Toys "R" Us bonds up on expected tender plans; Cablecom, American Tire, 155 East deals price

By Paul Deckelman and Paul A. Harris

New York, March 23- Toys "R" Us bonds firmed smartly Wednesday, as the company declared in a filing with the Securities and Exchange Commission that it might tender for those bonds in connection with its previously announced leveraged buyout by a syndicate led by Kohlberg Kravis Roberts & Co., which also includes Bain Capital LLC and Vornado Realty Trust LP.

In the primary arena, new deals successfully priced for Cablecom Luxembourg SCA, American Tire Distributors Inc., Pogo Producing Co. and 155 East Tropicana LLC/155 East Tropicana Finance Corp., the latter offering slightly upsized. Stile Acquisition Corp./Masonite International Inc. was heard to have postponed its planned $825 million two-part bond issue due to market conditions, while two other prospective issuers - White Birch Paper Co. and IAAI Finance Corp/Insurance Auto Auctions Inc. - restructured their upcoming deals.

Heading into the week's final session, an abbreviated Thursday show that gives way to Easter weekend, the primary market moved purposefully on Wednesday.

However sources noted a change in the wind - or, more precisely, the credit cycle - as the session ran rife with news of issuers widening price talk, securing previously unsecured bonds, shortening maturities and extending call protection.

And one of the week's most highly anticipated deals, Stile/Masonite's $825 million, simply disappeared.

"The ball is definitely in the buy-side's court right now," one investment banker conceded late Wednesday.

"They are still buying things, but now they have reasons to push back and to get more out of issuers.

"Given the economic conditions that is certainly their prerogatives."

Cablecom Luxembourg prices CHF 1.275 billion

The session's biggest transaction by far came from Cablecom Luxembourg SCA, which priced CHF 1.275 billion of senior secured floating-rate notes (B) in three quick-to-market tranches, two of which priced on top of outwardly revised price talk.

The company priced CHF 700 million equivalent in two tranches, one each in euros and Swiss francs.

The €200 million tranche priced at 99.00 with a coupon that pays three-month Euribor plus 250 basis points. That was on top of outwardly revised price talk of Euribor plus 250 basis points at 99.00. Originally the euro-denominated notes had been talked at 237.5 basis points area.

The CHF 390 million tranche also priced at 99.00 with a coupon that pays three-month Swiss Libor plus 262.5 basis points. Again the transaction came on top of revised talk. Originally the Swiss franc-denominated five-year notes had been talked at 250 basis points area.

In addition the company priced €375 million of seven-year notes at 99.00 with a coupon that pays three-month Euribor plus 275 basis points, right on top of the original price talk.

Goldman Sachs & Co. ran the physical books for the debt refinancing deal.

$730 million from U.S. issuers

Meanwhile in the U.S. market, three issuers brought $730 million in five tranches.

American Tire Distributors Inc. raised approximately $330 million in a restructured deal.

The company sold $140 million of seven-year senior floating-rate notes (Caa2/CCC+) at par to yield three-month Libor plus 625 basis points, wide of the three-month Libor plus 525 basis points area price talk.

The company also priced $150 million of eight-year senior fixed-rate notes (Caa2/CCC+) at par to yield 10¾%. Talk on the fixed tranche was 10% area.

In addition the company sold a previously unannounced $51.5 million tranche of non-rated senior discount notes due Oct. 1, 2013. The zero-coupon notes priced at 77.705 to yield 13%.

The company had originally been in the market with $130 million of seven-year non-call-two floating-rate notes and $200 million of 10-year non-call-five senior subordinated notes.

Banc of America Securities ran the books for the acquisition financing from the Charlotte, N.C.-based independent wholesale supplier of tires.

Elsewhere oil and gas exploration and production firm Pogo Producing Co. priced a quick-to-market $300 million issue of 6 5/8% 10-year senior subordinated notes (Ba3/BB) at 99.10 on Wednesday to yield 6¾%, 12.5 basis points wide of the 6½% area price talk.

Goldman Sachs & Co. ran the books for the debt refinancing deal.

And East Tropicana, LLC, issuing in conjunction with 155 Tropicana Finance Corp., priced an upsized $130 million issue of seven-year senior secured notes (B3/B-) at par to yield 8¾%, on the wide end of the 8½% to 8¾% price talk but increased from $125 million.

Jefferies & Co. ran the books from the Las Vegas gaming and lodging company, proceeds from which will be used to repay debt and fund the construction of Hooters Casino

Insurance Auto, White Birch talk restructured deals

Iaai Finance Corp. (Insurance Auto Auctions Inc.) issued price talk of 10½% to 10¾% on its restructured $150 million offering of eight-year non-call-four senior notes (Caa1/CCC+), which are expected to price Thursday via Deutsche Bank Securities and Bear Stearns & Co.

The company had originally been in the market with seven-year non-call-three senior subordinated notes.

Also restructured was White Birch Paper Co. (Bear Island Paper Co.)'s $400 million two-part bond offering (B2/B).

The company is now in the market with approximately $250 million of eight-year non-call-four senior secured notes which it has talked at the 9% area. The notes had originally been 10-year non-call-five senior unsecured notes.

White Birch also added security to its tranche of seven-year non-call-two floating-rate notes, which it has talked at three-month Libor plus 450 basis points. The tranche had also originally been marketed as an offering of senior unsecured notes.

Timing on the Credit Suisse First Boston-led deal remains to be determined.

Stile/Masonite postpones

Finally on Wednesday, another one bit the dust.

Stile Acquisition Corp./Masonite International Corp. postponed its $825 million two-part offering of high-yield bonds due to adverse market conditions.

Deutsche Bank Securities, UBS Investment Bank and Scotia Capital were the bookrunners.

The Mississauga, Ont.-based building products company is concurrently in the market with an approximately $1.525 billion credit facility, which has initially not been impacted by the postponement of the bond deal, according to the source.

The company came to the capital markets to help fund Kohlberg Kravis Roberts & Co.'s acquisition of Masonite.

155 East dip in trading

When the new 155 East Tropicana 8 ¾% senior secured notes due 2012 were freed for secondary dealings, "they did not break to a premium," a trader said, seeing the new bonds go out at 99.5 bid, par offered, down from their par issue price earlier in the session.

He saw the new Abitibi-Consolidated 8 3/8% notes due 2015, which priced Tuesday at par and then fell to 98.5 bid, 99.5 offered on the break, at that same closing level on Wednesday, amid general weakness in the forest products sector.

Toys jumps higher

Back among already existing issues, Toys "R" Us' 7 7/8% notes due 2013 were quoted by one market source up as much as 5½ points at one point during the session at 98 bid, before closing up four points at 96.5.

Another market source called that same 96.5 level for the Wayne, N.J.-based toy retailer's 7 7/8s a 4¼ point gain and said that the big winner on the day was Toys' 7 3/8% notes due 2018, which rose a full eight points to 92.5. He also saw the company's 8¾% notes due 2021 up 6 3/8 points to 96.875, its 7 5/8% notes due 2011 at 99.25 bid, up 5¾ points, and its 6 7/8% notes due 2006 a point up on the day at 102.5.

Toys "R" Us "caught a lot of people sleeping" with the revelation of its plans, a trader said, and the bonds "had a pretty aggressive movement up."

He saw the 7 7/8s at 96 bid, 97 offered, its 7 3/8s at 91.5 bid, 92.5 offered and its 7 5/8s at 99 bid, par offered, all up five points on the day. He estimated the 83/4s up six points to 97 bid, 98 offered.

The rise in the company's bonds represents a sharp reversal, since they had been on the slide ever since news of the deal was announced earlier this month.

The SEC filing said that the company would tender for the bonds if requested to do so by the buyers.

In a subsequent statement issued late in the session, Toys "R" Us said it has not been asked and did not know whether it would.

However the sharp jump in the bond prices indicated the market expects a tender to happen.

"They lost five, six, seven points since the deal was announced last week and the leverage numbers were revealed," said high-yield retailing analyst Bob Lupo of BB&T Capital in Red Bank, N.J.

"People thought the transaction price [$6.6 billion] was high, and when it didn't include the assumption of debt, but was in addition to it" - the company has some $1.75 billion of outstanding bonds - "they did the math and the leverage number was pretty high, at eight times [EBITDA] plus."

Toys' indication that it might tender for the bonds before the closing of the acquisition, at the specific initiative of the company's buyers, "surprised a lot of people," the analyst said.

"The reason is that while the company could have kept the bonds outstanding, keeping them as existing debt without doing anything with them, I think that given all of the leverage ramifications and the size and complexity of the transaction, and the various stages of upcoming asset sales and maneuvers, KKR and the other buyout sponsors figured they needed cooperative capital markets and decided to tender for the paper."

As part of the agreement, the buyers have secured commitments from their lenders to finance a U.S. bridge loan, a U.S. asset-based debt facility, a European real estate bridge loan, and a European asset-based debt facility, the SEC filing said.

Lupo said that the prospective tender for the notes "was triggered by a covenant [in the bond indentures] which limits the amount of additional liens secured by property which can be financed. Presently, it's about a billion-dollar number, and given the current value of the real estate, which is well in excess of that - I've heard estimates of $3 billion or higher for the real estate - the buyout people wanted that paper out of the way."

He went on to note that while "they probably could have maneuvered" to do any financing transactions at an operating company level, while keeping the existing bonds at the holding company level, "to traverse the covenant, again, wanting cooperative capital markets and a cooperative investor base," they decided to take the paper out instead.

Lupo noted that the financial markets were pretty much caught by surprised when the structure of the deal emerged - for KKR and its partners to purchase the entire company - since most people had figured the game plan would be for Toys "R" Us to spin off its profitable Babies "R" Us business, separating it from the underperforming toy store division, and then just try to find a buyer for the latter. Under that scenario, company shareholders would get stock in the newly spun off Babies business, and would also reap the proceeds of the sale of Toys' residual assets, such as real estate, through special dividends.

"I think that while the company was attempting to do that, the potential buyers realized that all of the segments were closely wedded - they were supplying the Babies stores and the Toys "R" Us stores from the same warehouses, and their systems were the same. It would be very problematic to separate them, so it made sense to make a bid for the whole business - especially given the value of the real estate for the whole business."

He said that realization of the extent of the real estate value "triggered the need to tender for the bonds, rather than live within the $1 billion carveout - a lot of people thought that was sufficient to extract value, by selling toy stores that were underperforming and monetizing $1 billion of real estate that they could do under the [bond] covenants, and maybe selling their 48% interest in Toys "R" Us Japan. But when Vornado got in the act, and communicated the value of all of the real estate, I think the decision was made to bid for the entire company, and to tender for all of the bonds."

Forest products particularly weak

Elsewhere, a trader saw "a general condition of weakness" in the market on the last full trading day of the week, ahead of Thursday's early (2 p.m. ET) close and the full market closure Friday for the Good Friday/Easter holiday.

He saw particular weakness in the forest-products area, "which had actually been moving up until last week or so. It seemed to be taking a lot of pressure."

He saw Tembec Industries' 7¾% notes due 2012 at 91.5 bid, 92.5 offered, well down from their levels at 96 bid, 97 offered a week ago.

Bowater Inc.'s 6½% notes due 2013, recently trading above par, were 96.5 bid, 97.5 offered on Wednesday, while Norske Skog Canada Ltd.'s 7 3/8% notes due 2014 dropped to 98.5 bid, 99.5 offered from their recent levels at 102.5 bid, 103.5 offered.

Independently, Tembec's 8½% notes due 2011 were seen down nearly three points at 95.25, while Norske's 8 5/8% notes due 2011 were down two points at 103.5 bid, and Jefferson Smurfit Group plc's 8¼% notes due 2012 lost more than three points on the session to finish at 104.5.

"That sector has sort of been sucking wind," the first trader said. "The week before that, all the cyclicals were getting hit to some degree - steel we knew a couple of weeks ago, and now we've got the forest products. Chemicals are a little softer, although no dramatic sell-off there." However he did see Resolution Performance Products LLC's 13½% notes at 107 bid, 108 offered, down from 109 bid, 110 on Monday.

Auto names slip

The recently skidding automotive supplier sector was doing "not much worse" on Wednesday, he said, with Collins & Aikman Products Co.'s 10¾% senior notes due 2011 off a point at 80 bid, 81 offered and the Troy, Mich.-based automotive components manufacturer's 12 7/8% subordinated notes due 2012 two points lower at 41.75 bid, 42.75 offered.

He saw Dura Operating 's 9% notes due 2009 at 82 bid, 83 offered and Visteon Corp.'s 7% notes due 2014 at 84 bid, 85 offered, both unchanged on the session, and Dana Corp.'s 6½% notes due 2009 down a point at 97.25 bid, 98.25 offered, after the Toledo, Ohio-based maker of axles, brakes, and driveshafts, engine, filtration, fluid-system, sealing, and structural products lowered its earnings guidance for the 2005 first quarter to 11 to 13 cents per share, from 17 to 23 cents previously, "no big surprise," the trader said.

Outside of the auto area, the news that former Hollywood Entertainment Corp. CEO Mark Wattles has retained a Dallas-based investment banker in hopes of arranging to buy about half of the Wilsonville, Ore.-based video rental chain's stores - with the aim of facilitating Blockbuster Inc.'s hostile takeover bid for the company by presumably lessening the potential anti-trust implications of such a takeover - were seen having little real impact on Hollywood's 9 5/8% notes due 2011. The bonds were quoted continuing to hover around the 112 mark.

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