Ahold slides as CEO, CFO quit; EL Paso up on asset sale; Penney price talk emerges

By Paul Deckelman and Paul A. Harris

New York, Feb. 24 - Dutch retailer Royal Ahold NV's bonds and shares slid sharply Monday as investors decided to cash out after the company's CEO and CFO resigned in connection with accounting irregularities. Elsewhere, El Paso Corp. bonds were up several points after the energy operator announced plans to sell assets to Chesapeake Energy Corp.

In the primary sphere, two subsidiaries of El Paso Corp will bring $700 million of new debt to market Friday. On the more immediate horizon, price talk emerged on J.C. Penney Corp.'s planned $350 million split-rated deal, which could price as early as Tuesday.

Ahold - which owns the Stop N Shop and Giant supermarket chains in the U.S. - said that its chief executive officer and chief financial officer would resign after it found accounting irregularities at its U.S. Foodservice unit.

Ahold thus becomes the latest in a long line of companies to be laid low by the emergence of accounting problems, a disturbing trend which surfaced in the fall of 2001 when Enron Corp. disclosed all kinds of fishy bookkeeping.

Ahold's fall was "pretty bad," said a market source, who pegged its Ahold Finance unit's 6 7/8% notes due 2029 at 66, a breathtaking plunge from its previous levels around 93.375. A trader saw "a nice sized drop" in Ahold's 8¼% notes due 2010, which slid as low as 76 bid Monday from prior levels around 112, before finally stabilizing at 78.

Ahold said that it would restate its financial results going back to 2000 as a result of the discrepancy at its Columbia, Md.-based food service unit. Observers said the announcement might trigger a Securities and Exchange Commission probe of the company.

Standard & Poor's cut the company's previously investment-grade-rated corporate credit rating two notches, to BB+ from BBB previously. For the moment, Moody's Investors Service continues to rate it as an investment-grade credit, although this could change very quickly since the rating agency put Ahold on review for downgrade.

Ahold shares plummeted $6.53 (61.09%) to $4.16 on New York Stock Exchange volume of 16.2 million - 76 times the normal turnover of about 216,000.

The trader said that the drop seemed confined to Ahold, with no fallout evident - yet - among other operators in the very competitive supermarket industry - a low-margin business which has seen several notable names forced into bankruptcy court restructurings in recent years, including Pathmark, Bruno's and, more than once, Grand Union.

Among high yield supermarket operators Monday, though, Stater Brothers' 10¾% notes held steady at 99.5 bid/100.5 offered, while Ingles Markets' 8 7/8% notes due 2011 were unchanged at 91.5 bid/92.5 offered. Great Atlantic & Pacific Tea Co. - A&P - was unseen.

Elsewhere, El Paso's bonds were solidly higher after the Houston-based energy production and distribution company announced plans to sell $500 million of mid-continent natural gas reserves to Chesapeake Energy Corp.

Standard & Poor's noted approvingly that the deal is "supportive of the firm's credit quality." S&P currently rates El Paso at B+, with a negative outlook.

But it said that the proposed sale, "coupled with other asset sales that have either been completed or are currently under contract, will account for about one-third of El Paso's plan to sell $2.9 billion of assets in 2003. The asset sales, which are necessary to meet the company's shortfall between cash flow and expected capital expenditures, will enhance the company's liquidity position and aid its efforts to meet debt maturities in 2003."

El Paso debt holders also approved, its 7¾% bonds due 2032 rising to 65.5 bid/66.5 offered from 62 bid/64 offered previously, while its 6.95% medium-term notes due 2007 jumped to 71 bid from 66.25.

El Paso's shares rose 23 cents (5.32%) to $4.55, on NYSE volume of about 10 million shares, slightly less than usual.

Oklahoma City-based Chesapeake also announced that it would buy $30 million of gas reserves from Vintage Petroleum Inc. in a separate transaction. Chesapeake's 8 1/8% notes due 2011 were quoted at one desk as having firmed slightly to 104.875 from 104.5, although at another desk, they were estimated to have eased a bit to offered levels around 104 from around 104 bid/105 offered.

Vintage's 7 7/8% notes due 2011 were a point better, at 98.5 bid.

Also on the energy front, Williams Companies Inc.'s 8 1/8% notes due 2012 were seen "up a decent amount," in the words of one observer, moving to 83 bid from 77. A market watcher said Calpine Corp.'s debt was "up a couple of points," with the San Jose, Calif.-based independent power producer's 8¾% notes due 2007 heard to have moved up to around 46 bid from prior levels at 43. Its 8 5/8% notes due 2010 were 1½ points better, at 45.5 bid. AES Corp.'s 9 3/8% notes due 2010 were heard 1½ points better, at 70.5.

American Tower Corp. bonds were higher, after the Boston-based communications antenna tower operator reported fourth-quarter earnings results. Its 9 3/8% notes due 2009 were quoted as high as 80 bid from prior levels in the 77-78 area.

The company said that in the fourth quarter, its net loss of $52.4 million represented a decrease from $149.7 million in the 2001 fourth quarter. And it said that it had achieved free cash flow positive in the quarter, ending with $127 million of cash and cash equivalents. EBITDA before restructuring, excluding approximately $4 million of net, non-recurring positive items, increased 25% to $90.2 million from $72.4 million in the fourth quarter of 2001.

Whether that good news would help other tower operators was open to debate; at one desk, Crown Castle International Corp.'s 10¾% notes due 2011 were quoted unchanged at 83.75 and other tower names such as Pinnacle Holdings and SBA Communications "didn't do anything." But at a second shop, Crown Castle's 9 3/8% notes due 2011 were a point better at 79.5 bid.

Qwest Communications International Inc.'s bonds were seen not much changed on the Denver telecommunications company's announcement at a Merrill Lynch communications conference that it would shed some non-core assets. A trader said its 7¾% notes due 2006 were seen holding steady "in the same 74-6 context they've already been in."

Meanwhile in primary action sources have been telling Prospect News that the buy-side still has cash in spite of two successive weeks of outflows from high-yield mutual funds -and issuers seemed to be betting on it during Monday's session.

Through a pair of its subsidiaries, Southern Natural Gas Co. and ANR Pipeline Co., El Paso Corp. opened the valve Monday sending a fresh $700 million of seven-year notes into the junk bond pipe, figuring to price the whole lot on Friday.

And from crossover land Plano, Tex. retailer J.C. Penney announced it intends to price $350 million in a split-rated seven-year deal slated to go down on Tuesday.

Also Radnor Holdings Corp. announced it began holding its $135 million of seven-year notes (B2/B-) up in front of investors on Monday. That deal is expected to price early in the first week of March. The deal from the Radnor, Pa.-manufacturer and distributor of foam packaging and specialty chemical products for the foodservice, insulation and protective packaging industries comes via Deutsche Bank Securities and is expected to price March 4.

And from the tech sector price talk of 12¾%-13% emerged on ON Semiconductor Corp.'s $200 million of seven-year senior secured first priority notes (B3/B).

Two separate subsidiaries of El Paso announced they would bring a combined total of $700 million of new Rule 144A senior notes, both with seven-year maturities, and both rated B1/B+.

Southern Natural Gas will bring $400 million, with $95 million of the proceeds being retained for general corporate purposes, and the remainder to be used to pay a dividend to El Paso.

ANR Pipeline Co., meanwhile, will bring $300 million, with proceeds designated to retire payables to affiliates, with $25 million going for general corporate purposes.

Salomon Smith Barney and Credit Suisse First Boston are joint bookrunners. Both offerings are set to hit the road Tuesday, and figure to price on Friday.

Meanwhile on Monday, from the universe of split-rated credits J.C. Penney announced an offering of $350 million of seven-year senior unsecured notes (Ba3/BBB-), which is expected to price Tuesday. Price talk on the deal, via Credit Suisse First Boston, is 8 1/8%-8 3/8%.

One sell-side source told Prospect News that while the crossover accounts will no doubt form the first circle around the deal, plenty of high yield names will almost certainly be peering closely over their shoulders.

"The high-yield market is obviously getting a little skittish," this official commented. "People are looking to put money into decent-rated credits. The J.C. Penney deal is straightforward and very simple, and the crossover guys will help improve demand for the name."

As if to reinforce this official's comment on the J.C. Penney split-rated deal, Monday's "Situation Room" report, from the Banc of America Securities credit market research team, noted that high grade and high yield credit market performance has lately "decoupled."

David Goldman, head of Banc of America's global markets group research, Jeffrey A. Rosenberg, head of the group's credit strategy research, and senior high yield credit strategist Ali Balali, among others, noted that "while high grade spreads overall have continued to tighten, high yield credit spreads have widened. The increase in credit risk observed in the highest credit risk issues in the high grade market is being reflected in the increased credit risk and spreads in the high yield market. Moreover, the increase in the credit risk in the high yield market is broad based, with spreads in 20 out of 27 sectors widening since January 9, when the decoupling between the two markets first began.

"Certainly, the decoupling up to this point has been slight - spreads in the high yield markets have only modestly widened, while those in the high grade markets have only modestly tightened," the report continued. "Within the high grade market itself we are also seeing the decoupling - here between BBB spreads and higher credit quality spreads. Spreads of the lowest credit tier within the high grade universe have widened over the past several weeks, indicating increased credit risk - even as higher credit quality spreads have tightened.

"This trend is unlikely to last," the report added. "In a typical credit spread rally, the back end leads the front end (i.e. lower credit quality spreads tighten more than high quality spreads). While in aggregate, credit spreads in the high grade market have continued to tighten, the weakening in high yield and BBB high grade spreads point to a weakening in perceived credit quality, posing short-term risks that the overall market could widen."

Finally on Monday price talk of 12¾%-13% emerged Monday on ON Semiconductor Corp.'s upcoming $200 million of seven-year senior secured first priority notes (B3/B). The Phoenix-based semiconductor manufacturer's deal, via Salomon Smith Barney and Credit Suisse First Boston, is expected to price Wednesday.

Looking toward Tuesday's session, Hughes Electronics Corp. subsidiary DirecTV Holdings LLC is expected to price $1.4 billion of 10-year senior subordinated notes (B1/B). Price talk on the deal, via Deutsche Bank Securities, Banc of America Securities, Credit Suisse First Boston, Goldman Sachs and Salomon Smith Barney, is 8¼%-8½%.

Late in Monday's session, a session that saw a steep drop in equity prices with the Dow Jones Industrial Average declining just a hair under 2%, a sell side official commented that the junk bond market and equities continue to defy widely held expectations that they ultimately move in approximate parallel.

"The high yield market rallied last week," this official said.

"The equities were down 160 today but high yield was just quiet. There wasn't any activity. There are no buyers of paper, and there are very few sellers.

"You're just kind of stuck in this environment."

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