Auto sector bonds skid on GM earnings warnings; LBO fears rattle Toys 'R' Us

By Paul Deckelman and Paul A. Harris

New York, March 16 - Automotive suppliers' junk bonds turned sharply lower Wednesday after General Motors Corp. warned that it expects lower than originally forecast first-quarter and 2005 earnings.

Also on the downside, Toys 'R' Us bonds fell for a second consecutive session as speculation mounted that the Wayne, N.J.-based toy and children's product retailer might be acquired in a leveraged buyout deal, which would leave the company holding even more debt than it's already got.

In the primary market, no deals were heard to have priced Wednesday, but price talk was heard on a quartet of offerings expected to come to market as early as Thursday - a two-part transaction for American Tire Distributors Inc., and single-tranche deals for Trustreet Properties Inc., M/I Homes Inc. and Nexstar Broadcasting Group Inc., the latter issue an add-on to the company's existing bonds.

GM threw the auto names into reverse as it abandoned its previous projections that it would at least break even in the first quarter, or maybe even turn a slight profit, instead telling Wall Street that it now expects a loss of at least $1.50 per share. For the full year, the world's biggest carmaker slashed its projection to $1 to $2 per share, well down from previous guidance of $4 to $5. GM - which issues first-quarter results on April 19 - blamed the sharply lower expectations on poor vehicle sales in North America and rising health care costs.

That caused Standard & Poor's to lower its outlook on GM's $301 billion of consolidated debt to negative from stable. The company's corporate credit rating stands at BBB-, meaning the next move from S&P would likely kick GM's ratings down into junk territory. Spreads on GM's own bonds - for the moment still investment-grade rated - were said by traders to have widened out by around 50 basis points on the session; for instance, its 8 3/8% notes due 2033 were quoted at 461 bps over comparable Treasuries, versus Tuesday's 405 bps spread.

Back in the heyday of Detroit's Big Three, when GM, Ford Motor Co. and Chrysler Corp. held undisputed hegemony over the American car market and fat profits were rolling in every year, with GM leading the pack, there was a popular saying: when General Motors sneezes, the American economy catches cold.

That's the way it was in the automotive supply sector Wednesday, as the whole group skidded lower after GM's warning.

Collins & Aikman Products Co. - whose bonds had already been veering into a ditch lately on fears of production cutbacks at GM, Ford, and DaimlerChrysler AG and continually rising raw materials costs, continued to spin its wheels Wednesday ahead of its scheduled release of fourth-quarter and 2004 earnings on Thursday. Those results had been scheduled for release Tuesday, but the Troy, Mich.-based maker of interior and exterior automotive components pushed that release back to Thursday, which had caused its bonds, recently cautiously rebounding from prior lows, to go back on the slide.

That slide continued Wednesday, with its 10¾% senior notes due 2011 dropping to 88.5 bid, 90.5 offered at the opening, down from 91.5 bid, 92.5 offered on Tuesday, a trader said. The bonds rebounded a little from their early lows, getting as good as 89.5 bid, 90.5 offered in intra-day trading, before dropping back again to 87 bid, 88 offered at quitting time, down 4½ points on the session. Its 12 7/8% subordinated notes were seen down three points on the day to 65 bid, 66 offered, but "were not as active as the 103/4s," the trader said.

Another automotive loser Wednesday was Dura Operating Corp., whose 8 5/8% notes due 2012 were seen down about 2½ points on the session at 97.5 bid, 98.5 offered. Its 9% notes due 2009 tumbled about four points on the session to 88 bid, 89 offered.

Besides being pulled down by the GM news along with the rest of the sector, the Rochester Hills, Mich.-based maker of drive control and seating control systems had some bad news of its own to add more fuel to the fire. It said that said it now expects to report a loss of five to 15 cents per share for the first quarter - versus its previous projection of a profit between 10 cents and 35 cents a share - blaming the loss warning on cutbacks in North American light truck production.

Dura also lowered its full-year adjusted EBITDA guidance to a range of $185 million to $195 million from its prior forecast in the $210 million area.

There was still more bad news from yet another name in the group, Foamex International Inc. The Linwood, Pa.-based maker of foam rubber used in auto seats and vehicle dashboards, among other uses, was supposed to report its 2004 fourth-quarter and full-year results Friday, but sought and got a 15-day extension from the Securities and Exchange Commission to April 4.

"Yet another company delaying results," a trader said. "A lot of people are running scared to dot those 'i's and cross those 't's without being sure that everything's kosher."

He saw Foamex's 9 7/8% subordinated notes due 2007 drop to 52.5 bid, 53.5 offered from 57 bid, 58 offered. At another desk, its 13½% notes coming due on Aug. 15 were a point lower at 94 bid, while its 10¾% notes due 2009 were three points down at 85 bid, 87 offered.

Apart from the auto names, most issues were likewise down, pulled lower by a slide in stocks and oil prices rampaging to record highs above $56 per barrel.

There was "a lot of garbage out there," said the first trader, in seeing bonds down at least half a point to a point across the board.

Toys 'R' Us slides

Toys 'R' Us - whose bonds had fallen on Tuesday after the company said it would "indefinitely" delay release of its fourth-quarter earnings figures so it could reflect changes in how it accounts for leases - "got hit pretty good" again on Wednesday on fears that the company may be sold on a leveraged buyout basis, which would likely load it up with more debt on top of the existing obligations. Many in the market believe those new obligations will be structured so that they are senior to the existing notes, effectively pushing the outstanding issues further down the ladder in the event of a recovery scenario.

While the prospect of a buyout by either LBO specialist Kohlberg Kravis Roberts & Co. or by an investment group led by Cerberus Capital Management LP pushed the company's New York Stock Exchange-traded shares up 68 cents (2.62%) to $24.77, and brought its 6¼% mandatory convertible notes along for the ride, up 1½ points to 59 on the chatter, the bonds were going the opposite way, with Toys' 7 3/8% notes due 2018 dropping as low as 82 bid, 83 offered, a six-point loss in intra-day dealings, before the bonds came off those lows to end at 85 bid, 86 offered, down three points on the session.

A market source saw the company's 7 7/8% notes due 2013 nearly three points lower at 94.75, while its 8¾% notes due 2021 fell to 93 bid, down almost two points.

Triton down again

Triton PCS Holdings bonds - which got clobbered on Tuesday after the Berwyn, Pa.-based wireless service provider posted a considerably larger-than expected quarterly operating loss and warned of weak 2005 earnings - got pounded again Wednesday, traders said, particularly in its subordinated issues.

While its 8½% senior notes due 2013 were down another point to 91.5 bid, 92.5 offered, on top of a five point loss Tuesday, its subordinated 9 3/8% notes due 2011 swooned 10 points on the day and 16 over two days to 68 bid, 69 offered, while its 8¾% notes due 2011, off seven points Tuesday, retreated another nine on Wednesday to 66.5 bid, 67.5 offered.

Tekni-Plex continues lower

And Tekni-Plex Inc., whose bonds lost several points Tuesday after the Somerville, N.J. -based packaging maker announced late in the day that it had begun a consent solicitation that would let it incur more debt, continued to fall Wednesday, with its 12¾% senior notes due 2010 dropping further to 81.5 bid, 82.5 offered from 85 bid, 86 offered previously.

The company is seeking the approval of its 12¾% noteholders for giving the company the authority to take on new debt, thus giving it more financial flexibility. Tekni-Plex is currently prohibited by its bond indenture from incurring any new debt.

Duane Reade lifted by earnings

One of the few gainers on the day was New York-based drugstore operator Duane Reade, whose quarterly numbers "were not as bad as expected," a trader said. That boosted its 9¾% notes to 90 bid, 91 offered, up from Tuesday's close at 87.5 bid,. 88.5 offered.

Primary quiet

Wednesday's session turned out to be anything but a hummer in the high yield primary market as rising fuel prices, falling stock price and a bleak outlook for U.S. automaker General Motors Corp. conspired to soften junk bond prices.

"It was not an especially great day for the high beta asset classes," one sell-side source conceded late in the session.

The source added that the junk market was weaker by at least a point across the board. Recently priced high yield issues generally took it on the chin Wednesday, the source said, adding that one exception was the recently priced Revlon Consumer Products Corp. 9½% senior notes due 2011 (Caa2/CCC), which were holding in.

However, the source said, just about everything related to the auto sector ended the session on blocks, underperforming the rest of the generally lower market.

The reason, explained the source, is that General Motors announced a weaker outlook for 2005.

The primary takes a powder

Although terms were expected to emerge on several deals during the Wednesday session, no new issues had been priced as Prospect News went to press.

Offerings heard to be Wednesday business early in the morning had become Thursday-Friday business by the close.

Nevertheless, the new issue calendar is by no means empty, and the remainder of the March 14 week figures to see well over $1.25 billion of issuance.

Talk emerged on a good portion of it Wednesday.

Trustreet Properties Inc.'s $250 million of 10-year senior notes (B1/B+/BB-) were talked at the 7 3/8% area and are expected to price on Thursday, via Banc of America Securities.

Elsewhere M/I Homes Inc.'s $200 million of 10-year senior notes (Ba2/BB) were talked at a yield in the 6¾% area, with pricing also expected on Thursday, via Citigroup and JP Morgan.

And American Tire Distributors Inc. issued price talk Wednesday on its $330 million two-part offering, which is expected to price on Friday via Banc of America Securities.

Talk is three-month Libor plus 525 basis points area on a tranche of seven-year non-call-two floating-rate notes (CCC+, lowered from B-), and 10% area on a $200 million tranche of 10-year non-call-five senior subordinated notes (CCC+).

Nexstar, Suburban Propane plan add ons

Meanwhile developments were heard on a pair of add-on deals, including Nexstar Broadcasting Group Inc.'s $75 million add-on to its 7% senior subordinated notes due Jan. 15, 2014.

The talk is 97.00 area, with pricing expected on Thursday morning.

Again, Banc of America Securities has the books for the debt refinancing deal from the Irving, Tex.-based broadcasting company which was first heard to be in the market last week.

Elsewhere Suburban Propane Partners, LP announced that it plans to price a $250 million add-on to its 6 7/8% senior notes due Dec. 15, 2013 (B1/B) late Thursday or early Friday in a debt refinancing deal via Wachovia Securities and Goldman Sachs.

The Whippany, N.J. propane supplier's original $175 million issue priced at par on Dec. 18, 2003.

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