Rockwood, Herbst, K&F deals price; Goodyear, Northwest up

By Paul Deckelman and Paul A. Harris

New York, Nov. 5 - The high-yield primary market ended what had been a quiet week with splash, as deals from Rockwood Specialties Group Inc., Herbst Gaming Inc., K&F Acquisition Inc. and Stats ChipPAC successfully priced. The Herbst deal and Rockwood's two-part, dual currency offering were upsized from originally announced plans, while K&F was downsized in its final form.

In secondary market dealings, Goodyear Tire & Rubber Co.'s bonds bounced upward, as the Akron, Ohio-based tiremaking giant released bullish third-quarter guidance. And Northwest Airlines Corp.'s notes were seen climbing, as the company announced favorable news in its effort to get its employees' cooperation in cutting costs.

On the heels of three dormant days the high yield primary market sprang to life on Friday, showing evidence that it remains, as sources say, a hot market.

A total of $1.425 billion equivalent priced in six tranches during the closing session of the first week of November 2004. Two deals upsized, including the day's biggest issue, a two-piece $675 million equivalent dollar and euro deal from Rockwood Specialties Group Inc. The offering was increased by $50 million equivalent, with both tranches pricing on top of inwardly revised price talk.

Bear Stearns high yield analyst Mike Taylor told Prospect News on Friday that the market is indeed on a roll as 2004 winds down.

However Taylor said that the rolling junk market may be headed toward an uphill stretch.

"Our thesis is that next year we are going to see building inflationary pressure," he said. "There are concerns about the federal deficit, the current account deficit and currency weakness. We see those factors as likely to contribute to higher interest rates, which we think will pressure the high-yield market in 2005.

"The relatively tight spreads and very low absolute yields that we have been seeing in this run-up over the past few weeks set the market up for a correction.

"Of course the quest for higher yields is not going to disappear overnight and that will mitigate some of the sell off pressure.

"But I think we're in for a correction in 2005."

Rockwood oversubscribed

Rockwood Specialties Group priced Friday's biggest deal, an upsized $675 million equivalent dual-tranche offering of 10-year senior subordinated notes (B3/B-) that was oversubscribed in the United States as well as in Europe, according to a market source.

Both tranches came on top of revised price talk and the total amount was increased from $625 million.

In the dollar-denominated tranches the Princeton, N.J., chemical manufacturer sold $200 million at par to yield 7½%. Price talk was revised to 7½% from 7¾% to 8%.

In the euro-denominated tranche the company sold €375 million of the notes at par to yield 7 5/8%. Price talk had been revised to 7 5/8% from 8% to 8¼%.

Credit Suisse First Boston, Goldman Sachs & Co. and UBS Investment Bank ran the books for the acquisition-related deal.

K&F also oversubscribed

The quest for high yielding paper also created excess demand for K&F Acquisition, Inc.'s $315 million of 10-year senior subordinated notes (Caa1/B-) which came at par on Friday to yield 7¾%, at the tight end of the 7¾%-8% price talk.

The issue was downsized by $50 million - the amount that the company added onto its term loan.

Lehman Brothers and Goldman Sachs & Co. ran the books for acquisition financing from the New York City-based manufacturer of aircraft parts.

Herbst upsized

Also upsized was the Herbst Gaming's $170 million issue of 10-year senior subordinated notes (B3/B-) which priced at par to yield 7%, at the tight end of the 7 1/8% area price talk. The deal was increased from $150 million.

Lehman Brothers ran the books for the acquisition deal from the Las Vegas gaming company.

Stats ChipPAC Ltd. completed an upsized $215 million of seven-year notes (Ba2/BB) at par to yield 6¾%, at the tight end of the 6 %-7% price talk. The offering was expanded from $165 million.

Deutsche Bank Securities and Lehman Brothers ran the debt refinancing deal from the technology company that is based in Singapore and Fremont, Calif.

Finally on Friday Building Materials Corp. of America priced a $50 million add-on to its 7¾% senior second lien notes due Aug. 1, 2014 (B2/B+) at 102.25, on top of the 102.25 area price talk. The transaction resulted in a 7.36% yield to worst and a 7.42% yield to maturity.

Citigroup ran the books. The Wayne, N.J., manufacturer of asphalt roofing products' original $200 million priced at par on July 21 and so came away from Friday's add-on with a better interest rate.

Friday's six tranches took the week's total issuance to $2.075 billion in seven tranches.

New deal news

As far as the high-yield forward calendar is concerned, Friday produced only a trickle of news.

Melbourne, Australia, pharmaceutical and healthcare services company Mayne Group Ltd. will begin a roadshow Wednesday in Singapore for an offering of senior notes (existing senior ratings Ba1/BB), with stops in Hong Kong, London and the U.S. to follow.

Morgan Stanley has the books for the Rule 144A/Regulation S offering, the size and maturity of which remain to be determined.

Elsewhere Star Gas Partners, LP announced in a Friday press release that it plans to sell $300 million of debt securities in a private or public offering.

The financing is expected to close by Dec. 17, based on the expiration date of an amendment and waiver under the company's credit agreement with lenders led by Wachovia Bank, NA.

JP Morgan is leading the deal for the Stamford, Conn.-based distributor of home heating oil and propane.

And Citizens Communications Co. has shortened the roadshow for its $400 million of senior notes due January 2013 (Ba3/BB+), with the deal is now expected to price on Monday.

Earlier in the week the Stamford, Conn.-based incumbent local-exchange carrier had announced a Nov. 5-10 roadshow, so the marketing time has been cut in half.

JP Morgan, Morgan Stanley and Banc of America Securities are joint bookrunners for the debt refinancing deal.

Rockwood, K&F, Herbst jump in trading

When the new Rockwood dollar-denominated senior subordinated notes due 2014 were freed for secondary dealings, the bonds were seen trading around 103, while the euro-denominated tranche was quoted at 102.25 bid, 102.75 offered, on "better buyers into the close," a trader said. Both issues had priced at par earlier in the session.

K&F's new 7¾% senior subordinated notes due 2014 were seen trading up to 103 bid from their par issue price. And Herbst's new 7% senior subs due 2014 were also around 103, up from par originally, "jumping into a huge premium."

He noted that "there's just a lot of cash out there and people are trying to put it to work. A lot of the allocations we were hearing, particularly on Rockwood, were kind of lame, and so, in the secondary market, people were bidding 'em up, trying to buy more bonds."

He said that the $361 million inflow to high yield mutual markets reported Wednesday by AMG Data Services "was really not that much - but at the end of the day" the fact remains that the fund-flow numbers, considered a reliable indicator of overall junk market liquidity trends, have been overwhelmingly positive over the previous 10 or 12 weeks.

"With Treasuries selling off after the [unexpectedly strong] employment number this morning," our market was pretty much unchanged," the trader said.

"There was some stuff a little bit firmer and some stuff a little bit softer. Some of the Treasury-sensitive stuff was offered without a bid but there was not a tremendous amount of trading."

He said that the big question is whether "equities continue their roll and the economy is on fire." He noted that the Federal Reserve's policy-setting Federal Open Market Committee is slated to meet this coming week and "the consensus is they'll move 25 basis points now."

The whole high yield market, though, he said, "is 100 basis points tighter versus Treasuries - and how long can that go on?"

Goodyear gains on forecast

Goodyear's bonds were up solidly, with a market source seeing its benchmark 7.857% notes due 2008 up a quarter point at 98.5, while its 8½% notes due 2007 and 7% notes due 2028 were both half a point better at 105.5 bid and 82.5 bid, respectively.

The big mover, however, he said, was Goodyear's 6 5/8% notes due 2006, which firmed to 106 bid from 104.5.

At another desk, a trader saw Goodyear's 7.857s at 99 bid, par offered, noting that "just two days ago they were at 96.5."

Yet another source saw those same bonds up three points on the session, to close at 98.5 bid.

Goodyear's New York Stock Exchange-traded shares were up $1.57 (15.35%) to $11.80 at the close.

The biggest U.S. tiremaker said that it expects a third-quarter profit of between 19 and 21 cents a share versus a loss of 68 cents per share a year earlier. Analysts had been predicting 19 cents a share of earnings. Goodyear anticipates sales rising to about $4.7 billion for the quarter, up from $3.9 billion a year earlier, and up as well from the $4.52 billion Wall Street expects.

Goodyear is attributing its likely better sales and earnings to higher tire prices and stronger sales volume.

Goodyear also said it had discovered errors which would be restated from its 2003 financial statements, including a misclassification of deferred income tax assets and liabilities by about $360 million. The company asserted that the errors had no effect on cash flow or net income and the changes the company expects to make are not expected to have any impact on its financial covenants.

Goodyear plans to report third-quarter results by Tuesday, including detailed information on the restatement. It will file an amended 2003 annual report and amended reports for the first and second quarters of 2004 as quickly as possible.

Northwest rises on pilot deal

Northwest Airlines Corp.'s 7 7/8% notes due 2008 were seen up as much as three points on the session to 75.5 bid after the Eagan, Minn.-based airline carrier announced that its pilots had overwhelmingly approved a new contract containing a 15% annual pay cut over the next two years. Fully 89% of the more than 4,000 pilots who voted approved the contract, with just over 10% opposed.

The pay cuts and other changes in the contract are expected to generate $265 million in annual savings, part of Northwest's overall effort to cut employee costs by $950 million annually. The airline is currently in talks with its ground workers and will begin negotiating soon with its mechanics and flight attendants.

Besides taking a 15% pay cut, the captains also agreed to kick in 20% of the cost of their medical and dental insurance, and the airline would impose a 1,200-hour-a-year cap on sick leave. Northwest will continue contributing to the pilots' pension fund at current levels, although the captain's lower base salaries will mean a reduction in the amount of money (based on a percentage of pilot pay) that the airline will have to put in.

In return for their concessions, the pact includes stock-option and profit-sharing components.

In order to spread some of the pain of sacrifice around to gain the pilots' approval, the agreement calls for Northwest executives, up to and including chief financial officer Doug Steenland, to take the same 15% salary haircut as the pilots; Steenland, for instance, would see his annual pay cut by over $100,000, and his contractually mandated annual performance-based bonus would also be reduced. The executive and other non-pilot pay cuts will amount to another $35 million.

The cuts strengthen Northwest's hand as it attempts to renegotiate a $975 million credit agreement scheduled to expire next October. Industry experts say that a failure to refinance that deal could impact on other Northwest credit agreements and in turn jeopardize the airline's continued financial viability.

Officials of the Air Line Pilots Association's Northwest local cited those talks in unanimously recommending that the members accept the pay cut, which, though steep, is nowhere near as large as the 32.5% cut the union agreed to in order to help Northwest rival Delta Air Lines Inc. keep flying. Even with the cut, the union told its members that the Northwest pilots will remain near the top end of the salary range for the major carriers, although Delta's pilots - not figuring in their new agreement, which they are now in the process of voting upon-are considered the top earners in the industry. The new Northwest contract won't take effect until after the credit agreement is renegotiated.

The pact with its pilots also lets Northwest's regional affiliates, such as Pinnacle Airlines, carry more passengers - a key component in the airline's plan for cutting costs and staying competitive with both its old-line network carrier peers like American Airlines, Continental Airlines, the bankrupt United Airlines and US Airways and troubled Delta, as well as the lower-cost carriers like long-time segment leader Southwest Airlines and such upstarts as Jet Blue, AirTran and the bankrupt ATA.

By letting Northwest increase both the number of smaller jets flying the regional routes linking smaller cities with major airports and the number of available seats in each plane, Northwest hopes to make more efficient use of its fleet - mixed between the smaller regional carrier jets that carry up to 50 passengers, and the more familiar big jets - and reduce its fuel consumption, which has developed into a ruinously expensive drag on the earnings of all airlines, large and small. Northwest estimates that being able to make greater use of the regional jets may produce as much as $15 million of additional annual revenue.

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