Parmalat to file for bankruptcy as accounting hole grows, bonds retreat; Werner debt steady

By Paul Deckelman and Sara Rosenberg

New York, Dec. 23 - Parmalat Finanziaria SpA ran up the white flag on Tuesday and said it would seek bankruptcy protection, even as it appeared that the accounting scandal threatening the Italian dairy products producer is even bigger than initially thought.

The Italian cabinet earlier approved an emergency decree setting up a streamlined bankruptcy procedure aimed at quickly stabilizing the troubled company and the company then confirmed it would follow the procedures set out in the decree. Meantime, its battered bonds retreated several additional points, although news that the company would file had been universally expected.

Elsewhere, Werner Holding Co. remained the most prominent domestic distressed name, following the sizable fall in its bonds and bank debt on Monday, but the bonds and loans hung in around the same levels, or perhaps even slightly better.

Parmalat's bonds, which had been quoted as having fallen into the mid-to-low 20s on Monday, further eased to around 20 bid, 22 offered on Tuesday, two different traders said, while at another desk, they were seen only slightly above those levels and still down several points on the session.

A market source pegged Parmalat's dollar-denominated 6 5/8% notes due 2008 at 21 bid, 22.5 offered, while he saw its euro-denominated issues, such as its 4 5/8% notes due 2004 and 5¼% notes due 2004, at 22 bid, 24 offered. Its actively traded 6¼% notes due 2005 were a slightly wider 22 bid, 25 offered.

Italy's largest food processing company issued a statement following a meeting of its board of directors indicating that it plans to file for bankruptcy, and it is expected to do so Wednesday, following the publication of a government decree establishing the new streamlined mechanism that would apply to all big-company bankruptcies, starting with Parmalat's.

The new mechanism was approved at an emergency meeting of Prime Minister Silvio Berlusconi's cabinet during an emergency meeting convened to head off a crisis that is being widely compared to the 2001 collapse of the U.S. energy trading giant Enron Corp.

Assuming Parmalat chooses to file under the new streamlined procedure rather than the standard standard insolvency arrangement, which entails delays during which creditor claims can mount up, turnaround specialist Enrico Bondi - recently installed as chairman and chief executive officer following the resignation under fire of company founder, chairman and CEO Calisto Tanzi - would be appointed as special commissioner in charge of the restructuring. The country's industry minister, Antonio Marzano, said the Bondi-headed rescue commission would be granted "immediate powers," and charged with presenting a restructuring program to his ministry in a "short" time. While the commission could sell assets in an extreme case, its mandate would be to try to hold the company together and preserve its assets and jobs, "not the shareholders or the management."

Bondi's task may be complicated by the fact that the "hole" in the company's accounting - originally thought to be about €4 billion after Bank of America declared as a forgery a document claiming a Parmalat subsidiary had the money on deposit - may be closer to €7 billion, as a judicial source confirmed media reports indicating that besides the phantom €4 billion not in the vaults of B of A another €2.9 billion of bonds that had supposedly been bought back by the company had not been.

The disclosures - the latest in a series of shocks to investors that began when the company failed to immediately pay off a €150 million matured bond issue despite its earlier claims of ample liquidity - have beaten the company's formerly investment-grade rated bonds down from par to around 20 cents on the dollar, and have rendered Parmalat stock virtually worthless.

Prosecutors meanwhile widened their probe of the probable accounting fraud at the company, scrutinizing Tanzi and a number of other former executives. Bank of America formally filed fraud charges against the company with a court in Milan.

Distressed debt trading Tuesday "was almost dead except for Parmalat," a trader said. "There just was not much trading."

One of Monday's most active names, Werner Holding, pretty much stabilized at the lower levels to which it had fallen Monday.

Its bank debt held steady at 90 bid, 91 offered, despite news that the company is expecting to meet with lenders in the near future regarding amending financial covenants so that Werner can stay in compliance with the existing credit agreement.

The possible amendment was announced during a conference call on Tuesday, during which the Greenville, Pa., ladder company discussed its decision to stop supplying Werner products to Home Depot and to enter into a supply agreement with Home Depot rival Lowe's Co, according to a fund manager.

"There's no real change on it," a fund manager said of Werner's bank debt. "People are digesting what they heard on the call. They talked about why they decided to stop doing business with Home Depot and signed an exclusive contract with Lowe's - but there was nothing really interesting.

"They do expect to have to amend their credit facility with this change," the fund manager continued. "Chances are they'll fall short of the EBITDA covenant and other financial covenants. They expect to hold a meeting for the existing group in mid-first quarter 2004 to go over an amendment type of deal and discuss their plans going forward. It will probably happen in February."

Sales of all products to The Home Depot, including extension ladders, stepladders, attic ladders and assorted accessories, accounted for $161.3 million, or 31%, of the company's total net sales in 2002, and $100.1 million, or 27%, of total net sales during the nine months ended Sept. 30.

Back in October, holders of Werner's bank debt and bonds were rocked when Home Depot - the nation's largest retailer of building supplies, tools and equipment, mostly aimed at contractors and do-it-yourselfers - announced that it would stop buying stepladders from Werner and would also take another look at Werner's contract to supply extension ladders and other climbing equipment to Home Depot stores.

That caused Werner's bonds to slide from around par levels to the low 70s; on Monday, following the announcement that Werner would no longer supply its biggest customer with ladders, the bonds swooned to levels as low as 43 bid from prior levels around 70, although they bounced off those lows to end Monday's dealings in the mid-50s.

On Tuesday, Werner's bonds were unchanged, its 10% notes due 2007 quoted around a 55-56 context, although a trader said that investors looking for the bonds put out low-ball bids, trying to pick them up at cheaper levels, although without success.

"They opened with a 50 bid, closed with a 56 bid," a trader said, just like [Monday]. They tried to be tricky in the morning, no one bites, so they close the same way they closed [Monday]. 56 bid, nothing. They threw the 50 bid out to see if anybody was going to bite, and they'd have a big gain. Then it was a 53 bid, a 55 bid, a 56 bid, and then it dies."

Another trader also said that Werner was "a little better bid [from Monday] at 55-56, but there were no sellers around - just buyers waiting in the weeds."

Among the airlines, the trader said he saw "sellers, some sellers, trying to get rid of AMR paper, UAL paper, but not a whole hell of a lot going."

However, a distressed-debt trader saw UAL's bonds quoted around 12.5 bid, 13 offered and added "we bid on them but there were no offerings."

The Illinois-based corporate parent of United Airlines, currently in Chapter 11, said Tuesday that it had met the requirements of its bankruptcy loans for the 10th straight month in November and expects to meet them in December, and touted the fact that it generated positive cash flow of about $69 million, or more than $2 million a day, in November, excluding the proceeds from the sale of the online travel company Hotwire. However, the troubled air carrier still reported a $75 million net loss for November, including reorganization expenses and the Hotwire gain.

And Air Canada's 10¼% notes due 2011 were seen unchanged at 38 bid, "about where they've been for the past week," a market source said, even with some measure of resolution to the bidding war between Hong Kong investor Victor Li's Trinity Time Investments and rival suitor Cerberus Capital Management. Air Canada on Monday confirmed Trinity as its choice to be its leading equity partner after Li sweetened his offer to top Cerberus, and on Tuesday a court-appointed monitor recommended the offer be approved by Air Canada's bankruptcy judge.

Li is offering to pay C$650 million for 31% of the insolvent Canadian air carrier and offered creditors up to 66% of the restructured airline in exchange for their claims. The monitor estimated that given the difference between the airline's current value and the C$10 billion of claims, creditors would recover slightly more than 18 cents on the dollar under Li's offer,

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