Chesapeake bonds firmer on asset-sale news; Tousa trades flat on missed payment

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 - If anyone was really expecting the junk bond market to begin the new year by roaring back to life on Wednesday after having spent most of the past three weeks essentially sleepwalking in the traditional holiday-induced daze, they were sadly disappointed. Traders said the combination of an odd mid-week start to the new trading year, a less-than-full complement of market participants - many people extended their New Year's holiday and others staggered back in no real mood to get down to business yet - plus the pounding the equity markets took in the opening session of 2008, was enough to keep almost everybody who was in sitting on the sidelines.

Market features were few. One name which moved around a little on news was Chesapeake Energy Corp., whose bonds firmed a bit on the announcement that the Oklahoma-based energy company had agreed to sell some natural gas assets for $1.1 billion.

The distressed-debt precincts meantime saw some upside movement in Tousa Inc.'s bonds - but only because the troubled Hollywood, Fla.-based homebuilder missed the scheduled Jan. 1 coupon payment on two series of bonds, causing all of its paper to begin trading flat, or without accrued interest - just another key milestone on the dreary journey to a corporate restructuring of some sort, either in or out of court.

The high yield primary market, which has been in a virtual deep-freeze since mid-December - the last deal to actually price was Helix Energy Solutions Group Inc.'s offering of eight-year bonds way back on Dec. 18 - continued to just poke along.

Equity downturn scares quiet junk market

Back among the established names, a trader said that "there wasn't much going on," noting that with the equity market "getting hurt pretty good," junk players were apparently deciding that discretion was the better part of valor. He saw the widely followed CDX Index of junk market performance down 5/8 point at 94 7/8 bid, 95 3/8 offered.

Among market statistical gauges, the KDP High Yield index fell 0.06 to 77.54, while its yield widened by 1 basis point to 8.78%.

Looking at the broader market, advancing issues narrowly shaded decliners. And quiet as it was, overall market value was several times that of Monday's abbreviated final session of 2007.

Still, the trader said, it was "pretty quiet. It'll take a little time for everybody to get back into the swing of things."

Another trader said that at his shop, there were "just two guys in. It was pretty much dead." Apart from the flurries of activity surrounding Chesapeake Energy and Tousa, there was "not much else going on."

One senior high yield syndicate official reckoned that only half the forces had returned Wednesday to see out the remainder of the truncated first week of 2008.

This official said that against the backdrop of tumbling stock prices the high yield cash market and indexes were both ½ point lower on the day, as the first market session of the new year closed.

"There are a lot of people still out," the banker said. "Others are just getting back into their seats.

"It remains to be seen what will happen to the market.

"Next Monday, when people get back into the thick of things, we should begin to see some indications."

However another source from the sell-side told Prospect News that a deal will surface on Thursday.

Elsewhere a source from the buy-side was also marking junk lower, but specified that high yield had not sold off nearly as much as stocks, adding that the Dow Jones Industrial Average declined by 1.67%.

Chesapeake cooks with gas-asset sale

The trader saw Chesapeake's bonds up about "a point or two" on the news that the Oklahoma City-based independent oil and gas exploration and production company has agreed to sell some of its natural gas assets in Kentucky and West Virginia to UBS AG and Deutsche Bank's DB Energy Trading LLC unit for $1.1 billion.

He quoted the company's 6½% notes due 2017 at 96.5 bid, 97.5 offered, which he called up "not much, around a point" on the news.

A market source at another desk saw those bonds up 2 points on the day at around 98.5. Trading was fairly brisk for a quiet session, though with very little big-block trading,

Meanwhile, Chesapeake's New York Stock Exchange-traded shares were up 81 cents, or 2.07% on the news, ending at $40.01. Volume of 7.3 million shares was slightly above normal.

Chesapeake - the largest independent gas producer in the U.S. and third-largest producer overall - is aiming at raising an additional $2 billion through such sales this year and next.

It plans to use the proceeds from such transactions in what it terms its "low-risk drilling program," hoping to produce rates of return in excess of 30%. Chesapeake also eyes using some of the cash to whittle down its estimated $10 billion of outstanding long-term debt.

Under terms of the agreement, UBS and Deutsche Bank will receive scheduled quantities of natural gas from Chesapeake's interests in more than 4,000 producing wells over a 15-year period. Chesapeake will retain rights to drill to deeper depths on existing wells that are part of the sale or to drill new wells on the properties.

The transaction covers about 2% of the company's current proved reserves and net production - about 210 billion cubic feet equivalent of proved reserves and 55 millions of cubic feet equivalent of current net production.

Tousa bonds higher, but trading flat

The other major story making the rounds of the junk market Wednesday involved Tousa - the company formerly known as Technical Olympic - which said in an 8-K filing with the Securities and Exchange Commission that it had failed to make the semi-annual interest payments due Jan. 1 on its $300 million of 9% senior notes due 2010 and $185 million of 10% senior subordinated notes due 2012.

Even before the official word came down in the form of the SEC filing, there was intense speculation in the market that the troubled Florida builder had indeed failed to make the required interest payments. That in turn caused market participants to begin trading the bonds flat, or without their accrued interest, resulting in a rise of several points in the bonds' nominal price.

A trader saw Tousa's 8¼% notes due 2011 trading at 45.5 bid, 47.5 offered, which he said was "up a couple of points" from the bonds' previous levels in the lower 40s, citing the missed coupon payment.

Meanwhile, the 9s, he said "used to be 2 points behind" the 81/4s but were now even with them, trading at the same 45.5 bid, 47.5 offered level.

Noting that the company also has another interest payment coming due on Jan. 15 on its 7½% subordinated notes due 2015, he said that "if they didn't make [the scheduled payment on Jan. 1], they won't make any of them."

Another trader saw the 10 3/8% subs at 7 bid, 9 offered, up 2½ points, and the 9s up 3 points at 45 bid, 47 offered, noting the switchover to trading flat, a sign the company did miss the coupon payments. "They got that initial [price] bump because of the [loss of the] accrued [interest] - it was all priced in."

The company's nearly-worthless penny-stock shares, which now trade over-the-counter after their recent delisting by the NYSE, meantime lost 2 cents, or 12% of their little remaining value, to end at 14 cents per share.

Tousa has been among the hardest-hit of junk-rated homebuilders getting clobbered by the two-year slowdown in the U.S. housing market. Like many homebuilders, the company profited handsomely from the hot real estate market in the earlier part of this decade, when the seemingly insatiable desire of people to get out of the renters' rat race and finally own their own homes - or for some people, to grab a piece of the then-red-hot real estate market and actually make some money off it like everyone else seemed to be doing by buying homes and renting them out to tenants or even "flipping" them in quick sales - led to strong sales and healthy profits.

Tousa got involved in a potentially lucrative joint-venture project in its then-booming home territory of Florida, figuring the sky was the limit - but chose to buy its 50% stake in Transeastern LLC in the summer of 2005, which turned out to be the top of the market - although no one realized this at the time. The housing market peaked that summer, as new-home sales began to slow under the combined weight of a glut of houses on the market and higher interest rates - the Federal Reserve had started driving interest rates up in the preceding year to combat incipient inflation, and the key fed funds rate had already risen some 2 percentage points to about 3% by the summer of '05, on its way to its eventual recent peak of 5¼%.

A year into the joint venture, Tousa knew it was in trouble. It revealed to its lenders and investors in September 2006 that Transeastern's sales were falling far short of its optimistic earlier projections, with perhaps a quarter of the anticipated sales actually realized. At that rate, it acknowledged, the unit could not even generate enough income to continue its debt service. Tousa was forced to assume the debt of its problem child and negotiate a costly settlement with the unit's lenders, putting Tousa's own finances on shaky ground, even as the housing slowdown continued and deepened, particularly in the once red-hot Sunbelt territories like Florida.

As if that weren't already bad enough, the meltdown this past year of the subprime mortgage industry and the ripple effect which that had on the larger residential lending business put further pressure on the builders in general. Bankruptcy rumors have been swirling around Tousa for some time, although the company has steadfastly maintained its intention of carrying on and avoiding such a drastic step.

Last month, the company and its senior lenders agreed on revised terms for its first-lien term loan and revolving credit facility - but warned that the amendment could inhibit its ability to make the interest payment for the bonds, since it would now be required to operate under tighter cash flows.

Now that Tousa has missed the payment deadline, instead invoking the standard 30-day grace period allowed for in the notes' indentures, the countdown clock has started on a possible default, since the failure to make the interest payments by the grace period deadline "could result in the indebtedness represented by the notes becoming immediately due and payable and as a result cause other indebtedness of the company to be accelerated and become immediately," the SEC filing said. Tousa is expected to hold restructuring talks with its noteholders before then in order to head off that possibility - although there is no guarantee that such a settlement will be reached within that timeframe.

High yield grab-bag

Elsewhere, a trader said that even with the junk market weighed down by falling stocks, the widely traded automotive bellwethers "held up pretty well." He saw General Motors Corp.'s 8 3/8% bonds due 2033 unchanged at 80.5 bid, 81.5 offered, while Ford Motor Co.'s 7.45% bonds due 2031 were similarly unmoved at 73.5 bid, 74.5 offered.

At another desk, however, the Ford bonds were being quoted down 2 or 3 points in active trading, at 71.5 bid.

A trader saw GM's 49% financing arm, GMAC LLC's 8% bonds due 2031 down ½ point at 83 bid, 84 offered, and quoted GMAC's wholly owned Residential Capital LLC mortgage unit's 6½% notes due 2013 unchanged at 60 bid, 62 offered. But a market source elsewhere pegged its 7% notes due 2011 down 2 points at 60.5.

Primary still waiting

Meanwhile the primary market produced no news on Wednesday.

One sell-sider said that with equity markets down in the last week, the high yield new issue process could be slowed.

On the other hand, the syndicate official said, U.S. Treasury rates are dropping, so high yield investors should be looking at attractive spreads when new issues do come to market.

One sell-side source noted that the 10-year Treasury closed yielding 3.91% on Wednesday, down from 4.03% on Jan. 31.

Another sell-sider mentioned that short-term interest rates are dipping back down, and added that three-month Libor was 4.68% late Wednesday, versus 5.15% at the beginning of December.

The source added that three-month Libor peaked around 5¾%, spotting it at 5.72% on Sept. 6, 2007.

Nothing on the road

The sell-sider who saw one deal headed to the market on Thursday declined to furnish a name.

Meanwhile an investment banker said that a couple of roadshow starts are likely to surface early next week.

Although a buy-sider could not come up with names for either of those two, this source said that BIL Holdings (Lyondell-Basell Finance Co. Ltd.) is expected to show up soon with $7 billion of senior secured second-lien notes and/or senior unsecured notes via Citigroup, Goldman Sachs, Merrill Lynch, ABN Amro and UBS Investment Bank, to help fund the already completed acquisition of Lyondell Chemical Co.

In addition, the buy-sider said, Harrah's Entertainment Inc.'s $6.025 billion of senior unsecured notes, an LBO deal via Citigroup, Deutsche Bank Securities, Bank of America Securities, Credit Suisse, JP Morgan and Merrill Lynch, is expected as early 2008 business.

This same source said that Avaya Inc.'s $1.45 billion two-part offering of senior unsecured notes (CCC+) is expected to come early in the new year.

The LBO deal, comprised of $700 million of cash-pay notes and $750 million of PIK toggle notes, will be led by Morgan Stanley, Citigroup and JP Morgan.

Meanwhile a sell-sider said that Catalina Marketing Corp.'s $490 million offering of notes (Caa1/B-), an acquisition financing deal, is expected to surface early in the year.

The St. Petersburg, Fla.-based promotional marketing services provider is expected to sell $330 million of senior PIK toggle notes and $160 million of senior subordinated notes.

Bear Stearns, Goldman Sachs and Morgan Stanley will lead.

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