Upsized Dynegy deal, Graphic Packaging lead primary; FHC Health scrubbed

By Paul Deckelman and Paul A. Harris

New York, Aug. 1 - Dynegy Inc. brought its long awaited billion-dollar-plus mega-deal to market Friday, actually upsizing the three-part offering to $1.45 billion. Another notable new dealer was Graphic Packaging International Inc. (in reality, Riverwood International Inc., into which Graphic Packaging is being merged), which sold $850 million of new bonds. Smaller deals were heard to have priced from Southern Star Central Corp. and Vale Overseas Ltd. Along with the deals that did go was the one that didn't - as FHC Health Systems Inc. pulled its planned $250 million offering.

In the secondary market, it was the same old story as had been seen over the previous several sessions, with the glut of new paper both expected and having actually priced, combined with the continued pasting that Treasuries have been taking, combined to push prices of existing debt lower. Another negative factor, traders said, was the $1.06 billion high yield mutual fund outflow seen in the week ended Wednesday - the biggest net outflow since late May, and the first of more than $1 billion since all the back in September 2002.

But despite that outflow, seven tranches in four deals were transacted during Friday's session in the primary market, resulting in total proceeds of $2.77 billion.

The lion's share came from Dynegy's upsized $1.45 billion; the company priced two fixed-rate tranches and a floater, although talk widened substantially on the deal before it got done.

And the final session of the July 28 week did produce evidence that the market is experiencing some backup as FHC Health pulled the plug on its $250 million eight-year notes (B3) offering, citing market conditions.

Nevertheless, for those inclined to seek the silver lining, the $2.77 billion that priced Friday represents a greater amount than priced during any entire month (!) of 2002's third quarter; July 2002 saw $1.30 billion in seven deals, August 2002 saw $1.18 billion in six deals and September 2002 saw $2.45 billion in 10 deals.

As Friday's session got underway word circulated the market that the price talk was being revised on the Dynegy deal.

When the dust settled the rumors turned out to be true.

Dynegy upsized to $1.45 billion from $1.325 billion its offering of second priority senior secured notes deal (B3/B-) and priced it as follows: $525 million of 9 7/8% seven-year fixed-rate notes priced at 99.371 to yield 10% (revised price talk was 10% area, from 9½%-9¾%); $700 million of 10 1/8% 10-year fixed-rate notes priced at 99.217 to yield 10¼% (revised talk was 10¼% area, from 9¾%-10%); and $225 million of five-year floating-rate notes priced at par, with an interest rate of Libor plus 650 basis points (revised talk was Libor plus 650 basis points area, from Libor plus 600-625 basis points).

Credit Suisse First Boston was bookrunner on the deal.

In addition to Dynegy, Graphic Packaging Internationalsold $850 million in a two-tranche issue of high-yield bonds during the session.

The company sold $425 million of eight-year senior notes due (B2/B-) at par to yield 8½%, wide of the 7¾%-8% talk, and also $425 million of 10-year senior subordinated notes (B3/B-) at par to yield 9½%. Talk put them 100 basis points behind the senior piece.

Terms were also heard on Southern Star Central Corp.'s $180 million of seven-year senior secured notes due (B1/B+). It priced via Lehman Brothers at par to yield 8½%, in the middle of the 8½% area talk.

And emerging markets issuer Vale Overseas Ltd., a wholly owned subsidiary of Brazilian iron ore producer Companhia Vale do Rio Doce, sold $300 million of 9¼% 10-year unsecured unsubordinated notes (Ba2) at 98.386 to yield 9¼% via Deutsche Bank Securities and Morgan Stanley.

Toward the end of the July 28 week - and especially in the wake of the outflow reported Thursday - market sources began advising Prospect News that the new issuance calendar would likely begin to see some casualties, and the first one appeared Friday.

FHC Health Systems, Inc. postponed its offering of $250 million eight-year notes (B3) on Friday, citing market conditions. The Citigroup and Goldman Sachs-led deal had been talked at 10¼% area.

However the session saw three new issuers emerge.

A two-day roadshow is set to commence Monday for Fisher Scientific International Inc.'s offering of $200 million 10-year non-call-five senior subordinated notes (B2/B+), which are expected to price on Wednesday via JP Morgan.

The roadshow started Friday for Monitronics International Inc.'s $200 million of seven-year senior subordinated notes which are expected to price early in the week of Aug. 11 via Banc of America Securities.

And Calpine Corp. announced plans for yet another bond offering along with a new term loan, although a source told Prospect News the entire transaction will be priced off the bank loan desk.

In the transaction, Calpine Construction Finance Co. LP will bring a $750 million offering comprised of $450 million of eight-year second priority secured floating rate notes and $300 million of six-year first priority secured institutional term loans. Goldman Sachs is the lead for the offerings.

During Friday's session Prospect News made contact with Barclays Global Investors high yield portfolio manager Tom Parker to get the investor's opinion as to why the previously rallying market had turned south, with outflows from the funds and a bid reported to be largely absent.

Parker's e-mail response cited six causes:

"1. The large amount of new deals slowing down the market.

"2. Rising rates caused the sell off of double-Bs early in the month, which has worked it way down the credit spectrum.

"3. The above slowed down the momentum of high yield, so market timers have begun to exit.

"4. Some players (hedge funds, dealers) were most likely borrowing short and buying high yield on a levered basis; with the rise in rates they have had to reverse this trade.

"5. Second half (specifically July-November) has historically been weak relative to the first half. I believe part of this is that the new issue calendar tends to build throughout the year, but institutional investors tend to allocate to high yield at the turn of the year. There is also a tendency of volatility to rise in the second half, and rising vol is bad for high yield.

"6. High yield is an illiquid-quoted market. Dealer quotes tend to overshoot when there are more buyers than sellers and then reverse dramatically when sellers appear. So even if no trades have occurred, the high yield indexes will fall quickly.

"It is interesting to note that the factors that have caused Treasury rates to rise all indicate that the economy will grow faster than expected and that inflation will be higher than expected, both of which are bullish for high-yield bonds," Parker added. "When defaults are falling, high yield tends to outperform other fixed income securities, and the recent news gives more confidence that defaults will continue to fall."

When the new Dynegy bonds were freed for secondary market activity, the 9 7/8% second priority senior secured notes due 2010, which had priced at 99.20 earlier in the session, were quoted little changed at 99.25 bid, 100.25 offered. The new 10 1/8% notes due 2013 were at 98.75 bid, 99.75 offered, down slightly from their 99.217 issue price.

If the recent behavior of other new issues is any indication, the new Dynegys are unlikely to see their issue price again once they begin trading around in earnest.

Over the past week or so, what had been a sizable list of recently priced issues which had been trading at least two points or more north of their issue price, has dwindled down to a precious few, such as Jacuzzi Brands' 9 5/8% senior secured notes due 2011 and Rockwood Specialties Group Inc. 10 5/8% senior subordinated notes due 2011, both still bid around 102, well below their previous peak levels in the 104-105 levels.

Conversely, what had been a relatively short list of new issues trading at least two points worse than their issue price - mostly consisting of the three tranches of Calpine Corp. bonds, which have gotten hammered down pretty much since Day One - now includes such names as Cincinnati Bell Inc., Western Wireless Corp., Vivendi Universal, Danka Business Systems Inc., IMC Global Inc., Payless Shoe Source and United States Can Co.

But the worst of the bunch remains Calpine, its three tranches down a full 12 points since having priced at par on July 10.

A trader who noted the sharp slide that the Calpine bonds have taken - and the somewhat lesser declines seen in other issues as well - opined that "the Street is just full up with merchandise, and some investors are just throwing in the towel, taking their losses. It's getting a washout."

He said that this has produced some interesting situations, with "some [new] issues that we haven't seen in a while now reappearing for sale. Paper that you couldn't find a week or two ago is now readily available.

Issues that fall into that category include such off-the-beaten-track deals as Le Nature Inc. or Psychiatric Solutions Inc. - small deals from not-so-well-known issuers which priced weeks ago and were quickly put away - only to re-emerge now. "People are just barfing things up."

"Everything is going down," a second trader said, "everything is weaker."

Even as its new bonds have moved to below 90 bid, Calpine's established debt "was getting kicked in the teeth," he said, with its 8½% notes due 2011 cascading down to 69.5 bid, 70.5 offered from 71.75 bid, 72.5 offered on Thursday.

The recently priced Nextel Communications Inc. 7 3/8% notes, which had been seen around 97 bid, 98 offered, ended Friday at 95.5 bid, 96.5 offered.

Also among the communications-related names, Lucent Technologies Inc.'s 7¼% notes due 2006 were three-quarters of a point lower, at 92 bid, 93 offered, while XM Satellite Radio's zero-coupon/14% notes were down about the same amount to 71.75 bid, 72.75 offered.

Outside of the telecom and communications operators, it was still pretty rough. The trader quoted Allied Waste's 10% notes due 2002 down more than a point to 104.5 bid, 105 offered from 105.5 bid, 106.5 offered, after the Scottsdale, Ariz.-based Number-2 U.S. waste disposal company reported late Thursday that second-quarter net earnings fell 84% from a year ago to $5.4 million (3 cents a share), versus $33.9 million (18 cents a share) a year earlier. Wall Street was looking for about 13 cents a share, and the disappointing results trashed the company's shares more than 10% in Friday's activity.

However, the trader cautioned that he didn't know whether Allied was down because of the soggy numbers or just because "it was the kind of day that even if you had positive earnings, bonds were down a point or so."

Another trader said that "with a billion-dollar-outflow and the calendar still building up, everything is sliding" - a retreat made even more pronounced because overall trading activity is pretty thin, with many people away on mid-summer vacation and even those in their offices not choosing to be very active on a summer Friday afternoon, especially with the continued abuse the Treasury market has been taking lately from panicky fixed-income investors.

"Everything was just sliding," he said, noting for instance, that HealthSouth Corp.'s 2011 and 2012 paper, which had been quoted around 84 bid, 85 offered at mid-week, was going home Friday at 80 bid, 81 offered.

Charter Communications Holdings LLC's 8 5/8% notes due 2009, he said, which had risen smartly to bid levels in a 75-76 context Thursday in response to the St. Louis-based cable operator's second-quarter results (narrower than a year ago), plus assurances from management that they were making increasing free cash flow a priority, and changes in the company's pending tender offer for its bonds, moved back down to around 72.5 bid, 73.5 offered.

Penn National Gaming Inc. announced that its underperforming Hollywood Casino Shreveport subsidiary would not make scheduled Aug. 1 interest payments totaling $12.3 million due on the unit's 13% senior secured notes due 2006 and the 13% first mortgage notes due 2006. Standard & Poor's reacted by cutting Hollywood Casino Shreveport's debt ratings to a defaulted D, and the Hollywood Shreveport bonds were quoted at 58 bid, down about seven or eight points on the session. Parent Penn National's 11 1/8% notes due 2008 lost two or three points, to end at 107 bid.

Overall, one of the traders said, "you had a lot of grumpy people out there, who couldn't be very happy with what was going on. High yield is now catching up to the rest of the bond market. It had to happen sometime."

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