Quiksilver flashes on possible unit sale, cost cuts; Smurfit Stone up after Chapter 11 filing

By Paul Deckelman and Paul A. Harris

New York, Jan. 26 - Quiksilver Inc.'s bonds raced upward Monday on news reports that the Huntington Beach, Calif.-based sports apparel maker might be selling its athletic shoe brand - or possibly even the whole company. Apart from such speculation, the company announced a cost-cutting plan it said would save $40 million annually.

Another gainer was Smurfit Stone Container Corp., whose bonds rose after the Chicago-based maker of paper packaging materials - to the great surprise and astonishment of exactly nobody - filed for Chapter 11 protection from its junk bond holders and other creditors.

Downsiders included gaming operator Las Vegas Sands Corp. and automotive parts makers Visteon Corp. and Lear Corp.

After last week's busiest-in-months week, primaryside players dialed things down a few notches. However, the new Crown Castle International Corp. deal that priced last Thursday, among others, was seen continuing to move solidly higher.

Market indicators mixed

Back among the established issues, the widely followed CDX High Yield 11 index of junk bond performance, which lost ¼ point on Friday, was up by ¼ point on Monday, a trader said, quoting it at 74 5/8 bid, 75 1/8 offered, The KDP High Yield Daily Index, however, declined by 10 basis points to 53.88, while its yield held steady at 13.67%.

In the broader market, advancing issues improved to pull virtually even with decliners, who had led Friday by a margin of around nine to seven. Overall market activity jumped by 52% from the levels seen in Friday's session.

Despite the activity, a trader said that apart from the movement of names with news attached to them, like Smurfit Stone, Quiksilver or Freeport-McMoRan Copper & Gold Inc., whose bonds were actively traded on the company's quarterly numbers, although they didn't really move very much, the session was "another quiet Monday."

He called the market's overall movement "sideways."

Meanwhile a syndicate desk source said Monday was a quiet day, with nothing going on in either the primary or secondary markets.

"The default rate is 4.02%," the official said, noting the Monday bankruptcy filing of high-yield issuer Smurfit-Stone Container Corp.

"We're looking for a default rate of 9% or 10% for this year.

"To get there from here obviously that rate will have to climb fast."

Another trader said that there was a fair amount of volume - but confirmed that most of it seemed centered in the likes of Smurfit Stone, Freeport-McMoRan, and Quiksilver.

He saw Community Health Systems Inc.'s 8 7/8% notes due 2015 -- the issue sometimes regarded as a market barometer because of its large size and easy tradability - be nothing of the sort on Monday; the Franklin, Tenn.-based hospital operator's bonds, which rose 1 point to 95 bid, did so on what the trader termed "very light volume" of just $3 million.

"That volume was not indicative of our market," he said, noting that things were "far busier."

Active Freeport runs in place

Far more typical was Freeport-McMoRan, whose bonds traded in pretty strong volume after the Phoenix-based metals mining firm came out with quarterly numbers.

However, while there was no shortage of trading, there wasn't very much movement. The trader saw its busiest issue, the 8 3/8% notes due 2017, turn over $54 million of bonds - but end unchanged on a round-lot basis at 78.5 bid.

"It's quite unusual to have that kind of volume - and still see the bonds being unchanged."

There seemed to be a little more activity in the company's 8¼% notes due 2015, which were up 1 point at 82 bid, with $25 million traded. Freeport's floating-rate notes due 2015 ended at 66 bid, up ¼ point on $11 million traded.

Freeport reported a fourth-quarter net loss of $13.9 billion, or $36.78 a share - versus a year-earlier profit of $414 million, or $1.05 a share. However, the giant loss was almost totally due to special items totaling $14 billion, or $36.84 per share, including writedowns for its existing inventories and long-lived assets and goodwill. Excluding those items, the company would have reported a profit of $23 million, or 6 cents a share - while Wall Street had been looking for a loss excluding items of about 95 cents per share.

The unexpected operating profit was seen by participants as a sign that Freeport seems to be making some progress in being able to balance its costs and output in the face of a much weaker global marketplace.

Those results played well on the equity side, with the company's New York Stock Exchange-traded shares shooting up as much as 15.25% before finishing the day up $2.13, or 9.34%, at $24.94. Volume of 34 million was 1½ times the norm.

Smurfit Stone climbs after bankruptcy

A name which was even more heavily traded than Freeport-McMoRan was Smurfit Stone, which filed for Chapter 11 protection - after more than a week of speculation in the market that this was what the debt-laden Smurfit Stone was going to do.

Analysts greeted the news positively, feeling that the filing with the U.S. Bankruptcy Court in Wilmington, Del., would give the company the opportunity to get out from under some of its estimated $3.5 billion of debt. Bondholders agreed; a trader saw Smurfit Stone's most actively traded bond, the 8 3/8% notes due 2012, trading at a round-lot level of 14, well up from 11.125 on Friday. The bonds, he noted, were trading flat, or without their usual accrued income. Some $55 million of that issue changed hands.

He also saw Smurfit Stone's 8¼% notes due 2012 also at 14, up from 11.125, on volume of $25 million.

All of the bonds are "trading on top of each other" at the higher level, he noted.

Another trader saw all of the bonds at 14 bid, 15 offered, noting dryly that the filing was "not much of a shock."

He also noted that the bonds "were already trading flat, as far back as two weeks ago," and characterized the rise in all of the issues to the 14 mark from 11 previously, also including the 7½% notes due 2013, the 7 3/8% notes due 2014, and 8% notes due 2017, as a case of "people trying to get a position" in the Smurfit Stones, as the company goes into reorganization.

But while the bondholders are likely get some recovery, the shareholders, all the way at the back of the line and expected to get nothing, took the NYSE-traded shares - already trading at virtually worthless penny-stock levels - down further still. They fell 1.7 cents, or 28.57% of their little remaining value, to 4.3 cents per share. Volume of 34.5 million was over four times the average turnover.

Quicksilver 'quake

A trader said Quiksilver's 6 7/8% notes due 2015 were "the big winner, up significantly" to 54 bid, 55 offered - which he called a 24-point gain - on published reports talking up the possibility that company might sell its athletic shoe division to VF Corp.

"It was the big upsider of the day," another trader said, quoting the bonds at 54.5 bid - well up from the most recent round-lot level of 33.25, last Wednesday, on volume of $15 million.

Meanwhile, the company's Big Board-traded shares zoomed by as much as 71.52% in intraday dealings, before closing at $2.21 - still up 70 cents, or 46.36%, on volume of 4.3 million shares, some 2½ times the usual daily handle.

The fashion industry trade publication Women's Wear Daily reported on Friday that Quiksilver was close to selling its DC Shoes brand to competitor VF Corp. That report also said that the company could be in talks with athletic wear industry leader Nike Inc. to sell itself outright.

However, other news reports indicated that Nike had made a bid - and that Quicksilver management had rejected it.

In a research note, Citigroup said of such a deal that while it would be a great move for VF, it would be a mixed bag for Quiksilver. While "the possible cash infusion for ZQK is important as the company needs to refinance its short-term debt, including $167 million which is uncommitted, and a $72 million facility due to mature in March 2009," Citi declared, it added "however, with the possible sale of DC, we think Quiksilver could be losing its growth crown jewel." It summed up such as deal as "a Short-Term Potential Positive for ZQK, But Long-Term Impact Uncertain."

At Lazard Capital Markets, analyst Todd Slater opined that "given that the health and attractiveness of Quiksilver's brands is overshadowed by ongoing financial and liquidity troubles, we believe a good solution would be a friendly transaction with stronger strategic players."

Neither VF, Quiksilver or Nike has commented on the media and analyst speculation about such a deal.

Back in the realm of actual news, Quiksilver on Monday did outline plans to save as much as $40 million annually via belt-tightening, including the elimination of 200 jobs.

Quiksilver also said that it remains committed to its previously announced effort to restructure its $1.07 billion in debt, a process it said is on track to be completed in February. Quiksilver has said that it was in discussions with European and Asia/Pacific banks to refinance its short-term debt and was also negotiating a term loan to supplement its credit availability in the United States.

Some issues move lower

While most of the attention was dominated by upsiders like Quiksilver and Smurfit Stone, traders saw some losers as well. One noted that Las Vegas Sands' 6 3/8% notes due 2015 dropped to a round-lot level of 54.5 bid from 58 on Friday, on volume of $6 million.

A trader said a negative Wall Street Journal story about the sector pushed the automotive parts-makers lower, with Visteon Corp.'s 7% notes due 2014 down 2 at 5 bid, 7 offered and its 8¼% notes due 2010 also down a deuce at 16 bid, 18 offered.

He also saw Lear Corp. down by a pair of points, its 8¾% notes due 2016 at 18 bid, 20 offered.

Among the carmakers themselves, a trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 down ½ point at 13.5 bid, 14.5 offered, while domestic arch-rival Ford Motor Corp.'s 7.45% bonds due 2031 gained ½ point to 22.5 bid, 23.5 offered.

Another trader saw the GM benchmarks up ½ point to 15 bid, on $3 million traded, while the Ford long bonds gained 1¼ points to 22.5 bid, on $5 million traded.

Among the shorter issues, he saw GM's 7.20% notes due 2011 tumble to 19.5 bid from 24.5 on Thursday, the last previous round-lot trade, though with only $2 million traded.

The trader saw GMAC LLC's 8% bonds due 2031 unchanged at 52 bid, with only $4 million traded, while its 5 5/8% notes coming due on May 15 were a point better at 96.5, though on only $1 million of turnover.

At another desk, GMAC's 6 7/8% notes due 2011 gained 2 points to the 71 level, but the 8s were quoted down 2 points at 49.5.

Crown Castles still king

Among the recently priced new issues, a trader said that the new Crown Castle 9% notes due 2015, were trading as well as 94.5 bid, 95.5 offered - up about ½ point on the session, as the Houston-based antenna tower operator's bonds, an upsized $900 million of which priced on Thursday at 90.416, continued to firm. The bonds had finished on Friday around the 94 bid level.

A trader saw Petrohawk Energy Corp.'s 10½% notes due 2014, an upsized $600 million of which priced Thursday at 91.279 bid, at 93 bid, 94 offered, also up about ½ point from Friday.

The trader also said that the new Nielsen 11 5/8% notes due 2014, an upsized $330 million of which had priced on Wednesday at 90, were at 91 bid, 92 offered, up about ¾ point on the session

Varied outlooks for primary

For the second straight session the primary market remained inactive on Monday.

When quizzed as to whether last week's burst of new issue activity will carry forward, sources gave various responses.

To recap, last week saw three issuers combine to raise $1.66 billion of proceeds.

Crown Castle International Corp. priced the biggest deal in over half a year - a massively upsized $900 million issue of 9% six-year senior unsecured notes (B1/B) that came at 90.416 to yield 11¼%.

Also Petrohawk Energy Corp. priced an upsized $600 million tap of its 10½% senior notes due Aug. 1, 2014 (B3/B) and Nielsen Finance LLC and Nielsen Finance Co. completed a $330 million issue of 11 5/8% notes (Caa1/B-).

The Crown Castle deal saw more than 200 accounts fill up an order book with $2 billion of orders, while the Petrohawk deal played to more than 100 accounts, sources said.

Those levels of participation were broadly interpreted as representing a high-yield investor base eager to put cash to work.

Some expected that last week's activity would prompt potential issuers to turn up sooner rather than later in order to raise cash in a market where the way ahead could pose challenges to those wishing to refinance corporate debt.

"We expect one or two deals this week," said one syndicate official, who was not surprised that Monday primary market was inactive.

"Some days are going to be quiet, but we're probably going to have a few busy days as well," the sell-sider said.

"Right now the momentum is pretty ideal for people who need to come to the market."

A disconnect

However another sell-side source who watches the high-yield pointed out that the 2009 high-yield rally has taken place against a backdrop of mostly lousy economic news.

On Monday alone, massive layoffs were announced at Caterpillar Inc., Home Depot, Sprint Nextel Corp. and Pfizer, Inc.

"The equity market is down 8% year-to date, but the bond and loan markets have both rallied," said the sell-sider.

"That seems like a disconnect.

"I think the primary market is going to be a little slow here, at least until equities rally."

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