Levi bonds better on improved results; Chesapeake, AmeriGas deal details emerge

By Paul Deckelman and Paul A. Harris

New York, April 12 - Levi Straus & Co. bondholders were anything but blue on Tuesday, as the venerable San Francisco-based jeans maker reported better fiscal first quarter earnings, including a swing into the black from a year-earlier net loss. However, those bonds did come off their early peak levels to end only moderately higher.

Auto-supplier names continued on their road downward, in the wake of the troubles besetting U.S. car industry giants General Motors Corp. and Ford Motor Co., with Collins & Akiman Products Co. and Dura Automotive Systems Inc. seeming to bear the brunt of the downturn.

Debt of asbestos-challenged companies was sharply higher after both the Republican chairman of the Senate Judiciary Committee and the panel's ranking Democrat indicated a deal might be near - finally - on setting up a $140 billion fund to pay asbestos related medical claims, which have driven dozens of companies bankrupt over the last few years.

Tuesday came and went with no new issues pricing in the primary market.

However the calendar kept pushing its way to the $5 billion mark in terms of dollar-denominated deals, and well beyond that mark if you factor in the €1 billion-plus presently parked on it.

Again Tuesday it was energy names making the headlines, with Chesapeake Energy Corp. revving up to drive through Wednesday with $600 million of 11-year paper, and AmeriGas Partners LP set to do likewise with $400 million of 10-year notes.

A bid for new paper

"The new issue market has snapped back a little bit," a sell-side source said late Tuesday.

"Nothing significant has priced yet. But it feels pretty firm out there. There is a bid for new paper again."

Conceding that existing issues traded off again during the session, this source contended that the bad news for the secondary market may be good news for the primary at this point.

"The secondary market is volatile," the source said. "But I think there is a little bit of a disconnect between that and whether people are prepared to buy new paper, because ultimately if the secondary market trades down you are picking up your paper cheaper in the primary market."

Chesapeake expected to be blowout

Tuesday's headline grabber, in terms of the primary market, was Chesapeake Energy Corp., which will hold an investor conference call at 10 a.m. ET on Wednesday for its $600 million offering of senior notes due 2016 (expected ratings Ba3/BB-).

Pricing is expected to take place Wednesday afternoon.

Lehman Brothers, Banc of America Securities, Credit Suisse First Boston, Deutsche Bank Securities and UBS Investment Bank are joint bookrunners for the acquisition deal.

The company is also in the market with a concurrent $400 million convertible deal.

Sources told Prospect News late Tuesday that the Oklahoma City natural gas company's deal is likely to be a blowout.

One sell-side source said that the company's existing 10-year paper was trading at 140 basis points over Treasuries, so a low six-handle yield for the new Chesapeake notes seemed like a reasonable expectation.

AmeriGas talked 7% area

Also set to drive through the primary market on Wednesday is AmeriGas Partners LP/Finance Corp.

The Valley Forge, Pa., propane distributor plans to price $400 million of 10-year senior notes (B2), which are talked at a yield in the 7% area.

Credit Suisse First Boston has the books for the debt refinancing deal.

TFM abandons 10-year tranche

Elsewhere on Tuesday, a new structure emerged on Mexican freight railroad company Grupo Transportación Ferroviaria Mexicana, SA de CV's $460 million bond offering.

The company now plans to sell a single tranche of seven-year non-call-four senior notes (expected B2/confirmed B+), which are talked at 9¼% to 9½%. TFM dropped a proposed offering of 10-year senior notes.

Pricing is expected on Wednesday.

Morgan Stanley has the books for the refinancing deal.

An informed source told Prospect News that the new structure reflects the company's preference given the present market conditions, and also reflects demand.

Looking for a reason

A buy-side source who spoke to Prospect News on background Tuesday said that the junk market had been looking for a reason to trade wider, and added that the recent credit scares coming from the auto sector, combined with the Federal Reserve's cautionary language regarding inflation in the U.S. economy, were reason enough.

"In this latest widening, after the GM news, the market had widened out by 80 to 100 basis points," the investor said.

The source went on to say that the expectation that a sizable portion of General Motors Corp. debt could be cut to sub-investment grade gives junk players plenty to think about at present.

"I think that a lot of people are expecting that within six months GM could be cut to junk by two of the three agencies," the buy-sider said.

"Obviously there are some accounts that own GM that are not allowed to own any below-investment-grade debt. I don't know that that is the majority of the situation, though.

"The writing is pretty much on the wall, here. For somebody who can't own it, if it goes junk I believe they have probably already sold a lot of it.

"That's not to say that once it happens the market won't widen further. But certainly a portion of this is already priced into the bonds. The GMAC 2031s are trading around 500 off."

Significant impact

The buy-sider said that should GM paper become junk it would be "a big technical negative" for high yield.

"It's unprecedented," the investor said. "We've never seen that much paper come into the market before. The impact could be significant."

When Prospect News followed by asking whether high-yield investors would tend to feel compelled to own it, the investor said that they will at least have to consider it.

"I don't think all of the GM bonds are going to find their way into high-yield hands because I think there are still investment-grade accounts and other buyers such as pension funds and insurance funds and other asset managers that are still going to own the bonds," the buy-sider said.

"But certainly from a short-term perspective we've seen that when that much money flows into high yield there is a period of adjustment.

"GM is going to be 6% or 7% of the market, in terms of index-eligible securities. If Ford is downgraded it would be another 6%. So you're talking about approximately 12%.

"Even if only one of them gets downgraded, representing 6%, it's unlikely that you are going to see people hold index-type weights of GM. A 6% position is not plausible. And in fact many funds, like mine, have a limitation on a single security holding.

"That is another technical negative. People are not going to be owning index-type weights in GM or GMAC."

Six-percent cash

Based on recent data the investor has seen, the source estimated that the mutual funds are presently sitting on approximately 6% cash.

"That is a decent level of cash," the source added.

"People are a little cautious. There are technical forces weighing on the market, with regard to what is going on in the auto space. High-yield spreads are not at a super-compelling long-term level. But a lot depends on how the credit market holds in.

"The default rate has been pretty low, and is low currently. It's just a matter of where it goes in the future. Most projections indicate that it will pick up slightly, by year-end, to somewhere a little north of 3%. That is still going to be well below the long-term 5% default range that is typical of the market.

"It's tough to make an argument that there is great long-term value here."

Asked if the credit cycle had turned, the buy-sider said: "I think that balance sheets are in pretty good shape, although the pace of improvements has pretty much come to an end.

"I think we have definitely seen the tights for this cycle in the credit markets. I don't think we're going back to the tights we saw at the beginning of this year."

Gardner Denver $125 million acquisition deal

Finally on Tuesday Prospect News learned that Quincy, Ill., compressor manufacturer Gardner Denver Inc. is expected to sell $125 million of high-yield bonds as part of the financing backing its acquisition of Thomas Industries Inc., a Louisville, Ky., compressor company.

The roadshow is expected to get underway in the near future.

Bear Stearns & Co. and JP Morgan will lead the deal.

Open window

One sell-side source said late Tuesday that the high-yield primary market appears to be open, and not just for so-called "defensive" credits, such as the recently seen spate of energy names.

"People think that the window to go out and issue is open," the source said.

"The market is waiting for direction, whether it comes from Treasuries or a big credit event, or a big financing coming together.

"You just have to see how things price and trade because although the calendar is there, none of it has come off of the back end yet."

Levi higher but off peaks

Back in the secondary market, Levi Strauss bonds were "all over the place, on the upside mostly," a trader said, following the release of results for the fiscal first quarter ended Feb. 27, and the company's subsequent conference call.

He saw the Levi 12¼% notes due 2012 moving as high as 112.5 bid during the session, well up from their Monday close at 110.25 bid, 111 offered. However, by the end of the day, those bonds had come back down to close at 111.5 bid, 112.5 offered.

The same up-and-down pattern was seen in the Levi 9¾% notes due 2015, which got as good as 102.75 bid 103.75 offered from Monday's finish at 99.5 bid, 100.5 offered, before giving up most of its gains to close out at par bid, 100.75 offered.

People liked the earnings, and the call, the trader said, "but then they remembered we're in a crappy market and pulled back."

At another desk, a trader said that the bonds "ran up just before the conference call, but then started to come off. The whole market was weak, until the release of the Fed minutes [from the Federal Open Market Committee's March 22 meeting, which reassured the equity market and in turn junk players that the Fed won't be overly aggressive in raising interest rates]. It was probably profit taking" from the early gains that brought the Levi bonds down.

The trader saw the 121/4s firm up to 113 from 110.5 bid, 111 offered on Monday, but said that the bonds then "came off their highs" to end at 111.5 bid, 112.5 offered.

Levi said that net income for the first quarter increased to $47 million - a sharp turnaround from the $2 million net loss seen in the same quarter of 2004. The improvement was due primarily to a $123 million increase in operating income. First-quarter 2005 net sales were $1.006 billion, up from $962 million for the first quarter of 2004, representing an increase of $44 million, or 5% on a reported basis and 2% on a constant-currency basis. On the conference call, the company also noted the benefits from its first-quarter debt transactions, including the issuance of new dollar- and euro-denominated bonds, with the proceeds used to take out an equivalent amount of much higher-coupon notes which had been scheduled to come due in 2008 (see related story elsewhere in this issue.)

Asbestos names jump

Also on the upside - and decidedly so - were asbestos-related bonds, after both Sen. Arlen Specter, R.-Pa., the chairman of the Senate Judiciary Committee, and the ranking Democrat on that panel, Sen. Patrick Leahy, D.-Vt., indicated that they might be able to soon present a bill setting up the asbestos claims trust fund that would be acceptable on a bipartisan basis.

That would be good news for companies like Owens Corning, Armstrong World Industries Inc., and USG Corp., which were all driven to seek shelter under the Chapter 11 umbrella to escape a veritable torrent of asbestos-related medical lawsuits.

The companies are hoping that such a claims fund - to be financed by the companies themselves and their insurers - will provide an adequate mechanism for handing the claims and getting the process out of the courts, where they face the risk of huge damage awards.

Owens Corning's bonds and those of Armstrong were seen hovering in the upper 70s, at least 10 to 12 points higher on the session. USG, whose bonds were already around the 130 mark, was seen about two point better on the news.

Auto names plunge

On the downside, Collins & Aikman "got beat up," a trader said, and Dura Operating "got killed all day," as the automotive supplier sector continued to skid lower following Ford Motor Co.'s earnings warning after the market closed on Friday. The Number-Two U.S. carmaker's alarm followed a similar warning last month by its larger rival, General Motors. The prospect that the two auto giants will keep lowering production to meet sagging customer demand for their vehicles has thrown the bonds of the companies that sell them parts and systems into a funk, perhaps none more than Troy, Mich.-based Collins & Aikman.

The trader saw the Collins 10¾% senior notes due 2011 at 80 bid, and its 12 7/8% subordinated notes due 2012 at 43 bid, 45 offered, both down several points.

Besides the overall malaise in the auto sector, he cited negative mention of the supplier sector in general and Collins & Aikman in particular, in the widely read "Heard on the Street" column in Tuesday's editions of The Wall Street Journal, which said that companies such as Collins & Aikman and Metaldyne Corp. are likely to be hurt by a downturn at Ford and GM.

He saw Metaldyne's 11% notes due 2012 falling to 79.5 bide, 81 offered from 81 bid, 83 offered before.

And he glimpsed Dura's 9% notes due 2009 retreating to 75 bid, 77 offered from 79.5 bid, 80.5 offered.

The trader said that he does not trade Ford or GM bonds - yet - but said that it seemed to him only a matter of time before one or both of the auto giants got downgraded to junk status.

"Whichever one gets cut to junk, it will be a crossover [name] first - but then it will come to me."

At another desk, Ford's bonds - which got banged around on Monday - were seen fairly stable at lower levels Tuesday, with some issues down half a point or so. Some desks are now quoting Ford's still nominally investment-grade rated bonds in dollar terms, as if they were already junk, rather than on a spread versus Treasuries basis.

A source at the desk said that 7 1/8% notes due 2025, for instance, had "pretty much leveled out," and were hanging in around the 80-81 context to which those bonds had fallen on Monday. He saw its 7.45% notes due 2036 in a "79ish-80ish context," down about half a point on the day, while Ford's 6 3/8% notes due 2029 "held pretty steady" Tuesday, after having fallen to around the 72-73 area.

"A lot of things were unchanged, or only slightly lower," he said, although he saw Ford's 7.4% notes due 2046 quoted down three or four points to around 77-78. And Ford's 6 5/8% notes due 2028, were being quoted down as low as 73.25 bid, well down from their recent levels just below 80, although he said others were pegging the bonds at a more moderate 76.75.

Ford said late Friday that its full-year earnings for 2005 will only come in at about $1.25 to $1.50 per share, down from the $1.75 to $1.95 per share previously expected. Ford also said it doesn't expect to reach its goal of $7 billion in pretax profits by 2006. That prompted Standard & Poor's to revise its outlook on the company's BBB- debt - just one small step above junk - to negative from stable previously.

© 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.