Big steel deal causes Ispat, International Steel bonds to jump; NorthWestern, Hawk price deals

By Paul Deckelman and Paul A. Harris

New York, Oct. 25 - News of a giant steel industry merger pushed the bonds of two of the companies involved, Ispat Inland and International Steel Group, up sharply in busy trading Monday and helped lift some of the other names in the sector, such as AK Steel Corp., a bit higher as well. Also on the upside, Delta Air Lines Inc. bonds were heading toward the wild blue yonder for a second straight session, on hopes that the troubled Atlanta-based air carrier and its pilots union might be getting close to an agreement on wage-cut concessions.

In the primary sphere, NorthWestern Corp. sold an upsized offering of 10-year senior secured notes while Hawk Co. took wing with a $110 million 10-year note deal. Coming deals were heard from K&F Industries and from Choctaw Resorts Development Enterprise.

Back among the secondary names, the steel sector "was the sector du jour, and Ispat and ISG were the bonds du jour," a trader observed, seeing the sharp climb Ispat's bonds in particular took on news of the planned acquisition of ISG by Ispat's Dutch-based parent company in what amounts to a $17.8 billion three-way transaction, easily the biggest ever in a steel industry which has seen a wave of consolidation over the past few years (see related story elsewhere in this issue).

Ispat's 9¾% notes due 2014 were being quoted at 121 bid, well up from the Rotterdam-based steeler's prior level around 110. A market source also pegged its floating-rate notes due 2010 at 109 bid, up four points on the session. He saw International Steel's 6½% notes due 2014 having firmed a smart six points on the day to 106.5.

A trader saw the International Steel bonds having gotten as good as 109 bid 110 offered from their previous levels around par, before falling back to end the day 106.25 bid, 107.25 offered, and he saw the Ispat 93/4s finishing at 122 bid, 123 offered.

Another trader saw the International Steel bonds get up to 107.5 bid, well up from par, before coming off that peak to close at a still-robust 106.5, while the Ispat notes ended at 122.5.

Ispat, which is 77% owned by British steel tycoon Lakshmi Mittal, will acquire a privately held Mittal-owned company, LNM Group NV, in an all-stock transaction; then that combined company will acquire International Steel for $42 per share, consisting of $21 per share cash and the rest in stock. The resulting company will be renamed Mittal Steel Co. and Lakshmi Mittal and his family will own 88% of it, with 9% of the company will be owned by International Steel Group chairman Wilbur Ross and the rest of ISG's current public shareholders, and 3% to be owned by Ispat's public shareholders. Completion of the first step of the LNM portion of the merger is expected by the end of 2004, with completion of the International Steel portion of the deal by Feb. 1.

Other steel names rise

A trader said that steel bonds "carried the market" on what he saw as an otherwise "lackluster day." Among the issues seen benefiting from the Ispat/ International Steel deal were fellow steelers AK Steel, whose 7 7/8% notes due 2009 were quoted "up one or two [points] at par. He also saw Oregon Steel Mills Inc.'s 10% notes due 2009 two points better at 110.

Bonds and shares of other steel companies not involved in this deal were seen firmer on the theory that this huge deal may cause other steelmakers in the United States and elsewhere to consider mergers as a way of retaining the size to stay competitive with the new Mittal Steel.

However, another market source said that the Oregons, if anything, were half a point lower at 109.5. He also saw AK's 7¾% notes due 2012 a quarter point better at 98, and saw United States Steel LLC's 10¾% notes half a point better at 117.5. U.S. Steel's 9¾% notes due 2010 were seen off a quarter-point at 112.75.

Delta soars

Elsewhere, Delta Air Lines bonds were seen "way up," in the words of a trader, with the 7.70% notes due 2005 ending at 55 bid, 57 offered, up from 48 bid, 50 offered on Friday, which in turn was an improvement on Thursday's 44-46 level. He saw the 7.90% notes due 2010 advance from 27 bid, 29 offered on Thursday to 30 bid, 32 offered Friday, and from there to 34 bid in Monday's dealings. And he saw the battered 8.30% notes due 2029 firm Monday to 28 bid, 30 offered, up from 24 bid, 26 offered on Friday, and up even further from Thursday's close at 22 bid, 24 offered.

The airline's New York Stock Exchange-traded shares jumped 54 cents (16.67%) to $3.78, on volume of 17.3 million, more than triple the usual turnover.

Delta bonds and shares were up on market buzz that the air carrier might be able to twist arms among its 7,500 pilots to approve $1 billion of annual cuts in their wages, said to be the highest in the airline industry. The union and the airline have been arguing over this for months, with Delta claiming that a refusal of the pilots to give the company the $1 billion of wage cuts will send it nosediving into bankruptcy court. The cash-strapped company was reported Monday to have lined up some $600 million in new financing from a unit of American Express - if the airline can get its pilots to give it the wage cuts it says it needs.

Pathmark drops on guidance

Pathmark Corp. bonds were quoted down sharply after the Carteret, N.J.-based supermarket operator issued lower guidance and was greeted in response by a Standard & Poor's ratings cut.

A market source quoted Pathmark's 8¾% notes due 2012 "down quite a bit," quoting the bonds at 87 bid, well down from prior levels around 94. At another desk, the bonds were seen down only about three points from prior levels at 89.5.

Pathmark management's revised its EBITDA expectations to $140 million to $146 million, down from its previous guidance of $154 million to $165 million. It cited lower-than-expected sales for the fiscal third quarter ending Oct. 30 and predicted continued sales weakness in the fourth quarter.

In response, S&P lowered its ratings on Pathmark , including the corporate credit rating, to B from B+. The subordinated debt is rated CCC+, and the outlook is negative.

The ratings agency projected that EBITDA will now be at the low end of management's revised expectations of $140 million to $146 million - which themselves are well below the $190 million achieved in 2003.

A&P rises

But a trader saw another supermarket operator better after its release of favorable numbers last week. He quoted Great Atlantic & Pacific Tea Co.'s 7¾% notes due 2007 half a point up at 92.75 and its 9 1/8% notes due 2011 up half a point to 82.75, while pointing out that over the last week, those bonds have come about six points off their prior lows.

Two deals price

Two deals totaling $335 million priced during the opening session of October's final week.

Both were slightly upsized and both came at the tight end of price talk, including NorthWestern Corp.'s Chapter 11 exit financing deal, which played to substantial investor demand, according to a market source.

Meanwhile one new issuer stepped onto the stage. Choctaw Resort Development Enterprise plans to price $150 million by mid-week.

And a sell-side source told Prospect News that quick-to-market activity may take center stage as potential issuers considering full roadshows will be increasingly aware of the pending U.S. presidential election, set to take place one week from today.

Substantial demand for NorthWestern

The biggest of Monday's two deals came from Sioux Falls, S.D.-electricity and natural gas provider NorthWestern Corp. It priced an upsized $225 million issue of 10-year senior secured notes (Ba1/BB) at par to yield 5 7/8%

The print was at the tight end of the 6% area price talk and the size was increased from $200 million. Credit Suisse First Boston and Lehman Brothers were running the books.

NorthWestern, which serves 600,000 customers in South Dakota, Nebraska and Montana, filed for bankruptcy protection in September 2003.

One market source, noting the company's "strong four-B rating" as it emerges from Chapter 11, said that there was plenty of demand for NorthWestern's new 5 7/8% notes.

Also pricing Monday was an upsized $110 million of 10-year senior notes (B2/B) from Cleveland-based supplier of highly engineered friction products Hawk Corp.

With Jefferies & Co. leading the deal the notes priced at par to yield 8¾%, at the tight end of the 8¾%-8 7/8% price talk. The offering was raised from $100 million.

The proceeds will be used to refinance debt.

Dobson talk

Elsewhere on Monday, price talk was heard on what figures to be - barring surprises - the biggest deal to price during the final week of October.

Dobson Cellular Systems set price talk for its $700 million three-tranche offering, with pricing expected to take place on Tuesday or Wednesday.

The company is selling $500 million to be split between seven-year fixed and floating-rate first priority senior secured notes (B-).

The fixed-rate notes are talked at 8 3/8%-8 5/8%. The floating-rate notes are talked at three-month Libor plus 475-500 basis points.

The company is also selling $200 million of eight-year fixed-rate second priority senior secured notes (CCC) which are being talked at 125-150 basis points behind the seven-year fixed-rate notes.

Morgan Stanley, Lehman Brothers and Bear Stearns & Co. are joint bookrunners for the deal from the subsidiary of Oklahoma City-based Dobson Communications Corp.

Choctaw's $150 million to price by mid-week

Meanwhile a scant few details surfaced during the Monday session on a couple of deals that have been hanging around on the "shadow calendar."

Choctaw Resort Development Enterprise plans to price $150 million of 15-year non-call-seven senior notes (existing ratings B1/BB-) on Tuesday or Wednesday, via Bank of America Securities.

Price talk is expected to come out Tuesday on the notes, which will have an 11.85-year average life with a sinking fund of $4.5 million per year, and an $87 million balloon payment at maturity.

The company, a Choctaw, Miss. tribal gaming enterprise, will use the proceeds to repay debt.

K&F plans $365 million notes

Also Prospect News heard details about the LBO financing in which Aurora Capital Group will acquire K&F Industries in a $1.06 billion deal that is expected to close in November.

K&F Industries, a Los Angeles-based investment firm that acquires and builds companies in partnership with operating management, is expected to sell $365 million of senior subordinated notes. The financing will also include a new $505 million credit facility and $315 million of equity from Aurora.

Lehman Brothers, Goldman Sachs & Co., J.P. Morgan and Citigroup will run the books for the bond deal.

Beware the ballot

One sell-side source, with a nod to the Choctaw deal that is expected to price by mid-week, suggested Monday that whatever unannounced business that does appear over the course of the Oct. 25 week is likely to be drive-by business.

The reason, said the source, is that issuers and their underwriters are now taking into account the presidential election, set to take place on Nov. 2, a week from Tuesday.

"With the stock market running a downhill course right now you gotta think that people are going to take this election into account as they think about roadshow timing," the source said.

"You could launch a deal on Tuesday and price it next Wednesday," the source added. "But why would you want to do that when you know for certain that you will be competing for attention with the headline news?"

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