Tenneco, IOS lead busy new-deal sector; secondary in the shadows

By Paul Deckelman and Paul A. Harris

New York, June 10 - The primary sector was once again the main focus of activity in the junk bond market on Tuesday, as several deals priced, including Tenneco Automotive Inc.'s $350 million of 10¼% senior secured notes due 2013, and IOS Capital LLC's upsized $350 million of split-rated 7¼% senior unsecured notes due 2008.

The new Tenneco bonds were well-received in the secondary market, trading up handsomely as soon as they were freed. Traders said that with the junk market's attention once more centered on the primary-side - in view of the generous liquidity situation following a mammoth mutual fund inflow last week - dealing in established issues took a back seat.

The primary market continued to crank on Tuesday, as three high-yield transactions were completed by the investment banks.

Two of those deals were upsized. However it was the one that did not upsize that generated the lion's share of exclamation points in Tuesday's email messages to Prospect News: Omnicare, Inc. sold $250 million of 10-year senior subordinated notes (Ba2/BB+) at par, during Tuesday's session, printing an ultra-low 6 1/8% yield on its new notes.

And speaking of print, St. Petersburg, Fla.-based commercial printing solutions company Danka Business Systems, Inc. was the only prospective issuer to position itself on the forward calendar on Tuesday. However information trickled around the market during the second session of the June 9 week on several deals that are expected to materialize in the near term, including Graphic Packaging International Corp. and Xerox Corp.

Meanwhile on Tuesday, Prescott Crocker, the Evergreen High Yield Bond Fund manager, told Prospect News that with all of the money presently allocated to junk bonds the summer of 2003 looks like it could turn out to be a comparatively busy one.

Crocker reckoned that given the cash that needs to be put to work the investment banks may be depended upon to keep bringing the deals.

"It will keep the market in check, though," commented the Evergreen portfolio manager. "The growing supply will satisfy demand."

Crocker also told Prospect News that the better high yield credits are not presently overpriced.

"I believe the market is going to go down to 400 basis points above Treasuries, which is where it is traditionally," he said. "The reason is that 400 basis points over is a whopping twice the 10-year yield, and a lot more than the shorter maturities.

"So why shouldn't corporations in America have that low of a yield in an environment where the economy is not coming unglued?

"In that environment, where the Fed is determined not to raise interest rates and in which there is tremendous stimulation, I don't think high yield is unduly overpriced."

However as investors wade out along the risk curve the price of the market does not remain cheap, Crocker specified.

"I think the triple-Cs are overpriced," stated the Evergreen manager. "Those have really been driving the returns in the marketplace. And they really depend upon fundamental change within their balance sheets. And that is harder to achieve than just lowering the spread of gaming companies from 700 to 600; after all, the gaming companies are going to survive.

"But the triple-Cs are going to have to be restructured, refinanced, and they require an improving economy. Those and the junior subordinated stuff are what I think is dangerous.

"Look at Collins & Aikman junior subordinated," he said. "On one quarterly announcement they dropped 30-points - in a bull market.

"We all know that every September and October everything gets offered for sale, in our world as well as in equities. The smart thing to do is get out of anything that is junior and anything that's risky."

Tuesday's session in the high yield primary market produced terms on three junk bond deals.

The headline-grabber was Omicare's $250 million issue. The Covington, Ky.-based pharmacy services-provider's new 10-year senior subordinated notes (Ba2/BB+) priced at par to yield 6 1/8%, coming at the tight end of the 6 1/8%-6 3/8% price talk. Bookrunners were Lehman Brothers, JP Morgan and UBS Warburg.

"Did you see the Omnicare deal?!" was a characteristic comment heard as terms circulated the market, and news of the company's low interest rate was heard.

One sell-side source described it simply as "a phenomenal transaction."

The other two high-yield issues that price Tuesday were both upsized.

Tenneco Automotive, Inc. priced an upsized offering of $350 million of 10-year senior secured second lien notes (B2/CCC+/B) at par to yield 10¼%. The deal was increased from $300 million and came at the tight end of the 10 ¼%-10 ½% price talk. JP Morgan, Morgan Stanley and Banc of America Securities did the bookrunning on the Lake Forest, Ill. automotive parts supplier's deal.

Also on Tuesday, Teco Energy Inc. brought an upsized $300 million of 7½% seven-year senior notes (Ba1/BB+), pricing them at 98.932 to yield 7.7%. Merrill Lynch, Morgan Stanley and Citigroup did the bookrunning on the Tampa, Fla. energy company's bonds, which were increased from $200 million and came slightly tighter than the 7¾% price talk.

And from the universe of crossover credits, terms were heard on Ikon Office Solutions, Inc.'s subsidiary IOS Capital, LLC's split-rated $350 million of five-year senior unsecured notes (Ba1/BBB-). The Lehman Brothers managed deal priced at 99.25 to yield 7.43%, slightly tighter than the 7½% area price talk. The deal was increased from $250 million.

Two sources advised Prospect News that high yield accounts had "no doubt" participated in IOS Capital.

"With as much cash as there is in the market you can practically take that for granted," one sell-side source said.

Only one new deal surfaced during Tuesday's session. The roadshow is set to begin Wednesday or Thursday for Danka Business Systems plc's offering of $175 million seven-year senior notes, according to Danka corporate treasurer Larry Schaad, who added that Bear Stearns & Co. will be the bookrunner. The deal is expected to price late in the week of June 16 or early in the week of June 23.

However details were heard Tuesday on three "shadow calendar" deals.

According to informed sources Goldman Sachs will be the lead bookrunner on the bond portion of the Graphic Packaging's financing of its merger with Riverwood Holdings Inc. The deal figures to be larger than the $850 million that was mention in a Standard & Poor's ratings release issued late last week (see related story in this issue).

Also on Tuesday Deutsche Bank Securities was identified by an informed source as the lead bookrunner on a coming bond deal from Xerox Corp., which will also obtain a new $1 billion credit facility and bring convertible and equity offerings (see related story on page one of this issue).

And Vought Aircraft Industries, Inc. is heading into the high-yield new issuance market with $250 million of senior notes, to help fund the merger between Vought and The Aerostructures Corp. Goldman Sachs and Lehman Brothers will be underwriters, according to an informed source.

Finally on Tuesday price talk of 8¾%-9% emerged on MSW Energy Holdings $200 million of seven-year senior secured notes (Ba1/BB), which are expected to price on Wednesday, via Credit Suisse First Boston.

When the new Tenneco bonds were freed for secondary dealings, the issue - which a trader called "well-subscribed" - quickly moved up to around 103 bid from their par issue price.

The trader also saw Omnicare's new 6 1/8% senior subordinated notes due 2013 as having "opened at 101 bid, looking" for offers to sell. Another trader saw the new bonds as having firmed slightly from there to late-day bid levels at 101.25-101.5., which he said would translate to a very un-junkbond like 5.93% bid-side yield to worst.

"It's sort of in a favored sector, and they've never disappointed, so that's just one of those buy-and-hold, put-away-type issues that come and go. You'll never trade it. So it's not one to be short [in], even at these levels."

Other than that, he said, there was "not much to say" about Tuesday's dealings in established issues.

"The focus is definitely not on secondary trading," he declared. While he saw the market "a little bit firm" at Tuesday's opening, "the sense that I get is what we saw was a little bit of selling, at these higher levels."

Such names as Georgia-Pacific, Crown Cork & Seal and Tembec were trading into bids and easing slightly.

"It seems like we were at these kind of levels a couple of weeks ago," when the primary market was sizzling and the secondary, relatively speaking, fizzling, "and they were met with pretty decent selling. Then we had the two weeks of outflows and that kind of turned the market over a little. But we're sort of back up to the most recent highs. It's quiet, but it feels heavier at these higher levels."

Among specific issues, he saw steels "a little weaker. U.S. Steel, AK steel, they were whacking them in the morning and around midday," although the bonds came back most of the way by the end of the session.

U.S. Steel's 9¾% notes due 2010, for instance, were heard to have opened around 102.25 bid and then dropped down to 100.5 by mid-day before coming back up to around 101 bid, 102 offered by the day's end. Its 10¾% senior notes due 2008 were quoted down about a point at 105.5.

Penn National Gaming's 8 7/8% notes due 2010 were quoted at 105 bid/107 offered, essentially little changed, after the Wyomissing, Pa.-based gaming operator announced updated - and improved - guidance for the second quarter.

The company said its guidance would reflect "better-than-expected" second quarter operating results through May 31, which it said "reflect[s] a continuation of growth trends at many of Penn National's gaming properties as reported with the first quarter 2003 financial results.

The company raised its revenue estimates for the quarter to $329 million from $326 million, with operating income projections raised to $52 million from $49 million, EBITDA expectations raised to $71.1 million from $68.2 million, and earnings per share projections raised to 38 cents from 33.

But for the full year, Penn National was forced to pull back a little, chiefly because of the expected impact of recently enacted increases in adjusted gross receipt taxes and admission taxes imposed by Illinois - where Penn National operates a riverboat casino, the Hollywood Casino Aurora, part of Penn National's recent purchase of Hollywood Casino.

While Penn National said it was taking actions to mitigate the impact of the Illinois tax increases - including employee layoffs, marketing and promotional program reductions, other cost reductions and the adoption of admission fees - it still sees full-year revenues a $1.188 billion, off from the previous estimate of $1.206 billion, with operating income expected to come in at $184.2 million, down from $187.1 million previously expected. Full-year EBITDA is likely to total $255.9 million, versus $258.8 million, and earnings per share are expected at $1.32 versus the earlier projection of $1.34.

The Illinois legislature, at the behest of Gov. Rod Blagojevich, passed the gaming tax increase on May 30. Immediately after that, Penn bonds retreated a little from their prior levels, with the 8 7/8s for instance, falling to around their current 105 levels from 106.5, and its 11 1/8s easing to slightly north of 110. But they have essentially stabilized at those levels since then.

Last week, CIBC World Markets lowered its earnings estimates on Penn, Illinois-based Argosy Gaming, and several other operators with Illinois exposure, including Harrah's Entertainment and Mandalay Bay Gaming, and downgraded Argosy's shares.

But on the bond side, the company's high yield research director, Jacques Cornet, recently noted that generally speaking, "gaming bonds have held up pretty well and in certain cases have been oblivious to other events in the high-yield market as well as within their industries."

Argosy and Penn - which have the most Illinois exposure in the industry - both "have pretty manageable balance sheets and even after the legislation will continue to generate free cash flow. In our view, that should limit bond price volatility. So I don't think it's going to have a dramatic effect [on the bonds]."

Cornet said that Penn initially felt the impact of the tax hike more than Argosy "because of where they are - they just bought Hollywood, and they're a little bit more leveraged than Argosy."

The latter's bonds, meanwhile also continue to hang in despite the fears of what higher taxes might do to the bottom line, with its 103/4s quoted late last week at 109.5 and not seen around since then.

As to the other players with Illinois exposure, Cornet noted that Boyd Gaming, Harrah's and Mandalay all have operations there - but these are too small to make much impact versus the overall size of the companies and their operations in Las Vegas, Atlantic Cite and elsewhere.

© 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.