Market struggles continue; Fremont General plunges; Beechcraft mega-deal coming

By Paul Deckelman and Paul A. Harris

New York, March 5 - The junk market continued to gyrate around at mostly lower levels Monday, trying to shake off the effects of the continuing global equity debacle. But although most prices were lower, there were signs of stabilization as buyers came in to take advantage of lower levels. However, one noted research company is warning that the four-year long junk market party may be about over.

In specific secondary market issues, Fremont General Corp.'s bonds dropped 5 points, hurt by continued market concerns about the sub-prime lending market in which the Santa Monica, Calif.-based home lender is a large player, as well as by the ongoing federal probe of the company itself.

Fedders Corp. bonds tumbled into the lower 50s and were trading flat, or without their accrued interest, traders said, citing market belief that the Liberty Corner, N.J. -based air conditioner maker had chosen to not make the scheduled March 1 coupon payment on its bonds but to instead invoke the 30-day grace period.

On the upside, Pathmark Stores Inc.'s bonds firmed smartly as the news became official that it will be acquired by The Great Atlantic & Pacific Tea Co. - best-known as the operator of such Pathmark rivals as the venerable A&P and Waldbaum's supermarket chains.

In the primary market, aircraft manufacturer Hawker Beechcraft Inc. announced plans for a $1.2 billion four-part offering of fixed- and floating-rate senior and senior subordinated notes. High yield syndicate sources heard that the company will be hitting the road Wednesday to market the multipart mega-deal to prospective investors.

They also heard pre-deal market price talk emerge on NSG Holdings LLC'S upcoming half-billion-dollar-plus offering of amortizing senior secured notes due 2025.

Another rough day in junk

Back among the secondary issues, "the market was a little rough out there," one trader said. Apart from specific names that may have had some positive news attached to them, "the rest of the market was relatively weakened across the board. There's a lot of nervousness."

With, Asian equities having traded off by 2% to 4% overnight, European equities down 1% to 2% and Dow futures down 100 points at the opening of Monday's session, a source from a hedge fund spotted the CDX 100 index 1.125 points lower at the open, however shortly after a high yield syndicate source said there had been some improvement, and marked the index down 0.875 points

After the close a senior sell-sider said that junk tried to rally in the early afternoon as equities came off their lows.

Noting that credit default swaps underperformed the cash market, the sell-sider spotted the CDX down 0.75 points on the day, with the broad high yield market perhaps ¼ to ½ point lower.

Another trader said things "are gonna get uglier - much uglier."

For instance, he said, "the autos are sure going to hell."

He saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 down 1¾ points and Ford Motor Co.'s 7.45% notes due 2031 off 1½ points, with the GM bonds dipping to about 89.5 and the Ford notes falling back to about the 75 level. The two auto giants - whose flagship bond issues are usually among the most heavily traded on any given day - "have gone out about 150 basis points from their tights in February. So the carnage continues there."

Beginning of the end?

With the junk market seen to have turned a corner the last week in February and headed suddenly downward after having cruised along over the first nearly two months of the year, some observers are now having second thoughts about the continued profitability of the formerly high-flying asset class.

The CreditSights bond-research firm, for instance, said in a research notes to clients that it was lowering its opinion on junkbonds from marketweight, where it had been since last fall, to underweight.

While acknowledging that the various factors that pushed the junk market to near-record highs - at least prior to the worldwide stock market retreat that began a week ago - may still be in effect, the advisory service warned: "The era of ravenous risk appetite that was fueled by excess liquidity and appreciating asset prices came to an abrupt end" last week. And after a "virtually uninterrupted rally" that has been going on in junk since October 2002, the report concluded, "we count ourselves among those who think that last week's events will historically be seen as the beginning of the end."

A contrary view

Another trader, however, took a less pessimistic view. While he saw "the whole market down at least 2 points, right from the get-go this morning," later, he said, "a lot of buying came in. There was a good bid to the market - it's definitely lower, but it's not like the old days, where you would see things and the market would be down 10 or 15 points. It went down in a very orderly fashion, and I would there's still a lot of accounts putting their money to use."

He said the automotive sector "was a little bit heavier than most, but away from that, the market was only off a half- to three-quarters of a point today - if at all. There are definitely buyers down there."

Pathmark pushes upward

A lot of those buyers were playing in Pathmark, with the Carteret, N.J.-based supermarket operator's 8¾% notes due 2012 firming to levels above 104 bid, up about 2 points from there they had closed on Friday, and up more than 3 points from the levels around 101-101.5 which the bonds had held before the recent news that it was in talks to be acquired by Montvale, N.J.-based A&P. Activity was described as brisk, with many "size" trades of large bond blocks.

Traders meantime said that with A&P's two bond issues having mostly been taken out via a tender offer some months back, leaving only token amounts of its 7¾% notes due 2007 and 9 1/8% notes due 2011 outstanding, "you're not going to see anything" in A&P bonds, as one put it.

The combination of the two Northeastern store chain operators will create a 550-store, $11 billion regional supermarket industry powerhouse operating in the New York, New Jersey, Philadelphia and Maryland markets as well as in Michigan and Louisiana.

A&P will pay $9 in cash and 0.12963 of its own shares for each share of Pathmark share, for a total of $678.6 million. The assumption of somewhat over $600 million of Pathmark debt will bring the deal's total valuation to about $1.3 billion.

Fremont in freefall

While the Pathmark M&A story was big news and provided some welcome upside to a market that can use all the good news that it can get, the slide in Fremont General's bonds was more representative of the market's negative tone.

A trader said that the company's 7 7/8% notes due 2009 were down about 5 points to 86 bid, 87 offered from prior levels in the 90s, pushed lower by a combination of market angst about the rapidly deteriorating sub-prime lending sector as a whole, downgrades by Standard & Poor's (down two notches to B-) and Moody's Investors Service (one notch, to B3), as well as the continued cloud that hangs over the company's head in the form of an investigation by federal regulators.

With sub-prime loans made to borrowers of dubious credit history and questionable ability to repay, government regulators have told lenders to tighten their standards.

Fremont said Friday that it had agreed to a U.S. cease-and-desist order that would halt more than a dozen violations, including "unsatisfactory lending practices" and "operating with a large volume of poor-quality loans."

Chiquita continues to get peeled

Another, more well-known name that continued to get "hammered" as one trader put it was Chiquita Brands International Inc. He saw the Cincinnati-based fruit and vegetable importing company's 8 5/8% notes at 92.75 bid - well down from levels around 98 that it held recently as last week. He saw "a lot of arb activity" in Chiquita.

The bonds have gotten mashed on investor wariness on the weak pricing environment in the world banana business, as well as Chiquita's announcement last week that it will delay the filing of its annual report, due March 1, until mid-month.

Chiquita's 7½% notes due 2014 were down 1¼ points at 88.25.

Fedders not so cool these days

From out of the distressed market came the word that Fedders bonds fell into the lower 50s and were trading flat, after traders said the company chose to not make the scheduled March 1 coupon payment on its bonds but to instead invoke the 30-day grace period.

One trader saw the 9 7/8% notes due 2014 at 53 bid, 55 offered, trading flat - well down from levels around 61 bid, 62 offered on Thursday and 59 bid, 59.5 offered on Friday, when it was unclear whether the company would make the coupon payment on schedule or not. His understanding Monday was that the payment had not been made.

The prior levels reflected the bonds being quoted with their interest, although the trader said "it was not with a lot, they were sort of ex-the interest once you were past March 1."

Another trader quoted the bonds down 5 points at 55 - but he said that "they're in the process of selling one of their units - the IAQ business - and once they do that, with the proceeds, they'll pay down their bank facility and avoid Chapter 11, and you can make the argument that after the workout, the paper is probably a par bond."

According to several market sources, the company met with investors Friday to say that the company had entered the grace period.

Prospect News called the Liberty Corner, N.J.-based company on Monday to confirm the reports but did not reach anyone.

Ainsworth off again

A trader saw Ainsworth Lumber Co.'s bonds down another point on Monday, with its 7¼% notes due 2012 at 74.5 bid, 75.5 offered "after the conference call" on which company executives discussed the Vancouver-based forest products company's financial situation. The bonds had also fallen on Friday.

Last week, Ainsworth reported a loss of $108 million in 2006 - a sharp deterioration from the previous year, when it earned $153 million. Ainsworth blamed the swing into the red on poor prices for oriented strand board, a key product, due to the slump in the U.S. housing market. OSB is a panel product made out of chips of hardwood or softwood, used as sheathing for outside walls and roofs in house construction.

Ainsworth has said that it expects OSB prices to remain weak this year because of the continued slowdown in new home construction.

Calendar builds

No issues were priced during Monday's primary market session, however two new offerings were announced.

Hawker Beechcraft Corp. will start a roadshow on Wednesday for its $1.2 billion four-part offering of notes.

The Wichita, Kan., aircraft manufacturer is offering eight-year senior notes in three tranches (B3/B-):

• Senior fixed-rate notes, non-callable for four years;

• Senior PIK toggle notes, non-callable for four years; and

• Senior floating-rate notes, non-callable for two years.

In addition the company is offering a tranche of 10-year senior subordinated notes (Caa1/B-) which come with five years of call protection.

Goldman Sachs & Co., Credit Suisse, Citigroup and Lehman Brothers are joint bookrunners for the acquisition deal.

Elsewhere Iron Mountain Nova Scotia Funding Co., a wholly owned subsidiary of Boston-based data storage company, Iron Mountain Inc., will hold a Wednesday-Thursday roadshow for its C$175 million offering of senior subordinated notes due 2019 (B3/B) - a debt refinancing deal via being led by Bear Stearns, Banc of America Securities LLC, JP Morgan, Lehman Brothers and Scotia Capital.

NSG to price Tuesday

NSG Holdings LLC (Northern Star Generation Services Co. LLC) set talk on its $514 million offering of 18.75-year amortizing senior secured notes (Ba2/BB) at 7½% to 7¾% on Monday.

Lehman Brothers and BNP Paribas are joint bookrunners for the deal, which is expected to price on Tuesday.

An informed source told Prospect News that the NSG deal is coming together pretty well, and added that the price talk reflects the present choppiness in the market, suggesting that had the NSG deal cleared before the sell-off got underway early last week it might have seen tighter pricing.

Continued weakness

A senior syndicate source said that recently priced high yield issues continue to be weak, but added that higher quality issues, trailing a rally in Treasuries, have tended to outperform their lower-quality counterparts.

For example, the source said, Allied Waste Industries, Inc.'s new 6 7/8% senior notes due 2017 (B1/BB-/B+), which priced at par in a $750 million issue on Feb. 26, were off a couple of points, trading in a 98 bid, 99 offered context.

Recent low-rated issues, however, are off more significantly, down as much as 4 or 5 points, the source said.

As an example the official pointed to the new Digicel Group Ltd. 8 7/8% notes due 2015 (Caa2/CCC+), which priced at par in a $1 billion tranche on Feb. 22, but have lately traded at 95.75 bid.

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