

Stage set for late-week action

Price guidance emerged Wednesday on two tranches of notes totaling $200 million being offered by Chattanooga, Tenn. health and beauty care products manufacturer Chattem Inc., according to informed sources.

The deal is expected to be priced on Thursday afternoon.

Guidance is Libor plus 300-325 basis points on $75 million of six-year floating-rate notes (Ba3/B+). And guidance is 7%-7¼% on $125 million of 10-year non-call-five senior subordinated notes (B2/B-).

Banc of America Securities and Morgan Stanley Dean Witter will are joint bookrunners.

Prospect News caught up with Keefe just before she left for the Chattem roadshow in New York.

"It's a good company," Keefe commented. "We've owned Chattem for a long time.

"It has Selsun Blue shampoo and some basic consumer brands.

"They worked on settling their liability related to diet pills. They came to a settlement that they could afford. And the leverage, even with paying out a lot of cash for that, is I believe in the 4.5-times range.

"These guys have taken their knocks associated with that business, and gotten out of that business, and branched out into everyday consumer products that people buy.

"That's a good, stable-type of bondholder business that we like."

Later in the session, in the roadshow's wake, Keefe told Prospect News that Chattem was not completely getting out of the diet business.

"Its pills are down to $19 million per year of revenues out of over $240 million," she commented. "They are settling most of the PPA litigation and aren't a target of ephedra-related suits because they followed the FDA guidance in 1997 and kept it at low doses unlike some of the 'performance products' other companies produced."

Meanwhile Wednesday price talk of 9¾%-10% emerged on AMF Bowling Worldwide Inc.'s planned $150 million of six-year senior subordinated notes (B3/CCC+) via Merrill Lynch & Co. and Credit Suisse First Boston.

And the price talk is 7½%-7¾% on Jo-Ann Stores, Inc.'s $100 million of eight-year senior subordinated notes (B2/B-), expected to price late Thursday afternoon also via Merrill Lynch & Co.

Emerging markets overheated?

Keefe told Prospect News on Wednesday that she bought some Embratel (Empresa Brasileira de Telecomunicacoes) paper. The deal priced in late November as 11% guaranteed notes due 2008 (B2) at 99.049 to yield 11¼%.

And despite the chop in the emerging markets that ensued when the Federal Reserve kindled an interest rate scare in late January, the purchase is not causing Keefe to quake.

"I bought it at par and that 11% bond is still sticking around there," she said.

"You hear that Brazil may be overheated but that's only if everything reverts to the mean.

"I really think there has been some fundamental change in Brazil. Going forward, if both the U.S. and Brazil stay on trend Brazil is going to improve and the U.S. is going to go down. And I would much rather be riding a trend of fiscal conservatism and improvement than fiscal deterioration in the sense of deficits as a percent of GDP, etc.

"If we're going back to the days of chaos in Brazil, in terms of domestic unrest and not being concerned about inflation and not trying to rein in public expenditures, etc., etc., then you would expect the Brazilian situation to be overvalued.

"But if they keep going on their current trajectory we still may have some room to go.

"Embratel, structurally, if it were not located in Brazil, would certainly be trading at a lot lower yield than 11%. That's why I saw the opportunity there."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.