Northwest bonds plunge as bankruptcy seen near; Select Medical scrubs deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 13 - Northwest Airlines Corp.'s bonds "got crushed" Tuesday in the words of one trader, as it appeared ever more likely that the embattled Eagan, Minn.-based Number-Four U.S. airline carrier is headed for an emergency landing in the bankruptcy courts.

Elsewhere, Ford Motor Co.'s bonds were better, in the wake of the announcement as the market was closing Monday that it has agreed to sell its Hertz car-rental unit to a group of private-equity companies for about $15 billion, including the assumption of some $10 billion of debt. In turn, former Ford subsidiary Visteon Corp.'s bonds firmed on the morning news that Visteon and its onetime corporate parent had reached a definitive agreement on a Ford bailout of the troubled Van Buren Township, Mich.-based components maker that will include Ford's takeover of 23 high-cost plants that were a drag on struggling Visteon's finances.

Apart from the airline bonds, high yield hung well on Tuesday, according to a market source who marked the broad market unchanged on the session.

In the new-deal arena, Select Medical Holdings Corp. indicated that it will not proceed with its planned issue of $250 million of 10-year floating-rate notes. Price talk emerged on E-Trade Financial Corp.'s upcoming two-part bond offering and on San Pasqual Casino Development Group's single-tranche deal, which could price as early as Wednesday.

Northwest "was on a roller coaster" Tuesday as speculation that the company could file for bankruptcy mounted, a trader said, "with some [people] starting trading it flat [i.e. without the accrued interest], some trading it with [interest], going up and down. It's unbelievable.

"So far [as of late Tuesday afternoon], they haven't really filed, and guys are switching back and forth." He added that "the big dealers are [still] trading with [interest]."

He saw the company's benchmark 8 7/8% notes due 2006, which opened the session at Monday's close around 44 bid, 46 offered, fall as low as 20 bid during the day, before coming slightly off their lows to finish out at 25 bid, 27 offered.

Other issues moved down to near those same levels, as the bonds compressed, heading toward a single level that would reflect the market's estimation of bondholders' likely recovery in a bankruptcy. In Northwest's case, that would seem to be in the low-to-mid 20s, as its 9 7/8% notes due 2007 dropped to 23 bid, 25 offered from 35 bid, 37 offered previously, its 7 7/8% notes due 2008 plunged to 21 bid, 23 offered, a 10-point drop from prior levels, and its 10% notes due 2009 were also down 10 points, to 22 bid, 24 offered.

"It was pretty much Northwest today," said another trader, who saw the 8 7/8% notes close out on Monday at 43 bid, 44 offered, open at 42 bid, 44 offered, then ease slightly to 41.5 bid, 43 offered - and then completely "go into the toilet" and nosedive to levels as low as 20 bid, 25 offered, when the news hit the tape that the airline had failed to make an $18.7 million payment due Monday to Mesaba Aviation Inc., a regional feeder carrier for Northwest. It has until Monday to make the payment - and Mesaba could "exercise available remedies" if the payment is not made by then.

After that, the trader said, "there was just no looking back."

After hitting the wide 20-25 market, he said, the bonds went flat - a loss of about 2½ points of accrued interest on the 8 7/8s, he noted - before tightening a little to 22 bid, 24 offered, and finally to 25.5 bid, 27.5 offered, trading flat. All of the other bonds are now trading flat, he said, except equipment trust certificates and enhanced ETCs, both of which are secured by liens against company-owned aircraft, unlike the unsecured bonds.

Even as bankruptcy speculation continued to swirl around Northwest, however, the trader played devil's advocate.

"Call me crazy," he said, "but I wouldn't be surprised if there was just a little bit of 'hail Mary'-type good news before these guys file" - the possibility that the company may somehow stave off bankruptcy, for at least a couple of days, with a desperate penultimate maneuver.

"I doubt that they'll file tomorrow [Wednesday]," he continued, "because they've got seven days to make this payment to Mesaba, and they have the cash - unless this really is 'it' for them. On the other hand, maybe they do [file on Wednesday]."

A filing Wednesday seemed to be the conclusion of yet another trader, who attributed the meltdown to a New York Times.com web article indicating that Northwest was going to file, "supposedly tomorrow [Wednesday]." He said that was the primary driver to the fall in the 8 7/8s to 25.5 bid, 27.5 offered by day's end, a nearly 20-point swoon, rather than the Mesaba Air payment glitch, which he called "part and parcel of the whole situation."

"It doesn't help," he said, while still noting that the Times speculation was the more likely catalyst.

He also noted that late in the afternoon the company additionally said it would not make about $23 million of payments due on Sept. 10, 11 and 12 "relating primarily to outstanding equipment trust certificate aircraft financings." Not making those payments "makes sense if you're about to file."

He saw people trading the company's bonds both with accrued and without accrued interest. "At the beginning, when nobody knew what was going on, there was a little mass confusion, they were going back and forth, but it seemed like at the end of the day, everyone decided to trade them with accrued, being that the '07 and the '08 paper, if you were to settle a trade today and if they were to pay off their coupon payment on [Sept. 15] on all three issues, they're trading basically with only one day of accrued.

"So I think that's the reason people are looking at it and saying, essentially that it's not a huge claim on the unsecured paper, only two of them have a point or two of accrued interest built into them, the '06s and the '09s. People decided to trade them with - though that's beside the point."

At his shop, he said they were trading Northwest with the interest - although it should be noted that this was during trading which took place before the company's announcement that it had not made the payments on the certificates, which will likely have everyone trading it without on Wednesday. Northwest additionally faces coupon payments due Friday on both issues of its 2007 unsecured bonds - the 8.70% and 9 7/8% notes - as well as its 7 7/8% notes due 2008. There has been no word from the company on what it intends to do about those bonds, although a bankruptcy filing, should it come in the next few days, will make that a moot question.

Northwest's Nasdaq-traded shares meantime lost more than half of what little value they still have, plunging $1.74 (52.57%) to $1.57, on very heavy trading of 98 million shares - 14 times the usual turnover.

Ford, Hertz rise on Hertz sale

Elsewhere, a trader saw Ford's 7.45% notes due 2031 trading perhaps half a point higher at 82 bid, after the Dearborn, Mich.-based auto giant announced that it will sell Hertz, the largest U.S.-based car rental company, to a coalition of private-equity companies - Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity. They will pay Ford $5.6 billion and assume some $10 billion of debt.

The buyout deal is likely to be funded with a huge issue of new bank debt and, possibly, bonds (see related story elsewhere in this issue) - which prompted to Standard & Poor's to warn Tuesday that it could cut Hertz's BBB- credit rating to junk bond levels. Moody's Investors Service issued a similar caution on Monday about its Baa3 rating.

Even so, a trader said he saw Hertz's floating-rate notes due 2008 move up two points to close to the 98.25 level, while its 6.90% bonds due 2014 were up a point to 95.75 bid. He did see the company's 7 5/8% notes due 2012 retreat to 98.75 from 99.625 bid, 99.375 offered.

He said that there had been "a lot of big-sized trades" in the session, with a number of bond buys ranging anywhere from $2 million to $5 million in size.

Hertz's 7 5/8% notes due 2007, however, while actively traded, were pretty much unchanged at 96.5 bid, 97 offered.

Visteon better on Ford deal

Also out of the automotive sphere, Visteon's bonds firmed on the news that the components maker had reached definitive agreement with Ford on the latter's bailout for its problem-plagued problem child, which will cut Visteon's revenue by one-third to $11.4 billion - but which will also help it avoid bankruptcy. Ford will take back nearly two dozen loss-producing factories from Visteon and will attempt to sell them to other buyers. Visteon had struggled under the costs of running those factories, including burdensome labor contracts it inherited from Ford when it was spun off.

A trader saw Visteon's 8¼% notes due 2010 gaining a point on the day to 98.5 bid, while its 7% notes due 2014 rose to 89.75 bid from 89.

Tenet little moved on Katrina troubles

A trader said that he had seen little or no impact on the bonds of Tenet Healthcare Corp. from "all of this [news] on television about 40 bodies being found in one of their New Orleans hospitals" in the wake of Hurricane Katrina. He quoted the Dallas-based hospital operator's 9¼% notes due 2015 unchanged at 102.5 bid, 103.5 offered.

At another desk, Tenet's 6 3/8% notes due 2011 were seen down half a point on the day, at 94.5.

The New Orleans Times-Picayune reported on Monday that recovery workers discovered and removed 45 bodies from a flooded-out Memorial Medical Center, a Tenet-owned hospital eventually abandoned during the devastating flood that followed the hurricane. Tenet said that before the hospital was finally abandoned to the rising floodwaters, as many as 2,000 people - its own patients, doctors, nurses and other hospital staff, patient family members and patients and personnel from other local hospitals had sought refuge at the 317-bed facility, well as community members.

Tenet said it was "grief-stricken by the tragic toll" at Memorial, and explained that some very sick adult patients just could not survive the brutal conditions associated with the storm and the flooding - four days with "poor sanitation, without power, air-conditioning and running water, and with temperatures in the building approaching 110 degrees . . . despite the heroic efforts of our physicians and nurses. " No patients drowned nor did any die as a result of lack of food or drinking water, the company asserted. When the decision was made to abandon the facility, all patients still alive were evacuated by private helicopters hired by the company, Tenet said, since land evacuation was impossible, an exodus completed on Sept. 2. It said that some hospital personnel remained behind to safeguard the remains of the dead and to assist in their removal by authorities, a task not completed until Sunday.

The deaths are being investigated by state attorney general Charles Foti, and might also eventually produce wrongful-death civil lawsuits by patient families that could potentially seek to sock the company for millions of dollars.

In a separate incident, Foti charged the husband-and-wife owners of a New Orleans-area nursing home where 34 people died amid the rising flood waters with negligent homicide for not evacuating the patients when they still could. The facility is not affiliated with Tenet or with any other major healthcare company.

"The stock was down, but the bonds were unchanged," the first trader observed. Tenet's New York Stock Exchange-traded shares slid 23 cents (1.94%) to $11.65 on volume of 2.6 million, just slightly above the normal activity level.

E*Trade, San Pasqual talk deals

Meanwhile the primary market took a breather with no issues pricing and no new roadshow starts heard.

However one deal was postponed, as Select Medical Holding Corp. pulled the plug on its $250 million offering of 10-year floating rate notes, citing market conditions.

Tuesday's pause in the primary notwithstanding, high-yield sources are looking for a plethora of junk to price during the final three sessions of the week.

Two deals appear to be on tap for Wednesday.

New York City online brokerage firm E*Trade Financial Corp. issued price talk Tuesday on its $450 million two-part bond offering (B1/B+).

The transaction involves a tranche of new eight-year senior notes which are talked at a yield in the 7½% area, and an add-on to the company's 8% senior notes due June 15, 2011, which are talked at the 7¼% area.

Tranche sizes remain to be determined.

JP Morgan and Morgan Stanley are joint bookrunners for the acquisition financing.

A market source told Prospect News late Tuesday that the deal is going well, with a sizable order book building for new eight-year notes at 7½%.

Also poised to price during the midweek session is San Pasqual Casino Development Group's $180 million offering of eight-year senior notes (B+). The San Diego gaming firm talked the note at a yield in the 8% area on Tuesday.

Merrill Lynch & Co. has the books for the debt refinancing and project financing deal.

A market source said that the gaming deal is a blowout, and looked for the yield to come at the tight end of talk, or perhaps even inside of price talk.

Prospect News also heard that the Perkins Family Restaurant $190 million offering of eight-year senior notes (B2/B) via Wachovia is getting a good reception at the 9¾% area, which is the pro forma on the note, according to a market source.

No formal price talk has been heard, the source added. The LBO deal is expected to price on Friday.

Select Medical scraps floater

The Select Medical Holdings Corp. pulled the sheet over a deal that was first heard to be undergoing some investor pushback late last week.

The company announced in a Tuesday press release that it has withdrawn its proposed $250 million offering of 10-year floating-rate notes due to present market conditions.

JP Morgan, Merrill Lynch & Co. and Wachovia Securities were joint bookrunners for the deal, which had been talked at six-month Libor plus 575 basis points.

On Monday a market source had told Prospect News that the call premiums for the bonds, which would have been callable after two years, had been doubled in a restructuring to 104, 102, par from 102, 101, par.

Proceeds from the deal were slated to take out preferred stock and fund a dividend.

One source told Prospect News late last week that investors were hitching on the tenor of the bond, 10 years, as well as on the fact that the Pennsylvania acute care provider planned to use some of the proceeds to fund a dividend.

Neiman Marcus launches bank deal

The watchwords of the summer 2005 primary market seem to be "big LBO deal."

SunGard Data Systems, Inc. did $3 billion in late July to fund its LBO.

Gamestop Corp. is presently in the market with a $950 million two-part deal (Ba3/B+) to fund its merger with EB Games, with pricing expected early to mid next week.

Intelsat is heard to be coming with $4 billion to fund its acquisition of PanAmSat.

And this summer people cannot seem to mention big LBO deals without a passing nod to Neiman Marcus Group Inc.'s $5.1 billion leveraged buyout financing.

The Prospect News bank loan desk heard that Neiman Marcus held a very well attended bank meeting on Tuesday to kick-off syndication on its proposed $1.6 billion credit facility - a process that is anticipated to go smoothly as term loan orders had already been flowing in before the actual launch took place.

Credit Suisse First Boston and Deutsche Bank are the joint lead arrangers on the deal.

Hertz financing

The Prospect News bank loan desk also heard Tuesday that the Hertz Corp. will be getting a new credit facility, will most likely be issuing bonds and could potentially be tapping the asset-based securities market to help back its leveraged buyout.

Deutsche Bank, Lehman Brothers and Merrill Lynch will all be involved in the credit facility, and will likely be involved on any bond offerings as well.

"Structure is still moving around. You can expect multiple tranches in different markets. Could be euro component(s) as well," a source said.

On Monday, Hertz, a Park Ridge, N.J, vehicle rental organization, announced that it has agreed to be acquired by Clayton, Dubilier & Rice Inc., The Carlyle Group and Merrill Lynch Global Private Equity from Ford Motor Co. in a transaction valued at $15 billion.

© 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.