AES gain on asset sales leads power sector higher; Levi lower on earnings, outlook;

By Paul Deckelman and Paul A. Harris

New York, March 25- AES Corp. bonds were solidly higher on Tuesday, after the Arlington, Va.-based independent power producer announced asset sales totaling $327 million. That helped to push a power sector that was already heading upward even higher.

On the downside, Levi Strauss & Co. Investors were singing the blues after the jeans maker reported weaker-than expected first-quarter numbers.

AES's 9½% senior notes due 2009 were quoted as having pushed up to 81.5 bid/82.5 offered from prior levels at 78.5 bid/79.5 offered, while its 8½% subordinated notes due 2007 rose to 65 bid/66 offered, from 60 bid/61 offered on Monday.

At another desk, AES' 9 3/8% notes due 2010 were seen three points better, at 80 bid/82 offered. The company's New York Stock Exchange-traded shares were 40 cents better (+12.2%) at $3.68, on volume of 4.5 million shares, roughly double the average turnover.

AES said that it had reached agreement on three separate sales transactions providing approximately $327 million in proceeds to the company.

The largest is its sale of 100% of its ownership interest in two generation businesses in Bangladesh to CDC Globeleq; the aggregate transaction is valued at $437 million, which includes cash and assumed project debt of $310 million, which equates to an equity purchase price of $127 million, with AES also to be released from approximately $44 million in contingent liabilities.

AES also announced that it will sell an approximately 32% ownership interest in AES Oasis Ltd. - a newly created company that will own two electric generation and desalination plants in Oman and Qatar, generating facilities in Pakistan plus future power projects in the Middle East - to the IDB Infrastructure Fund for cash proceeds of approximately $150 million.

And it further said that it had recently closed the sale of its 100% equity interest in California-based Mountainview Power Co., which owns a small, (126 megawatt) retired gas-fired thermal power plant, and its 100% equity interest in Mountainview Power Co. LLC, which will operate a partially constructed large (1,056 MW) gas-fired combined cycle plant, to Sequoia Generating LLC. That transaction resulted in initial cash proceeds to AES of $25 million with an additional payment of $5 million to be paid to AES on April 15, plus another $20 million if certain project-specific milestones are achieved.

AES said the sales are another step in its efforts to strengthen its balance sheet and execute its turnaround plan. AES is looking to reduce its approximately $4.4 billion of outstanding debt, and has raised a total of $1 billion in cash from asset sales this year on the way to that goal.

AES was but one of a number of merchant energy companies whose bonds were "smokin'" on Tuesday, in the words of one trader, helped by the AES news and by expectations of positive developments from Wednesday's scheduled meeting of the Federal Energy Regulatory Commission. The FERC is expected to decide this week on the refund claims arising out of the California energy crunch in late 2000 and early 2001, long-term California power supply contracts, and other issues.

The state claims that merchant energy providers like Dynegy Inc., Mirant Corp. and others gouged state energy consumers to the collective tune of some $8.9 billion. But in December, an initial decision by a FERC law judge awarded California just $1.8 billion in refunds - and since the state still owes suppliers $3 billion, that means that far from recouping the billions that it claims, California would still have to give the suppliers about $1.2 billion if the decision stands.

Analysts believe that at best, the state is likely to either break even or get only a small recovery, well below the nearly $9 billion it is hoping for.

The prospect that the FERC won't sock it to the merchant energy providers helped to push Dynegy's bonds, and those of Mirant "up a couple of points" Tuesday, a trader said.

Another trader saw Dynegy's 8¾% notes due 2012 advancing to 71 bid/72 offered from 68.5 bid/69.5 offered on Monday; Mirant's 7 5/8% notes due 2006 were 1½ points better at 61.5 bid/62.5 offered; Williams Cos. Inc.'s 8 1/8% notes due 2012 rose a point to 87 bid/88 offered, while Calpine Corp.'s 8½% notes due 2008 were 1½ points better at 55 bid/56 offered, and its 8 5/8% notes due 2010 were nearly a point up at 53 bid.

One name which was not seen trading around - despite the sector's general strength and some company-specific positive news, was CMS Energy Corp., whose 7½% notes due 2009 have recently hovered north of 83 bid.

The Dearborn, Mich.-based utility company's shares were up 44 cents (10.40%) to $4.63 in NYSE trading, after CMS announced that its banks had agreed to extend the March 31 maturity date on its revolving credit facility by as much as three months, to the earlier of either June 30, or the closing date of the company's sale of its CMS Panhandle Companies unit. CMS still owes $123.8 million of the original obligation of $295.8 million.

And a trader said he didn't see much in trading Tuesday of El Paso Corp.'s bonds, although he allowed that the Houston-based power producer and pipeline operator's paper "had its shot last week," when it rose in reaction to El Paso's $1.7 billion settlement of California's claims against it, as well as its recently announced financing moves, including a subsidiary's issue of $300 million of new seven-year notes.

Outside of the energy and power constellation, Foster Wheeler Ltd.'s 6¾% notes due 2005 jumped five points, to 57 bid/59 offered, after the Hamilton, Bermuda-based provider of design, engineering, construction, manufacturing and plant operation services said that its fourth-quarter loss narrowed to $112.1 million ($2.73 a share) versus a year-earlier loss of $343.1 million ($8.39 a share). The company also projected that 2003 EBITDA would be about 30% higher than similar results over the past three years. The results were so welcomed by investors that even the news that the company had received formal notice from the NYSE that it may be de-listed for failing to meet the minimum total market capitalization failed to dent the bonds, or the shares, which boomed 20 cents (17.70%) to $1.33. Foster Wheeler said it expects to file a business plan with the exchange that will allow it to stay listed.

Also on the upside, bonds and shares of XM Satellite Radio Holdings Inc. were up as an analyst's report touting the satellite radio broadcaster got a good reception from investors. XM's 14% notes were two points better at 47 bid/48 offered, while its stock jumped 74 cents (13.94%) to $6.05 on the Nasdaq on three times heavier than usual volume of about 10.6 million shares.

SkyWaves Research of Ann Arbor, Mich. forecast that XM's subscriber base would grow to around the 490,000 to 500,000 area by the end of the first quarter, and would likely double from there to 1.2 million by the end of 2003. The research firm also projected that XM would enjoy "significantly lower" subscriber acquisition costs throughout 2003. The company is scheduled to unveil fourth-quarter results on Thursday; in the third quarter, XM added nearly 65,000 subscribers, to bring its total by the end of that quarter to just over 200,000.

On the downside, Levi Strauss' debt "got mowed" on disappointing earnings results, a trader said, with the San Francisco-based apparel maker's 12¼% notes due 2012 falling more than five points to end at 94.25, its 7% notes due 2006 dropped to 85 bids/86 offered from 91 bid/92 offered previously, and its 11 5/8% notes due 2008 were four points down, at 96 bid.

A trader said that the 11 5/8s had fallen as low as 94 bids during the session before coming off the bottom to end where they did.

At another desk, a market observer said that the company's short-dated 6.80% notes, scheduled to mature later this year, pretty much hung in around the par level, down just half a point to a full point, but its longer-dated paper "got whacked."

Levi announced that it lost it lost $24.5 million in the fiscal first quarter ended Feb. 23 versus a $2.5 million year-earlier profit.

Levi said that the loss reflected a more severe sales slowdown than management anticipated, largely due to a feeble holiday season and mounting consumer worries about war and terrorism, which seemed to put a damper on consumer spending during much of February.

Also lower was AK Steel Corp., whose 7 7/8% notes due 2009 dipped to 92 bid/93 offered from prior levels around 95 bid/95.5 offered, and its 7¾% notes due 2012 lost three points to 91.5 bid/92.5 offered. AK's shares dropped 75 cents (16.78%) to end at $3.72 on the NYSE on volume of three million shares, about five times the norm.

Investors were apparently reacting to projection embedded in the Youngstown, Ohio-based steel company's annual report, filed Friday with the Securities and Exchange Commission, in which AK predicted that first-quarter shipments would likely decline to about 1.35 million tons from 1.43 million tons shipped in the 2002 fourth quarter of 2002, due to reduced demand from contract customers in the appliance, construction and manufacturing markets.

Separately, the bankruptcy court handling the sale of National Steel Corp.'s assets ruled that potential buyer AK would have more time in which to secure a new labor contract with the steelworkers' union - considered critical to whether the bankrupt Indiana-based steel company will be able to be bought. AK, as the lead bidder, was given until April 9 to reach a contract with the union, versus the previous March 26 deadline. The union objected to the extension, claiming that there was now no incentive to force the company to seriously and quickly bargain.

United States Steel Corp. is also hoping to buy National and has an April 10 deadline to resubmit a bid, after its $750 million offer was topped by AK's $925 million bid.

News on the new issuance side of high yield was positively scarce Tuesday as sources advised Prospect News that market activity continues to take a back seat, in terms of investor focus, to the unfolding U.S.-led military campaign to displace Iraqi dictator Saddam Hussein.

No transactions priced on Tuesday, nor were any new deals announced.

"There is nothing going on, whatsoever, besides this war," one official commented. "No one is going to launch a roadshow in this environment."

However one sell-side official told Prospect News Tuesday of "being up to my armpits in pitches and potential transactions."

"People are going to wait to see what happens this week," the source said. "And so long as there is no domestic terrorism I think the market's going to continue. I think deals are going to be announced."

This official qualified that the credits likely to show up will be "seasoned issuers and the better-rated issuers: guys that can get in and out of the market strategically and surgically, for good uses of proceeds.

"You won't see a lot of lodging deals or airline-related deals," the source added. "But look for the bread and butter guys - consumer products, healthcare, energy. That's the sweet spot."

Among the morsels of news that did manage to circulate the market, Tuesday, regarding new issuance, one source told Prospect News that a "well-attended" roadshow had taken place in New York for Dan River Inc.'s $150 million of six-year senior bullets (B3/B-). That Rule 144A/Regulation S deal, via Deutsche Bank Securities, wraps up its roadshow Thursday.

Also Prospect News learned Tuesday that Lehman Brothers and Salomon Smith Barney will be joint bookrunners on an offering of Hayes Lemmerz International, Inc. senior notes, expected to come during the second quarter. The size of the deal as well as the maturity and structure of the bonds remain to be determined.

The deal is part of the Northville, Mich.-based auto parts supplier's exit financing from Chapter 11, with the confirmation hearing set for April 9.

Nor is Hayes Lemmerz the only "exit financing" deal in the present market. Laidlaw, Inc. plans to bring $300 million senior secured notes (B+), as part of its Chapter 11 exit financing, Prospect News learned Monday. In addition to the bonds the company is also obtaining a new $825 million credit facility via Citigroup and Credit Suisse First Boston.

For one high yield official the simultaneous appearance of two exit financing deals, in a market that is "choking on cash," is not exactly a coincidence.

"The market is that hot," this source contended. "There are a lot of people looking for paper, and when that's the case people are willing to do that stuff."

However another sell-sider invoked "the cleansing power of bankruptcy," and spelled out a rationale for exit financing transactions.

"When you are the holder of the debt, after bankruptcy when the company is going to exit, if you can get somebody to sell it for you you're better off because you get cash as opposed to holding onto the securities and having to try to trade them," said the official.

The alternative, said this sell-side source, can be seen by looking at the plight of the holders of Chiquita Brands International Inc.'s 10.56% senior notes due 2009. That company emerged from bankruptcy one year ago, having erased $700 million in debt from its balance sheet.

"They gave the existing senior note holders and bank debt holders $250 million of 10.56% senior notes due 2009 when they exited bankruptcy," said the official. "So those guys ended up with illiquid stuff that they had to trade.

"If there had been a high yield market for those guys they would have gotten cash, and cash is king.

"That's why you're seeing a lot of guys trying to hit the market for exit financing. If it doesn't work they'll just give paper back to the creditors.

"When there is a marketplace you should probably hit it."

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