Dynegy bonds rise despite earnings restatement; Cascade deal prices, junk buyers drawn to Avnet

By Paul Deckelman and Paul A. Harris

New York, Jan. 31 - Dynegy Inc. bonds were quoted several points higher Friday, even as the Houston-based merchant energy company announced that it would restate earnings back to 1999 and posted a sharply wider quarterly loss.

In the primary market, Friday's session left several sell-side sources scratching their heads, as Canadian paper-maker Cascades Inc., a four-B credit, priced an upsized deal with a low seven-handle while Arizona microchipper Avnet Inc., hauling six Bs from the rating agencies, priced its deal at 9¾%.

And Anchor Glass Container Co., of Tampa, Fla. bottled up enough investor interest to complete its $300 million transaction on Friday.

Meanwhile market reaction to the $648.9 outflow from the mutual funds for the week ending Jan. 29 seemed to be "outflow-schmoutflow."

Back in the secondary market, Dynegy announced that it would restate earnings for 1999, 2000, 2001 and part of 2002, due to previously revealed accounting problems, and said that the restatements might affect its ability to remain in compliance with certain credit agreements because of the consolidation of a lease onto its balance sheet, which would push the company's debt-to-capitalization ration past the mandated top limit of 65%.

Dynegy also announced a $423 million net loss ($1.15 per share) in the latest quarter - far wider than the deficit of $9 million (3 cents a share) seen last year.

But while Dynegy shares plunged 51 cents (21.43%) to $1.87 on New York Stock Exchange volume of 34 million shares, over triple the norm, the bonds were seen better. Dynegy's 8½% notes due 2005 firmed to 65 bid from prior levels at 62.5, while its 6 7/8% notes due 2011 ended at 49.5 bid, up from 47 previously.

Observers speculated that the bonds got a boost from Dynegy's announcement of plans to cut its trading and marketing operations and to close its U.S. communications business in the first quarter - with the capital investment which would otherwise have gone to those activities now available to repay debt.

Elsewhere, a trader saw a mostly quiet day, with the market soft in the wake of the release of high yield mutual fund numbers for the latest week showing that nearly $649 million more left the funds - a key gauge of junk market liquidity - than came into them in the week ended Wednesday.

He did see some activity in the bonds of Nortel Networks Inc., quoting the 6 1/8% notes due 2006 at 85.5 bid/86.5 offered, well up from levels earlier in the week around 80 bid/82 offered. But he said that most of the activity seemed "Street driven, with no accounts active," as dealers purchased the paper to do swaps versus convertible securities, giving the whole advance, he said a "haphazard" tone.

The bonds of Crown Cork & Seal Co., which earlier in the week announced plans for a massive $3 billion refinancing - including the sale of $1.75 billion of new senior secured notes - continued to hold the gains which they notched in the immediate aftermath of the announcement by the Philadelphia-based maker of beverage cans and other metal containers - an announcement which came as something of a surprise in some quarters of the junk market.

The company's 8 3/8% notes due 2005 were being quoted at bid levels around 98.25-98.5, while its 2006 bonds were at 89 bid/91 offered.

"They've had their run-up and now they're hanging in" at higher levels, a trader said.

At another desk, a market source said that he had seen Crown Cork's 6¾% notes due later this year trading in a 97.5-99 bid context Thursday, with no change seen Friday, while its 8 3/8s were seen north of 99. The Crown Cork restructuring envisions extending all of its debt maturities out to at least 2006.

In the longer-term area, Crown Cork's 8% notes due 2023 were quoted in the 75-76 neighborhood, while its 7 3/8% bonds due 2026 were in the 73.5 bid/75.5 offered area.

Ed Mally, head of research for Murray Capital Management Inc., said that Crown Cork looking to come to the high yield market with such a big new deal "is a signal that the high yield market can reopen again for quality credits." He added that while the Crown Cork offering will be judged on its merits, the recent $1.5 billion mega-deal from Georgia-Pacific Corp. was a sign that the junk market, flush with cash after many weeks of mutual fund inflows, could handle big deals comfortably.

Mally said that with respect to Crown Cork having asbestos exposure or asbestos liability- a factor in the large loss that the company posted on Wednesday, the day it announced its recapitalization - "I think it's a signal that people are becoming more comfortable with the ability of companies to manage their asbestos liabilities."

Crown Cork announced a fourth quarter loss of $272 million ($1.71 per diluted share), noting that among other factors, it had increased its reserve for its asbestos litigation.

Asbestos concerns have driven a number of high yield issuers into Chapter 11 over the past several years, including such varied names as Owens Corning, Armstrong World Industries, USG Corp., and W.R. Grace, and have hung threateningly over other companies not in bankruptcy such as Crown Cork and Owens-Illinois.

But Mally - formerly the high yield research chief for CIBC World Markets Inc.-struck a hopeful note. "My sense is that the trend with asbestos is a more positive trend now, relative to managing those liabilities. I think the market consensus is that the worst is over, things have hit bottom in that respect and it's become more quantifiable and manageable at this point."

Crown Cork is structuring its bond offering and its concurrent $1.05 billion bank loan as secured debt, so that should Crown Cork be forced into some sort of restructuring scenario, both the bank lenders and the bondholders would rank ahead of the asbestos claimants.

Speaking hypothetically, he opined that "whether or not this would create a different fight in bankruptcy court would remain to be seen. But I think what the company is trying to tell investors is that they're offering a secured piece of paper, that they've quantified their Iiabilities.

"Investors obviously have to make their own assessment of how comfortable they are with the structure and security going forward," Mally said, but added: "I think the message in this is that the market is comfortable with a company like Crown Cork, and that the market is comfortable with quantifying asbestos exposure and liabilities and that it ultimately sees that as not as huge a concern [as before]."

Earlier in the week Diane Keefe, portfolio manager of the Pax World High Yield Fund, which screens issuing companies with regard to their performance on a variety of social issues, told Prospect News that she would have a look at Crown Cork & Seal's deal. However she professed wariness about the credit.

"I haven't been interested in it in the past because of the asbestos liabilities," Keefe told Prospect News.

"I listened to Georgia-Pacific; they have asbestos liabilities too but it's a small amount of their cash flow.

"What's interesting is that there is a group of plaintiff's lawyers who have begun to specialize in mesothelioma, which is a kind of cancer that is very rare and really bad. If you have it you pretty much have a bad life, and a much-shortened one. So the settlements have become much bigger.

"These lawyers are prosecuting these cases in certain working-class districts where the judges are very sympathetic to working people and not very pro-corporate.

"That's bad in terms of modeling going forward what asbestos exposure can do to a company. So all things being equal I will steer clear from companies that have asbestos liabilities in tens of thousands of cases."

But on Friday a sell-side source told Prospect News that it is perfectly conceivable that Crown will get the deal done around the yields it set forth in a Friday filing with the Securities and Exchange Commission.

And although no price talk has surfaced as yet on the $1.75 billion mega-deal, Crown Cork filed financial data with the SEC Friday showing the pro forma impact of the refinancing and referred to the pending issuance of "$500 million in third priority notes at an assumed interest rate of 12%," and "$1,250 million in second priority notes at an assumed interest rate of 9.5%."

"People heard about asbestos with Owens-Illinois and Georgia Pacific," this official said. "I think people are over the asbestos-related claims.

"And based on trading, and on how familiar people are with that credit, there is a strong likelihood they will get it done around there. It all depends on what happens in the equity markets next week."

Another high-yield company which has been struggling with the asbestos problem is auto parts maker Federal-Mogul Corp., which announced Thursday that it will acquire most of Honeywell International Inc.'s Bendix friction materials business in exchange for taking on all current and future Bendix liability in asbestos lawsuits. Honeywell will give Federal-Mogul about $2 billion of insurance, which it expects will cover most of the Bendix-related asbestos claims.

Southfield, Mich.-based Federal-Mogul has been in Chapter 11 since 2001, forced to file for bankruptcy under a flood of potential asbestos claims. On Friday, it also announced that it will file a reorganization plan in early March to emerge from Chapter 11.

The reorganization plan would convert all claims from creditors and asbestos claimants into equity in the reorganized company, with junk bond holders slated to get 49.9% of the new common stock and the rest going into a trust that will benefit current and future asbestos claimants.

Federal-Mogul's 7½% notes due 2004 were quoted at 18 bid/20 offered, about the same level they've recently held.

Also on the bankruptcy front, the bonds of United Airlines continued to languish in the range of five to seven cents on the dollar for the 10.67% notes due 2004, little changed by the not unexpected news that the troubled Number-Two U.S. air carrier had posted another gigantic loss in the latest quarter.

UAL rival Northwest Airlines' 7 5/8% notes due 2008 were seen a point lower, around 58 bid. But Continental Airlines' 8% notes due 2005 - which had fallen four or five points Thursday to around 53 bid - were reported having regained part of that to close Friday at 55.

In the primary, high yield investors who have lately been carping in the corridors about tight-pricing new deals likely derived little if any gratification from the Cascades transaction, which was executed Friday by Salomon Smith Barney and Scotia Capital. Upsized to $450 million from $325 million, the offering of 10-year senior notes (Ba1/BB) priced at par to yield 7¼%, spot on to the 7¼% price talk.

Meanwhile investment-grade credit Avnet priced $475 million of five-year notes (Baa3/BBB-) at par Friday to yield 9¾%, via Credit Suisse First Boston and Banc of America Securities.

Although the fact that Avnet's six-B deal priced 250 basis points wider than the four-B Cascades offering prompted several sell-siders to make unkind suggestions about the business of credit rating, one informed source simply shrugged when Prospect News called requesting an explanation.

"Different industries, different sectors, etc.," this source commented.

In any event the Avnet transaction seemed to attract extensive interest among high yield and crossover accounts, sources said.

I think anything that's rated triple-B to triple-B minus right now has crossover buyers," one sell-side official said. "At the end of the day all the investors are coming together.

"And when you get that type of price range (9¾% for Avnet) it's worthwhile trying to lock in."

Also pricing Friday was Anchor Glass Container's $300 million of 10-year senior secured notes (B2/B+). The deal, via joint bookrunners Deutsche Bank Securities Inc., Credit Suisse First Boston and Banc of America Securities, priced at par to yield 11%, wide of the 10½%-10¾% price talk.

Also on Friday price talk of 9¼%-9½% emerged on Star Gas Partners, LP's $200 million of 10-year senior notes (B3/B). The deal, from joint bookrunners JP Morgan and Wachovia Securities, is set to price late Monday.

Finally on Friday, along with the low-yielding Cascades deal another conversation catalyst was the $648.9 million outflow from high-yield mutual funds for the week ending Jan. 29.

"It's a pretty nice chunk," conceded David Eshnaur, portfolio manager of the Buffalo High Yield Fund. "My guess is that the market has run so much you've got some market-timing money coming out."

Eshnaur professed the belief Friday that high yield's recent strong performance can be attributed almost exclusively to the big run of inflows that began in the autumn of 2002.

"Technically what's driven the market is all the cash," he said. "Meanwhile you've had mixed fundamentals. Some companies are doing okay, some aren't doing so well. So if you get any bad news, and you start getting cash withdrawn, the market is going to back up a little bit.

"But I think there is still enough cash on the sidelines for the market to at least tread water for now. If we start seeing consecutive weeks of big withdrawals then the market is going to sell off."

And a sell-side official who spoke late Friday with Prospect News also seemed to be of the opinion that high yield's recent strength is due to technicals. This official said that high yield's outperformance relative to equities, which have traded off thus far into 2003, is an "anomaly."

"The equity market will trade off because of macro-events, or because earnings are off," the source said. "The same events that are going to influence that market are going to influence our market.

"The only thing that was driving the somewhat inequitable performance between the two was the money that flowed into our market. Once the money stops flowing in any technical anomaly that our market was experiencing is going to subside."

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