Gap, retailers fall on continued West Coast port labor woes; Wynn to hit road with eight-year deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 7 - The worsening labor dispute in West Coast docks means big problems for retailers who get merchandise shipped in from Asia - and that pushed the bonds of such companies as Gap Inc. lower Monday. Also on the downside was Charter Communications Holdings, whose bonds retreated in line with its shares, which lost more than quarter of their remaining value.

On the primary side of the equation, Wynn Las Vegas LLC - helmed by legendary gaming entrepreneur Steve Wynn - is scheduled to begin a roadshow Tuesday for its $340 million bond offering.

In the secondary market, "the retail guys were getting pounded with this dock stuff," a trader said, even as talks between the dockworkers union and the operators of 29 Pacific Coast ports broke down and President Bush appointed a fact-finding board to give him data that he'll use to decide whether to order an 80-day "cooling off" period under the 1947 Taft-Hartley labor law that would send the stevedores back to the docks. The shippers' association closed 29 ports in California, Oregon and Washington State on Sept. 27, after accusing dockworkers represented by the International Longshoreman's Union of work slowdowns.

Retailers who get shipments of electronic products, apparel and other goods from manufacturers in the Orient are among the hardest hit by the strike; if it drags on any further, they will be forced to have their merchandise shipped via airfreight, which is considerably more expensive than maritime shipping. Fall is the traditional time for retailers to build inventories as they ramp up to the all-important holiday season.

In the high yield retailing sector, Gap is already reeling from several straight years of declining month-over-month sales and quarterly profits, although its numbers have recently not been as bad as they had been, leading some observers to speculate that the San Francisco-based apparel chain's problems may have bottomed out and it might be poised to finally turn the corner.

But the dock strike threatens the company's recovery; accordingly, its shares lost 58 cents (6.16%) to end at $8.84 on New York Stock Exchange volume of eight million shares, up from the usual five-million-share turnover. On the bond side, Gap's 6.90% notes due 2007, which had traded around 86 bid/88 offered late last week, were down around 84 bid/85 offered on Monday. Its 8.80% notes due 2008 dipped to 93 bid/96 offered from last week's 97 bid/99 offered. The trader said that only the 6.90% was really active; he saw lower levels quoted, but no real trading in the 8.80s.

He also saw retailer Saks Inc.'s paper "looking a little heavy, with a lot more activity, down several points from the week before."

The Birmingham, Ala.-based department store operator's 8¼% notes due 2008, which had recently been seen as high as 90 bid/92 offered, opened Monday at 86 bid/90 offered.

"There was some trading taking place between that 87 and 89 price," he said, "although it looks like some buyers emerged there, because it's been a hard [issue] to find. So people are taking advantage of this over-exaggeration - not that there's a major problem with Saks [unlike with, say, Gap] - and taking it from there.

"Some stuff they're shying away from, other stuff, you can't find anything, it's cheap and hopefully, as cheap as you think it is, it's the right price - you're not going to buy it five points cheaper tomorrow. That's the way of the market right now - it's soft and it's sloppy," he added.

Even among the investment-grade retailers, the West Coast dock stoppage was having an effect, with Sears Roebuck & Co.'s 6.70% notes due 2012 heard to have widened out between 20 and 25 basis points.

Outside of the retailing arena, Charter Communications paper was several points lower, even as its shares plunged 40.5 cents (26.38%) on Monday to end at $1.13. Nasdaq volume of 7.6 million shares was somewhat above the 6.3 million usual handle.

Charter bonds "were all down three or four points," a distressed-debt trader said, citing unconfirmed market rumors - first reported Monday by the Prospect News Bank Loan Daily - that the St. Louis-based Number-Four U.S. cable system operator's chief financial officer was going to resign. That rumor circulated in the bank debt markets on Friday and caused a short-lived pullback in Charter's bank debt, but that debt bounced as players realized that the tale was without foundation.

Still, the bond trader said, the CFO rumor was still being bruited around the market on Monday, helping chop the stock down and pushing Charter's bonds down.

Another trader estimated the Charter bonds were down more than two points, while the convertible debt, which is more directly linked to the stock was down as much as five points. There was no fresh real news seen about the company, which last week warned that its cash flow would not meet earlier expectations, due to losses among its basic subscribers.

Yet another trader characterized the Charters as "lower, heavy." The only issue had seen bid on, however, were the 10% notes due 2009, at 53. The 10% notes due 2011 dropped from their morning highs around 54 bid/56 offered to 52 bid/54. "So the paper is heavy, but you don't see a lot of bids around [for it], but that's also indicative of the overall market.

Ironically, the Charter bonds were in retreat even as a communications industry trade publication, Multichannel News, was reporting that Charter CEO Carl Vogel "has a plan to revitalize the sluggish shares - and it involves the company's billionaire chairman."

According to the story, which attributes its information to unidentified sources, Vogel "is set to meet with Charter chairman and largest single shareholder Paul Allen this week to convince the Microsoft Corp. co-founder to make a significant investment in Charter public debt."

Vogel last week appeared at a Goldman Sachs communications industry conference in New York at which he alluded to Wall Street's desire that Allen step up and bolster confidence in Charter by buying its securities.

Multichannel News said "sources familiar with the company" were saying that Vogel "is set to press Allen hard about making a substantial debt purchase, possibly around $500 million of Charter's outstanding 8.625% bonds." With those bonds currently trading in the low 50s, a $500 million investment would take out about $1 billion of Charter's $17.5 billion of debt - a transaction which Multichannel News said could lower Charter's ratio of debt-to-cash flow to about 8 x from 8.7 x.

The trader, meanwhile, said that Charter's movement Monday certainly did not reflect that the market expected any kind of debt buyback, although it should be noted that Multichannel News is not a mass-circulation publication and word of the story was largely confined to investment-oriented Internet bulletin boards.

"Maybe Vogel will be meeting with some Allen," the trader quipped, in noting the lack of market response to the story.

Also in the cable field, a trader quoted Cablevision's 8 5/8% notes due 2009 unchanged in the 78 bid/80 offered area, apparently not helped by news reports that the Long Island, N.Y.-based cable operator is in talks with NBC to sell its Bravo arts channel for about $1.2 billion.

There was likewise little movement seen in other widely watched junk issues like Nextel Communications Inc.'s benchmark 9 1/8% senior notes due 2009, which were little changed around 78.25 bid.79.25 offered, while its 10.65% notes were steady at 86 bid/87 offered.

"AES Corp. was down three or four points, on top of last week," a trader volunteered. The Arlington, Va.-based independent power producer's bonds were lower last week, following a ratings agency downgrade for the company and in line with general softness in the utility/merchant energy sector, led by investment-grade operator TXU Corp.

AES said Thursday that it would swap cash and new senior secured notes for its 8¾% senior notes due 2002 and new notes for its 7 3/8% remarketable and redeemable securities ("ROARS") due 2013 but which are putable next year. Standard & Poor's then lowered AES' corporate credit and senior unsecured ratings to B+ from BB-; while it acknowledged that the exchange transaction would increase AES' flexibility by pushing off any substantial maturities for up to three years, it warned that the downgrade "reflects continued deterioration in AES' Latin American businesses, and anticipation that cost-cutting and improved performance at other businesses will not make up for those losses to the extent that AES had projected in its guidance."

"People are just wondering what they'll have to do to get this [exchange offer] deal done," the trader said in noting the market's continued wariness about AES-"whether they'll have to sweeten it from 10% to 13% or 15% or 100% or whatever."

In the primary, the week of Oct. 7 got underway with a modicum of news, as price talk was heard on two of the three deals poised to price before this coming Friday's close.

And the sound of rattling dice was heard in the primary market on Monday as Wynn Las Vegas let it be known that it will begin roadshowing the public deal to fund Steve Wynn's gaming, lodging, retail enterprise known as "The Dream."

However it seemed on Monday that the high-yield primary market news managed to capture only part of the attention of syndicate officials in New York investment banks. Cascading equity prices competed with junk market news, as officials were training their eyes on stock indexes.

Speaking to Prospect News shortly after the S&P 500 closed at 785.32, down 1.9% - reportedly the lowest close since April 28, 1997 - one sell-sider said grimly: "I don't see a lot of people buying junk bonds in this environment, do you?"

Citing in addition to falling stock prices the threat of war in Iraq, this official noted that risk-aversion among investors is presently high and "the new issue front is thin."

This source further reasoned that falling equity prices are putting the squeeze on capital, wedging cash-strapped companies into ever-tighter credit crevices.

"There is a connection between the stock market and the economy," this official said. "The stock market's tone dictates how loose capital is going to be."

In an environment of falling equity prices, this sell-sider said, the Federal Reserve ought to consider a further cut in the Fed Funds rate, presently positioned at a 10-year low of 1.75%. However even if the Fed does this, the official said, it doesn't necessarily follow that capital will soon become available to companies.

"Take Cablevision," this source suggested. "The market is soured on cable bonds right now. Cablevision needs half a billion dollars. A year and a half ago, no problem. You could have had a deal done in a day.

"But now the market is soured on cable bonds and no one is going to give them money. So they're screwed. They make cost cuts and do asset sales.

"The market dictates who gets the capital."

Another official who spoke shortly after the financial markets closed Monday termed the present high-yield primary market a "sustained low deal-flow environment."

This official specified that in order for the situation in high yield to meaningfully improve the equity markets would have to stabilize.

Prospect News asked this sell-sider what the present situation portends for the directories deals heard to be headed into the market. QwestDex, sources have said, could launch the acquisition financing deal for the Qwest Communications yellow pages business as early as late in the present week.

"People still have cash to put to work," this source responded. "The directories deals are pretty good deals. The business is very stable. And a lot of those deals are being structured fairly conservatively. So if they're going to play that's not a bad place to play. I think they can get some good value and not take a lot of risk.

"I think the first one out of the gate will do fine," the official added. "With regard to the others it may be a case of people getting filled up in the sector.

"But I think those deals have a better shot than some of the other deals crossing the forward calendar these days."

With regard to Monday's news events, a syndicate source told Prospect News that the roadshow starts Tuesday for Wynn Las Vegas, LLC and Wynn Las Vegas Capital Corp.'s public offering of $340 million of second mortgage notes due 2010 via joint bookrunners Deutsche Bank Securities Inc., Banc of America Securities, Bear Stearns & Co. and Dresdner Kleinwort Wasserstein. The junk bond deal is coming concurrently with $1 billion of credit facilities and a $450 million IPO. The proceeds will be used to design, construct and equip the Le Rêve gaming, lodging and retail operation in Las Vegas.

The roadshow is scheduled to conclude on Oct. 22.

Also on Monday price talk of a yield in the 12% area was heard on Amerco Inc.'s $275 million of seven-year senior notes (Ba2/BB+) - a deal expected to price Wednesday via Credit Suisse First Boston and Merrill Lynch & Co.

And price talk of a yield in the 10½% area emerged Monday on FMC Corp.'s $300 million of seven-year senior secured notes (Ba2/BB+), which are also expected to price Wednesday. The bookrunners are Salomon Smith Barney and Banc of America Securities.

An informed source said that the new bonds will contain a second priority lien on certain of the Philadelphia-based chemical company's domestic fixed assets and a second priority lien on shares of FMC Wyoming.

An informed sell-side source told Prospect News on Monday that given the present circumstances in the capital markets, and the volatility of "certain industries," the second priority liens provide investors with some "security and comfort."

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