RJ Reynolds prices big two-part deal; Ford bonds off as Moody's threatens downgrade to junk

By Paul Deckelman and Paul A. Harris

New York, June 22 - Ford Motor Co.'s bonds were lower Wednesday, after the Number-Two U.S. carmaker warned late Tuesday that results from its core North American vehicle operations will be weaker going forward and lowered its full-year earnings guidance sharply. In turn, Moody's Investors Service - which still rates Ford as a barely investment-grade Baa3 - put it under review for a downgrade to junk, while Standard & Poor's said that with the anticipated weaker results, it is more likely that Ford's debt ratings - which the agency already knocked down to junk-bond levels last month - will be downgraded further.

Overall sources assessed the high-yield market basically unchanged in very light trading on Wednesday, as junk spreads held ground in the face of a notable rally in Treasuries which caused the yield of the 10-year U.S. government bond to plunge well below the 4% mark.

In the primary arena, R.J. Reynolds Tobacco Holdings Inc. brought a $500 million two-part offering of secured notes to market - the latest in a series of quickly shopped "drive-by" deals offered up by opportunistic issuers looking to take advantage of market conditions. Price talk meantime emerged on Chiquita Brands International Inc.'s scheduled calendar offering of 10-year senior notes, which is expected to price on Thursday.

Meanwhile no new roadshow starts were heard during the mid-week session.

Losing air?

Louise Rieke, portfolio manager of the Waddell & Reed Advisors High Income Fund, told Prospect News on Wednesday that the high-yield market presently appears flat and not very interesting.

Rieke added that the new issue market sparked to life when the high-yield mutual funds snapped their record-breaking streak of negative flows with two consecutive weekly inflow over the two-week period that ended on June 8. According to Prospect News' analysis of data published by AMG Data Services those two inflows totaled $1.085 billion, and ended a 15-week run of outflows, totaling almost $6.8 billion, dating back to mid-February 2005.

Rieke went on to say, however, that the most recently reported AMG number, a $383.59 million outflow following those two consecutive inflows, seemed to "take the air out of the market.

"But people have been buying new issues," she added. "But as to whether they are buying them to hold them or to make a little money by selling them, I can't say."

R.J. Reynolds sold from high-grade desk

The only issue to price Wednesday came from Winston-Salem, N.C.-based tobacco company R.J. Reynolds, which priced $500 million of senior secured notes (Ba2/BB+/BB+) in two tranches.

Citigroup and JP Morgan ran the books for the debt refinancing deal that priced off of the investment-grade syndicate desk.

The company priced $300 million of 6½% five-year notes at 99.601 to yield 6.593%, and $200 million of 7.3% 10-year notes at 99.846 to yield 7.321%.

In addition to pricing off the high-grade desk the two tranches had been talked in the fashion of investment-grade deals - on the basis of spreads to Treasuries.

The yield on the five-year note came at a 287.5 basis points spread, on the tight end of the Treasuries plus 287.5 to 300 basis points price talk. And the yield on the 10-year notes came at a 337.5 basis points spread, on the wide end of the Treasuries plus 325 to 337.5 basis points price talk.

Hynix, Chiquita talk

The investment banks continued to set the table for the finish of the June 20 week, as price talk was heard on two of the three deals that are expected to price during the Thursday session.

Hynix Semiconductor Inc. set price talk and modified the structure of its $750 million offering of seven-year senior fixed-rate notes and senior floating-rate notes (B1/B+).

Price talk for the fixed-rate notes was set at the 9¾% area and the maturity was reduced to seven years from 10 years.

Meanwhile the seven-year floating rate notes were talked at Libor plus 600 basis points.

Citigroup, Deutsche Bank Securities, UBS Investment Bank and Merrill Lynch & Co. are running the books for the deal from the Korean semiconductor company.

Elsewhere Chiquita Brands International Inc. talked its $225 million offering of 10-year senior notes (B3/B-) at 8 5/8% to 8 7/8%.

Morgan Stanley and Wachovia Securities are joint bookrunners for the acquisition funding deal.

As to the other offering expected to price Thursday, talk of 8½% to 8¾% came out Tuesday on Ocean Rig Norway AS's $150 million of eight-year notes (B3/B-), pricing via Morgan Stanley.

Ford drops

Back in the secondary sphere, Ford's bonds were seen down 2 to 2½ points on the session, a trader said, "after the Moody's news caught a bunch of people by surprise. It caught them off guard and [the bonds] traded down."

Actually, he said, "it was a light day," volume-wise, but "the uncertainty out there caused everyone to unwind some long positions."

He saw Ford's benchmark 7.45% notes due 2031 start out around 84 bid, 85 offered, before ending up at 81.5 bid, 82.5 offered

At another shop, a market source saw the Ford bonds initially take "a two-point hit," with the 7.45s dropping to around 82.5 from 85.125 previously. Then, he said, some trades late in the session dragged the bonds down to about 81.5 bid, 82 offered.

The first trader said that the threat by Moody's to junk Ford "was the only real driver." Before that, he said, "it was really range-bound."

Moody's - which so far has kept Ford out of junk territory - said Wednesday that "the very significant and continued reduction in Ford's North American earnings outlook reflects the escalating competitive and cost challenges the company faces, and the increasing difficulty Ford may have in delivering credit metrics that are supportive of the Baa3 rating by 2007."

Moody's said that those metrics include EBITDA margins that approximate 4%, fixed-charge coverage of between 3.5 and 4 times, as well as free cash flow-to-total lease and pension adjusted debt of more than 15%

Moody's did acknowledge Ford's "strong" $23 billion liquidity position, the likely benefits of its efforts to monetize its Hertz Corp. car-rental subsidiary, probably through a spin-off or sale, and the good consumer reaction to its newly introduced vehicle lines, particularly the Mustang.

But it said that the decision whether or not to junk Ford would depend on factors including whether the continued market acceptance of Ford's new products would be sufficient to offset the continuing consumer shift away from what has been Ford's bread-and-butter in recent years, trucks and SUVs, whether increasing competition in North America will continue to pressure Ford's market share position and price realization; and "the degree to which these competitive challenges and the potential for restructuring-related expenditures will cause Ford's automotive operating cash flow to turn negative and thereby erode its liquidity position."

Threatens full junk status

Even though S&P's statement indicating that another downgrade was likely came out before Moody's news, the trader said the latter development was far more important, since S&P already has Ford at junk, while a Moody's downgrade, should it occur, would tip the balance and make Ford firmly junk, with two out of the three leading agencies so declaring (Fitch Ratings still has Ford as investment grade and has not said it will change that anytime soon).

"Regardless that S&P already has them at junk, if Ford were to be cut by Moody's, that would send them into official junk status," he said, with consequences ranging from being kicked out of investment-grade bond indexes to forcing some high-grade accounts with strict guidelines to dump the paper.

"It would take a little while, and you can argue that it's already been priced in, so I wouldn't go so far as to say that it was any kind of meltdown - they [the Ford bonds] were just a little weaker, down two points or whatever. It wasn't seven or eight points or anything like that."

He said that it was especially significant that Moody's was reviewing the carmaking giant for a downgrade "because they had already cut them to the current levels a month ago. They already cut them - but now they are reviewing them again, because of what they came out with [Tuesday]."

Ford - which in the spring had already issued bearish revised guidance - announced late in the day Tuesday that it now sees even weaker results ahead for its core North American automotive unit, due to expectations for lower vehicle sales and continued supplier-related challenges.

While the Number-Two carmaker did increase its second-quarter earnings guidance to 30 to 35 cents per share, excluding special items, from previous projections calling for quarterly profits in a range of breakeven to 15 cents per share, this was entirely due to a lower assumed tax rate and stronger results from its Ford Motor Credit financial arm, rather than to any improvement in its main business, making and selling cars and trucks.

Accordingly, Ford lowered its full-year earnings guidance to $1.00 to $1.25 per share from earlier guidance of $1.25 to $1.50 per share, excluding special items and discontinued operations. In April, Ford had lowered full-year per-share guidance from its original 2005 projection of $1.75 to $1.95.

Ford also announced additional salaried-related cost-cutting actions, including the elimination of 1,700 positions, or about 5% of the non-union North American workforce, and will also reduce the use of agency and purchased services by 10% - these reductions coming on top of the elimination of 1,000 salaried jobs that was announced in April.

Ford further said Tuesday that it would evaluate options for reducing personnel-related costs outside of North America as well, and to conserve cash would eliminate 2005 bonuses for salaried management employees worldwide and suspend its 401(k) matching grant for salaried employees, effective July 1.

Standard & Poor's - which dumped Ford officially into junk-bond land with a May 5 downgrade to BB+ from BBB- previously - said Wednesday that while the ratings and outlooks of Ford and Ford Motor Credit would not be immediately affected by the carmaker's latest announcement, "we believe there is now an increased likelihood that the ratings . . . will ultimately be downgraded further."

The ratings agency said it interprets the lowered guidance to mean that Ford's North American automotive operations "will generate a substantial loss this year, reflecting its vulnerability to cost, market share, and pricing pressures, even though overall industry demand remains robust," and added that Ford's "weak sales performance in the shrinking mid- and large-size sport-utility segments remains a particular concern."

It also warned of the possibility that "sweeping and costly additional restructuring actions will be necessary - going far beyond the incremental salaried employee-related measures that Ford has just initiated."

A market source saw Ford Motor Credit's 7% notes due 2013 open at 95.75 bid, 96 offered, and then end the session down a point at 94.5.

GM slips

And he saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 "seem to have held pretty steady," in a context of 83.75-84 for much of the day. However, he said there were a number of relatively small trades late in the session, a possible indicator of retail investment activity, that dragged the bonds as low as 82.875 bid, before they ended at around 83, down ¾ point to a point, "give or take."

Another trader said those GM bonds lost about ¾ point, to end at 83.25 bid, 84.25 offered.

He said that initially, market sentiment toward the troubled auto sector was positive, with the news Tuesday that the residential lending division of GM's financial arm, General Motors Acceptance Corp., had issued $4 billion of bonds in three tranches through Residential Capital Corp., a new investment grade-rated subsidiary, "and it was well accepted late Tuesday in the U.S. and early Wednesday in Europe, trading up maybe 15 bps or so - so there was a positive tone when we started the day. Throughout the entire day it was positive to maybe unchanged, but then, at the point of Moody's coming out and telling [Ford] it could be downgraded, that spooked the market."

Steel keeps heading down

Steel sector bonds "are still under some pressure," said a trader, quoting AK Steel Corp.'s 7 7/8% notes due 2009 at 91.5 bid, 92.5 offered and its 7¾% notes due 2012 at 85 bid, 86 offered, both down about half a point.

Another market source, though, saw the bonds falling farther from a higher original level, with the 7 7/8s down two points on the day to 92, and the 73/4s half a point lower at 86, this despite an apparent lack of fresh news about the Middletown, Ohio-based specialty steels producer.

Movie Gallery down on earnings warning

Elsewhere, Movie Gallery Inc. - the Dothan, Ala.-based video-rental chain operator that recently acquired the larger and better-known Hollywood Entertainment Corp. - said that its second-quarter sales will be weaker than originally expected, citing "the recent weakness in the home video release schedule" of the major film studios - in other words, not enough good new films are going into the second-biggest U.S. video chain's 4,900 stores, a development that the company said "is having a significant adverse impact on our results."

That helped take the company's 11% notes due 2012 down more than two points on the session to 104.5.

The company announcement also pointed out that the theatrical box-office - i.e. traditional movie theaters - is "in its 17th week of a slowdown and enduring its worst slump in two decades," adding that "the flow-through of an unimpressive slate of titles will continue to adversely impact our stores in both the rural and urban markets over the next few months."

AMG, Isle of Capri better

A market source said that AMC Entertainment Inc.'s bonds - which had pretty much gone nowhere Tuesday on the news that the Kansas City, Mo. -based theater chain will merge with New York-based rival Loews Cineplex Entertainment Corp. - seemed firmer, with its 8% notes due 2014 moving up to 91.5 bid from 90.25, its 9 7/8% notes due 2012 half a point better at 101, its 9½% notes due 2011 up ¾ point at 99.25, and its 8 5/8% notes due 2012 unchanged at 104.

Isle of Capri Casinos Inc.'s 7% notes due 2014 were seen having risen for a second consecutive session, finishing at par, up half a point on the session, on top of a 11/2-point rise in Tuesday.

Its 9% notes due 2012 gained a quarter-point to 108.25.

The Biloxi, Miss.-based gaming operator's bonds were up in apparent reaction to a court decision on Tuesday in Florida, which will allow Isle of Capri to put slot machines into its Pompano Park Harness Racetrack starting July 1.

The ruling by Broward County Circuit Judge Leroy Moe follows voter approval in a March referendum of "racinos" - i.e. racetrack casinos - offering Las Vegas-style slot machines, which are otherwise illegal in Florida. It lets Isle of Capri proceed with their installation as Pompano Park, even though the state legislature has not yet drawn up guidelines for such racetrack slots, as directed by the voters. Should the state not appeal the ruling or appeal and lose, the legislature could meet in a special session and enact slot machine guidelines which could be more restrictive than operators like Isle and Magna Entertainment Corp., which plans to put slots into the Gulfstream Park track, would prefer.

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