Refco slide continues; Delphi better; Doane Pet Care prices 10-year deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 14- The high-yield bond market ended the week Friday just as it had begun it - with yet another sharp drop in Refco Inc.'s bonds as the staggering New York-based financial services company continued to be hit with a deluge of bad news at least comparable in severity to the torrential downpours that have soaked New York and surrounding areas all this week.

Refco seemed to be the main area of focus for the secondary market, although here and there, other developments occurred. One was a solid rise in the bonds of bankrupt automotive components maker Delphi Corp., with short-covering suggested as one explanation for the improvement.

Lear Corp.'s bonds were seen lower, as traders cited rumors circulating around that the company had drawn down its bank credit line - seen potentially as a sign of possible looming liquidity problems.

In the high-yield primary market, Doane Pet Care Co. successfully priced an offering of 10-year notes at a slight discount to par, the only pricing activity seen all day.

Price talk emerged on Hilcorp Energy's upcoming 10-year note offering, while K-Sea Transportation was heard getting ready to hit the road Monday to market its seven-year bond issue.

Overall, after a robust Friday morning start the high-yield market held in with what one buy-side source estimated to be nearly half-a-point of gains in the early afternoon.

"There was a lot of short-covering in the auto sector this morning," the source commented, adding that high yield was seeing a pretty good bounce at the end of the week.

However by the Friday close a syndicate official said that the market had coughed up nearly all of its gains from earlier in the day, ending a quarter of a point higher "at the most."

But clearly, the focus was on Refco. Its battered 9% notes due 2012 - which a week earlier had been breezing along at levels around 108 - were heard to have been knocked into the mid-to-upper teens Friday, before firming off those lows to end bid around 30 - still a 10-point drop in the securities' price.

Those bonds began sliding in response to revelations that ousted chief executive officer Phillip R. Bennett allegedly performed some financial sleight-of-hand to get $430 million of bad debts off the company's balance sheet just before its initial public offering several months ago. Those allegations resulted in Bennett's removal from his post by the company, along with another senior executive, and his arrest on securities fraud charges, while Refco warned that its financial statements over the past three years could not be relied upon. That, in turn, caused the major rating agencies to sharply downgrade its formerly respectable ratings to deeply distressed levels, while the company on Thursday imposed a moratorium on withdrawals at its Refco Capital Markets unit. Friday brought further bad news, as a second major unit stopped operating, with Refco Securities LLC - a broker-dealer that accounts for more than half of Refco's gross revenues - saying it was unwinding clients' and its own positions, a move that signals the unit is essentially going out of business. There were further ratings downgrades.

A trader saw the 9% notes - which on Thursday had lost nearly half their value in falling from the 70s down to a closing level of about 40 bid - "trading in a range today, a big range," with the issue hitting an early low of 15-20, and "a bunch of trades" in the teens, before the bonds firmed up to close around 29 bid, 31 offered.

"Wow," he exclaimed when he checked to see just how low the bonds had gone before they came off their lows, and then added a scatological expletive. "And to think that a couple of days ago, we had them at 75-77 - and at 108 a few days before that," he chuckled, mirthlessly.

"It was an absolutely total disaster," another trader declared, as he noted that "it had to be the most active bond today," with an estimated $164 million face value of the bonds changing hands, out of a total float of $390 million.

He also saw the bonds close around 30, but opined: "I don't think anybody has any idea what it's really worth." He said that "right off the bat" on Friday, the bonds had notched low trades around 16, with "some real trades" at 18 or 19, with the high tick for the day that he saw as good as 38, before the bonds fell back to end at 30. "Nice volatility."

He added that "there's a lot more to this story than we've heard. If their only problem was this loan that Bennett took, and he repaid it in full, with interest - then why do they have a problem?"

Disclosures earlier in the week indicated that the $430 million in hard-to-collect receivables owed to Refco, some dating back to 1998 - had been transferred to a separate company controlled by Bennett.

When the spit hit the fan on Monday - the debt markets were closed for the Columbus Day holiday - Bennett was reported to have cut a $433 million check to Refco to take care of the matter. But that still did not prevent his being placed on leave by the company and later charged with securities fraud by federal prosecutors.

The second trader noted that "even on the first day when all this broke [Monday for the equity market, Tuesday in the bond pits], they traded down to 90" from the pre-news 108 level, and just kept going south. Shocked investors then took the bonds down from 90 into the upper 70s on Wednesday, and then down to 40 on Thursday, and to 30 on Friday.

He agreed with the proposition that disclosure of the complex receivables arrangement - which had been buried deep within Refco's financial structure and essentially went unreported up till now - likely spooked investors who have adopted an attitude of "where there's smoke, there's fire" in wondering what other unpleasant surprises might be waiting to be uncovered next.

"And I think they're probably right. There's got to be something else. The whole thing doesn't make any sense."

He noted that the receivables had been described in the media as "uncollectible" - "which would mean those receivables would be worthless if they're uncollectible. You're telling me that Bennett took $400 million out of his own pocket and gave it to them for worthless receivables? The whole story doesn't make sense. There's something else there that will take a long time to come out."

He reiterated that "I don't know what the value of this thing is. I'm pretty sure the equity has no value [Refco's New York Stock Exchange-traded shares, which had closed at $28.56 on Friday, Oct. 7, before the storm broke, fell to $10.85 by Wednesday, and then declined further to $7.90 in pre-market trade before dealings were indefinitely suspended Thursday]. Whether there's anything left over for [holders of] the bonds? I don't think anybody has any clue."

"The whole day was Refco," said yet another trader, who saw low trades in the 23 area and high trades around 33, before the bonds "leveled off" and settled in around 30.25 bid, 31 offered.

And another said that Refco's ride "had been wild," before the bonds settled at 30 bid, 33 offered.

A trader said that Refco was "the one thing that everyone was looking at. There was "not a whole heck of a lot of other stuff" happening.

Delphi higher

One name which seemed to be bucking the overall negative tone of the market was Delphi which "actually was a little better," with its paper closing over 60, "certainly the highest it's been this week.

A second trader saw Delphi's bonds, now all trading on top of one another since the Troy, Mich.-based auto electronics manufacturer's bankruptcy filing, at 61.5 bid, 62.5 offered, well up from 58 bid, 58.5 on Thursday. He attributed the rise to "short covering," after the bonds had gotten whacked around following the Chapter 11 filing.

Lear falls on rumor

But while Delphi was on the rise, a trader saw another automotive name - Lear Corp. - weaker, with the 8.11% notes due 2009 of the Southfield, Mich.-based maker of automotive seating units and interior components moving down to 89.5 bid, 90 offered from prior levels at 91.5 bid, 92 offered, on market rumors - which he said were denied by Lear - that the company had drawn down heavily on its bank credit line, although sources in the bank debt market queried by Prospect News had seen no unusual activity there.

While the trader himself saw no actual levels on the bank debt, he said he had heard that "CDS [credit default swaps] spreads on it were 100 basis points wider."

Several other traders also saw Lear bonds lower and noted the credit-line drawdown rumors, with one also quoting its 5¾% notes due 2014 "down a touch" at 78.5 bid, 80.5 offered, and the 8.11s down more substantially, into the high 80s.

While Lear's New York Stock Exchange-traded shares were marginally lower, down 34 cents (1.15%) to $29.11, on volume of 8.7 million, better than five times the normal turnover, posters on investment-oriented internet bulletin boards noted considerable activity in put options on the company's shares, considered a bet that they will go lower.

He also saw Delco Remy's bonds "go down in sympathy" with Lear, quoting the auto components manufacturer's subordinated 9 3/8% notes and 11% notes, both due 2011, "trading almost like they're bankrupt," at 47 bid, 49 offered, while its 9 5/8% senior notes due 2011, "which people think are money-good" falling to 86.5 bid from levels at 90 bid, 92 offered earlier in the week.

"You have some significant ugly stuff here," the trader said, "with the changes in the bankruptcy laws" and everything else weighing on the market, including the bounce from recent lows in energy prices and the expectations of still higher energy prices this winter, and the tightening interest-rate environment.

Then too, he said, you have the pattern of recent withdrawals from high-yield mutual funds, a widely followed measure of overall liquidity trends. Market participants familiar with the weekly fund flow numbers put out by AMG Data Services of Arcadia, Calif. told Prospect News that some $406.5 million more left the funds in the week ended Wednesday than came into them - the fifth straight hemorrhage, and twelfth in the last 14 weeks.

"You used to look [at the outflows] and say the market was going to be a little weaker," he said, "but the real dynamic in this market is, what are the hedge funds doing? They're unregulated, and could just hit anything - they go long and short.

"It's a real wild card, almost a self-fulfilling prophecy," he continued "because they short the bonds - and then they borrow from the mutual funds, whose value they're crushing by having the funds go lower.

"It's very weird. They short the bonds all day long."

With all of that bad karma floating around, the situation is, he concluded, "not for the faint-hearted."

A burst of primary business

The primary market sputtered to life Friday with two issuers pricing deals for a total of $326 million of combined proceeds.

Hilcorp Energy Co., issuing in conjunction with Hilcorp Finance Co., priced an upsized $175 million issue of 10-year senior notes (expected ratings B3/B) at par to yield 7¾%, on top price talk. The deal was increased from $150 million.

Deutsche Bank Securities ran the books for the drive-by debt refinancing deal from the Houston-based oil and gas exploration and production company.

A source close to the deal told Prospect News that Hilcorp came into the market with a few investors lined up to take the paper out.

Elsewhere Doane Pet Care Co. sold $152 million of 10 5/8% 10-year senior subordinated notes (Caa1/B-) at 99.226 to yield 10¾% in a deal that had wound its way along the investor roadshow circuit.

The yield came at the wide end of the 10½% to 10¾% price talk, with the sale generating $150.82 million of proceeds.

Lehman Brothers ran the books for the acquisition financing.

Doane Pet Care is a Brentwood, Tenn., manufacturer of store brand pet food.

Sub-$500 million week in primary

The combined proceeds of Hilcorp and Doane, added to Ntelos Holding Corp.'s $134 million proceeds deal, which priced in a Wednesday drive-by, brought the Oct. 10 week to a close having seen just $460 million price in three tranches.

Adjusting for Friday's transactions, the market closed Friday having seen slightly better than $79.6 billion of year-to-date issuance in 313 dollar-denominated tranches, well short of the $106 billion and change that had priced in 427 tranches by the close of business on Oct. 14, 2004.

K-Sea sets sail Monday

News of one roadshow start was heard Friday.

K-Sea Transportation Finance Corp. will start a roadshow on Monday for its $150 million offering of seven-year senior unsecured notes (B+), via Lehman Brothers.

The New York City marine transportation company will use the proceeds to refinance debt incurred in financing its acquisition of Sea Coast Towing, Inc., as well as to repay certain other debt and for general partnership purposes.

Thinned-out calendar

K-Sea joins five other issuers with deals that are presently thought to be October business.

They include:

* Targa Resources Inc.'s $350 million of eight-year notes (B2), via Credit Suisse First Boston, Merrill Lynch & Co. and Goldman Sachs & Co. Sources throughout the market expect part of this deal to follow a now-familiar route into the loan market (one source said as much as $200 million could be shifted);

* Roundy's Supermarkets Inc.'s $325 million in two tranches via Bear Stearns & Co. and Goldman Sachs & Co.; and

* Pipe Holdings plc (Polypipe Inc.)'s £185 million in two parts, led by Deutsche Bank Securities.

Also thought to be October business is SS&C Technologies, Inc.'s $250 million of subordinated notes via Wachovia Securities, JP Morgan and Bank of America.

Finally, although the dust is now believed to have settled on its roadshow, Middletown Rancheria Gaming Enterprises' $50 million of non-rated seven-year senior unsecured notes, via Jefferies, is also thought to still be in the market.

A calendar for November

Two high yield syndicate officials from investment banks inhabiting the top-10 on the high-yield issuance league table advised Prospect News on Friday not to mourn too deeply for the sorry shape of the October new issue market.

November, these officials said, figures to be different.

And both professed an awareness of new issue business that can be expected to appear as fall 2005 deepens.

"The market is stronger today," one official said early Friday morning. "It has found a new level. It's only a matter of time before people want to start buying new issues again.

"In a couple of weeks the primary will be back in business."

This official also asserted that neither the $406.5 million outflow from high yield mutual funds reported for the most recent week by AMG Data Services, nor the $10 billion of outflows on the year make a substantial dent in the liquidity of the high yield asset class.

"People have stopped paying attention to that," the source said.

The source estimated that as much as $2 billion of coupon payments per month continue to come into the market, as a given.

Only when outflows exceed those will they become meaningful, the source added.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.