Pegasus wings clipped on Chapter 11 buzz; Case New Holland reprices five-years

By Paul Deckelman and Paul A. Harris

New York, May 18 - Pegasus Satellite Communications Inc. bonds swooned badly Tuesday - albeit on relatively thin trading - after the Bala Cynwyd, Pa.-based distributor of satellite TV programming outlined a scenario in a Securities and Exchange Commission filing under which it might be forced into bankruptcy. While this was mentioned as no more than a worst-case possibility, traders said it was enough to spook investors and chop the bonds down anywhere from 10 to 20 points.

In the primary sector, Case New Holland Inc. - which priced $500 million of new 6% senior notes due 2014 back on May 4 - was heard by high yield syndicate sources to have repriced that issue Tuesday, in response to changed market conditions. Also on the new-deal front, Transportation Technologies Industries Inc. priced a $100 million issue of six-year bonds, though the new notes came at a sizable discount from par.

Pegasus "was up and down all over the place," a trader said, "some in the mid-40s, some in the low-to-mid-50s, depending on the coupon."

Another trader said that Pegasus bonds were down about 15 points across the board, quoting the its 13½% notes due 2007 at 28 bid, 30 offered, while its 11¼% notes due 2010 were at 52 bid, 54 offered, off 13 points.

The trader attributed the drop to the market rumors, although he allowed that "for that credit, not much traded that I saw. Some guys came out to sell paper, but some guys wanted to buy paper too low and sell it too high. It was a tough one to get around [Tuesday]."

At another desk, a market source looking at the Pegasus carnage exclaimed "wow! Holy cow!" adding with no little understatement that "it looks like a significant drop." While he acknowledged the Chapter 11 scuttlebutt, he added that "there was different news out on it, so it was not like everybody was throwing that rumor around."

He pegged the Pegasus 131/2s as having fallen to 25 bid from previous levels around 48, clearly the biggest decline of the day. He said the company's 9 5/8% notes due 2005 were only off 10 points at 58 bid, but its 12 3/8% notes due 2006 dropped to 51 bid from prior levels at 69. Pegasus' 9¾% notes due 2006 retreated to 54 bid from 67.5, while its 12½% notes due 2007 ended at 55, down from 69.5. "Listen to this," he exclaimed, noting that the 12¾% notes due 2007 dropped a full 20 points to 40 bid.

Pegasus' Nasdaq-listed shares meanwhile dropped 83 cents (5.94%) to $13.15 on volume of 462,000, not quite three times the norm.

Pegasus fell to earth on Tuesday after the company said in its quarterly 10-Q filing with the SEC that it was trying to figure out how it is going to pay a $51.5 million judgment that recently came out of a breach-of-contract suit against the company brought by DirecTV, whose programming Pegasus delivers to customers in rural areas.

Pegasus said in the filing that it doesn't have the cash-on-hand to pay the judgment and interest costs on the decision, which could add as much as another $12 million to the bill. If it doesn't pay, it could be in default under its bond indentures and the terms of the company's Pegasus Media & Communications Inc. credit agreement. If the company can't get a waiver from its creditors in that case, Pegasus warned that it might have to seek court protection (see related story elsewhere in this issue).

Bear Stearns conference slows activity

Elsewhere, there was "not a lot of trading going on," a trader said, with many portfolio managers and other decision makers at the Bear Stearns Global Credit Conference in New York, which runs through Wednesday.

"The whole backdrop is so heavy and the activity was so muted that even good news made it difficult to move."

J.C. Penney edges higher on earnings

Case in point, he said, was J.C. Penney Co.'s bonds, which were up perhaps a quarter of a point after the Plano, Tex.-based retailer reported better numbers in the fiscal first quarter.

There was "not much change there," he said, even though the company's bonds had been "beaten down so badly" from its prior highs. He saw its 6 7/8% notes due 2015 at 101.5 bid, 102.5 offered.

At another desk, an observer saw J.C. Penney bonds do a little better, its 7.60% notes due 2007 firming a point to 108 bid, its 7 3/8% notes due 2008 more than a point up at 107.75, and its 6½% notes due 2007 going to 103.5 from 102.74

While Penny's net earnings were down year-over-year to $41 million (13 cents per share), including various charges, versus $61 million (20 cents a share) a year earlier, its operating earnings rose to 38 cents per share from 5 cents per share a year ago. The operating earnings figure beat both company estimates of earnings in the 30 to 35 cents range, and Wall Street expectations of around 34 cents a share of earnings from continuing ops.

Penney attributed the improvement to strong spring sales and less clearance merchandise.

Retail sales for the first quarter rose to about $4.03 billion, an 8.7% rise, while same-store sales at the company's department stores open at least a year - the key performance metric in the retailing industry - were up 9.5%.

But the numbers "didn't propel the bonds up three points or something like that," the trader insisted. The market's still pretty heavy."

Gap rises

Also in the retailing sphere, he said, Gap Inc., showed "a little strength" in light trading, up perhaps a point to 108 bid, 109 offered, after Moody's Investors Service raised the San Francisco-based apparel retailer's debt ratings a notch, bringing its senior unsecured bonds up to Ba2 from Ba3 previously.

Moody's said the upgrade "is based upon the company's progress in improving its operating performance, free cash flow, and credit metrics as a result of a more disciplined approach to its operations in key areas such as product assortment, inventory management and real estate."

The ratings agency said further cited "continued trend of improvements in operating performance, positive comparable store sales driven by both increases in store traffic and higher average unit sales, and solidly improved credit metrics."

It said that under the leadership of chief executive officer Paul Pressler, "the management team has introduced new business controls and brought discipline to key areas of the company's operations. New controls around merchandising have resulted in a sharper differentiation between the three brands and a more targeted product assortment in each of the three brands that mitigates to some degree the financial consequences of the fashion risk inherent in Gap Inc.'s business franchise."

News that Lucent Technologies Inc. had won contracts worth more than $120 million from China Unicom for further expansion of China Unicom's CDMA network apparently didn't give much of a boost to the Murray Hill, NJ.-based telecommunications equipment maker's bonds. While Lucent's long bonds - its 6½% debentures due 2028 and 6.45% bonds due 2029 - each rose to 72.25 bid from prior levels around 70.5, its benchmark 7¼% notes due 2006 dipped half a point to 100.5 bid, while its 5½% notes due 2008 were a point down, at 90 bid.

But news of an even bigger contract, from IBM - as much as $1.5 billion in revenues through 2010 - did give Amkor Technology Inc.'s bonds a jolt, with the West Chester, Pa,.-based semiconductor packaging and testing services provider's 7¾% notes due 2013 up a point at 95 bid. Its 9¼% notes due 2008 were up more than two points at 104.25.

Bear Stearns conference keeps primary quiet

The Bear Stearns 13th Annual Global Credit Conference in New York City, which kicked off Tuesday, was said to have muted the session's primary market activity.

"That tends to attract a huge cross-section of high-yield market participants," one sell-side source told Prospect News. "Things tend to get pretty quiet."

The day's few news stories included the repricing of Case New Holland Inc.'s $500 million bond deal, which substantially reduced the issue price and increased the yield for the Lake Forest, Ill. tractor and combine company.

Mike Difley, vice president & portfolio manager of the American Century High Yield Fund, told Prospect News on Tuesday that heading into summer 2004 there are presently plenty of forces for high-yield investors to take into consideration. Some of those investors are no doubt taking stock.

"I think people are battling right now over how quickly and how much the Fed is going to tighten interest rates," Difley said. "That has thrown some uncertainty into the market.

"People have stepped back to reassess the levels where they think things should trade. Until we see some stability in the secondary market - and we saw a little bit of a bounce this morning - you're probably not going to have a big ramp-up in the forward calendar."

Difley said that last Thursday's report that high-yield mutual funds underwent a $2.15 billion weekly outflow certainly didn't take the funds by surprise.

"That's a trailing number," he pointed out. "The mutual funds knew that there was going to be a sizable outflow.

"The mutual funds are only a portion of the market," Difley added. "You did see some liquidity from other players such as asset managers and insurance companies.

"When you see outflows week after week there is probably going to be some pressure in the market. But at the same time some of the bonds were probably snapped up by other players at lower prices."

Difley added that he does not look for the new issue market to regain anything close to its early 2004 volume anytime soon.

"I think we are going to see some choppy water as we head into summer, with the political situation being a little unstable and the concerns about rising rates.

"We could see a little volatility."

Case New Holland cuts price, hikes yield

In Tuesday's primary market activity Case New Holland Inc. repriced its $500 million issue of 6% five-year senior notes. The new issue price is approximately 92.80, decreased from 97.459. The resulting yield is 7¾%, increased from 6.6%.

Deutsche Bank Securities was the bookrunner for the deal that originally priced in a quick-to-market transaction on May 4.

In a press release Monday the company stated that its net proceeds from the sale were approximately $474 million, representing a cost to the company on a yield basis of 7¼%.

Market sources told Prospect News that the underwriter is picking up the 50 basis points difference between the 7¼% yield that the company will pay and the 7¾% yield that will be paid to investors.

Deutsche Bank Securities declined to comment.

According to market sources the value of certain assets as reported in the offering memorandum was subsequently discovered to be of lower credit quality than had been disclosed, whereupon investors demanded to be compensated at a higher yield.

Elsewhere Tuesday Transportation Technologies Industries Inc., a Chicago-based manufacturer of components for trucks, buses and specialty vehicles, priced $100 million of 12½% senior subordinated notes due March 31, 2010 (Caa1/CCC+) at 97.00 to yield 13.262%.

CIBC World Markets and Wachovia Securities were the underwriters on the deal, with proceeds going to take out the 15% senior subordinated bridge notes used in financing the acquisition of the company by Trimaran Capital Partners in March 2000.

An informed source told Prospect News that the deal had originally gone out at 11¾%-12% price guidance during the week of May 10. However, the source added, the deal was substantially restructured, subsequent to which guidance was not revised.

Details on deals in the market

Price talk of 10¾% area emerged Tuesday on Clean Harbors Inc.'s upcoming $150 million of 10-year senior subordinated notes (Caa1/B), expected to price mid-to-late in the present week via Credit Suisse First Boston and Goldman Sachs & Co.

Meanwhile the roadshow starts Wednesday for Concentra Operating Corp.'s $150 million of eight-year senior subordinated notes (B3/B-), with pricing expected to take place late in the week of May 24.

Credit Suisse First Boston and Citigroup are joint bookrunners for the debt refinancing/dividend payment deal from the Addison, Tex. company which provides financial services to the health care industry.

A sell-side source who spoke to Prospect News shortly after Tuesday's session came to a close said that the Bear Stearns conference notwithstanding, the primary market is not presently expected to resume the pace it maintained as winter gave way to early spring.

"The primary market is adjusting itself to the new yield levels," the official explained.

"At some point the demand will come back, based on those new levels at which accounts need to be compensated in order to buy new issues in a rising interest rate environment."

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