Levi Strauss bonds better on good numbers; Gildemeister deal prices

By Paul Deckelman

New York, July 13 - Levi Strauss & Co. Inc. bonds were being quoted up anywhere from two to three points Tuesday after the San Francisco-based blue jeans maker reported favorable second-quarter earnings and indicated that its efforts to sell its Dockers khaki casual clothing business and use the anticipated proceeds for debt reduction were moving along.

Major downsiders during Tuesday's session included Delta Air Lines Inc., after the Atlanta-based air carrier announced that it would take hefty non-cash charges against earnings and low-cost airline sector powerhouse JetBlue announced fare cuts - leading analysts to fear that already financially hard-pressed old-line legacy carriers like Delta will now come under further pressure.

Also lower was Citizens Communications, sliding after Moody's Investors Services' Monday downgrade of the company's ratings to junk status.

Primaryside activity was quiet, with just one deal heard to have priced by the time trading rolled up for the day - German machine-tool maker Gildemeister AG's €175 million offering of senior subordinated notes due 2011.

The notes priced at par to yield 9¾%, in line with pre-deal market price talk.

The deal was brought to market by Bayerische Hypo- und Vereinsbank, and Westdeutsche Landesbank.

The company will use the proceeds, along with those of a capital increase which it undertook in June by selling new shares, to eliminate shorter and medium maturity debt, while providing more capital for the company's planned expansion.

Price talk emerged on Freescale Semiconductor Inc.'s upcoming three-part $1.25 billion offering of fixed- and floating-rate notes, which is expected to price late Thursday.

The tranche of 10-year fixed-rate notes is expected to price to yield between 250 and 275 basis points over the U.S. Treasury note coming due in May 2014. The yield on the fixed-rate seven-year notes is expected to be 25 basis points inside that on the 10-year notes while the five-year floating-rate notes will price at around 275 basis points over Libor.

The megadeal is being brought to market by a large team of underwriters, led by joint book-running managers Goldman Sachs, Citigroup and JP Morgan.

The Austin, Tex.-based microchip manufacturing company is currently a subsidiary Motorola Inc. Proceeds will be used to help fund its planned spin-off from the Schaumburg, Ill.-based electronics giant.

Levi gains on earnings

Back in the secondary sphere, Levi Strauss's planned disposal of its Dockers subsidiary has been the catalyst behind the firmness seen in the company's bonds since about mid-spring, a trend which accelerated after Levi officially acknowledged on May 11 what everyone else already knew - that the valuable unit is indeed for sale.

Levi on Tuesday reported favorable second-quarter results, and disclosed in its 10-Q filing with the Securities and Exchange Commission that it would "very soon" begin soliciting the consents of its term loan and revolver lenders to proposed amendments to the covenants governing those facilities, changes that would facilitate a possible sale of Dockers and give Levi more flexibility in deciding which part of its $2 billion of total debt to pay down with the proceeds (see related story elsewhere in this issue).

Those proceeds could total anywhere from half a billion dollars to a billion dollars, although most market-watchers expect something in between those two extremes.

Fueled by the good numbers and the progress the company claims it is making in shopping Dockers around, Levi's bonds were solidly firmer.

A trader saw the company's 7% notes due 2006 shoot up to 95 bid, 96 offered from Monday's closing levels at 92.5 bid, 93.5 offered, before coming off those highs and "settling in." He said the movement was propelled by the second-quarter results, which he characterized as "in line to better" than expectations.

Levi said that net income for the second quarter was $6 million, versus a net loss of $42 million for the second quarter of 2003. The improvement was driven by higher operating income, lower tax expense and a decline in losses on foreign exchange management contracts, offset in part by higher restructuring charges.

Operating income for the quarter increased 23% to $77 million, or 8.1% of revenue, versus $63 million, or 6.7% of revenue, a year ago. Operating income improved in all three of the company's geographic regions, North America, Europe and Asia-Pacific. Higher gross profit and lower sales, general and administrative expenses more than offset higher restructuring charges for the quarter.

The trader saw the Levi 11 5/8% notes due 2008 push up to 100.75 bid, 101. 75 offered from 97.5 bid, 98.5 offered previously, while its 12¼% notes due 2012 ended at 101.75 bid, 102.75 offered, up from 98 bid, 99 offered.

"The shorts covered, waiting for the [mid-morning] conference call," he said. The call itself produced no dramatic news, he said, although it appears that the consent solicitation among the bank debt holders "is getting close."

Another trader later in the session saw the Levi bonds going home around those same higher levels to which the paper had moved during the morning.

At another desk, the 12¾% notes were seen ending at 100.25 bid while the 11 7/8% notes were at par - but both were still up more than a point-and-a-half on the session.

A trader saw Ameristar Casinos Inc.'s 7.85% notes firm to 104 bid, well up from 101.625 previously, but had no explanation for the spurt in the Las Vegas-based gaming operator's bonds.

Amkor rebounds

Amkor Technology Inc. was a big loser in Monday's session after Moody's Investors Service changed its outlook on the West Chester, Pa.-based semiconductor assembly and testing services company to negative from stable, based on its recent warning that it could see an operations loss in the coming quarter. But a trader said that it was his opinion that after having been knocked around Monday - and on the preceding Friday as well - Amkor was pretty much "sold out," and should "spend some time around this 10% [yield] level as a floor and then head higher."

At another desk, the rebound seemed to have already begun Tuesday. Amkor's 9¼% notes due 2008 were seen up a point at 98 bid, while its 7¾% notes due 2013 were noted up a point-and-a-half at 88 bid.

Citizens drops

Amkor's Monday status as the big loser of the day was assumed by Citizens Communications, following Moody's downgrade of the Stamford, Conn.-based telecommunications company to junk status.

Moody's cut the company's ratings three notches to Ba3 from Baa3 previously after Citizens announced plans to use its high cash flow to pay a one-time special dividend of $2 a share and an annual dividend of $1 per share.

The company's bonds "were all over the place," said one market source, who quoted its bonds as having "really moved up" at first on Monday, its 9¼% notes due 2011 pushing as high as 115 before the Moody's news hit the tape - which caused the bonds to close Monday at 112.75 bid, before trading Tuesday at levels around 108.375 bid, 109.

He saw the company's 9% notes due 2031 as having fallen to the equivalent Tuesday of 100.5 bid, 101.5 offered, as the bonds' spread over Treasury widened out some 65 basis points to 375 bps.

At another desk, a trader pegged those long bonds as down five points on the day Tuesday to the 101 level. He saw those bonds open as low as par bid, 101 offered, before firming to around the 101 level.

"They were off their lows for the day - but still went out well below Monday.

He saw the 91/4s opening at 106 bid, 107 offered, well down from around 112 late Monday, before improving - slightly - to 108.5 bid, 109 offered going out.

"There was some major volatility in this market," he declared.

Delta down

Elsewhere, Delta Air Lines' paper was losing altitude, after the third-largest U.S. air carrier said that it would take a second-quarter charge of $1.65 billion to cover deferred income taxes and pilots' pensions. It was the latest negative news about the carrier, which has warned that it could conceivably end up in Chapter 11 unless its pilots give it substantial wage concessions - more than a third of their scheduled salaries - and agrees to other concessions.

There was meanwhile more bad news for the whole airline industry, with JetBlue, one of the highest fliers among the emerging low-cost carriers, announcing that it would put a million seats on sale for up to half-off this fall, including $99 one-way fares from New York or Boston to cities in California. JetBlue thus follows the lead of low-cost industry leader Southwest Airlines and other low-cost peers - and analysts fear this may goad the large network carriers, like Delta, into likewise cutting fares to hang onto market share, cutting off their own revenue streams in the process.

And Smith Barney Citigroup downgraded the shares of AMR Corp. - the parent of American Airlines, the largest U.S. carrier - saying rivals who restructured could wind up with lower costs. Delta is looking to follow the lead of AMR, which last year forced their pilots into large concessions in order to keep the airline alive.

Delta's 7.70% notes due 2005 were seen to have traded down on Tuesday to 62 bid, 64 offered, from 65 bid, 66 offered previously while its 8.30% bonds due 2029 lost two points to end at 38 bid, 40 offered.

Another trader saw Delta's 7.90% notes due 2009 slipping to 47.75 bid from 51 previously, while its 9¾% notes due 2021 were down a pair at 44 bid.

Delta's New York Stock Exchange-traded shares meantime swooned 66 cents (9.78%) to end at $6.09.

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