Danka, Worldspan price deals; Allegheny Energy lower on liquidity warning

By Paul Deckelman and Paul A. Harris

New York, June 24 - Danka Business Systems plc and Worldspan LP priced new deals late in the session Tuesday - the latter's having been downsized to $280 million from the originally planned $315 million.

In secondary market dealings, Levi Strauss & Co. bonds ended a slide which had stretched for several sessions, while Allegheny Energy Inc.'s debt headed south after the Hagerstown, Md.-based utility company's late-Monday warning that it is talking to its bank lenders about additional liquidity and that earnings and cash flow will be well below previous forecasts

Levi Strauss bonds, which have recently been easing from earlier highs, seemed to stiffen up a little on Tuesday; a market source said the San Francisco-based blue jeans maker's debt was "up a little," and quoted its 7% notes due 2006 as having firmed to 81 bid from 78 previously.

At another desk, the company's 11 5/8% notes due 2008 were seen up as much as three points on the day to 85.5 bid.

Another market watcher saw the Levi 12¼% notes due 2012 as having firmed to 83 bid.

No fresh news was seen that would justify any kind of substantial movement in the bonds of the privately held company.

A trader said that was also the case in a lot of mostly negative bond-price action that he had seen during the session, and over the previous several sessions.

"There was no really bad news out on these names - just a little profit-taking.

He noted, for instance, that Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009, which last week had been seen as high as the 109-110 bid area, had since gradually eased from those lofty levels, and were "a little weaker" now, no better than 106.5 bid, 107.5 offered.

Tyco International also "seems weaker," he said, with its 6 3/8% notes due 2005 now at 104 bid, 105 offered, down from levels around 105-106 last week.

Another name which has come off its recent highs, he said, was Calpine Corp. - even though the San Jose, Calif.-based independent power producer finally made its long-expected announcement that it had clinched agreement with its banks on a new, two-year, $950 million secured working capital revolving credit facility.

He quoted Calpine's 8¼% notes due 2005 as having begun the session around 92 bid, 94 offered, but remarked that "people started hitting the bids," and had dragged the issued down to 88.5 bid, 89.5 offered by day's end. He also saw Calpine's 8½% notes due 2011 easier at 71.5 bid, 72.5 offered, "off a couple."

Perhaps the bonds were easier because the new facility was a little smaller than the $1 billion the company had been gunning for, or perhaps it was because - in the words of Standard & Poor's - the deal "is positive for the credit, but not sufficiently positive for a change in the outlook or the rating" (S&P said it is "skeptical about the banks' willingness to extend the maturity of the revolver beyond Dec. 26, 2004, because the note holders for the $1.2 billion 2006 convertible senior notes have the right to require Calpine to repurchase the notes at par on that date ). Or perhaps, as the trader said, it was just more profit-taking off recent gains than anything else.

One name which was seen lower on definite news, however, was Allegheny Energy, whose 7.80% notes due 2011 were two points lower at 85 bid. On the equity side of the ledger, Allegheny's shares dropped 83 cents (8.92%) to $8.48 on New York Stock Exchange volume of 4.2 million shares, more than three times the average daily handle.

Allegheny said in a statement released after the close on Monday that its common equity ratio (common equity to total capitalization) "has fallen below the level required under certain key Securities and Exchange Commission (SEC) authorizations. As a result, the company will be required to obtain further SEC authorizations to engage in financing and other activities that are critical to its near-term financial viability."

As if that sober warning wasn't enough, the company said that while it is preparing applications for submission to the SEC requesting authorizations to engage in certain financings and other activities - without which its financial flexibility will be severely constrained - and while it is in discussions with its senior bank lenders and is actively pursuing the sale of the West Book of its energy trading portfolio, it could give "no assurance" that such efforts to improve its situation will prove successful. Accordingly, Allegheny cautioned that if it is "unable to secure its liquidity position through the steps it is currently pursuing, it would be required to review other alternatives, including the possibility of seeking protection under the bankruptcy laws."

Energy sector peer Mirant Corp.'s debt was lower, in the wake of the late Monday announcement that S&P had lowered the company's ratings and those of several subsidiaries to CC from CCC previously.

Mirant's 8.30% notes due 2011 were down a point, at 60, while its 7.20% notes due 2008 were also a point lower at 62. Its 7.4% notes due 2004 were "down a point or two" at 72, a market observer estimated.

On the upside, Rite-Aid Corp.'s 12¼% notes due 2012 went home a point better at 81 bid, 83 offered, while its 11 5/8% notes firmed a point to 83.5 bid, 85.5 offered; the Camp Hill, Pa. based drugstore chain operator reported first-quarter per-share results at break-even, excluding special charges, in line with analysts'' projections.

In the primary, two issues priced during Tuesday's generally quiet session, as Danka Business Systems sold $175 million of 11% seven-year notes, and Worldspan priced $280 million of eight-year notes to yield 9 5/8%.

And for the second time in the past three primary market sessions no new offerings were added to the forward calendar.

A consensus emerged among sell-side sources who spoke to Prospect News on Tuesday: prospective issuers are likely awaiting Wednesday's pronouncements from the Federal Reserve to see how big the widely anticipated rate cut will be and to hear how the Fed believes the risks to the U.S. economy are weighted.

"After the Old Man speaks Wednesday you'll probably see some new deals," one official suggested.

Another sell-side source seemed to concur.

"I think people are paying attention to that," said this official. "If rates stay low that's an encouragement for high yield. If they hold firm or if rates go higher it could really let a lot of steam out of the market because the higher rates go the greater will be the distinction between Treasuries and high yield.

"Right now people feel like they have to go to high yield to get any yield at all."

Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, told Prospect News on Tuesday that whether and by how much the Fed cuts interest rates may not prove as important as the indications it gives on the direction of the economy.

"The Federal Reserve has been talking the Treasury market down in yield and up in price," Gaffney said. "With rates so low they don't have a whole lot of room.

"When they make their announcement Wednesday it's not going to be so important whether it's 25 or 50 basis points. What will be more important is whether they are going to maintain their downward bias, because if they go back to neutral the market could read that as evidence that they are done cutting, and you could see rates going back up, which would not be good because the economy needs time.

"Companies need time to tap the capital markets at these lower rates because if growth is going to be slow we have to reduce the debt burden for them," the Loomis Sayles PM added. "If they're not going to have the cash flow to pay down debt, at least make it affordable for the time being.

"Look at GM, with their $13 billion. I know that's not high yield but it's kind of a Band-Aid approach: debt financing to pay off another liability. And that's a variable-cost liability that you are paying for with fixed costs. It's kind of a slippery slope.

"I'm not as pessimistic as I sound," Gaffney insisted. "I think they're going to do the right thing. But it's definitely a very tricky game.

"And for the high-yield market it's great that financing costs are so much lower," she added. "You just have to be in the right names so that no matter what the cost they're still going to be able to pay you back."

Prospect News had last spoken to Gaffney in late May, when the preponderance of opinion held that the high yield had been rallying on "technicals," that is, on the strong flow of cash into the asset class, as opposed to "fundamentals," such as improvement in the U.S. economy and in the earnings statements of companies.

"It still is predicated upon technicals," Gaffney stated Tuesday. "Rates are low and there is an appetite for yield. But the fundamentals are not as bullish as the market is."

Prospect News followed by asking whether the fundamentals had improved at all, during the past month.

"With financing costs down the debt burden is reduced but not dramatically," said Gaffney. "You still have companies that are saddled with a lot of debt and the only way they're going to pay it off is to grow at a pretty fast pace. And we just don't have those growth expectations. Our growth expectations are pretty modest, which makes it challenging."

As to her recent activities in new high yield issues Gaffney told Prospect News that she was involved in Monday's Huntsman Advanced Materials deal. The company sold $245 million of seven-year senior secured notes (B2/B) at par to yield 11%, and $100 million of five-year floating rate notes at 98.0, bearing an interest structure of Libor plus 800 basis points with 2% Libor floor. Deutsche Bank Securities and UBS Investment Bank were the bookrunners.

"We participated in the deal because we think that reflation is part of the future, so all the cyclical deals that are being priced cheaply are of interest to us.

"But other than that it's tough to find any great value out there," Gaffney added.

Meanwhile during Tuesday's session Danka sold $175 million of 11% seven-year senior notes (B2/B+) at 97.66 to yield 11½%, wide of the 11%-11¼% price talk. Bear Stearns was the bookrunner for the St. Petersburg, Fla. document services provider's deal.

Also on Tuesday Worldspan priced a downsized $280 million of eight-year senior notes (B2/B-) at par to yield 9 5/8%, at the tight end of the 9 5/8%-9 7/8% price talk, via Lehman Brothers and Deutsche Bank Securities.

On Monday the company cut the deal from $315 million, shifting $25 million from the bond offering to its new credit facility and $10 million to capitalized leases.

Price talk of 7½% area emerged Tuesday on Alaris Medical Inc.'s upcoming sale of $200 million eight-year non-call four senior subordinated notes, which are expected to price Wednesday afternoon via Bear Stearns, Citigroup and UBS Investment Bank.

And price talk of 9¼%-9½% was heard on Reliant Resources, Inc.'s offering of $350 million seven-year non-call-four senior secured notes (B1/B+), set to price on Thursday via Banc of America Securities, Goldman Sachs, Deutsche Bank Securities and Barclays Capital.

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