Moody's cuts Tyco to junk; Crown Cork up on asbestos ruling; JLG prices upsized deal

By Paul Deckelman and Paul A. Harris

New York, June 12 - Tyco International Corp.'s bonds have been trading like junk issues for months, and it took a big step towards have ratings to match Wednesday, as Moody's Investors Service downgraded the embattled conglomerate two notches following close on Standard & Poor's threat Tuesday to do the same. But the downgrade to junk status came too late to affect trading in its bonds. Crown Cork & Seal Co. Inc. meantime was the recipient of good news, and its bonds firmed after a positive asbestos case court ruling.

In the primary market. JLG Industries priced an upsized issue of 10-year notes and price talk emerged on three deals that remain to be priced during the rest of the week of June 10.

And while no new issues surfaced Wednesday, one credit resurfaced. Portrait-taker PCA International was heard to be returning with a deal that is smaller than the one it pulled the plug on back in back in late April.

During a conversation with Prospect News on Wednesday Prescott Crocker, manager of the Evergreen High Yield Bond Fund told Prospect News that the recent build-up of the forward calendar (20 dollar-denominated junk bond deals totaling $5.04 billion) should pave the way for "some nice cheap prices."

When Prospect News mentioned during the conversation with Crocker that during the past two weeks two portfolio managers had disclosed that their high yield accounts were running upwards of 25% investment grade credits, his response was "That's smart. They're reaching out before these guys come in, and finding attractive values."

The natural follow-up question, therefore: Is the Evergreen High Yield Bond Fund running any high grade?

"Ten-percent of the fund is high grade," Crocker said. "You go out and try to find an opportunity to make a capital gain."

Although he did not specify which high grades he presently owns, Crocker said that a couple of conspicuous telecoms presently situated north of the credit border were indeed of interest.

"I'm trying to find a time to buy AT&T," he said. "I'm watching it like a hawk. And the parent company of Sprint as well.

"They're trading at the prices of our universe.

"My take is that the whole industry continues to go down. Why shouldn't it take Sprint and AT&T with it, in terms of widening price parameters?

"I have not yet been a buyer of Sprint or AT&T. But I have made it a point of saying: 'You better figure out when you're going to buy. And why.'"

Back on the more familiar side of the credit border, Wednesday, McConnellsburg, Pa. reaching and digging machine-maker JLG Industries, Inc. reached for an extra $25 million from investors who dug its $175 million of senior subordinated notes (Ba2/BB+) sufficiently that the notes priced at par to yield 8 3/8%, at the tight end of the 8 3/8%-8 5/8% price talk. The deal had originally been planned at $150 million. Wachovia Securities and Credit Suisse First Boston were joint bookrunners.

When the new JLG bonds were freed for secondary dealings, they were quoted as having firmed to as high as 100.75 bid from their par issue price, "but then they softened a little from there," a trader said.

And amid the crash-bang of fallen deals from Wyndham, Trump and Hollywood Entertainment, Prospect News heard a "resurrection" story from a market source, Wednesday: Matthews, N.C.-based portrait photography firm PCA International, which postponed its junk bond deal for $200 million of seven-year senior notes (Caa1/B-) on April 26, was heard to be returning.

The new deal is said to be downsized by $40 million to $160 million. Like its predecessor, the new PCA International offering is said to be comprised of Rule 144A seven-year non-call-four senior notes. They have a B- with a positive outlook from Standard & Poor's. And the syndicate, according to the market source, is once again Goldman Sachs & Co. as bookrunner and Banc of America Securities as co-manager. No timing was heard.

Meanwhile Wednesday price talk of 9%-9¼% was heard on Australian yeast-maker Burns Philp's US$450 million of 10-year senior subordinated notes (B2/B), which are expected to price Friday morning, via Credit Suisse First Boston.

Price talk also emerged Wednesday on the two part $350 million offering from Sugarland Tex. homebuilder Technical Olympic USA, Inc. Its $200 million of eight-year non-call-four senior notes (Ba3/B+) are talked at 8½%-8¾%, and its $150 million of 10-year non-call-five senior subordinated notes (B2/B-) are talked in the 75 basis points area over the seniors. The Technical Olympic deal is also set to price Friday, via Salomon Smith Barney.

Finally, price talk of 8 5/8%-8 7/8% was heard on Methanex Corp.'s split-rated offering of US$200 million 10-year senior notes (Ba1/BBB), which are expected to price Thursday afternoon via Goldman Sachs.

Although terms were expected Wednesday on AmeriCredit's $300 million of seven-year senior notes (Ba1/BB-), via joint bookrunners Bear Stearns & Co. and JP Morgan, no terms were available as the Prospect News High Yield Daily went to press after the close of the session.

Hence, figuring AmeriCredit into the sum, four high yield deals (four Bs or lower) are expected to price Thursday, for a total of $975 million.

Back among already trading issues, Tyco had been heading for junkbondland for months, as its shares and bonds steadily moved southward after the sprawling Bermuda-based conglomerate first embraced a strategy under which it would break itself up as a means of maximizing shareholder value, only to later do an abrupt about-face and abandon the plan as an ill-timed "mistake." On top of that, its plans to sell its CIT Group financial services arm had to be scrapped in favor of a spin-off and initial public offering, and chief executive officer Dennis Kozlowski was forced to quit under fire and was subsequently indicted on tax charges - and that probe has now widened to scrutinize whether the company played any part.

Moody's cited Tyco's laundry-list of troubles in its announcement that it had chopped the ratings on the company's senior unsecured bonds to Ba2 from Baa3 previously.

The rating agency said that "possible further management changes, emerging from adverse developments of corporate governance issues, could divert management focus from the core business and hinder the company's ability to restore confidence of its customers, suppliers and investors." Moody's noted that Tyco "is expected to proceed with the planned IPO of its CIT subsidiary, which should bring needed cash to begin debt reduction. However, even with the anticipated debt reduction from the CIT transaction, the potential risks attendant to the widening array of management and corporate governance issues at Tyco render the company's credit profile inconsistent with an investment grade rating."

The downgrade, however, came after bond trading had pretty much wrapped up for the day and thus had no impact on the day's dealings.

Prior to the downgrade, a market source said, Tyco's bonds "went down, then rallied a bit, but were still down about two points on the day." He quoted its 6¾% notes due 2011 down two points to 71.5 bid, while its 5.80% notes due 2006 were a point lower at 74.5.

A trader quoted Tyco's 6 3/8% notes due 2005 at 78 bid, and saw its 6 3/8% notes coming due later this year at 95 bid/96 offered - both levels recorded before the Moody's downgrade. He opined that "I think that you will see them [fall Thursday]."

Or maybe not. Tyco's shares fell to a 6-year intraday low of $8.30 Wednesday in New York Stock Exchange dealings, before bouncing off that nadir to end at $10.15, still 90 cents (8.14%) lower, on volume of 129 million shares, almost five times the norm. In after-hours trading, however, those shares shot as high as $13.10, a 29% gain, prompting several participants to wonder what was going on.

What was going on, as it turned out, was news that the Securities and Exchange Commission had - finally - cleared the way for Tyco's long-awaited and badly needed initial public offering for CIT Group. Proceeds from the IPO are slated to be used to ease a feared liquidity crunch at Tyco.

Still, debt-siders remain a bit more skeptical than equity players about Tyco's prospects; Standard & Poor's has warned that Tyco must launch the IPO - which the company said last week might have to be delayed because of lingering SEC questions about accounting for CIT's goodwill - within the next two weeks, or face a possible downgrade to junk status. S&P currently rates Tyco's bonds at BBB- with negative implications.

Tyco announced late Wednesday that it had agreed to restate its fiscal second-quarter results to account for about $4.5 billion related to the impairment of goodwill at CIT, thus resolving the SEC's questions and gaining the OK for the IPO.

Elsewhere, CMS Energy Corp. debt continued to retreat in the face of the three-notch downgrade which Moody's laid on the Dearborn, Mich.-based electric power producer and trader late Tuesday, after the markets had closed.

CMS debt had already been falling Tuesday on lingering fallout from its recent revelations of bogus "round-trip" power trades with other companies that artificially inflated volume statistics and revenue figures.

CMS debt "got killed, down at least 10 points," one market-watcher said, although its decline was estimated at a slightly more conservative six to seven points at another desk, where the company's 7½% notes due 2009 were seen as having fallen to around 82 bid.

CMS shares, meantime, dropped as low as $11.75 during the day - the lowest level they'd seen since the Wall Street crash of October, 1987 - before coming off those lows to end at $13.01, still down $2.10 (13.90%) in busy NYSE trading of 7.73 million shares, about five times normal.

The Moody's move, which dropped the company's senior unsecured bonds to B3 from Ba3 previously, followed Tuesday's announcement by former auditor Arthur Andersen that its 2000 and 2001 opinions about the company's results could not be relied upon, given the recent disclosures about the "round-trip" sham power trades.

Additionally, the ratings agency said, "the downgrades reflect CMS's weak cash flow and high debt levels, as well as limited financial flexibility and the challenge of refinancing upcoming debt maturities including the company's $450 million credit facility that comes due on June 15, 2002." With that deadline starting it squarely in the face, CMS asked its lenders for a four-week extension during which a rollover could be worked out.

While things were looking pretty bearish at CMS, it was just the opposite at another junk-rated power producer, AES Corp., which announced plans to sell its stake in AES NewEnergy to Constellation Energy Group for $240 million. In a conference call later in the session, company officials were reported to have said that the deal would free some $30 million in bank credit and reduce potential energy-trading risk by as much as $295 million.

Arlington, Va.-based AES's 8 3/8% notes due 2007 were being quoted up as much as six points on the session to 51 bid, while at another desk, the company's 9 3/8% notes due 2010 were seen up a more restrained two points, to 68.5 bid.

Crown Cork & Seal's bonds firmed after a court in its home base of Philadelphia threw out 376 asbestos liability cases against the packaging company.

A trader quoted its 6¾% notes due 2003 as having jumped to 90.5 bid/91 offered from prior levels in the low 80s, while its 7 1/8% notes coming due this Sept. 1 were a point-and-a-half better, at 98 bid/99 offered.

The 376 cases involved in Wednesday's ruling are just a small fraction of the more than 66,000 asbestos-related suits brought against the company, which got involved in the asbestos mess because of its acquisition more than 40 years ago of Mundet Cork Co., a maker of cork bottle-cap liners which - long before its acquisition by Crown - had an insulation division that made products with asbestos, which at the time was not considered hazardous. Despite the fact that Mundet's asbestos activities long pre-dated its connection with Crown Cork & Seal, which itself never made any asbestos products, Crown Cork & Seal legally is the successor company. However, a new state law caps a Pennsylvania-based successor company's merger-derived asbestos liabilities at the total value of the merged company's assets. It's not immediately known what effect the ruling may have on the mountain of still unresolved asbestos cases Crown Cork is a party to.

Still, "this is obviously good news" for Crown Cork, the trader noted; the firm is one of the few high-yield companies with asbestos liability exposure issues that has not already scurried for bankruptcy court protection.

"They had run up so much already," he said of the September '02s, "but every piece of news helps because they have to take those bonds out soon."

A trader saw Adelphia Communications Corp.'s bonds "a little better as the day wore on, noting, only partially in jest that "it's been a few days since the latest revelations of book-cooking" at the troubled Coudersport, Pa.-based cable company. "Maybe things are dying down a bit."

He quoted Adelphia's 10 7/8% notes as having pushed up to 47 bid from prior levels around 44.75 bid/45.5 offered.

Argosy Gaming's 9% notes due 2011 dipped to 102.5 bid, down a point and its 10¾% notes were a point lower at 107.75 bid; meantime, its shares fell $2.57 (8.94%) to $26.18, on investor concerns that Indiana's state legislature might follow the example of Illinois and sharply increase state gaming revenue taxes. While the lower house of the legislature passes a bill that gave something back to the gaming companies, such as allowing gambling riverboats to operate while docked, the state Senate version of the bill dropped that provision.

Argosy is a major riverboat gaming operator in the Hoosier state.

Shares of a number of other gaming concerns went down Wednesday in sympathy, although there wasn't much action in their bonds.

But one gamer which also has riverboat operations in Indiana was unaffected by the political news, as Trump Hotel and Casino Resorts Inc. Investors focused instead on the news that the company had secured a $70 million loan, which will be used to retire $62 million of Trump Castle Funding debt and a $5 million working capital loan due next year.

Trump investors "are more concerned about the short-term capital structure" of the debt-laden Atlantic City, N.J.-based gamer "than they are about something that may or may not happen somewhere down the road in far-off Indiana," a trader noted, adding that the Indiana revenues make up only a small part of Trump's operations.

Little movement was seen in either the bellwether Trump A.C. 11¼% first mortgage bonds due 2006, quoted around 75 bid, or the Castle's 11 ¾% notes due 2003, hovering around 88.5.

Trump shares, however, rose 20 cents (8.51%) to $2.55.

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