Upsized Lear deal prices, trades down; Freeport gyrates on Phelps Dodge deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 20 - Lear Corp. priced a quickly shopped two-part drive-by deal Monday - but while the Southfield, Mich.-based automotive seating supplier's offering generated enough interest to warrant it being upsized when it priced during the afternoon, the new bonds traded down when they were freed for aftermarket dealings.

However, Lear's existing bonds were higher, particularly its 8.11% notes due 2009, which strare slated to be taken out using a portion of the proceeds from the new deal.

Elsewhere, the bonds of Freeport McMoRan Copper & Gold Inc. gyrated around at lower levels on the news that the New Orleans-based copper and precious metals miner wants to buy Phelps Dodge Corp. for $26.9 billion, in an effort to quickly boost its copper reserves. However, later in the day, they were seen to have moved back up to end around unchanged.

The broad market started out soft on Monday morning and ended the session even softer, one high yield syndicate official told Prospect News.

The source pointed to recent new issues from Firestone Acquisition Corp. (Freescale Semiconductor Inc.), a landmark $5.95 billion four-part deal that priced last Thursday, and Elan Finance Corp.'s $615 million two-part deal, which priced Friday, and said that bonds from both had fared poorly during the Monday session.

"In certain names the market was down half a point to a point," the official added.

The source said that a little "new deal fatigue," trailing an intense volume of issuance seen over the past two weeks, may have taken hold on Monday, but also added that the stock market opened softer on the session as well.

"It was time for a little bit of a breather," the source added, noting softness in equities, a paucity of financial news and a short pre-Thanksgiving week.

Lear upsizes to $900 million

Only one issue priced during Monday's primary market session. However in keeping with the recent scale of high yield offerings it was a big one.

Lear Corp., the Michigan-based supplier of automotive interior systems and components, priced an upsized quick-to-market $900 million two-part senior unsecured notes transaction (B3/B-).

The company priced a $300 million tranche of seven-year notes at par to yield 8½%, on top of price talk, and a $600 million tranche of 10-year notes at par to yield 8¾%, also on top of price talk.

The 10-year notes tranche was upsized from $400 million.

The overall transaction was upsized by $200 million to $900 million from $700 million.

Citigroup ran the books.

Proceeds will be used to fund a tender for the company's outstanding 8 1/8% senior notes due 2008 and its 8.11% senior notes due 2009.

Shortly before the terms were circulated a buy-side source said that the deal was partly driven on "reverse inquiry."

The source added that the initial talk on both tranches was 25 basis points higher than the official talk that subsequently surfaced: that is, 8¾% on the seven-year notes, which were eventually talked at 8½%, and 9% on the 10-year notes which were eventually talked at 8¾%.

Later in the day a high yield investor who had watched the transaction said that the upsizing reflected the amount of cash that Lear needs to completely take out both issues of notes. In a press release earlier in the day - before the upsizing - Lear stated it would only take out a portion of the 8.11% paper maturing in 2009.

The investor added that there had been some talk that Lear could upsize the deal to $950 million, with the extra $50 million going for general corporate purposes. However the further upsizing did not materialize.

The investor went on to say that with the new bonds Lear shook off its high yield covenants. In spite of the B3/B- ratings the new paper comes with investment-grade covenants, the source said.

The buy-side source also said that in the documentation for the new bonds the company disclosed that it has a memorandum of understanding that it will contribute substantially all of its North American auto interiors business to a joint venture with Wilbur Ross, and noted that in October the Lear completed the sale of nearly all its European auto interiors business to a joint venture that involved Ross.

"If they hadn't included that there is no way they would have gotten this deal done," the investor said.

On to Thanksgiving

Sources noted on Monday that the ranks of market players were already thinned somewhat by the approaching four-day Thanksgiving holiday in the United States.

Those source unanimously expressed the opinion that the "thinning" effect seen Monday will only be amplified as the holiday-shortened week winds its way toward the early close on Wednesday.

One sell-side source who spoke after the Monday close said that the expectation is that Lear might be the last piece of pre-Thanksgiving business in the primary market.

Lear's new notes trade off after pricing

When the new Lear notes were freed for secondary dealings, traders said they saw both tranches of the new bonds head lower on the break.

A trader saw Lear's new 8½% notes due 2013 at 98.75 bid, 99 offered, down from their par issue price, while the new 8¾% notes due 2016, which were upsized to $600 million from the $400 million originally envisioned, trading at 98.625 bid, 99 offered, also down from their par issue price.

Another trader, however, saw both tranches dip to a shared low at 98.5 bid, 99 offered, but then, "it seems as though it caught a little bid after it traded down." He saw the bonds at 99.25 bid, 99.375 offered late in the day.

Yet another trader saw the 81/2s ending at 99.25 bid, 99.75 offered, while the 83/4s finished at 99 bid, 99.75 offered, both down from their par issue price.

On the other hand, he said, the existing 8.11% notes due 2009 firmed smartly, moving up to 104.4 bid, 106 offered, from prior levels at 103 bid, 103.5 offered, helped by the news that Lear intends to use the net proceeds of the new bond issue to pre-fund the repayment or repurchase of the 8.11s as well as Lear's outstanding 8 1/8% senior notes due 2008.

The trader also saw Lear's outstanding 5¾% notes due 2014 up ½ point at 85.5 bid, 86 offered.

The new bond issue and accompanying tender offer for the existing bonds weren't the only thing that Lear Investors were watching.

Late in the session, the company said in a Securities and Exchange Commission filing that it has entered into a non-binding agreement in principle to sell substantially all its North American auto interiors business to a joint venture with billionaire investor Wilbur Ross, who is in the process of cobbling together a new super company formed out of cast-off auto parts operations, hoping to replicate the success he has had doing this in the steel and coal industries.

Under terms of the deal, Lear will contribute its North American interiors business and $25 million cash to a new International Automotive Components Group North America LLC. In return, Lear would receive a 25% equity interest in the company, plus warrants for an additional 7% stake.

Lear - which earlier this year completed the sale of nearly all its European auto interiors business to Ross under similar terms - has been trying for months to get out from under its money-losing domestic interiors business, which would allow the company to concentrate on its seating business and its automotive electronics and electrical systems business.

Other auto names little changed

Elsewhere in the automotive realm, a trader saw "pretty quiet" dealings in sector names, even including recently volatile distressed auto parts companies.

For instance, he said that Remy International Inc.'s bonds "bounced around a little, but ended up not much changed," with the Anderson, Ind.-based automotive electronic components manufacturer's 8 5/8% notes due 2007 at 75 bid, 76.25 offered, while its 11% notes due 2009 were seen at 32 bid, 33 offered, about where they had been, on "not a lot of trading".

Remy's bonds have recently gyrated around at mostly lower levels, on poor results, and some investor feats that the company might end up filing for Chapter 11. Last week, Standard & Poor's lowered Remy's corporate credit rating to CCC from CCC+ previously, citing Remy's inability to improve very weak earnings and cash flow. The agency said this left the company with shrinking prospects for meeting its December 2007 maturity of its $145 million senior notes,

S&P also noted that Remy recently lowered its earnings guidance for this year to a range that is "not sufficient" to cover the company's cash interest expense.

It further said that that the lowered ratings reflected Remy's "very aggressive leverage," its weak EBITDA, looming near-term debt maturities and limited liquidity.

Elsewhere among the troubled auto names, the trader saw bankrupt Troy, Mich.-based parts supplier Delphi Corp.'s 6½% notes due 2009 hovering around the same 106 bid level that they have recently held.

He saw Dana Corp.'s bonds continuing to hold to levels in the lower 70s, again "in the same range that they've been in," with the bankrupt Toledo, Ohio-based auto parts supplier's 6½% notes due 2009 at 76 bid, 77.5 offered, and its 7% notes due 2028 at 74.5 bid, 75.5 offered.

And he saw bankrupt Rochester Hills, Mich.-based auto components maker Dura Automotive Systems Inc.'s 8 5/8% notes due 2012 unchanged at 25.25 bid, 26.25 offered.

Freeport volatile on Phelps Dodge news

Outside of the automotive arena, a trader saw Freeport McMoRan's bonds fall, but then come back, in response to the news that the company and Phelps Dodge have agreed to a merger agreements under which Freeport McMoRan will acquire Phelps Dodge for $26.9 billion in cash and stock, much of which likely will be debt-funded.

That prospect caused Freeport McMoRan's 6 7/8% notes due 2014 to be "quoted down on the first news," he said, falling all the way down to 96 bid, 97 offered, before bouncing back to end essentially unchanged at 99.75 bid, 100.75 offered.

S&P said it may raise Freeport's debt rating, now at BB-, and lower Phelps Dodge's BBB status.

The ratings agency said that a successful acquisition would give Freeport-McMoRan more geographic and reserve diversity, mitigating its exposure to the political and legal risks of operating in Indonesia.

But S&P also warned that it is concerned about the combined entity's "aggressive" debt levels and its ability to reduce debt in a reasonable time. Freeport-McMoRan is expected to fund the purchase with about $16 billion of debt, the agency added.

AK Steel up on Oregon bid

Elsewhere, news that Oregon Steel Mills Inc. has agreed to be acquired for $2.3 billion by Europe-based Evraz SA helped Middletown, Ohio-based specialty steels producer AK Steel Corp.'s bonds.

They were seen a little better in response to the, with a trader marking its 7¾% notes due 2012 at par bid, 101 offered, up ½ point.

The deal for the Portland, Ore.-based company is the latest manifestation of a merger-mania trend sweeping the world steel industry - although high-yield issuers AK Steel and United States Steel Corp.'s respective bonds were unchanged Friday on news reports of takeover speculation about Pittsburgh-based U.S. Steel.

Dole bonds better, Pathmark off

The trader saw Dole Food Co. Inc.'s 8 7/8% notes due 2011 down ¾ point at 96.25 bid, 97.25 offered. He attributed the decline in the Westlake Village, Calif.-based produce giant to "profit taking."

And he saw Pathmark Stores Inc.'s 8¾% notes due 2012 down about a point at 97.5 bid, 98 offered, after Moody's Investors Service downgraded the bonds to Caa2 from Caa1 previously, and cut the Carteret, N.J.-based supermarket operator's corporate family rating to Caa1 from B3, with a negative outlook.

Moody's cited its concern that the company's "weak profit margins could continue to erode given the competition in its narrow trade areas," as well as its view that "it is unlikely in the near term that Pathmark will become self-funding . . . given that cash flow from operations and reported operating profit in each of the first two quarters of fiscal 2006 trailed the same periods in the prior year."

It further warned that the company's weak profitability and credit metrics "could over time erode its ability to comply with covenants in its bank facility," and expressed worry that Pathmark "relies on external funding to finance its peak working capital needs and planned capital expenditures."

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