School Specialty bond sale cancelled; NRG, Texas Genco power up on merger news

By Paul Deckelman and Paul A. Harris

New York, Oct. 3 - In a highly unusual move, the underwriters of School Specialty Inc.'s recently priced $350 million sale of 10% notes due 2013, which had not yet settled, cancelled the Greenville, Wis. Supplemental education company's placement, apparently after seeing poor results for August and September, traders said. That cancellation in turn puts the company's planned leveraged buyout in jeopardy.

But other companies caught up in merger-mania seemed to be doing just fine Monday, with secondary traders reporting strong gains in the bonds of both NRG Energy Inc. and Texas Genco LLC, following the announcement that Princeton, N.J.-based NRG will acquire Houston-based Texas Genco in a nearly $8 billion deal that includes the assumption of $2.5 billion of Texas Genco debt.

And the bonds of Dex Media Inc. firmed on the news that the Denver-based telephone directory publisher agreed to be acquired by smaller rival R.H. Donnelley Corp. in a $4.2 billion deal. Donnelley's bonds also pushed upward, but then fell-back, gyrating around on conflicting interpretations of whether or not the pending deal constitutes a "change of control" event for Donnelley's bonds, before the company issued a clarification late in the session.

Otherwise, market participants said, things were pretty dull - partly a hangover from last week's Deutsche Bank Securities bond conference in Scottsdale, Ariz., which monopolized the attention of many portfolio managers and other senior decision-makers, and partly, one or two said, due to the Jewish New Year holiday that began Monday evening, which will thin the personnel ranks on Wall Street for much of this week.

One sell-side official marked high yield mixed overall during its first session of October 2005.

A lackluster day saw Treasury sensitive names trade weaker, the official added.

Meanwhile another source described the market down one-quarter of a point but saw strength in specific names - particularly in the existing bonds of Dex Media, Inc., which will be acquired by R.H. Donnelley, the market learned Monday.

Primary market chop continues

Those involved in the big LBO deals announced Monday could hardly have been encouraged by the terms that emerged on the truncated Affinion Group acquisition deal.

Following on the heels of last week's massively downsized LBO financing bond issues from The Neiman Marcus Group Inc., Affinion's deal had undergone significant transformation and weight loss when the terms finally emerged.

The company priced a $270 million deal, altogether dropping a proposed $500 million tranche of 10-year senior subordinated notes (Caa1/B-) so that the overall proposed bond sale was reduced to $270 million from the originally proposed $750 million.

The direct marketer of membership, insurance and package enhancement products priced its $270 million of 10 1/8% eight-year senior notes (B3/B-) at 98.662 to yield 10 3/8%.

The yield came 37.5 basis points beyond the wide end of the 9¾% to 10% price talk, which had earlier been revised from 9% area.

Credit Suisse First Boston and Deutsche Bank Securities were joint bookrunners.

The senior subordinated tranche, which was ultimately abandoned, had earlier been downsized to $350 million from $500 million.

UPC prices new notes

Meanwhile what was introduced as an add-on deal Friday, from UPC Holding BV, emerged as an issue of new but similarly structured notes on Monday.

The company priced a €300 million issue of senior notes due Jan. 1, 2014 (B3/CCC+) at par to yield 8 5/8%, on top of price talk.

The notes had originally been marketed as a straight add-on to the company's 7¾% senior notes due Jan. 1, 2014.

Credit Suisse First Boston, Deutsche Bank Securities, JP Morgan were joint bookrunners for the acquisition financing from the Denver-based cable TV and broadband internet provider to foreign markets.

LBO deals on the march

The wires bristled Monday with news of three sizable acquisitions.

NTL Inc.'s approximately $6 billion acquisition of Telewest Global Inc. is expected to generate £1.8 billion of high-yield debt.

Goldman Sachs & Co. served as financial advisor to NTL. Deutsche Bank Securities advised Telewest.

Elsewhere NRG Energy intends to fund its acquisition of Texas Genco with a combination of a senior secured credit facility and high-yield notes along with common and preferred equity.

Morgan Stanley and Citigroup have arranged for $4.8 billion in secured debt financing.

Finally R.H. Donnelley acquisition of Dex Media, Inc. is expected to generate $2.3 billion of new debt, although during a Monday conference call the company would not specify which markets it would approach, or what maturities it was considering.

Post-pricing dilemmas

News also emerged during the first October session that Banc of America Securities, JP Morgan and Deutsche Bank Securities, the initial purchasers of School Specialty's $350 million issue of senior notes, have terminated the issue.

The eight-year senior notes (B3/CCC+) priced at par on Friday, Sept. 23, to yield 10%.

The three institutions terminated the deal because in their view certain conditions to School Specialty's obligations under the senior notes purchase agreement have not been and cannot be satisfied.

School Specialty believes that this action relates to disappointing results in August and September and concerns about near-term financial and operating performance (see related story in this issue).

And Pregis Corp., which last Friday postponed the closing of the two issues of high-yield notes that it priced on Sept. 27, held a conference call Monday afternoon, a market source said.

The postponement relates to a raw material supply disruption caused by Hurricane Katrina, which devastated the U.S. Gulf Coast in late August.

Pregis priced a €100 million issue of 7.5-year senior secured second-lien floating-rate notes (B3/B-) at par to yield three-month Euribor plus 475 basis points, and a $150 million issue of 11 7/8% eight-year senior subordinated fixed-rate notes (Caa1/CCC+) at 98.102 to yield 12¼%.

Credit Suisse First Boston had the physical books, and Lehman Brothers was the joint bookrunner.

On the Monday afternoon call the company told investors that it expects the raw material supplier in question, Exxon, to be back online by the end of the month.

The source added that the company is expected to attempt to reprice the bonds this week.

School Specialty trades at 101, stops

A trader said that he had seen the new School Specialty bonds, which priced at par on Sept. 23, trading around "101 and change" Monday morning, pre-news - adding that "you don't see 'em now," in the late afternoon, after the underwriters bailed out.

"Basically, they released their numbers, and they weren't very good," a trader said, "so I guess JP Morgan and B of A, the bookrunners, pulled the deal" after the company cut its 2006 earnings forecast.

NRG, Texas Genco up

Elsewhere, NRG and Texas Genco were each higher on the news that the former company is buying the latter for $5.8 billion plus the assumption by NRG of $2.5 billion of debt (see related story elsewhere in this issue).

A market source saw Texas Genco's 6 7/8% notes due 2014 moving all the way up to 107.5 from prior levels around 101.75, while NRG's 8% notes due 2013 advanced to 110.25 bid from 106.5.

At another desk, a trader saw the NRG bonds at 110 bid, 111 offered, while the Texas Genco notes were at 1107 bid, 108 offered.

Calpine, Reliant also higher

Detecting some merchant power generator sector strength on the NRG-Texas Genco deal, a trader saw Calpine Corp.'s bonds "all over the place" at higher levels.

He pegged the San Jose, Calif.-based power generating company's 8 5/8% notes due 2010 three points better at 57 bid, its 8½% notes due 2011 five points better at 57 bid. Calpine's 8½% notes due 2008 were up three points at 63.5 . However, further out along the curve, he saw the company's 8¾% notes due 2013 just a point better at 71.75 bid.

Another power name seen doing better was Reliant Energy Inc., whose 9¼% notes due 2010 and 6¾% notes due 2015 were each half a point higher, at 109 bid and 98.25 bid, respectively.

Houston-based Reliant on Monday that it had agreed to sell its three New York City power plants to a group led by Madison Dearborn Partners and US Power Generating Co. for $975 million. The transaction is to help Reliant pare debt by about $4 billion going back to 2003.

Dex, Donnelley gain, Donnelley falls back

The other big M&A deal pushed the bonds of Dex Media up, and did likewise, at least for a while for R.H. Donnelley's bonds.

At one desk, a source saw the Dex Media holding company 8% notes due 2013 a point better at 103.75 bid, while Dex Media East's 9 7/8% notes due 2009 were half a point better at 109.5 bid, and Dex Media West's 5 7/8% notes due 2011 were 7/8 point higher.

As for Donnelley, he saw the Cary, N.C.-based telephone directory publisher's 6 7/8% notes due 2013 push all the way up to 98.5 bid from 95, and remarked that "they had recently dipped, and now they're back up."

The company's other bonds rose more modestly, its 10 7/8% notes due 2012 up ¾ point to 113 and its 8 7/8% notes due 2010 half a point better at 107.5 bid.

Another trader saw the Donnelley notes having pushed all the way up to par bid, 101 offered, "around lunchtime," from 94.75 bid, 95.75 offered,

But he saw those bonds retreat back into the mid-90s by the close.

"What happened," another trader said, "was they had a conference call to discuss the Dex deal, and somehow, based on something said on the call, it was construed that the Donnelley bonds were subject to a change of control put provision" in their indenture, requiring the company to buy the notes back - even though Donnelley is the acquiring party and will be the survivor company."

So confusing was this that Donnelley was forced to issue a statement late Monday, declaring that "the transaction is not expected to constitute a "change of control" pursuant to the respective indentures related to any notes issued by R.H. Donnelley Corp. and its subsidiary.

"The transaction is expected to constitute a "change of control" pursuant to the respective indentures related to all notes issued by Dex Media, Inc. and its subsidiaries."

That statement came too late to meaningfully affect aftermarket trading in the company's bonds, although he said that "that could have an effect [Tuesday]. The bonds should come down."

GM, Ford steady despite weak sales

Elsewhere, General Motors Corp. bonds, and those of rival Ford Motor Co., seemed little changed after the Detroit auto giants released their sales figures for September - and the figures were disappointing, with GM down 24% from year-ago levels and Ford off nearly 20%.

'Ford's numbers were a little weaker than people were expecting," a trader said, "while GM's were about what people were looking for."

He saw GM's 8 3/8% notes due 2033 perhaps unchanged to up a quarter point, while Ford's 7.45% notes due 2031 were down a quarter, both in a context around 77.5 bid, 78.5 offered.

Late in the day came word that Standard & Poor's had put the bonds of both companies on CreditWatch with negative implications.

"That will be something to look for tomorrow [Tuesday]," he said.

Former GM unit Delphi Corp.'s bonds were seen little changed on the day, a trader said, with the Troy, Mich.-based automotive electronics manufacturer's benchmark 6.55% notes due 2006 hanging in around 73.5 bid, and its 7 1/8% notes due 2029 in the same 63-64 context at which they have recently been trading.

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