Primary takes a breather after busy Thursday; Dan River continues slide

By Paul Deckelman and Paul A. Harris

New York, Oct. 17 - The high yield primary market took a step back on Friday, as accounts set to work digesting the more than $2 billion of new junk-rated debt which priced in six different deals on Thursday. While no issues were heard to have come down the chute during Friday's dealings, two were heard to be preparing to take new issues on the road for marketing - healthcare company NeighborCare Inc. (a/k/a/ Genesis Health Ventures Inc.), which is shopping a $225 million offering of senior subordinated 10-year notes, and Indonesian telecommunications operator PT Indosat, hoping to connect with investors to sell $300 million of 10-years.

In the secondary market, gainers included Qwest Communications International Inc., Levi Strauss & Co. and Loral Space & Communications Ltd. But the biggest mover was the beleaguered Dan River Inc., whose bonds were off for a third consecutive session after the Danville, Va.-based textile and bedding company announced at mid-week that it had sought and gotten waivers of financial covenant violations from its lenders.

Its 12¾% notes due 2009 - which had swooned a breathtaking 30 points on Wednesday to around the 45 level and which then lost another five points on Thursday, to about 40 bid, "continued to get hammered," a trader said, quoting the notes as having fallen as low as 31 bid, 33 offered. At another desk, the bonds were seen having dropped to 33 bid.

Standard & Poor's took note of the company's troubles Friday, dropping the ratings on its $248 million of debt. S&P lowered the company's long-term corporate credit rating to B- from B+ previously, cut its senior unsecured debt rating to CCC from B- and put the ratings on CreditWatch with negative implications.

S&P said it is "concerned about Dan River's ability to improve its operating results given the challenging business environment, expected higher raw material prices, and the tighter liquidity position the company faces with the new minimum excess availability requirement under the bank facility."

Also on the downside - and also the recipient of an S&P corporate credit rating downgrade, to CCC+ from B- previously - were the bonds of Solutia Inc. - continuing lower in the wake of the St. Louis-based chemical company's announcement Thursday that it was in talks with its bondholders about restructuring $1.25 billion in long-term debt, had hired financial advisors and was mulling options that could include bankruptcy or a sale of the company.

Its bonds had fallen around two points across the board on Thursday, and continued to head downward on Friday; A trader, who characterized the bonds' movement as "stabilizing at a lower level," quoted its 11¼% senior secured notes due 2009 as having dipped to 93 bid from 95, while a market source elsewhere pegged the company's 7¾% bonds due 2027 as having retreated to 62.5 bid from 64.

A trader, noting the continued erosion of the Dan River bonds, Solutia's difficulties and the recent slide in Twinlabs Corp. bonds - he noted that the bankrupt Hauppauge, N.Y.-based producer of nutrition supplements "is up for sale" to IdeaSphere Inc. of Grand Rapids, Mich., and "the bondholders are getting nervous," opined that "there are landmines out there, even though everyone thinks things are great," with ample liquidity in the primary and secondary markets and prices for many secondary issues having firmed smartly over the past month or so.

He quoted the Twinlabs bonds as offered at 41 - well down from levels around 60 bid, 62 offered about two or three weeks ago.

The bonds of international supermarket giant Royal Ahold NV's U.S. financing arm, Ahold Finance USA Inc. were heard to have softened a bit after the Amsterdam-based company warned in its long-awaited 2002 earnings statement that 2003 would be a tough year, due to intense competition in the low-margin industry as well as the continued fallout from the accounting scandal which shook the company early in the year; it cautioned that "the distractions caused by the events surrounding the announcement on Feb. 24, 2003 [of the accounting irregularities at Ahold's U.S. Foodservice unit] and the related investigations are expected to have had a negative impact on our business," with the auditors fees and refinancing costs likely to have a significant negative impact on its 2003 results.

Ahold Finance USA's 6¼% notes due 2009 were seen down half a point on the session, at par bid.

On the upside, Qwest - which also filed a long-awaited restatement of 2002 earnings, and those of 2001 as well - was seen to have firmed, investors apparently relieved that the Denver-based regional Bell telecommunications operating company had managed to finally get some of its accounting problems from past years behind it.

A market source quoted Qwest's LCI 7¼% notes due 2007 bid in the 89-89.5 area, "up significantly" from levels around 84.5 on Thursday, while its privately placed 13½% notes due 2010 were "up a little" at 119 and its 14% notes due 2014 were also up a bit at 123. However, the source saw Qwest Capital Funding's 7.9% notes due 2010 at 95.5 bid, "pretty much where they had already been trading."

At another desk, Qwest's 7½% notes due 2008 were pegged a point higher on the day at 98.5 bid, although its Qwest Services Corp. 13% notes due 2007 were down about three-eighths of a point, just below 114.

Also in the communications area, the market source said that Charter Communications Holdings' LLC's 8¼% notes due 2007 were three to four points over recent levels, "definitely up" at 91 bid, although the St. Louis-based cable operator's zero-coupon notes due 2010 were holding steady at 74 bid.

Satellite operator Loral's paper is "all of a sudden a hot commodity," a trader said, quoting its Loral Orion Inc. 10% notes due 2006 as having moved up to 81 bid, 83 offered over the past few sessions from prior levels in the mid-70s, as the bankrupt company has attracted bids for its constellation of communications satellites from at least two would-be-buyers, IntelSat and EchoStar Communications Corp. Although New York-based Loral favors the $1 billion IntelSat bid and rejected a $1.85 billion EchoStar bid to buy the whole company out of Chapter 11, EchoStar has persisted, making a new $1.03 billion bid for the satellites alone just before the Oct. 15 deadline; the issue is expected to be resolved via a bankruptcy court auction.

Loral's 9½% notes were meanwhile also quoted higher at 41 bid, 43 offered, from 36 bid, 37 offered.

Homebuilders were stronger on Friday, after the government reported that September housing starts rose 3.4% to a 1.888 million-unit annual pace - well above Wall Street's expectations of a 1.827 million unit rate. That leaves the important economic gauge just 2,000 units below the 17-year high pace set in July. Even though new building permits slipped 2.2% to a 1.86 million permit annual pace, it still topped analysts' consensus expectations o 1.835 million-permit rate.

D.R. Horton Inc.'s 5 7/8% notes due 2013 were estimated to have gained two points, to close at 96, while fellow homebuilder KB Home's 8 5/8% notes due 2008 were a point better, north of 111.

Collins & Aikman Products Co. bonds continued their comeback from recent low levels, the Troy, Mich.-based automotive component maker's 10¾% senior notes due 2011 a quarter point better at 87, while its more volatile 11½% notes due 2006 were a point better at 77. Collins & Aikman's bonds had fallen in response to newspaper speculation the company might lose its lucrative contracts with Chrysler, but then rebounded on the news that Ford commissioned Collins & Aikman to provide interior components to its key new Futura model.

And Levi Strauss was also on the comeback trail, recovering somewhat from lows it hit after the San Francisco-based blue-jeans giant acknowledged in an SEC filing that it had overstated earnings in 2001 by $26 million because of accounting errors on its 1998 and 1999 tax returns.

Levi's 12¼% notes due 2012 firmed to 79.25 bid from 78.5 on Thursday. Its 11 5/8% notes due 2008 were a quarter-point better at 81.25. And its 7% notes due 2006 were unchanged at 75.5.

In the backwash of a Thursday session that saw $2.26 billion of new junk bonds price, Friday found the new issue market somewhat somnolent.

No deals priced, however NeighborCare, Inc. announced it will start the roadshow Tuesday for $225 million of 10-year senior subordinated notes (Ba3/B+) via Goldman Sachs & Co. and UBS Investment Bank. That deal became the second of two deals now in the market that are related to a Genesis Health Ventures, Inc.'s split into two companies.

Meanwhile sell-side sources on Friday continued to mull the news that AMG Data Services had reported a $768 million inflow to high yield mutual funds for the week ending Oct. 15.

One official referred to it as "a positive signal," trailing a succession of "neutral signals."

"It's the first meaningful flow in one direction or the other in a month," said the source. "People generally expected that flows would be positive over the past several weeks. And this one was strongly positive."

Another sell-side source pointed to the seven tranches that priced on Thursday - four of them upsized, two priced inside of talk and three at the tight end of talk - and stated that in the face of upsized, tight-pricing deals news of inflows should come as no surprise.

"There is such a mismatch between supply and demand right now that almost any decent credit is getting done at very tight levels," said the sell-sider.

When Prospect News inquired about the "supply"-side of the equation, responses from three different sell side officials in separate conversations came with notable consistency.

"I don't see a $4 billion or $5 billion calendar building up anytime soon," commented one. "I think it will be more like $2 billion to $3 billion pricing each week for the next three or four or five weeks."

Another concurred with that range.

A third sell-side source said "I am looking for about $2.25 billion a week until we get to the holidays, at which point I don't think that anything meaningful will get done. So I look for activity to be somewhat heavier than $2.25 billion over the next several weeks."

However, a quick tally of the Prospect News High Yield Daily forward calendar turned up five deals totaling $800 million expected to price in the U.S. high yield market during the Oct. 20 week - a figure significantly short "$2 billion to $3 billion."

"I agree there is not a ton of stuff on the calendar," responded one official. "But I think we're going to be seeing a significant number of drive-by deals."

Another sell-sider, citing the apparent imbalance between new issue supply and the demand for paper on the part of the accounts, said: "The question is, can you find companies that want to access the market?

"Right now it's no secret that people have more money than they know what to do with."

Nor did Friday's primary market session offer any apparent relief to investors who need to put cash to work, as no deals priced.

Two new offerings entered the pipeline, however.

Genesis Health Ventures, Inc. which is in the process of spinning off the eldercare portion of its business, introduced the second of two related offerings now in the market. NeighborCare, Inc. will start the roadshow Tuesday for $225 million of 10-year senior subordinated notes (Ba3/B+). The deal is expected to price on Oct. 30.

Meanwhile the roadshow began on Oct. 15 for Genesis HealthCare Corp.'s $200 million of 10-year senior subordinated notes (B3/B-), via bookrunners Lehman Brothers, Credit Suisse First Boston and UBS Investment Bank (see related report on page one of this issue).

Elsewhere the roadshow starts Monday for Gaylord Entertainment Co.'s offering of $225 million of senior notes due 2013, led by Banc of America Securities, Deutsche Bank Securities and CIBC World Markets.

And Inn of the Mountain Gods Resort & Casino upsized its offering to $200 million from $185 million. The seven-year senior notes (Caa1/B) are expected to price early in the Oct. 20 week.

Price talk of 11½%-11¾% was heard Thursday on the Citigroup-led offer.

Meanwhile on the emerging markets corporate credit front the roadshow begins Tuesday for Indosat Finance Co. BV's offering of $300 million of senior unsecured notes due 2013 (B+).

Goldman Sachs, Barclays Capital and ING are underwriters for the offer from the P.T. Indonesian Satellite Corp. Tbk subsidiary.

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