Service Corp. 12-year deal prices, moves up in after-market; Calpine firmer

By Paul Deckelman

New York, June 10 - Service Corp. International brought a rollicking week to a close in the high yield primary market Friday, successfully pricing a $300 million issue of 12-year senior notes at price talk; the new issue then firmed smartly when it was freed for secondary dealings, traders said.

Elsewhere on the primary side, things were deadly dull - giving players a welcome breather after a frenetic week that saw a number of issuers bring quickly shopped deals to market and price them lickety-split, including two of the biggest offerings seen in recent months - Qwest Communications International Inc.'s $1.75 billion three-part leviathan and, on the same day, DirecTV Group Inc.'s $1 billion mega-deal.

In the secondary market, outside of the firm appreciation the new Service Corp. bonds saw, Calpine Corp. notes were better, still apparently riding the crest of Thursday's announcement that the San Jose, Calif.-based power generating company will tender for a series of 2014 notes using the proceeds of a planned asset sale. Well after the market close Friday, Calpine separately announced that it was terminating another tender offer - for notes linked to its Canadian subsidiary - citing "market conditions."

But as had been the case for pretty much all of the week, the secondary market played second fiddle to the suddenly revived primary, which revved up this week as issuers like Service Corp., Qwest and DirecTV, as well as MGM Mirage, Chesapeake Energy Corp., Ventas Realty and Tekni-Plex Inc. chose to strike while the iron was hot and get the financing they wanted to do done while interest rates remained near historically low levels. Yields on the 10-year Treasury note, for instance, managed to say just under 4% from the beginning of June through most of Friday's session, although the edged back up to slightly over 4% late Friday on profit-taking.

Also helping the situation was the improvement in market psychology following the massive $976 million junk bond mutual funds inflow reported for the previous week - the first such inflow in 16 weeks, and the largest since the fall of 2003 - which was then followed by a second straight inflow reported Thursday for $109 million. The fund flows are a measure of overall junk market liquidity trends and signal that investors looking for yield are apparently coming back to junk to find it.

Primary volume for June so far - with just 10 days gone - has already reached $5.16 billion, double the total for all of May and closing in on April's $5.46 billion.

Service Corp. in line with talk, up in trading

The star name of the day Friday was Service Corp., the giant Houston-based funeral home and cemetery operator, which was heard by high yield syndicate sources to have priced its deal, carrying a 7% coupon, at 99.003, to yield 7 1/8%, in line with pre-deal market price talk.

The notes are non-callable for life outside of a make-whole call at 50 basis points over Treasuries.

The deal was brought to market via joint bookrunning managers Merrill Lynch & Co. and JP Morgan.

Service Corp. plans to use the $297.009 million proceeds from the deal to fund its recently announced tender offer for its 7.2% notes due 2006 and 6 7/8% notes due 2007.

When the new Service Corp. bonds were freed for secondary dealings, the bonds were "very well received," said one trader, who saw them move up to 100.5 bid, 100.75 offered, while another trader called the deal "a beauty of a bond," quoting the new notes as having improved to 100.75 bid, 101.25 offered, for "a nice little gain right there for the new holders.

"The rest of the [capital structure] rallied with it," he continued, noting, for instance, that the company's 6¾% senior notes due 2016 "were right on top of them," at 100.5 bid, 101.5 offered.

Qwest gains

A market source meantime saw several issues of Qwest debt higher, including the Qwest Services Corp. 13½% notes due 2010, which firmed several points to around the 115 level, while the Qwest Corp. 7½% notes due 2023 gained more than two points to 90.5. The parent Qwest company's 8% notes due 2014 were up almost two points to end at 95.

Calpine keeps gaining

Among the existing issues not having any kind of new-deal connection, the trader saw Calpine's bonds better, with its benchmark 8½% notes due 2008 at 64 bid, 65 offered, after having moved up two points in morning trading.

He attributed the rise to the continued momentum the company's bonds showed after a down-and-up day Thursday, which saw Calpine's bonds first retreat on the news that the Securities and Exchange Commission had in April asked for documents relating to its downward revision of proved oil and gas reserve estimates and some other documents concerning other matters as well, only to then tick back upward later Thursday after Calpine announced that it had begun a tender offer for its $785 million of outstanding 9 5/8% senior secured notes due 2014, as required by the bonds' indenture in the event of the company coming into money as a result of an asset sale - specifically, Calpine's efforts to sell its remaining U.S. gas reserves, with the intention of monetizing that asset in order to generate proceeds with which to pay down debt.

A second trader, however, said that Calpine "didn't really move that much," pretty much just clinging to the gains it notched late in Thursday's session.

While the market seemed to apparently like that Calpine asset sale and bond takeout, the second trader opined that "there are two sets of opinion on [Calpine]. It looks like right now they're trying to do things that make sense - but they're still losing a lot of cash and they're mortgaging their future - and they don't have much more of assets to sell to cover."

While in the short-run, selling assets such as the gas reserves will result in debt paydown, he indicated, in the long run, Calpine will still have to buy gas from someone in order to run its plants - but will now be at the mercy of the energy markets, rather than being, in effect, hedged against them. "That's the point," he said.

"Somebody asked our senior analyst 'is the [Calpine] '06 paper good?' - and he said 'I don't think so.' He wouldn't put his money up on it. He thought that the only opportunity [to sell assets but not hurt the company's long-term prospects] was the California generating stuff. But they have a cash shortfall of something like $525 million a year. This is like a band-aid approach."

Therefore, he said, "nobody got excited" Friday.

At another desk, however, Calpine's 7¾% notes due 2009 were up more than two points on the day to 59.5 bid, while its 8¾% notes due 2007 were seen three points better on the day at 67. Calpine Canada Energy Finance ULC's 8½% notes due 2008 were up more than a point to 62.625.

Late in the day, after trading was finished, Calpine announced that it was terminating its pending tender offer for those dollar-denominated 8½% notes, as well as for two other Calpine Canada Energy Finance issues, its euro-denominated 8 3/8% senior notes due 2008 and sterling-denominated 8 7/8% seniors due 2011, citing market conditions. Calpine had been offering to spend up to $160 million to buy back all or part of the latter two issues and absent that, the dollar 81/2s, for about 52 cents on the dollar - well below Friday's levels. It said that it would not accept any already tendered notes, and would return any tendered notes to their owners.

"Who knows how this will go on Monday?" the first trader speculated upon hearing the news come across the tape.

Auto names continue strong

Elsewhere, the automotive sector was seen continuing to see strength, with Delphi Corp.'s 6½% notes due 2013 up a point at 75 bid, 76 offered.

"GM stock was up, and the bonds were up maybe a point, or a point or a half," said a trader, "but nothing really crazy."

He saw truck and bus maker Navistar International's 7½% notes due 2011 rise to 102.5 bid, 103.5 offered, up a point, linking the rise to the company's announcement Thursday of a 2% rise in second-quarter earnings from a year ago, and its raising its fiscal 2005 earnings outlook to between $4.80 and $5.10 per share, from a prior range of $4.60 to $5, and up as well from the Wall Street consensus of $4.67.

Navistar also released bullish revenue projections of between $11.4 billion and $11.7 billion, while analysts were looking for $10.93 billion for the year.

Another trader also saw that Navistar "got a lot better," and saw strength in Arvin Meritor and in GM itself, with ArvinMeritor's 8¾% notes going to 104 bid, up a point on the day

Other sectors showing strength, he said, included steel, with AK Steel Corp.'s 7 3/8% notes at 88 and its 7 7/8% notes at 94.5 bid, 94/75 offered, both up three-quarters of a point.

Downsiders, he said, included the forest products producer Tembec Industries, whose 8 5/8% notes due 2009 dropped two points to 79 bid, 80 offered, while its 8½% notes due 2011 were a point lower, at 76 bid, 76.5 offered.

Cenveo seen in play, rises

Denver-based mail-order company Cenveo's bonds were up three-quarters of a point to a full point, he said, its 7 5/8% notes rising to 95 bid, 95.5 offered on the perception that the company is "in play," with dissident shareholders Burton Capital Management LLC, Goodwood Inc. and others announcing that they have called a special meeting of Cenveo's shareholders - in order to replace the existing directors of Cenveo, whom they claim have done nothing to protect declining shareholder value.

Cenveo, in response said that "if a meeting of shareholders has been properly called for, the board will meet and set a date for such a meeting."

Back in the primary market, terms were heard to have emerged on a eurobond deal done earlier in the week for Austrian construction holding company Fimag Finanz Industrie Management AG, which priced a €75 million issue of five-year notes.

The notes, carrying a 4¼% coupon, priced at 99.559 to yield 4.35%, at 170 basis points over swaps - in the middle of pre-deal market price talk envisioning a spread of over swaps of between 165 and 175 bps.

The deal was brought to market Tuesday by two Austrian banks - Erste Bank and RZB - and was shopped to investors via a short roadshow before pricing.

Proceeds from the bond deal will be used to finance the company's expansion in central and Eastern Europe.

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