Foster Wheeler up on exchange; Levi earnings boost bonds again; Finova slips on dreary outlook

By Ronda Fears

Nashville, April 13 - Levi Strauss & Co. was the distressed bond du jour, extending a steady climb by another 2 to 3 points as the San Francisco jeans maker posted a sharply narrower loss and said it planned to cut 275 jobs.

Foster Wheeler Ltd.'s 6¾% bonds also were better by around 3 points, bolstered by better offer terms for those bonds than others in the Bermuda-based construction firm's exchange offer targeted to get consummated by the end of May.

Heading slightly lower, however, were Finova Group Inc. bonds as the company's annual letter to stockholders and noteholders reaffirmed a grim outlook for recovery levels.

Weirton Steel Corp.'s 10% issue due 2008 traded at 41 - about even with recent levels - as interested parties await the results of the two competing bids participating in the bankruptcy auction, which is the subject of a hearing Wednesday. But the company said late Tuesday that it is asking for a delay in that hearing.

One trader, though, noted there were offers on the Weirton bonds at 50 and 60.

Amid a sharp drop in metals prices - precious and otherwise - AK Steel Holding Corp.'s bonds "didn't fall off, they defied gravity," as one trader put it. The 7 7/8% bonds due 2009 stood at 94.25 bid, 95.25 offered and the 7 ¾% issue due 2012 at 91.50 bid, 92.50 offered. AK Steel shares, however, dropped more than 4% on heavy volume Tuesday.

Foster Wheeler 63/4s firmer

Most of Foster Wheeler's debtholders are being asked to exchange their securities for severely low cash amounts or equity, convertible preferreds and interest, and in some cases no interest, by the company, whose power engineering and construction operations are run from Clinton, N.J.

The 6¾% bonds, however, would be exchanged for new 10½% notes, stock, convertible preferreds and accrued interest.

Thus, traders said the 6¾% issue was seen moving sharply higher on the news, whereas the other bonds were seen nowhere in the market.

Foster Wheeler's 6¾% issue moved up to 92 from 89, one trader said.

The company said in a news release Tuesday that the exchange offer as proposed would reduce existing debt by nearly $500 million, extend maturities on $150 million of debt out to 2011 and reduce interest expense by some $30 million a year. The company expects to conclude the exchange by the end of May.

"This filing marks an important step toward completing our balance sheet restructuring," said Raymond J. Milchovich, chief executive officer, in the release.

"We believe we have built the foundation for successful performance with the operational initiatives we have put in place. The significantly improved balance sheet from this recapitalization will provide better support for our global operating companies to compete favorably and to achieve their full business potential."

Foster Wheeler also has obtained a commitment from a group of institutional investors to purchase $120 million of new senior secured notes due 2011, contingent on the closing of the exchange offer, with those proceeds earmarked to repay bank debt.

For each of the 6¾% notes, the company is offering $750 principal amount of 10½% series A senior secured notes due 2011, 62.051 common shares, 0.668 series B voting convertible preferred shares and accrued interest. The new preferred will mandatorily convert into 80 common shares and is entitled to dividends on an as-converted basis.

The company is proposing several other debt-for-equity exchanges.

Each $25 par of the 9% trust preferreds would be exchanged for either 2.781 common shares and 0.03 series B voting convertible preferred shares, or $6.25 in cash. No accrued dividends will be paid.

Each 6.5% convertible note would be exchanged for 207.997 common shares and 2.240 of the series B voting convertible preferred shares plus accrued interest through the date of the exchange.

Each of the series C 2009, series C 2024 and series D Robbins bonds would be exchanged for 213.759 common shares and 2.302 series B voting convertible preferred shares plus accrued interest through the date of the exchange.

Levi earnings lift bonds

Levi's bonds have been steadily moving higher in recent sessions, ahead of the earnings, but even as the earnings rolled across the tape Tuesday the bonds shot up again. The clothesmaker also plans to cut 275 job positions, one trader noted, and that was a particularly positive focal point.

The Levi 11 5/8% bonds ended the day at 87 bid, 88 offered, according to one trader who pegged the bonds 2 to 3 points higher on the day.

He mentioned hearing about a trade slightly north of 90, too. But, the trader suggested thinking about taking some profits at this point, or "sell on the news," as the bonds moved off some 3 points from their highs just during the session Tuesday.

While Levi's loss narrowed sharply and the company plans to cut jobs to trim costs, the company is cautious about the immediate future.

Levi posted a first quarter net loss of $2 million, greatly improved from the $58 million net loss in first quarter 2003 - attributed in part to better gross profit, which was $408 million, or 42.4% of sales, compared to $360 million, or 41.1% of sales for the first quarter of 2003. Net sales were $962 million, up 9.7% on a reported basis and 3.5% on a constant-currency basis.

"I'm encouraged about the start of the year. First quarter sales exceeded our expectations," said Phil Marineau, chief executive officer.

"Our first quarter performance reflects steps we took last year, including entering the mass channel, reducing our product costs and reorganizing our U.S. and European businesses to take cost and complexity out of the organization.

"We still have much more to do," he added. "We continue to be concerned about the Levi's and Dockers brands in the U.S. and Europe, but believe our revamped product lines are relevant and appealing. We have launched new marketing campaigns to drive additional brand sales worldwide."

Marineau said the company is also making "good progress" with consulting firm Alvarez & Marsal to identify additional opportunities to drive performance, reduce costs, boost working capital and improve cash flow.

At Feb. 29, Levi reported total debt less cash of $2.16 billion compared with $2.11 billion at the end of fiscal 2003.

As of April 11, the company said it had available U.S. liquidity resources of $423 million, consisting of $161 million in highly liquid short-term investments and $262 million in net available borrowing capacity under its revolving credit facility.

Jim Fogarty, chief financial officer, said the company expects ongoing deflationary pressures in apparel and a competitive market worldwide will continue to put pressure on sales and margins.

"We must stay focused on becoming a more efficient organization with a cost structure appropriate to the size of our business," Fogarty said.

"We are now completing an intensive analysis of our business strategies, plans and operations with Alvarez & Marsal, and are implementing a number of actions intended to simplify our business structure, reduce costs, enhance our margins and foster sensible revenue growth. To help reduce business complexity, business risk, inventory investment and enable cost savings, we are rationalizing our product lines."

This process, he said, includes narrowing merchandising assortments, exiting unprofitable or low-volume product lines and licensing out categories not in the company's core competency like tops and children's products.

Fogarty also noted that Levi has begun outsourcing most transactional activities in the human resources function of its U.S. business.

"As we continue to streamline the company in 2004, we will be eliminating staff and open positions. In May, for example, we plan to eliminate approximately 200 staff and 75 open positions in the North America region," Fogarty said.

"It is a challenging environment; however, with this quarter's good start and the execution of these initiatives we remain cautiously optimistic about our performance for the remainder of the year."

Finova slides on grim view

The bonds of Scottsdale, Ariz.-based financial services concern Finova Group Inc. slid a little further Tuesday as a dim forecast for the company - and recovery prospects for bondholders - were confirmed again by company executives in the annual letter to stockholders and noteholders.

"It was another nail in the coffin," one distressed trader commented, off-the-cuff, but then added that the distressed paper actually is trading at optimistic levels.

"The entire market is trading pretty expensive, though, because of a lack of supply, or high demand, whichever way you want to look at it."

Another trader said the Finova bonds traded at 621/4, "down a nip," and probably closed out the day at around 61¾ bid, 62½ offered. The bonds have been tracking lower from about 66 in mid-February when company executives talked of bleak recovery prospects for debtholders following the company's repayment of the $6.5 billion loan to Berkadia LLC.

In a letter to stockholders and noteholders filed at the SEC late on Monday, Finova chief executive officer Thomas E. Mara and chief operating officer Glenn E. Gray were rather blunt about the company's state of affairs.

On year-end figures, the company said there was a shortfall of assets to senior debt of some $1.2 billion.

"That is a huge and impossible hole to fill. With remaining net financial assets of only $1.5 billion, we would have to liquidate those assets substantially in excess of their carrying values to generate sufficient funds to fully repay the senior notes, even if there were no additional operating expenses," the letter stated.

"Absent a miracle, however, we do not have sufficient assets, nor the right kind and quality of assets, to enable us to eliminate the shortfall."

Using a phrase coined by one of its largest shareholders, the top executives talked in the letter about "picking the flowers and watering the weeds," in the context of its massive asset selloff in 2003. The company said liquidation of its asset portfolio brought in $1.8 billion of cash, reducing the portfolio size by more than 50%. And, more is forthcoming, but likely at a much slower pace.

If successful in reducing the portfolio of financing transactions targeted for this year, the letter said, the remaining portfolio would end up highly concentrated in the company's transportation assets, or "weeds with wings."

Paying off the Berkadia loan enables Finova to begin repaying noteholders earlier than anticipated - in May 2004 - with the caveat "if excess cash is available" after funding operating expenses and such things as interest payments or customer commitments.

The loan was from Berkadia, a joint venture between financier Warren Buffet's Berkshire Hathaway Inc. and Leucadia National Corp., who had gotten together in 2001 to front Finova the money it needed to emerge from bankruptcy.

Mara and Gray said in the letter that noteholders and others have contacted the company over the past few months to inquire whether there were plans for another restructuring plan.

"The board is willing to consider legitimate proposals presented by note holders or others, but is not currently formulating a plan. A restructuring could eliminate the stock ownership in Finova held by current shareholders," they said.

"Many obstacles exist to creation of a viable restructuring plan," they added.

"A restructuring presumes a sensible business plan emerging from that process. The current environment includes a plethora of lenders seeking to fund transactions at rates we consider to be imprudent. We believe it would be difficult in these circumstances to develop a business model that can produce returns to the creditors and/or new investors greater than that expected from the present course.

"Absent that, or a substantial new investment in Finova, we imagine it would be difficult to obtain the requisite approval to restructure the present debt obligations. The task becomes more difficult as the portfolio continues to shrink."

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