Pegasus wings clipped by DirecTV; Affinity, Pliant, Ormat deals price

By Paul Deckelman and Paul A. Harris

New York, Feb. 6 - Pegasus Communications Corp.'s formerly high-flying bonds swiftly fell to earth in Friday's dealings after DirecTV announced that it was ending all mediation of outstanding disputes with the Bala Cynwyd-based satellite programming distributor, prompting Pegasus to angrily accuse the satellite broadcaster of trying to throw a monkey wrench into its efforts to refinance its debt. However, Pegasus was the exception to the general rule in high yield secondary dealings, with most junk bond names rallying after job creation numbers the market viewed as favorable were issued by Washington.

In the primary sphere, the sobering news released late Thursday that some $1.5 billion more had flowed out of high yield mutual funds than came into them in the latest week - the funds are a key barometer of overall junk market liquidity trends - apparently didn't deter such issuers as Pliant Corp., Ormat Funding Corp. or Affinity Group Holding Inc. from bringing their new deals to market.

Back among the established issues, Pegasus Communications' bonds "got clobbered" on the DirecTV news, a market observer said. He quoted the Pegasus 9 ¾% notes due 2006 as having fallen to 86.5 bid from 98 previously, while its 11 ¼% notes due 2010 tumbled to 85.5 bid from 103. At another desk, the 11 1/4s' fall was seen as slightly less pronounced, as it ended at 88.25 bid, down from 102.5. Pegasus' zero-coupon discount notes due 2013 dropped to 77 from 92 previously.

Bond investors weren't the only Pegasus stakeholders to be perturbed DirecTV's move, which essentially scuttles hopes of Pegasus investors that the satellite TV giant might buy out Pegasus, which distributes DirecTV programming to around 1.6 million subscribers in rural markets around the country.

Pegasus' 6¼% convertible preferred tumbled 25 points down to the mid-30s on the news, while the company's Nasdaq-traded stock swooned $13.35 (32.05%) to $28.30, on volume of 4.3 million shares, an astonishing 25 times the normal turnover.

In recent weeks, the company's shares had traded up into the lower 50s, fueled by investor belief that DirecTV might buy out Pegasus to retain control of its subscribers and end a thorny legal battle.

Last year, DirecTV - owned by Hughes Electronics, formerly a unit of General Motors Corp., but now controlled by media tycoon Rupert Murdoch's News Corp. - had reached a settlement of a long-running dispute it had with the National Rural Television Cooperative, a group of distributors, including Pegasus, who resell DirecTV's output in rural markets. Under terms of the accord, subscribers of the various companies would revert back to DirecTV several years from now, and DirecTV would pay the resellers $150 per head. Pegasus objected to the settlement as inadequate and said it would not be bound by it, and the judge hearing the case ordered the two sides to take their dispute to an impartial mediator, who would try to bring them together.

Those talks went months without result, with Pegasus holding out for a higher payment or, some say, a buyout offer. But late Thursday DirecTV said it was breaking off talks and declared that it felt that it could put its fund to better use developing subscribers in more lucrative market rather than overpaying for it termed Pegasus's "declining subscriber base."

DirecTV president and chief executive officer Chase Carey said in a statement announcing the termination of the mediation efforts that "Pegasus has an unrealistic view of its contractual position and, therefore, of its resulting business prospects and fundamental valuation.

"With every day that passes, both Pegasus' significance to DirecTV and its value as a standalone enterprise diminish."

Pegasus claims attempt to hurt financing

Pegasus said that DirecTV was "seeking to intentionally damage the value of our equity and debt securities and thereby interfere with the successful completion of our recently announced financing," which consists of a $100 million add-on offering of new notes and using the proceeds to buy back some existing bond debt.

"Indeed, it would appear from their press release that DirecTV's larger purpose is to seek to acquire our DirecTV business at a substantial discount to the value that our bondholders and preferred equity holders are legally entitled to," Pegasus' statement said.

A trader who called the slide in Pegasus bonds "a meltdown," opined that "it seems to me that at least for now there's not going to be any financing for Pegasus. Unless somebody steps in [to help them], they're going to be in rough shape. Without DirecTV behind them, these guys are nowhere."

Pegasus announced Wednesday plans to offer a $100 million add-on to its 11¼% senior notes due Jan. 15, 2010.

Proceeds will be used to fund the tender for the company's outstanding debt securities maturing in 2005 through 2007. The tender commenced on Jan. 26.

DirecTV firms

While Pegasus's bonds were sliding, DirecTV's 8 3/8% notes due 2013 firmed slightly to 113 bid. The bonds of DirecTV rival EchoStar DBS were "not much moved," a market source said, quoting its 6 3/8% notes due 2011 half a point lower, at 103.5.

Apart from Pegasus, easily the junk market's disaster du jour, the junk market had a positive tone to it, especially after Washington released the latest employment statistics, which showed that non-farm payrolls grow by 112,000 in January - a respectable showing, particularly when compared to the unexpectedly anemic 1,000-job gain seen the month before.

But while it was a sizable gain, it was well under the 165,000 jobs Wall Street had expected - and got debt market players feeling that maybe the Federal Reserve won't be so quick to raise rates after all.

The market resembled "a tale of two cities," one trader said. "In the morning, prior to the employment number coming out, there were no bids. The market was down a point, a point-and-a half. Afterwards, bonds just gapped up, on very little, light volume."

El Paso up on asset sale

He saw El Paso Corp. bonds up two to three points on the session, with the Houston-based energy operator's 7 7/8% Notes due 2012 moving up to 93 bid, 94 offered from offered levels at 91, while its 7½% notes due 2006moved up to 98.5 bid from offered levels around 97.

The trader cited the news, announced earlier in the week, that El Paso had agreed to sell to sell its Aruba refinery and related marine, bunkering, and marketing affiliates to Valero Energy Corp. for $465 million plus working capital of approximately $175 million as of Dec. 31, 2003, resulting in total estimated gross proceeds of $640 million. After retiring a $370 million lease financing associated with the refinery, El Paso will have an estimated $265 million of remaining net cash proceeds, which will be used to reduce debt.

Also on the upside, he said, the airlines, gaining one to two points across the board, with Northwest Airlines' 7 7/8% notes due 2008 rising to 86 bid, 88 offered from 83 bid, 84 offered pre-news.

And he saw Mrs. Fields Original Cookies'10 1/8% notes scheduled to mature in December, firm to 70 bid from prior levels at 65, helped by the company's announcement of a tender offer and exchange offer for the Salt Lake City-based cookie store franchisor's bonds (see Tenders and Redemptions elsewhere in this issue) as well as by the overall post-news positive tone in junkland.

The market, he said, "breathed a sigh of relief" - especially since it had been reeling early on from Thursday's report of the $1.5 billion outflow from junk bond mutual funds in the latest week. But the job news overshadowed that.

'"Everybody was scared to death that the job creation number was going to be pretty bad. They pounded bonds in the morning, worried that a Treasury rate rise is going to hurt high yield. But right after the number was announced, the market just gapped up."

Slow start to primary

Meanwhile in the backwash of the news of a $1.56 billion outflow from high-yield mutual funds for the week ending Feb. 4, reported late Thursday by AMG Data Services, it was "radio silence," from the syndicate desks as Friday's session got underway.

However sell-side sources told Prospect News that by late in the morning the market began to regain its footing.

"Backing up by 25 to 50 basis points"

Three deals priced for approximately $615 million of proceeds worth of business, during Friday's session. And although two of those deals came wide of price talk and the third one came at the wide end of talk, sources were upbeat about the day's transactions.

"Everything seems to be getting done," said one sell-side official late Friday afternoon.

"In light of the outflow news things seem to be backing up by 25 to 50 basis points, but I think that is to be expected."

The biggest of the day's completed transactions was a zero-coupon deal from Schaumburg, Ill. packaging products company Pliant Corp. It sold $306 million of senior secured discount notes due June 15, 2009 (B3/B) at 73.627 to yield 11 1/8% - well wide of the 10¾% area price talk.

The deal, led by underwriters JP Morgan, Deutsche Bank Securities and Credit Suisse First Boston, generated $225.298 million of proceeds.

Elsewhere in the primary market Affinity Group Holding, Inc., a Ventura, Calif.-based provider of products for outdoor and recreational vehicles, priced an upsized $200 million of eight-year senior subordinated notes (B3/B-) at par to yield 9%. The deal was increased from $190 million.

Price talk was for a yield in the 8¾% area on the CIBC World Markets-led deal. So Affinity Group also came wide of the talk.

Finally Ormat Funding Corp., a geothermal energy company based in Yavne, Israel, sold $190 million of senior secured noted due Dec. 30, 2020 (not rated) at par to yield 8¼%.

That deal, via Lehman Brothers, came at the wide end of the 8%-8¼% price talk.

Potential supply continues to build

News of two new deals circulated the market on Friday.

Mrs. Fields Famous Brands LLC and Mrs. Fields Financing Co. Inc. plan to sell up to $121.7 million of seven-year senior secured notes in an offering expected to price in late February or early March via Jefferies & Co.

The size of the new bond deal depends upon the tender and exchange offers which the company commenced on Friday.

The Salt Lake City-based franchiser in the snack food industry will use the proceeds to refinance debt.

And Solon, Ohio-based Erico International Corp., a manufacturer of engineered metal products for niche applications, was heard to be in the market with $135 million of eight-year senior subordinated notes (B3/B-) via Deutsche Bank Securities and JP Morgan.

Erico will also be a debt refinancing deal.

The outflows of summer

Sell-side sources seemed quick to contextualize the large outflow from high yield mutual funds.

More than one source recalled during conversations with Prospect News that during high summer 2003, with the new deal pipeline extensively built up, the funds were reported to have undergone three successive high-magnitude outflows: negative $1.06 billion for the week ending July 30, 2003, negative $2.56 billion for the succeeding week, and negative $1.2 billion for the week after that.

"After those three weeks there was a four-week period where we saw about $5 billion come in," said one sell-side official.

"This time I think the recovery will be somewhat more gradual. But I don't believe that the outflow we saw on Thursday closes the market."

Relieving the pressure

In Friday's edition of Deutsche Bank's strategy organ, High Yield Weekly, that institution's strategists Hunkar Ozyasar, David Bitterman and Andrew W. Van Houten also took note of the outflow.

"Finally mutual funds saw the biggest outflow since August 2003," the Deutsche Bank high yield strategists wrote. "A total of $1.57 billion was taken out of mutual funds, marking the first outflow in 14 weeks. Considering that the cumulative inflow over the prior 14 weeks was under $4 billion, this outflow basically erased 38% of that gain.

"Although this isn't the best news, we are encouraged to see that the secondary trading losses haven't been worse. Also, outflows were long overdue, and as long as they do not turn into a chronic bleeding they will help to relieve the pressure on mutual fund managers to invest an ever-increasing pot of money into a limited bond supply in the high yield market."

Trading of new issues

When the new Pliant 11 1/8% senior secured discount notes due 2009 were freed for secondary dealings, they were quoted as having moved up to bid levels of around 75.5 from their 73.627 issue price earlier in the session.

The new Affinity Group Holding 9% senior subordinated notes due 2012 firmed slightly, to 100.375 bid, from its par issue price.

Among issues which had priced during Thursday's session, a trader saw Argosy Gaming Co.'s 7% senior subordinated notes due 2014 trading around par bid, 100.5 offered, little moved from their par issue price, although another trader later said he'd seen the new Argosy's trading in the 99 range.

He also saw Inverness Medical Innovations Inc.'s new 8 ¾% senior subordinated notes due 2012, which priced at par, as having climbed to 100.5 bid, 101 offered in late Thursday trading, and then adding to that gain Friday to close at 100.75.

Brazil double-whammied by central bankers

Emerging markets sources have been noting the travails of Brazilian sovereign and corporate paper subsequent to the late-January Federal Reserve Federal Open Market Committee meeting from which Wall Street divined the prospect of a looming interest rate hike.

Roberto Sanchez-Dahl, a portfolio manager at Federated Investors, told Prospect News on Friday that the Fed outlook is only part of the problem.

"That, taken in conjunction with the fact that the central bank in Brazil decided to stay on hold on the same day, created concerns about growth in Brazil," said Sanchez-Dahl.

"Basically it has been a continuous downward trend in terms of rates in Brazil. People were expecting further rate cuts because they have been cutting rates quite aggressively in the last nine to 12 months, and the market expected that to continue.

"The main point is that there are really no signs of inflation, so that they were expected to be cutting rates to further help with growth. And the market was taken by surprise by the fact that they decided to remain on hold."

Also on Friday, the expected sovereign deal from the Islamic Republic of Pakistan began to take shape.

Two different marketing teams are expected to start roadshowing the (B2/B) deal on Monday.

Deutsche Bank Securities, JP Morgan and ABN Amro will run the books on the Regulation S-only deal that is anticipated to come at $500 million.

According to an informed source the books are building well.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.