Football hangover stills trading; acquisitive Freescale gyrates; builders, retailers gain; Solutia eases terms

By Paul Deckelman and Paul A. Harris

New York, Feb. 4 - Super Bowl Sunday seemed to be the dominant influence on the junk market on Monday, participants said - and the mass distraction is expected to continue Tuesday when lower Manhattan will be awash in ticker-tape as the victorious Giants parade up Broadway.

On diminished volume, traders saw Freescale Semiconductor Inc.'s bonds gyrating around, last week's momentum either augmented or supplanted by news of an acquisition by the San Antonio, Tex.-based computer chip maker.

From out of that same high-tech sector, Affiliated Computer Services Inc.'s bonds were seen lower, despite a lack of fresh news on the company.

Elsewhere, retailers like Michaels Stores Inc. and Rite Aid Corp. continued to be well bid for.

Hovnanian Enterprises Inc.'s bonds were seen better, apparently helped by the news that its lenders have agreed to give the Red Bank, N.J.-based builder a break. Other sector names pushing higher included Standard Pacific Corp. and KB Home.

On an otherwise quiet day in the primary market, underwriters carrying discount signs returned with the $400 million Chapter 11 exit financing junk bond deal from Solutia Inc.

Market gauges little moved

A high yield syndicate official marked the broad market lower on thin trading Monday, and added that traders had spotted junk 20 basis points wider on the day.

"There seemed to be a big Super Bowl hangover, and there was a thin trickle of people coming in all day," the official commented.

A trader saw the widely followed CDX junk bond performance index ½ point weaker at 90 bid, 91 offered. The KDP High Yield Daily Index edged up 0.03 to 76.31, while the yield widened 4 basis points to 9.07%.

Advancing issues slightly shaded decliners, while overall activity, reflected in dollar volumes, fell by nearly 23% from Friday's level.

Big Blue is the big story

Traders across the board agreed that Monday's session was, in the words of one, "pretty dead" and mostly centered around "re-living football."

"Did you hear? The Giants won the Super Bowl," one said facetiously when asked what if anything stood out. And indeed, the improbable, exciting come-from-behind victory in the last seconds of the game by the underdog squad from the Meadowlands - making history by denying a heretofore perfect New England Patriots a chance to go into the record books with a spotless, unprecedented 19-0 record - dominated conversations at the watercooler, the trading desks and elsewhere Monday, especially with TV screens seemingly endlessly replaying the game highlights.

"It's a wonder anything got done," a market source said.

And the likelihood of much getting done on Tuesday was seen as pretty low, since lower Manhattan - home of a good deal of the financial community - is scheduled to see its first ticker-tape parade since the Yankees made their way up the Canyon of Heroes in October 2000.

A trader noted that the parade, which is scheduled to kick off at 11 a.m. ET "is going to slow things down a lot in the morning," as people jockey for positions from which to view the spectacle, although he noted "that whole 11 to 1 p.m. period [the scheduled finish time] isn't necessarily busy anyway."

Still, he allowed "it's going to slow things down; you've got a lot of guys down there looking out the window and not necessarily trading." Left unsaid was the notion that with people already in a celebratory mood, augmented by a parade, business would likely be slow the rest of the afternoon - except for the numerous bars and other watering holes in the Wall Street area.

Freescale firming continues

Apart from football-related festivities, Freescale Semiconductor was seen continuing to firm, apparently still riding the momentum from last week, when its bonds rose over several sessions in response to relatively positive quarterly results - sharply reduced losses from a year earlier - and hopeful projections, bouncing back from an oversold condition in the whole tech sector the week before.

A trader saw Freescale's 9 1/8% notes due 2014 up an additional 1½ points Monday to 77 bid, 79 offered. However, volume levels were seen off from the heavy dealings in the name which had been recorded last week.

Another market source, though, saw the Freescale bonds essentially unchanged on the day after some gyrations, mostly to the upside. This was especially true of its floating-rate notes due 2014, which after having traded in a 73ish context last week, zoomed up to 78 Monday, with several sizable trades up there, before relinquishing those gains and coming back down to around the 73 area. Its 8 7/8% fixed-rate 2014s meantime stayed anchored around the 84 level, and its 10 1/8% notes due 2016 were actually down a bit at 72 bid, versus late Friday's levels around 74.

Freescale announced plans Monday to acquire another Austin chip maker, SigmaTel Inc. for $110 million, or $3 per share.

Also in the high-tech sphere, Celestica Inc.'s 7 7/8% notes due 2011 were seen up 1¼ points to 99.

Affiliated Computer bonds off

Affiliated Computer Services' 4.70% notes due 2010 were seen as one of the more actively traded issues Monday, losing about 2½ points to end at 94 bid. No fresh news was seen out on the Dallas-based outsource provider of backroom computer services to other companies, which last week reported fiscal second-quarter results paced by what it called "strong" new-business signings and cash flow.

Meanwhile, New York-based mutual fund manager OppenheimerFunds Inc. said Monday in a 13-G filing with the Securities and Exchange Commission that had lifted its stake in ACS to some 7.885 million shares, or an 8.40% position; as of last Sept. 30, it had 6.652 million shares, or around 6.62% of the outstanding shares. Oppenheimer did not elaborate on the circumstances of its purchase.

Housing continues to hop

Outside of the high-tech sphere, a trader saw Hovnanaian's 8 7/8% notes due 2012 as the company's "most heavily traded issue," and he saw the bonds up 3 points to 56 bid, 58 offered, probably on the positive outcome of credit facility waiver talks with the company's lenders, who agreed to waive compliance with the tangible net worth, fixed charge coverage ratio and leverage ratio covenants through March 14, giving the company time to negotiate less onerous terms, according to an SEC filing.

Other Hovnanian issues, he said, saw "maybe one or two trades - and some of them were large trades - in sheer total number of trades, the 8 7/8s were the more heavily traded."

Another trader saw the Hovnanian 6¼% notes due 2015 around 69. However, he said of the latter credit that there were "not a lot of trades - there were a lot of CDS [credit-default swaps] quotes, but not a lot of cash-bond trading." Hovnanian's CDS were seen at 23.5 basis points bid, 25 bps offered, although he observed that the debt protection spreads were "all over" around that level - 23 bps, 24 bps, 25 bps.

There were, he reiterated "a lot of builder CDS quotes today."

That trader saw homebuilders' bonds in general "a little better," with Standard Pacific's 6¼% notes due 2014, for instance, "feeling better," quoted up a point at around 70 bid.

He saw Beazer Homes USA Inc.'s 6 5/8% notes due 2015 at 73 bid, up 1 point on the day.

A trader saw Standard Pacific's 6½% notes due 2010 up a point at 72 bid, 74 offered and its 7¾% notes due 2013 unchanged at 69 bid, 70 offered.

At another desk, KB Home's 8 5/8% notes due 2008 were up slightly to 100.5 bid, although its 6¼% notes due 2015 were down nearly a point around the 91 level.

Rite Aid rise continues

In the retailing sector, Rite Aid's 8 5/8% notes due 2015 were seen up nearly 2 points on the session to 77.25, although another source saw the bonds 1½ points better at 76.5. The Camp Hill, Pa.-based Number-3 U.S. drug chain's paper has firmed over the past several session, helped by last Thursday's report of a 2% year-over-year rise in same-store sales, the key economic metric in the retailing industry, and an eye-opening 52% year-over-year gain in total sales, due largely to the revenues from Eckerd and Brooks drugstores which company brought into its network in mid-2007.

That gain caused Lehman Brothers analyst Meredith Adler, who rates Rite Aid shares an "overweight" to write in a research note that the process of integrating those Brooks and Eckerd stores "is proceeding well and we believe the riskiest operational challenges are behind the company." Adler added that the hundreds of additional stores, which keep Rite Aid competitive, outlet-wise, with larger rivals Walgreen Co. and CVS/Caremark Corp., will, in the end build strong market share in Rite Aid's East Coast markets and cut costs.

Elsewhere on the retail front, Michaels Stores' 11 3/8% notes due 2016 gained 1½ points to 83.5 bid.

A trader saw Bon-Ton Stores Inc.'s 10¼% notes due 2014 at 70 bid, 71 offered, which he described as "a little easier, by maybe a point or so."

Finlay Fine Jewelry's 8 3/8% notes due 2012 were up a point at 51 bid.

But upscale emporium Neiman Marcus' 9% notes due 2015 were seen down ½ point at 100.25, about the same level its 10 3/8% notes due 2015 held after falling a point.

New Petroleum Development bonds move up

A trader saw the new Petroleum Development Corp. 12% notes due 2018 at 99.75 bid, 100.75 offered on Monday, noting that they had firmed smartly from Friday's issue price at 98.572.

Solutia returns

In the primary, Solutia marked down a $430 million face amount of 12½% eight-year senior notes (B2/B-) to 93.00.

The deal, which traveled a full investor roadshow in mid-January, and which subsequently became a source of disagreement between Solutia and its underwriters, Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities, is now expected to price before the end of the week.

If priced at the contemplated discount, the notes would yield 13.97%, and would generate approximately $400 million of proceeds.

Solutia's investor relations director, Susannah Livingston, told Prospect News that the company always intended to price the notes at a discount.

However, she added, the discount presently being contemplated, 93% of par, is greater than that which Solutia believed it would have to grant when the deal initially came to market.

"We had to come down a little bit for the market," Livingston conceded.

"Obviously we were hoping for a lot lower coupon."

Away from energy

Elsewhere a senior high yield syndicate official told Prospect News that a "corporate deal" could be launched into the ultra-quiet 2008 primary market during the middle part of this week.

"It's brewing," the official said, adding that this deal, unlike the majority of non-LBO issuance thus far in the new year, would be from the "industrial" space, not the energy sector.

Heretofore all of 2008's issuance not related to the hung LBO-backlog has emanated from the energy sector.

On Jan. 11 Southwestern Energy Co. priced a $600 million issue of senior notes due Feb. 1, 2018 (Ba2/BB+) at par to yield 7½%.

On Jan. 17 Atlas Energy Operating Co. and Atlas Energy Finance priced a $250 million issue of senior notes due Feb. 1, 2018 (B3/B) at par to yield 10¾%.

And on Feb. 1 Petroleum Development Corp. priced a $203 million issue of 12% 10-year senior unsecured notes (B3) at 98.572 to yield 12¼%.

Axcan deal in the spotlight

Apart from the above-mentioned Solutia exit financing deal, three others are presently in the market.

One of those, perhaps not surprisingly, is from the energy sector.

Forbes Energy Services LLC began a roadshow last week for a $200 million offering of seven-year senior secured notes (B2), a debt refinancing and general corporate purposes financing via Jefferies & Co.

The remaining two emerge from outside of the energy space.

Elyria Foundray Co. LLC started a roadshow on Monday for a $100 million offering of five-year senior secured notes (B3/B), an acquisition deal, also via Jefferies.

The other non-energy deal is Axcan Pharma Inc.'s $240 million offering of eight-year senior unsecured notes (B3/B-), an acquisition deal via Banc of America Securities.

On Monday night a senior high yield syndicate official, not in the deal, told Prospect News that Axcan has everyones' attention, given its size and its credit ratings (no triple Cs).

"It's a good sponsor," the official commented, referring to TPG Capital.

"It's a good pharmaceutical business.

"It's only $240 million of bonds, so it's not that big.

"It was an LBO deal structured after Labor Day, so it should have decent-sized caps. They should be able to attract people into it.

"It is an important indicator as to whether you can bring people into a deal," the senior syndicate official reasoned. "There should be a price that works for everybody."

No price tension

The syndicate official also asserted that despite evidence of a steady stream of outflows from the high yield mutual funds there is still cash on the buy-side that remains to be put to work.

"It's a bit of a chicken game, right now," the official said. "Who is going to blink first, the underwriters or the buy-side?

"Right now I think the buy-side can hold out longer.

"Underwriters are now in a situation where we can't get any price-tension. We're stuck at the price where a couple of large accounts are willing to get in. You don't get enough accounts in any individual deal.

"At some price these loans and bonds have value.

"But supply and demand is fundamentally broken right now."

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