Dynegy powers up on financing, airlines on Washington action; Tesoro hits the road

By Paul Deckelman and Paul A. Harris

New York, April 2 - Dynegy Inc. became the latest merchant energy operator to announce new financing, sending its bonds up smartly in Wednesday's dealings. Also continuing upward were the airlines - particularly the securities of the beleaguered AMR Corp. - aided by the prospect that the Iraq war may actually end soon, as well as the possibility of more than $3 billion of federal aid for the hard-hit airline industry.

Meanwhile the primary market revved its engines Wednesday as news of five new deals circulated the syndicate desks: one drive-by deal, three offerings to come with roadshows, and news of one new deal in the wings.

Salt Lake City petrochemical firm Huntsman International LLC intends to slide into the market with a drive-by $150 million add-on to its 9 7/8% notes of 2009, which is expected to price Thursday.

Refiners Frontier Oil Corp. and Tesoro Petroleum Corp. will start roadshows on Thursday, Frontier with $200 million of 10-year notes and Tesoro with $400 million of five-year paper.

Houston epoxy manufacturer Resolution Performance Products along with its subsidiary RPP Capital Corp. plans to stick in $175 million of seven-year paper - a deal heard to be pricing next week.

And pending its tender offer and approval of documents by the Securities and Exchange Commission, Corrections Corp. of America hopes to lock up $200 million from high-yield investors with its new offering of eight-year junk.

Meanwhile Wednesday a five-way bookrunning team of investment banks finished setting the stage for the two-piece offering of Vivendi Universal €1 billion of seven-year senior notes in dollars and euros, a deal expected to price Thursday.

Price talk is now out on both the dollar and euro tranches: talk of 9¼%-9½% emerged Tuesday on the dollar tranche and on Wednesday a syndicate source told Prospect News that the euro tranche is being talked at 50 basis points behind the dollar tranche. How the size will be split between the tranches has not yet been fixed.

Goldman Sachs & Co., JP Morgan, Banc of America Securities, Royal Bank of Scotland and Salomon Smith Barney are joint bookrunners.

"We've heard that the U.S. market was extremely hot!" commented a source from the eurobond market in a message to Prospect News on Wednesday.

"Vivendi should get done oversubscribed," the source added. "It's got the 'name' and the story is based on asset disposals, which in most cases would be a no-no, however there is demonstrable value to their portfolio and 'apparent' bids on the table. There's a lot of noise around the story with Liberty legal maneuvers and the Seagram tax/interest issue, but I don't think these are deal breakers.

"There's definitely a better spirit in the market here," added the eurobond market source, "largely carved out of the huge inflows in the U.S. and the number of deals getting done over there. Structural issues remain a moot point and deals might not get done due to investors' reluctance to acknowledge that credit rather than structural issues are the key positive portfolio returns. They have a valid point but it's a stalemate if the senior banks don't move."

Following the Vivendi Universal transaction which is anticipated to be completed Thursday, the forward calendar figures to hold a modicum of action through the first half of April.

Huntsman's $150 million add-on to its 9 7/8% notes due March 1, 2009 is expected to also price on Thursday, following an investor conference call that took place Tuesday, according a syndicate source. Deutsche Bank Securities and Credit Suisse First Boston will run the books on the Salt Lake City-based petrochemical company's Rule 144A deal.

The original upsized $300 million deal priced at par on March 18, 2002, via Deutsche Banc Alex. Brown, as Deutsche Bank Securities was then know.

Also, Wednesday's market was rife with news of new roadshows.

Frontier Oil will start making the rounds to investors on Thursday with $200 million of 10-year senior notes (B2/B+) via sole bookrunner Bear Stearns & Co. and co-manager BNP Paribas. Also starting Thursday is San Antonio, Texas refiner Tesoro's roadshow for $400 million of five-year senior secured notes (BB) via bookrunner Goldman Sachs and co-manager Banc One Capital Markets. Both deals are expected to price on April 10.

An informed source told Prospect New on Tuesday that the new Tesoro notes are one piece of a full refinancing of the company's existing senior secured credit facility.

"We've got a $225 million revolver with a $150 million letter of credit sub-limit," commented the source. "We have a tranche A and a tranche B totaling $850 million, and we're taking that whole bucket and refinancing it into a new senior facility, for which we need some more letter-of-credit capacity, and a term loan and this $400 million senior secured notes offering."

In addition to the two above-mentioned refiners starting roadshows, Prospect News also heard Wednesday that Resolution Performance Products expects to price $175 million of seven-year senior secured notes (B2/B+) during the week of April 7. Morgan Stanley will run the books on the deal from the Houston-based manufacturer and developer of epoxy resins.

Finally, a source told Prospect News on Wednesday that timing on the launch of Corrections Corp.'s $200 million of eight-year-non-call-four senior notes (B2/B-) depends upon completion of a tender offer announced Wednesday, and upon document approval by the Securities and Exchange Commission, according to an informed source.

Lehman Brothers is the bookrunner for the off-the-shelf deal.

Back in the secondary, Dynegy's bonds were "six or seven points better today," a market observer noted, quoting its 6 7/8% notes due 2011 as having firmed to 68 bid from prior levels at 62.5 while its 8¾% notes due 2012 as having pushed up to 76 bid from 71. The Houston-based merchant energy company's longer-dated 7 5/8% bonds due 2026 were also notably better, at 63 bid, up from 57 previously.

Dynegy's New York Stock Exchange-traded shares were meantime headed in the opposite direction, down 29 cents (10.07%) to $2.59 on volume of 29.8 million shares, about three times the norm.

Dynegy announced that it had reached agreement with its lending group on $1.66 billion of financing, replacing $1.3 billion of credit facilities scheduled to come due this month and next.

The new financing does not come without a price - Dynegy had to secure the new funding with "a substantial portion" of its assets, and may have to pay as much as $48 million in additional interest costs over the life of the loan, over and above the $417 million of interest it had previously projected. On the other hand, the company doesn't have to make the first payment on the new financing until February of 2005 - giving it more than a year in which to try to get back on an even financial keel.

Dynegy is one of a number of such companies involved in such areas as producing and marketing electricity, operating gas pipelines and, before its recent withdrawal from the business, trading various forms of energy. The whole sector was thrown for a loop by the failure in late 2001 of Dynegy's crosstown rival, Enron Corp. - which Dynegy at one point was considering buying, only to walk away shortly before Enron slid into bankruptcy. Also weighing down the sector have been falling electricity prices and the threat of possible defaults on large maturing debt obligations.

Dynegy is the latest member of the club to successfully refinance its obligations - although, as noted, the banks have in many cases been able to demand more collateral and higher interest rates. As recently as Monday, Reliant Resources Inc. announced that it had scored $6.2 billion of financing in order to keep from defaulting on $5.9 billion of obligations which were to have come due on Tuesday, and CMS Energy announced an $850 million financing deal on Monday. El Paso Corp. closed on $1.2 billion of funding last month, while Allegheny Energy Inc. refinanced in February and AES Corp. did so in December.

The continued availability of financing in the face of the industry's acknowledged problems, as well as the prospect that lawsuits and claims against the energy producers arising out of the 2000-01 California energy crunch might soon be resolved once and for all, have kept the sector's bonds strong, and they have recently been strengthening at a pace rivaling that of the U.S. armed forces now bearing down on Baghdad.

The sector was up most of last week on a decision by the Federal Energy Regulatory Commission awarding California far less than the $8.9 billion it was seeking from the energy companies, whom Sacramento said had engaged in price gouging during the crunch, and bonds have continued to rise - and in some cases, rise strongly - all this week.

In Wednesday's dealings, for instances, Calpine Corp.'s debt "was flying," a trader said, quoting the San Jose, Calif.-based independent power producer's 7 3/8% notes due 2008 at 61.5 bid/62.5 offered, and its 8½% notes due 2011 at 60.5 bid/61.5 offered, both two points higher. At another desk, Calpine's 8 5/8% notes due 2010 were quoted up as much as four points, at 60.5 bid, and its 8¾% notes due 2007rose to 61 bid from 57.5.

Calpine's shares rose 29 cents (8.38%) to $3.75 on the NYSE, with volume more than doubling to around 12.1 million shares. The issue was helped by an equity upgrade by Salomon Smith Barney from "underperform" to "in-line"; Salomon said in a research note that the refinancing by Reliant Resources makes it more likely that Calpine too will be able to refinance its debt.

The trader said that CMS Energy was also "flying," with the Dearborn, Mich.-based utility company's 6¾% notes due 2004 at 99 bid/par offered, up from 96 bid/98 offered previously; its 8 ½% notes due 2011 at 89 bid, a sharp improvement from levels around 80-82 just three days earlier; and its longer-dated bonds were up two or three points Wednesday. "They've had a nice little run," he noted.

AES' 10¼% notes due 2006 were meantime up nearly three points, at 76 bid.

A market observer, noting the continued rise in the energy bonds, said that a definite "lack of supply" was pushing the bonds up. "The market just keeps improving."

He saw El Paso bonds up a point across the board and Williams Companies Inc. "better by a couple."

He did not see any deterioration in the bonds of Aquila Inc., despite Moody's Investors' Service's downgrade of the Kansas City, Mo.-based electric utility's debt ratings (senior unsecured cut to Caa1 from B1, while subordinated was cut to Caa3 from B2); the company's 8.95% notes due 2011 have recently been quoted in the 84.5 bid area, while its 7 5/8% notes due 2009 have been around 81.

Outside of the energy producing sphere, Charter Communications Holdings LLC's bonds - which had firmed on Tuesday on the prospect of the St. Louis-based cable operator being able to make its near-term coupon payments and possibly being able to get a $300 million loan from its largest shareholder, billionaire investor Paul Allen - continued to rise on Wednesday. Charter's 8 5/8% notes due 2009 were quoted up another two points at 53 bid, while its zero-coupon/9.92% discount notes due 2011 were a point better at 45.

And the airlines continued to improve from recent very low levels, with the most beleaguered of the major carriers not yet in bankruptcy, American Airlines parent AMR Corp., leading the way. Its 9% notes due 2012 were quoted up about three points, at about 30 bid, "because the airline is going to lay off pilots and try to get its act together," a market source said.

A trader saw the bonds even better by the end of the session, quoted as high as 32 bid without any offers - a sign that investors think the bonds might appreciate further still. Such a rise is all the more significant, because barely a week ago, American's notes were languishing at bid levels around 16-17, knocked down by escalating fuel prices, a steep fall-off in passenger traffic due to worries about war and terrorism, and investor concerns about the airline's debt and liquidity status.

Fort Worth-based AMR said on Monday that unions representing its pilots, flight attendants and mechanics had agreed in principle to $1.8 billion of cost cutting measures which the company says are needed to keep the world's largest airline from joining its largest rival, Number-Two carrier United Airlines, in bankruptcy. On Tuesday, American presented its pilots with the Hobson's choice of either accepting 2,500 layoffs and steep pay cuts over the life of the six-year agreement or turning down the measures - which American says would save $660 million - and likely forcing the airline into Chapter 11, where a judge could in theory propose even more draconian reductions.

Fueled by the prospect of AMR being able to avoid bankruptcy by getting the desired concessions from its unions, as well as the possibility that a war which some investors feared might drag on for months could be ending sooner than expected, AMR's shares zoomed skyward Wednesday, to the tune of $1.25 (41.67%) to close at $4.25 on the NYSE. Volume was 35.2 million shares, about six times the average daily turnover.

Shares and bonds of the other carriers were likewise better, helped both by AMR's likely avoidance of bankruptcy, and by the news Tuesday that both the House and the Senate appropriations committees had approved packages of aid to the airlines totaling more than $3 billion.

Northwest Airlines' 8 3/8% notes due 2004 improved to 73 bid/75 offered from prior levels around 70 bid/73 offered, while Delta Airlines' 6.65% notes due 2004 rose to 78 bid/80 offered, from 75 bid/77 offered. Delta's 9% notes due 2016 were two points better, at 49 bid. Continental Airlines' 8% notes due 2005 were also two points better, at 50.5 bid.

The passage of the airline-aid measures by the committees are "a positive development. If they come through, the company [AMR] and the industry stand a chance at avoiding bankruptcy," said airline debt analyst Ray Neidl at Blaylock & Partners in New York.

Even though AMR - the most financially challenged of the major airlines which have not gone bankrupt (the way that United, US Air Group and, on Tuesday, Air Canada did) - has gotten the unions to okay the concept of concessions, the devil, as they say, is in the details, namely getting the specific unions to agree to specific levels of staffing cuts and pay and benefit reductions. United found that out the hard way before its bankruptcy filing last fall.

Does AMR have a chance to succeed where its Chicago-based rival failed? Neidel said: "At this point, I think it will happen. At this point, if there isn't any further deterioration in the industry, they can avoid bankruptcy."

He is also hopeful on the prospects that the Senate and the House can come to an agreement on some kind of aid bill soon, and get it signed by the president - even though the White House said late Wednesday that the $3 billion Congress is looking for is too expensive.

"The administration does not oppose some assistance for the airlines, but given the economic facts on the ground, we believe that the level of airline assistance recommended by the House and the Senate committees are excessive," White House spokesman Ari Fleischer told reporters.

Neidl is under no illusions that the airlines would be out of the wood, even if they were to get the full $3 billion. At best, he said: "It's a short-term fix. The airlines have to continue to work on their cost structure and their models if they are going to make the assistance work long-term."

Before anything can happen the aid packages - which differ somewhat in their details - still must first be approved by the full House and Senate and then must be reconciled in committee and sent back to the House and Senate for votes on the final versions.

Whether the Republican leadership can get President Bush to change his mind is still doubtful.

"The airlines were trading better," a trader said - but then Bush said the package was too expensive. That may weigh on them in Thursday's trading."

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