Pilgrim's Pride's wings clipped; more WaMu weakness; Rite Aid Q2 a bitter pill; funds out $277 million

By Paul Deckelman and Paul A. Harris

New York, Sept. 25 - Top U.S. chicken-processor Pilgrim's Pride Inc. was Junkbondland's biggest turkey on Thursday, as its bonds and shares nosedived after the company warned that it may breach its bank loan covenants due to an anticipated sizable fiscal fourth-quarter loss; it has sought a covenant waiver from its senior lenders.

For yet another session, Washington Mutual Inc.'s bonds were getting whacked lower, even as an early surge in the Seattle-based thrift operator's shares on a report it is seeking a private-equity buyer faded and turned into a big loss as investors focused on WaMu's failure to line up a bank to buy it, as well as the prospect that government regulators might step in and impose a deal. Unlike most of the rest of the market, WaMu apparently got no lift from Capitol Hill news reports indicating that lawmakers were getting closer to agreement on a revised version of the $700 billion credit-market bailout bill sought by the White House.

Rite Aid Corp.'s bonds were seen points lower, as the Camp Hill, Pa.-based drugstore chain operator reported a sharply wider fiscal second-quarter loss.

Primaryside activity remained muted, syndicate sources said.

Funds fall by $277 million on week

And as trading was winding down for the day, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $277 million more left the weekly-reporting funds than came into them.

It was the second consecutive outflow, including the $178 million cash exodus seen the week before, ended Sept. 17. Those two weeks, with outflows totaling $455 million, represent a sharp reversal of the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows had been seen in seven of those eight weeks, according to a Prospect News analysis of the AMG figures, totaling $632.366 million.

However, over the somewhat longer term, although there have been eight inflows seen during the last 15 weeks, dating back to the week ended June 18, against seven outflows, the funds have still lost a net of $619.05 million during that time, according to the Prospect News analysis, mostly due to the massive $651.2 million outflow seen in the week ended June 25. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar third quarter now almost finished, inflows, after that slow start, remain solidly ahead, with 23 inflows versus 16 outflows seen in the 39 weeks since the start of 2008, according to the analysis.

According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $1.297 billion, down from $1.574 billion the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

One high-yield syndicate source said that given the volatility in the capital markets over the past couple of weeks it is not difficult to believe that investor money is flowing away from the riskier assets.

However, the source added, the weekly fund flows numbers likely do not serve as a very good barometer of the amount of cash looking for a home in high-yield.

Market indicators mixed

The widely followed CDX index of junk bond performance, after losing ¼ point on Wednesday, rose 5/8 point on Thursday, a trader said, quoting it at 90¾ bid, 91¼ offered. However, the KDP High Yield Daily Index fell by 68 basis points to end at 66.60, as its yield widened by 18 bps to 11.61%.

In the broader market, advancing issues continued to trail decliners by a margin of two-to-one. Activity, represented by dollar volume, fell by 12% from the levels seen on Wednesday.

A trader, commenting on the generally lower junk levels, said that "our market has definitely been repriced here, which had to be done, with the repricing of the high-grade market.

"Obviously, if high grades widen, we widen. It's just a natural phenomenon."

However, he added that "our market has rebounded here in the afternoon, off its lows" - giving as an example the movements of a major high yield bellwether bond, the Community Health Systems Inc. 8 7/8% notes due 2015, quoting them on a round-lot basis at 96.5 bid, "only down a quarter [point], on the day - but I'm sure they traded lower." And sure enough, earlier in the session, the Franklin, Tenn.-based hospital operator's paper had traded as low as 95.5. More than $40 million of the bonds changed hands on the day.

After the market hit its lows, he said, "some bids came in, and offerings were jacked." He said that while there was another bid-wanted list of a little over $500 million, "maybe that's cleared, and everyone is hoping the worst is behind us."

Pilgrim's Pride gets pounded

Pilgrim's Pride's bonds were seen sharply lower in busy trading, while its stock nosedived for a second straight session, after the Pittsburg, Tex.-based poultry producer warned that it expects to breach one of its credit covenants because of an anticipated "significant" fourth-quarter loss.

A trader said that "for a change, the biggest drop [of the day] wasn't Washington Mutual, but Pilgrim's Pride." He saw the company's 7 5/8% senior notes due 2015 trading at 69.5 bid on a round-lot basis - well down from a recent trade at 84, with over $20 million of the bonds changing hands.

He also saw its 8 3/8% subordinated notes due 2017 at 52, up from 49 earlier in the day, versus 75 previously, on volume of over $15 million.

Another trader said the Pilgrim's Pride bonds were "down big today," with the 8 3/8s down 19 to 20 points at 50 bid, 53 offered, while the 7 5/8s were off at least 12 points to 68 bid, 71 offered.

A market source saw 7 5/8s open at 68 bid - calling that well down from recent levels in the mid-80s - and then continue to trade in a 67-69 context before going home at 69.25, down nearly 16 points on the session. Meanwhile, the 8 3/8% subs had plunged to about the 50 mark at the open from prior levels in the low 70s, then edged down further, before coming back a little to around 53. The source saw trading in both issues as busy, with a considerable number of round-lot trades pacing the action.

Pilgrim's Pride's New York Stock Exchange-traded shares - which had fallen nearly 40% on Wednesday before trading was halted late in the session - picked up on Thursday morning right where they had left off, at one point falling 48.7% from their Wednesday finish to $3.26, which one of the traders noted was a new 52-week low. The shares improved from that nadir, but not by much, finishing at $3.84, down $2.52, or 39.52%. Volume of 21.7 million shares was more than seven times the usual.

The bonds and shares were slaughtered after the company warned that it is expecting a sizable loss in the fiscal fourth-quarter that ends on Saturday due to high feed costs, weak pricing and demand for its chickens, and the negative impact of hedged grain positions it took to cope with the rising cost of corn and soybeans, which it uses for livestock feed. That loss may, in turn, trigger a violation of its fixed-charge coverage ratio covenant for the just-ending fiscal year under its bank credit facilities.

Pilgrim's Pride further said that it "believes it has reached an understanding" with the agent banks for the credit facilities to temporarily waive that fixed-charge coverage ratio covenant through Oct. 28 while it negotiates easier credit terms with its lenders. Those lenders meantime will continue to provide the company with liquidity under the terms of the credit facilities, although they could also declare a default and cut the flow of funds should the covenant waiver request be denied. The company expects to be in compliance with all other covenants as of the end of the 2008 fiscal year.

If the lenders go along with the easier covenants, it will be the second time this year that they have done so; in July, the company disclosed in a filing with the Securities and Exchange Commission that back in April the lenders had signed off on covenant changes through the end of fiscal 2009 a year from now, including a higher leverage ratio, and lower requirements for tangible net worth, net tangible assets to total liabilities and fixed-charge coverage. Pilgrim's Pride said at the time that the new levels the lenders agreed to were "levels the company believes it can comply with in the near-term despite the current economic issues facing the chicken industry."

As of the end of the fiscal third quarter in late June, the company had $1.52 billion of long-term debt, which had swelled from year-earlier levels in connection with its $1.1 billion 2007 purchase of rival poultry producer Gold Kist Inc. It had $341.4 million of credit-line availability as of that time.

Pilgrim's Pride gave no indication of the size of its anticipated fiscal fourth-quarter loss, although excluding special one-time items, Wall Street generally is expecting about $1 per share of red ink. In the fiscal third quarter, the company posted a quarterly loss of $52.8 million, or 75 cents a share, citing the impact which record corn and soybean prices had on its cost of doing business.

Investors got more bad news about the company when Moody's Investors Service weighed in late in the session with a cut in Pilgrim's Pride's corporate family rating and probability of default rating to B2 from B1 previously. Moody's is also keeping the company under scrutiny for a possible further downgrade.

That ratings cut followed a similar action Wednesday by the smaller Egan-Jones independent rating agency, which cut its assessment on Pilgrim's Pride to CCC from B- previously.

More WaMu weakness

Apart from the diversion caused by Pilgrim's Pride, the junk market continued to beat up on its two favorite whipping boys of late, Washington Mutual and Lehman Brothers Holdings Inc.

Washington Mutual's bonds continued to be whittled down, with still no deep-pocketed rescuer in sight for the largest U.S. thrift institution. Some WaMu issues have lost 10 to 15 points, or even more, in each of the past several sessions. "Washington Mutuals continue to get hit," one of the traders said.

Perhaps the most volatile credit in the capital structure Thursday was WaMu's 4% notes due 2009. A market source saw those bonds having opened around 35, actually up slightly from where they had gone home on Wednesday - but then having bounced around goofily at levels anywhere from a low of 19 to a high of 57 before finally stabilizing at 24.

On a round-lot basis, he saw the bonds going out at 25, after having traded as low as 20 earlier in the day, and having finished at 24 on Wednesday, "so they continue to weaken, but like the rest of our market, they have rebounded" late in the session.

He also saw the floating-rate notes due 2009 at 50.25 bid, down from 52 previously, on active volume of $30 million, while the 5¼% notes due 2017 dropped as low as 17 before bouncing back to 20.25 bid, off a bit from 21 on Wednesday.

A second trader saw 4% notes at 22 bid, 24 offered, which he called down 6 points, while its 8¼% notes due 2010 were off 5 points at 9 bid, 12 offered.

Yet another trader saw the '09s at 23 bid, 24 offered, noting that "even short paper is trading at distressed levels in the mid 20s. Any day now, WaMu is going to start trading flat."

The paper, he said, is "swinging points," noting that the '09s had been quoted Wednesday trading in the upper 30s or even as high as 40, before cascading back down to the 20s, though mostly on small-sized pieces.

At another desk, WaMu's 5% notes due 2012 were seen down more than 10 points, closing at 19.5 bid.

The company's NYSE-traded shares, meantime, after having initially surged on a report that the firm was seeking a private-equity buyer, quickly spat up all of those early gains and then some, finishing down 57 cents, or 25.22%, at $1/69. Volume of 411 million shares was not quite four times the average daily turnover.

The Wall Street Journal reported Thursday that WaMu has approached several private equity firms to gauge their interest in buying the company, saying that Carlyle Group LLC and Blackstone Group LP might team up on an offer with Texas billionaire bank investor Gerald J. Ford.

The paper meantime said that WaMu's efforts to find a banking industry peer willing to take it on have slowed, with Spain's Banco Santander saying "adios," and Canada's Toronto-Dominion Bank showing only tepid interest. It said that while domestic lenders Wells Fargo Corp., J.P. Morgan Chase & Co. and Citigroup have conducted due diligence, they are all concerned about taking on WaMu's substantial loan problems.

Looming in the background are federal banking regulators, who could step in, declare WaMu a failed institution, seize it and then sell its 2,200 branches, deposits and other good assets to an acquiring bank while holding onto its troubled loans and other bad assets. One analyst estimates a WaMu failure could cost the Federal Deposit Insurance Corp. as much as $24 billion. CNBC was reporting late Thursday that such a federal seizure could come at any time. The Wall Street Journal said J.P. Morgan would be the likely buyer for the branch network.

Lehman again weaker

A trader saw Lehman Brothers' 6 7/8% notes due 2018 dipping to a round-lot level of 17.5, down from 18.75 on Wednesday, on volume of $37 million.

Another market source pegged those same bonds at 17, down more than 1½ points on the day, while its 4½% notes due 2010 were seen marginally lower on the day at 17.25 bid.

A trader saw the bankrupt New York-based investment bank's senior notes, like the 5 5/8% notes due 2013 down "a point, maybe down 11/2" at a "generic" 16-17 level.

Rite Aid is routed

Rite Aid's bonds were notable losers in the wake of the company's report of a wider quarterly loss. A trader said Rite Aid's 8 5/8% notes due 2015 fell by 4 points to 56 bid, 58 offered, while a market source at another desk saw those bonds fall 6 points on the day to 56.5. Its 9 3/8% notes due 2015 were off 5 points at the 57 mark.

A trader pegged its 9½% notes off 2 to 3 points on the day at 57.5 bid, 58.5 offered.

But yet another trader, while also seeing those bonds at 57.5, called it a 7 point loss. He saw its 10 3/8% senior secured notes due 2016 dip to 91 bid versus 94.75 on Wednesday.

Those bonds slid after Rite Aid said it lost $222 million, or 27 cents per share, in the fiscal second-quarter ended Aug. 30. That was more than double the year-earlier red ink of $78.2 million, or 10 cents per share, and was a wider loss than the 15 cents per share which Wall Street was looking for, after special items.

Rite Aid blamed the wider loss on its difficulties in integrating the several hundred drug stores it acquired when it bought the Brooks and Eckerd regional drugstore chains in 2007.

Some issues move points lower

Elsewhere, a trader saw Momentive Performance Materials Inc.'s 9¾% notes due 2014 trading at 84.25, down 3 points on the session, quipping that the Albany, N.Y.-based producer of quartz and silicon materials for high-tech applications "looks like it lost some momentum."

Isle of Capri Casinos Inc.'s 7% notes due 2014 dipped as low as 71 before finishing at 71.75 bid, down 1½ points on the day.

Michael's Stores Inc.'s 11 3/8% notes due 2016 lost 3½ points to 51.

Several market sources saw Nortel Networks Corp.'s 10 1/8% notes due 2013 down sharply, despite a lack of fresh news out about the Toronto-based telecommunications equipment maker, which last week issued lower guidance.

One saw the bonds as having opened down 6 points, around the 75 bid level, and then having lost another 1½ points to end at 73.5.

At another desk, the bonds were seen even lower ending at 70 bid, a 10-point drop on the day.

Deals still expected

Meanwhile there was no primary market news.

"It's at a complete standstill," one sell-side source remarked.

On Thursday sell-side sources continued to profess expectations that the downsized Fresenius Kabi $800 million bond offering, via Deutsche Bank, Credit Suisse and JP Morgan, will launch soon.

One source expects that deal early next week.

The bond portion was downsized by $500 million, from $1.3 billion, with that amount shifted to the $2.95 billion bank deal (Baa2/BBB-).

Prior to this week's downsizing, the Fresenius high yield bridge had already been downsized to $1.3 billion from $1.65 billion.

Another name in leveraged markets news was Brocade Communications Systems Inc.

Its $1.1 billion term loan at Libor plus 400 basis points, which came at an original issue discount of 96.5, down from 98, allocated and broke for trading on Thursday, and was seen firmer in the secondary at 97 bid, 97½ offered.

The financing for Brocade's acquisition of Foundry Networks Inc. also includes a downsized $400 million 12-month senior unsecured bridge loan that will be taken out with either high-yield notes or convertibles.

However Prospect News heard from a market source that junk would seem to make more sense than the convert, given present stock market conditions.

On Thursday a source said that the Brocade bridge is priced at 700 bps over Libor.

Bank of America and Morgan Stanley are leading the financing.

Apart from Fresenius, forecasts of near-term primary market business are mixed.

On Thursday a senior syndicate source said that nothing, other than the widely anticipated Fresenius deal, appears imminent.

This source said that the market certainly is open for a well-rated credit from a defensive sector, provided the issuer is willing to pay a lot of coupon.

However earlier in the week an official from a different sell-side shop said that there are a couple of corporate deals that are prepped for launch should the volatility in the capital markets ease up a little.

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