Upsized Kansas City Southern deal prices, bonds move up; Ford optimism aids debt; American Media slides

By Paul Deckelman and Paul A. Harris

New York, Dec. 16 - Kansas City Southern Railway Co. successfully priced what could be the last real new deal of an otherwise pretty sorry year for the junk bond market early Tuesday. As has been the case with several other recently priced issues, the offering - already carrying a double-digit coupon - priced at a step discount to par to further boost yield to entice gun-shy investors to take the risk.

When the new bonds moved into the secondary market, they immediately firmed solidly.

Ford Motor Co.'s bonds were seen solidly better, as the Number-Two domestic carmaker said it faced no short-term liquidity problems and has no plans to make any unusual efforts to cut its bond debt. It also said that it expects to draw some interest in a possible sale of its Volvo European car line.

Also in the automotive arena, GMAC LLC's bonds were mostly better, as the Detroit-based car-loan financing and mortgage provider rode the momentum from Monday's advance, helped by the improved prospects for its debt-exchange offer to its bondholders.

MGM Mirage, which was already doing better Monday after announcing a big asset sale, continued to push upward in line with a generalized uptrend in the gaming issues, which have been hard hit by the economic slowdown and whose investors hope the latest Federal Reserve moves to stabilize and strengthen the volatile, weak economy and restore the gamers to their former profitability.

On the downside, American Media Inc.'s bonds tumbled, as the Florida-based tabloid newspaper publisher was continuing its talks with the holders of its bonds, including an issue coming due in May, and extended its tender offer for those bonds.

Kansas City Southern: now rather than later

Terms became available Tuesday morning on the Kansas City Southern Railway Co. bond deal, the first issue of the week, and the second in as many weeks in a junk bond market which has been averaging approximately one corporate deal per month since September.

Kansas City Southern priced a $190 million issue of 13% five-year senior unsecured notes (B2/BB-) at 88.405 to yield 16½% on Monday.

The deal was oversubscribed, according to Ginger Adamiak, general director of investor relations for Kansas City Southern.

Although the face amount of the issue was upsized from $175 million, the proceeds, $164.17 million, were in line with the $150 million to $175 million range that the company intended to raise, Adamiak added.

The yield came at the tight end of the 16½% to 16¾% yield talk, while the coupon came on top of talk.

Morgan Stanley was left bookrunner, and Banc of America Securities was the joint bookrunner.

Twice the price

The 16½% yield on the new Kansas City Southern senior unsecured notes due 2013 is more than twice the yield printed earlier this year when the company brought to market a $275 million issue of 8% senior unsecured notes due 2015 at par in late May.

"That is how much the markets have changed in a very short amount of time," Adamiak commented.

The Kansas City Southern general director of investor relations said that Monday's deal went as well as can be expected, but added that the 16½% interest rate is much higher than anything else on the company's balance sheet.

Now or later

Kansas City Southern needed the cash to address a $200 million issue of 7½% notes maturing in June 2009, and decided that it would be prudent not to wait in the hope that market conditions might improve in the early part of next year.

"Maybe January will be better, but maybe GM and others will go bankrupt," Adamiak pointed out.

"There is so much uncertainty out there. And the markets are tight. People are being very conservative.

"So we just went."

Adamiak added that the deal-runners assured Kansas City Southern that the issue could get done, but had warned that the price would be high.

Callable at par plus full coupon

Knowing that Kansas City Southern would get stuck with a high coupon the company went into the transaction determined to price a callable piece of paper.

"A few weeks ago they said there was absolutely no callable debt," Adamiak recalled, adding that more recently it seemed uncertain as to whether the company might succeed in pricing a callable bond.

Although the new 13% senior unsecured notes due 2013 are callable, the three-year call at 113 - par plus the full coupon - makes the notes economically more or less uncallable, Adamiak conceded, adding that naturally the company went into the deal seeking a conventional call at par plus half the coupon.

"It's a matter of how much better the markets get [by 2011], as to whether it's worth calling or not," the investor relations general director said.

Perhaps it is notable that in the next to last corporate deal to price in the high-yield primary, El Paso Corp.'s new 12% senior notes due 2013 (Ba3/BB-) which priced one week ago at 88.909 to yield 15¼% in a $500 million issue, the notes were non-callable.

As with Kansas City Southern, Morgan Stanley ran the books for the El Paso deal.

New bonds trade up

A trader said that the new Kansas City Southern 13% notes due 2013, which priced at 88.405 and which then began moving up solidly as soon as they were freed for secondary action, "continue to do well."

He saw the new bonds trade as high as 92.25 bid, and saw them left in a 92-93 range.

The company's outstanding 7½% notes slated to come due next June and which are to be taken out using the proceeds of the new deal, were meantime seen trading up around a point on the session at the 99 level.

The exchanges

On the restructuring front Neff Corp., which extended the expiration date for its exchange offer by one day to Tuesday from Monday, announced that a judge has denied a request for a temporary restraining order against the deal.

The plaintiffs in the case, lenders under Neff's second lien credit agreement, filed a complaint in the Supreme Court of New York seeking to enjoin Neff's exchange deal, alleging that it constitutes a breach of the inter-creditor agreement.

Neff stated that it believes that the complaint is without merit, and that it intends to proceed with the exchange offer and vigorously oppose the plaintiffs' claims.

The news on the Neff deal follows the withdrawal of the Station Casinos Inc. exchange deal on Monday.

The over-riding challenge for the Station Casinos deal was that bondholders organized and created a blocking group that prevented the deal from happening, according to an official on an investment bank's restructuring desk.

This source added that corporate law firms, partly due to the present lack of significant opportunities elsewhere, have taken to organizing the bondholders in the recent spate of exchange deals.

One result is that bondholders, traditionally known as susceptible to being divided and conquered, lately are working together to block issuers' initial terms, and negotiating for more consideration.

Market indicators move up

Among issues not having new-deal connections, the widely followed CDX High Yield 11 index of junk bond performance, which lost 1/8 point on Monday, rose by ½ point on Tuesday, with a trader quoting it at 72¾ bid, 73¼ offered. The KDP High Yield Daily Index meantime was up 5 bps at 47.18, while its yield tightened by a whopping 24 bps to 17.35%.

In the broader market, advancing issues held their lead over decliners, beating them by around a 10-to-nine margin. Overall market activity, reflected in dollar volumes, was up 13% from the pace seen in Monday's session.

Junk seemed to get an overall lift from the powerful surge in equities seen after the Federal Reserve announced its 75 bps cut in the federal funds target rate, lowering it from 1% previously to a range of between zero and 0.25%, the lowest level on record for the key rate at which banks borrow money from one another. Additionally, the central bank, in its customary post-meeting communiqué, said it would use "all available tools" to jump-start the economy.

The larger-than-expected rate cut - Wall Street was generally expecting a 50 bps decline in the fed funds rate to 0.50% -- coupled with the Fed's pledge to use other methods as well to stabilize the economy, now that its interest-rate cuts have gone about as far as they can go - heartened shares, which shot right up, causing the bellwether Dow Jones Industrial Average to zoom 359.61 points, or 4.20%, to end at 8,924.14. Broader indexes did even better, with the Standard & Poor's 500 index gaining 5.14% and the Nasdaq composite climbing 5.41%.

A trader said that "overall, it was a pretty light day ahead of the Fed," although he saw "a little bit of an increase in activity" after the 2:15 p.m. ET central bank announcement.

A senior high-yield syndicate official noted that junk saw a late Tuesday rally, tracking the stock market.

However, the syndicate source warned, with effectively just two or three trading sessions remaining before 2008 comes to a close, the capital markets could come under material pressure if, as has been anticipated, funds that have been mandated to move exposure by year-end push to liquidate positions.

Another syndicate source remarked that the early part of the final full trading week of 2009 saw the fourth corporate high-yield deal in as many months price in the new issue market.

MGM Mirage momentum continues

A trader said that "things were a little better here, post the [Fed] numbers," for instance seeing MGM Mirage's 13% notes due 2013 trade up to a bid level above 92; those bonds had priced back on Oct. 31 at 93.132, but then began sliding after that, hurt by the overall junk market downturn in November as well as the continued weakness in the gaming sector specifically. After bottoming out in the low 80s late in November, they have been inching back upward.

Las Vegas-based MGM got a boost on Monday when the company announced plans to sell its pirate-themed Treasure Island Hotel and Casino Resort on the famed Vegas Strip to billionaire gaming tycoon Phil Ruffin for $775 million, $500 million of it in cash and the other $275 million in secured notes. That had pushed the 13s up 3 points on the session to 91 bid, and lifted the company's other bonds as well.

Continuing that momentum on Tuesday, MGM's 6% notes coming due next October were up more than a point at 91 bid, while its 8½% notes due 2010 were seen 3 points better at the 75 level.

MGM's New York Stock Exchange-traded shares meantime jumped $1.98, or 17.22%, to end at their day's-high level of $13.48, on volume of 7 million, about 40% above the norm. Stocks of other gaming companies, like Wynn Resorts Ltd. and Las Vegas Sands Corp., were also higher on hopes the Fed move would help the economy.

The former's Wynn Las Vegas LLC 6 5/8% notes due 2014 were up 1 1/8 point Tuesday to 72 bid, on busy trading of about $10 million.

Ford gains on stable liquidity status

Among the automotive names, Ford's bonds were stronger, as the company said it has no short-term liquidity problem, is not considering any efforts to reduce its unsecured debt - meaning that it would be unlikely to embark upon the kind of debt exchange some junkers have been doing lately that would compel bondholders to accept less than face value for their bonds - and is also considering options for its Volvo car business and expects to generate some interest if the Swedish carmaker is put up for sale.

Ford's 7.45% bonds due 2031 jumped to 25 bid, up 3 points on a round-lot basis versus Monday, and up 5 points from Monday's closing odd-lot level, on busy trading.

Ford's chief executive officer, Alan Mulally, said in a CNBC interview Tuesday that said he sees signs that the auto market has stabilized and hopes for an industry recovery in the second half of 2009 - although he also acknowledged that for now, sales remain weak, based on the carmaker's reports of December sales so far.

In a separate Bloomberg TV interview, the Ford CEO also said that his company isn't considering an effort to reduce its unsecured debt, saying that even without exercising that option, "we have a plan to make it through the recession and get back to profitability in 2011 and begin repairing the balance sheet."

Another Ford exec, Mark Fields, who heads the company's operations in the Americas, speaking at a company event at its Dearborn, Mich. headquarters, said that Ford - unlike cash-strapped arch-rivals General Motors Corp. and Chrysler LLC, -- has no short-term liquidity problems, although it is hopeful that the Bush administration will move quickly on requests for emergency funds from the U.S. automakers. While GM and Chrysler each say they need several billion dollars in loans right away to keep from running out of money by year's end, Ford has said it does not need any immediate cash infusion, but would like to have a $9 billion standby line of credit for use should it need it.

Fields also said that Ford is looking at strategic options for its Volvo unit, although he would not comment on whether the company is talking to other automakers about a possible sale of the Swedish luxury car manufacturer. Mulally, also at the Dearborn event, said that he expects lots of interest in the brand from possible buyers, and that "even though times are tough, there are a lot of people who would love to have that brand."

GMAC bonds stay mostly firm

A trader meanwhile saw GM's 49%-owned financing unit, GMAC's bonds holding their own, riding their momentum from Monday's gains, with its 8% bonds due 2031 hitting a round-lot high of 33 bid, leaving them unchanged on that basis, and then being quoted late in the session in odd-lot trading at just under 32 bid, up around a point on the day.

Among the shorter-dated issues, GMAC's notes due 2011 were up nearly 3 points at just below 48 bid, and its 6 7/8% notes due 2012 were 3 points better at 42 bid. However, the company's 5 5/8% notes coming due in May were down a deuce at 71 bid.

GMAC's busiest bonds, its 7% notes due 2012, saw a high print of 46 during the session before closing on a round-lot basis at 45, up some 3 points on the day. Several smaller trades later on, however, left the bonds actually down slightly on the day, just below the 42 mark. Over $10 million of the bonds changed hands.

The GMAC bonds continued to ride the momentum from Monday, when they had risen across the board after the company said that holders of about $10 billion of their bonds had endorsed sweetened terms for GMAC's pending offer to exchange new debt, preferred stock and cash for those existing bonds. GMAC is hoping to get participation from the holders of at least 75% of the $38 billion of outstanding GMAC and Residential Capital LLC bonds it is trying to take out, a necessary step for GMAC's plans to convert itself into a commercial bank able to access federal bank bailout funding. Before improving the offer, only about 25% of the bonds had been tendered. While the additional bondholder support does not yet put GMAC over the top, it is seen as a large step in the right direction for the debt-laden company.

In Tuesday's dealings, several GMAC issues made the most actives list, as the company's paper was far busier than that of corporate parent GM, which saw only restrained trading.

With investors eagerly awaiting the details of a White House-sponsored auto industry bailout - president George Bush said that he is "considering all options," although Treasury secretary Henry Paulson said that the carmakers will get their lifeline from the government as soon as it's "prudent" - GM's benchmark 8 3/8% notes due 2033 were seen firmer, with a market source pegging the bonds going home at 15.5 bid on a round-lot basis, versus 14 late Monday.

However, the source had GM's shorter paper lagging behind, with its 8¼% bonds due 2023 down more than 2 points on the day at around the 13 level, and its 7 1/8% notes due 2013 also off more than 2 points, at 39.

Tech names tumble

A trader said that he saw "weakness in the tech sector," with Seagate Technology's 6 3/8% notes due 2011 languishing in the lower 70s, down about 4 or 5 points from recent levels, following a Standard & Poor's ratings downgrade of its Seagate Technology HDD Holdings unit.

He also saw Amkor Technology Inc.'s 9¼% notes due 2016 off a couple of points to around the 50 region.

Another trader said that the Chandler, Ariz.-based semiconductor packaging and testing services provider's bonds "opened up down 5-6 points" on Tuesday, "then bounced, to down 1½ points on relatively no news."

He said he did not know why the bonds were on the slide. However, he declared that Amkor was "the only real thing I saw in terms of price action."

Amkor's 7 7/8% notes due 2013 finished at around 49 bid, a 3 point drop, while another market source, seeing the bonds at that same level, said they were 5 point losers

American Media mauled

American Media Inc.'s 10¼% notes slated to come due in May were seen down 10 points on the session at 30 bid, as the supermarket tabloid publisher extended for another month to Jan. 15, its pending tender offer for those bonds and its 2011 notes. It meantime said that it remains in talks with lenders holding more than a majority of the borrowings under its operating unit's credit facilities and bondholders holding more than a majority of each series of the notes, and "believes substantial progress continues to be made toward achieving a financial restructuring and significant delevering of the company."

RathGibson bonds routed

Also on the downside, a market source reported a steep fall in the rarely traded 11¼% notes due 2014 issued by RathGibson Inc., a Lincolnshire, Ill..-based maker of metal pipe and tubing products.

Those bonds - which had last been seen in a mid-90s context all the way back in the summer - were being quoted Tuesday having tumbled into the high 20s on several large-block transactions.

There was no immediate news seen out about the company which might explain the sharp fall.

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