Levi continues gain on Dockers speculation; Ferrellgas prices small deal

By Paul Deckelman and Paul A. Harris

New York, June 4 - Levi Strauss & Co. bonds continued to firm Friday on investor speculation about the possible sale of its Dockers business - even as the chief executive of another apparel company who had publicly mused Thursday that his company could be interested in buying the unit for as much as $1 billion appeared to back away from those remarks and suggested that they represented, at this point anyway, more of a hypothetical scenario.

Primary-side activity was quiet - even in the wake of the latest week's net inflow of $565 million to yield mutual funds, a key indicator of junk market liquidity trends - the first such infusion after seven straight weeks of mostly large outflows, and the largest such injection of cash since the middle of last October. But only one deal was observed to have clattered down the chute by the time things wrapped up for the week - a relatively small drive-by eight-year note offering from Ferrellgas Partners.

Market sources mulled the implications of a better-than-expected set of non-farm payroll numbers during Friday's comparatively quiet primary market session.

The session's sole new issue came in the form of a $50 million add-on from Ferrellgas Partners via Credit Suisse First Boston.

But in the wake of Thursday's news that seven consecutive weeks of hemorrhaging in the high yield mutual funds had been stanched by a $565 million inflow - the biggest such weekly cash infusion thus far in 2004 - one source pointed to Friday's build-up on the forward calendar and insisted that the high-yield market remains vigorous.

Celestica, Argo-Tech, Cornell line up deals

News of three new roadshow starts for offerings that total $710 million was heard Friday.

Toronto-based electronics manufacturing services company Celestica, Inc. will commence a three-day roadshow on Tuesday for its offering of $350 million of seven-year senior notes, which is expected to price on Friday.

Citigroup, Banc of America Securities and Deutsche Bank Securities will be joint bookrunners for the debt refinancing deal.

Meanwhile the roadshow starts Monday for Argo-Tech Corp.'s $250 million offering of seven-year senior notes (B1/B), which is expected to price during the week of June 14 via JP Morgan.

The Cleveland-based manufacturer of aircraft fuel-flow devices will use the proceeds to repay debt.

And Cornell Cos. Inc. will also start a roadshow Monday for $110 million of eight-year senior notes (B3/B-), which are also expected during the week of June 14, also via JP Morgan.

The company, a Houston-based provider of corrections, treatment and educational services outsourced by federal, state and local government agencies, will use the proceeds to repay debt.

$2 billion-plus week ahead

A gradually building pipeline notwithstanding, the primary market moves into the week of June 7 with the expectation that $2.1 billion of business will be transacted.

The largest deal expected during the week comes from Colton, Calif.-based supermarket chain Stater Bros. Holdings, which is bringing $685 million in two tranches (B1) via Banc of America Securities. The roadshow for that deal is scheduled to wrap up on Wednesday.

Whither the carry trade?

Shortly after news circulated Friday morning, that the U.S. Labor Department had reported that non-farm business payrolls grew by 248,000 in May, raising this year's monthly average to 238,000, the fastest pace in four years, one sell-side source said that the news could conceivably attract more money into the higher yielding sectors of fixed income.

However, the source specified, the origin of that money can make a big difference.

"From an 'economic fundamentals' standpoint you would argue that higher risk areas like high yield and emerging markets are safer in an economic recovery scenario," the sell-sider said.

"On the other hand, from a technical standpoint there was a lot of money in high yield and emerging markets because of the carry trade, and that money pulls out.

"The question people have right now is 'How much of that carry trade was reversed, already, and how much of it still has to be reversed?'

"I don't think anyone really knows the answer to that. You hear people say that they think 80-90% of it is already out of the market. Certainly it does seem that a lot of the leverage is out of the market. And during the past week or so it has seemed as though it's been tougher for people to try to push the market down.

"The pain trade is to the downside. In general the market has held up."

Ferrellgas quick to the pump

Friday's sole transaction came from Liberty, Mo.-based propane company Ferrellgas Partners, LP. In conjunction with Ferrellgas Partners Finance Corp., it sold a $50 million add-on the company's 8¾% senior notes due June 15, 2012 (B2/B) at 103.25 to yield 8.057%.

The Credit Suisse First Boston-led deal came spot-on the 103.25 price talk and generated $51.625 million of proceeds.

The original $170 million priced on Sept. 11, 2002 at par, so the company shaved nearly 70 basis points from the original yield.

The new Ferrellgas 8¾% notes due 2012 were not seen having moved into secondary dealings, traders said.

Appleton Papers Inc.'s new 8 1/8% senior notes due 2011 and 9¾% senior subordinated notes due 2014, each of which had priced Thursday at par, were being quoted at 100.5 bid, 101.5 offered on the senior paper and par bid, 101 offered on the subs, "pretty much unchanged," a trader said.

He said that there was no great reaction to the late-Thursday news of a more than half-a billion mutual fund inflow, other than that it "proves money is coming back in to the market," which he said had "a decent tone."

Overall, Friday was "kind of a non-event, unfortunately," he said. "There was a little bit of activity, says from about 8:30 to 10:30 or 11'o'clock [a.m. ET] and then it really kind of shut down."

Still, "I don't know if it felt it or perceived it, but [the market] has been stronger. It was stronger on Monday. It had a decent tone to it, with things grinding a little tighter. We had a little hiccup about a week or two ago."

The inflow "stopped the $2 billion outflow of the past two to three weeks, and we saw some buyers in here - little items here and there. Things are grinding a little higher - but probably still off, in some cases, two to three points" from levels they held roughly a month ago, before the market started back-pedaling for a week or so, spurred downwards by a better-than $2 billion funds outflow seen in mid-May.

"We're getting a little stronger - but there was so little activity that any little activity makes it feel like the whole world is changing - which really isn't the case."

Levi up again

One name which saw moving on some volume was Levi Strauss, whose bonds had pushed up about a 1½ to two points Thursday on reported comments from Kellwood Co.'s chief executive officer, Hal Upbin, that his company - a St. Louis-based apparel maker that manufactures Dockers khaki pants and shirts under license for Levi - might be interested in the Dockers unit, which Levi has been shopping around to potential buyers since mid-May. He said that the unit, which has annual sales of about $1.4 billion, might bring Levi as much as $1 billion of proceeds were it to be sold - well above the $500 to $800 million analysts have been speculating about.

But on Friday, Upbin, on a conference call with analysts and investors, played down the import of those words, noting that Dockers is just one of "about a hundred companies" that Kellwood routinely watches as possible acquisition targets and in fact, there hadn't even been any kind of discussion about making a bid for the Levi unit by his own company's board. He further admitted that the billion-dollar figure he had quoting had essentially been pulled out of thin air, based on Wall Street chatter he had heard and media reports (see related story elsewhere in this issue).

A trader said that Upbin "kind of overstepped himself" in making such pronouncements - which the Kellwood CEO sheepishly acknowledged during his conference call.

The trader saw the Levi bonds not so much higher as tighter from Thursday's levels, "off the highs, but slightly tighter, as people try to figure out what's going on."

He pegged the Levi 7% notes due 2006 at 93 bid, 94 offered, while the 11 5/8% notes due 2008 were at 95 bid, 97 offered and the 12¼% notes due 2012 were at 93.5 bid, 95.5 0ffered.

But another trader begged to differ, saying the Levis "were settling in, but at higher levels, still moving up." The rise in the San Francisco-based blue jeans maker's bonds was clearly the "big story "of the session."

He quoted the 11 5/8s as high as 96 up half a point to a point on the day, while the 7% notes were a point better, in his estimation, at 93.5

At another desk, a trader said the Levis "were grinding higher, up half a point to a point, and just 10 points away from their all time high, when the 11 5/8s were at about 107." On Thursday, he saw those bonds up half a point at 96 bid, 97 offered, while the 7% notes were up a point at 93.5 bid, 94.5 offered, and the 12¼% notes were half a point ahead at 94.5 bid, 95.5 offered.

High yield analyst Bob Lupo of BB&T Securities in Red Bank, N.J., called Upbin's $1 billion estimated price-tag for Dockers "a touch high," given that only about $920 million of Dockers' $1.4 billion of annual revenues comes from retail sales of the products, the rest attributable to sales of licenses and other sources, but he did see an eventual bid somewhere in the $800 million to $1 billion area as not unreasonable.

"It's certainly an attractive asset," he said, likely to attract interest from a number of potential buyers - a list that he said could include such large apparel makers as VF Corp., Jones Apparel Group Inc. or Philips-Van Heusen Corp.

"There are other players" besides Kellwood, Lupo declared, expressing some skepticism that the St. Louis clothing maker is really in the hunt.

"Who knows why [Upbin] said that? Maybe he does have an interest - or maybe it's just passing. Maybe he's trying to backtrack now."

Of one thing the analyst was certain - "you don't negotiate something like that in the press."

Sale seen as positive

When Levi first indicated that it might explore the sale of Dockers, with proceeds likely to be used to pay down debt, skeptics questioned whether it would want to part with such a good cash-flow generator as Dockers, which also gives Levi the added benefit of keeping the company from being too dependent on the sale of its core blue jeans product.

But Lupo said that on balance, sale of the unit would do Levi "more good than harm," since any debt paid down would "benefit the bottom line more than Levi would be hurt by losing Dockers' EBITDA," since the company would be stronger overall. With less debt, for instance, Levi could seek a revision of its financial covenants, giving it more access to capital and greater financial flexibility.

A financially stronger, less leveraged Levi could then, in turn be able to refocus its efforts on improving its blue jeans sales.

"With a focused advertising campaign and with a less levered enterprise, I think Levis can re-energize its brand consciousness in the mind of the consumers," Lupo said.

This consciousness has slipped in recent years, along with sales, as Levi - the pioneer in making rugged, durable pants out of blue denim - has found itself caught in a squeeze between lower-priced jeans, sold in downscale stores, diluting the blue jeans image and grabbing the large downscale market of customers looking for the lowest price, and higher-priced designer jeans, which have a greater cachet among people interested in fashion, siphoning off the more upscale purchasers.

To fight back, Levi has within the past year or so rolled out its higher-priced Levi Strauss Signature line, and expanded its distribution channels to include such mass-marketing giants as Wal-Mart and Target Stores in the U.S. and Carrefour, ASDA-Wal-Mart and other stores in Europe.

"By focusing just on Levis [blue jeans], they'll be able to effect additional operating efficiencies and bring down their costs that way as well," he said.

"Even though there certainly is something of a tradeoff, net-net, [a sale of Dockers] is much more of a positive than a negative."

"The sale of Dockers would basically deleverage the Levis credit," a trader agreed, "at least for the next three years."

Lupo said that even though a deal for a relatively large asset such as Dockers, likely to be priced in a range approaching $1 billion, is a complex undertaking, one way or another "the odds are better than 50-50 that the deal gets done" and Dockers is sold to somebody.

But it won't happen overnight, due to the need of any potential buyer or group of buyers to do their due diligence and line up the necessary financing.

"It could take a couple of quarters" to put such a deal together, Lupo said, "maybe six, nine months down the road" before it would finally be completed.

Kellwood CEO Upbin, on his company's conference call, acknowledged the same reality.

"It would take a lot for us to proceed on such a transaction - and of course, it would entail a lot of work that we haven't done."

Calpine gains

Elsewhere, a trader saw Calpine Corp. bonds more than a point better on the session, the San Jose, Calif.-based independent power producer's 8¼% notes due 2005 having moved up to 89.5 bid, 90.5 offered from prior levels at 88 bid, 89 offered, while its 8½% notes due 2011 firmed to 60 bid, 61 offered from 59.25 bid, 60.25 offered previously.

Steel names rise on jobs data

A trader noted the Labor Department's announcement that non-farm payrolls had increased by 248,000 jobs in May - the third consecutive month in which a sizable number of non-farming jobs had been created, many of them in the manufacturing sector, a sign of renewed economic vitality for industrial companies.

Accordingly, he said, Middletown, Ohio-based steelmaker AK Steel Corp.'s paper was "up a bit," its 7 7/8% notes due 2009 at 89.5 bid, 90.5 offered and its 7¾% notes due 2006 at 87.5 bid, 88.5 offered.

Also on the upside, he said, was Oregon Steel Mills Inc.'s 10% notes, higher, he said, at bid levels around 103.5-104, and United States Steel, whose 10¾% notes were at 112.25 bid, 113.25 offered and whose 9¾% notes hovered at 109.25 bid, 110.25 offered.

Another trader also noted strength among the industrials, on the good jobs news coming out of Washington, with Goodyear Tire & Rubber Co.'s 7.857% notes due 2011 jumping to 87.5 bid from 83.75 bid, 86.25 offered. Auto components maker Collins & Aikman's 11½% notes pushed up to 97.5 bid, 98 offered from 96.75 previously.

Kmart structured paper in demand

And the trader saw "everyone a buyer" of Kmart Corp.'s structured finance paper, which is secured by store properties owned by the Troy, Mich.-based discount department store operator. Kmart - which closed several hundred of its stores in 2002 and 2003 as it restructured under Chapter 11 - said on Friday that it would sell up to 24 of its store locations to Home Depot, for up to $365 million total proceeds. It did not specify which exact locations would be sold, or for how much.

The trader said that with nobody sure what properties were covered, people were scooping up any kind of property-backed Kmart passthrough bonds - such as its 6.66% notes due 2010, which firmed to 75 bid from 70, or its 8.99% notes, up seven points to 54 bid.

"Everyone," he said, "was scrambling for paper."

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