Tembec up as Canadian dollar down; Sbarro, MasTec deals hit the road

By Paul Deckelman, Paul A. Harris and Ronda Fears

New York, Jan. 15 - Tembec Inc.'s bonds continued to firm Tuesday on apparent investor belief that the sliding Canadian dollar will help the troubled forest-products producer boost export sales of its wood products.

In the power generation sphere, Mirant Inc. bonds were better after the Atlanta-based company announced plans to sell six power plants for $1.4 billion. There meanwhile was little movement in AES Corp. bonds, even as Venezuelan officials talked more openly about nationalizing its 85% stake in the country's largest electric utility.

Six Flags Inc. notes continued to firm, extending the gains seen last week on the New York-based theme park operator's announcement that it would sell seven of its properties for $312 million and use the proceeds for debt reduction.

In the primary market, Sbarro Inc., Alion Science & Technology Corp. and MasTec Inc. - expected to each launch a bond deal - were heard to all be hitting the road this week to pitch their respective offerings to potential buyers.

Meantime, price talk emerged on two other upcoming deals - Tube City IMS Corp.'s $250 million of eight-year notes, and Open Solutions Inc.'s $325 million of eight-years. The latter deal is expected to price early Thursday.

Back among the established issues, traders said that overall, there wasn't too much movement.

"It was a typical Tuesday after a long holiday weekend," he said, referring to the fact that the debt markets had been closed on Monday for Martin Luther King Day, and had seen an abbreviated semi-holiday half session on the Friday before.

"The market was firm - it seemed like there were some buyers around, but very, very, very light flows."

Tembec rise resumes

With most names heard up perhaps ¼ to ½ point, Tembec's bonds stood out, with market sources pegging that paper up about 1½ to 2 points on the session.

One saw its 8½% notes due 2011 at 73.5 bid, 74.5 offered, which he called up a point or so. Another - while seeing the bonds about a point behind those levels, at 72.5 bid, 73.5 offered - estimated them up more than 2 points.

There was no fresh new news out about the Montreal-based timber producer, so the rise in the bonds rise (along with the nearly 10% gain in its stock in Toronto trading) was likely an extension of the gains seen in the whole paper and forest products sector last week, including such Tembec rivals as Abitibi Consolidated Inc. and Bowater Inc. (the paper and forest products sector was the best-performing industry group last week and for the year so far, according to analysts at Banc of America Securities who compile its weekly High Yield Index - see related story elsewhere in this issue).

The sector's rise, particularly since the start of the new year, has been attributed to the slide in the Canadian dollar, which is seen as a positive for exports. On Tuesday, the loonie retreated against the U.S. dollar and the euro in international foreign exchange trading, as oil prices hit a 20-month low, since Canada is one of the world's major oil and gas producers and oil earnings are a key prop under its currency. Light sweet crude futures for February delivery fell $1.59 to settle at $51.21 on the New York Mercantile Exchange, after having fallen as low as $50.53 earlier in the session. The settlement price was the lowest since May 26, 2005, when crude closed at $51.01.

Besides helping to bring the Canadian dollar down, thus making Canada's timber, pulp and paper exports more attractive in the United States and other external markets, the slide in oil has also been seen as a positive in another way for Tembec and the forest products companies, which are big users of energy, not all of which is produced by hydroelectric means.

However, the market-watchers at the Gimme Credit investment advisory service are not convinced; in a research note Tuesday, analyst Kim Noland assigned Tembec a "deteriorating" credit score. While acknowledging that the Canadian dollar's weakness so far this year, plus lower fuel prices and the liquidity boost Tembec got last year from a big repayment of tariffs when the United States and Canada settled their lumber trade dispute, "could have a meaningful positive effect on operating results," and "could lead to stability in credit measures during 2007," Tembec's leverage is "excessive" and its interest coverage weak.

In the longer term, Noland warned, Tembec "is subject to significant refinancing risk. . . many stars must align (lower Canadian dollar, strong pulp markets, lower fuel costs and recovery of lumber markets) for Tembec to avoid a capital structure adjustment longer term."

Mirant better on plant sale

Mirant bonds were seen better on the news that the company will sell six natural gas-fired U.S. power plants to LS Power Equity Partners, a private investment firm, for about $1.41 billion.

Mirant expects net proceeds of $1.32 billion, after paying off $83 million in project debt. The company does not expect to book a significant gain on the transaction.

Mirant is selling its Apex, Bosque, Shady Hills, Sugar Creek, West Georgia and Zeeland plants. An estimated $500 million in proceeds from the sale of Zeeland and Bosque are expected to be reinvested in or used to retire debt for the company's Mirant North America unit.

A trader saw Mirant's 7 3/8% notes up 3/8 point at 102 bid, 102.75 offered, while another saw those same bonds up ½ point at 102.5 bid, 103.5 offered, "not a tremendous move upward, but they were better."

AES little changed despite Venezuela news

While Mirant's bonds were moving about, investors saw not much movement in the bonds of Arlington, Va., global power produce AES, even in the wake of Monday's news that Venezuela seems to definitely be moving toward a government takeover of AES' 85% stake in Electricidad de Caracas, the utility which provides power to the country's capital city.

Recently reelected Venezuelan president Hugo Chavez last week outlined his intentions of nationalizing the country's telecommunications and electric generating operations as part of his efforts to turn Venezuela into a socialist state, which caused some retreat in the AES bonds about a day or two later when the impact of his comments sank in.

On Monday, the country's energy minister specifically said that the government anticipates completing a takeover of Electricidad de Caracas during the year's second quarter. He offered no further details as to how that takeover might be accomplished and what kind of compensation - if any - would be given to AES and the utility's other equity holders.

Despite that more specific threat against AES' interests, though, traders reported no movement in the company's bonds, so far. One saw the AES 7¾% notes due 2014 at 105.375 bid, 106.125 offered and declared "there's no change there." Another trader agreed with that level, and said "there was only limited news out, and no negotiations at all" in seeing the bonds staying where they had been.

One market source did see a ¼ point drop in its 9½% notes due 2007 to 107 bid, while its 8 7/8% notes due 2011 were ½ point lower at 107.

But another saw its 9 3/8% notes steady at 108 bid, 109 offered.

Analyst Clark Orsky of KDP Investment Advisors Inc. in Montpelier, Vt., said that he too had seen no major changes in the AES bonds, despite the ominous-sounding news coming out of Caracas.

"There were just a few trades, and the prices held in there, from what we could tell," he said.

"The market's reaction to bad news has been muted in general, so it's kind of hard to say," he opined, adding: "I was a little surprised there wasn't more movement in the bonds."

The analyst, looking at the recent AES stories out of Venezuela, suggested that " initially, it was kind of vague as to what was going on - but [now] it does seem like they're going to do something."

Orsky said that the Caracas utility "is a big piece of their [AES'] cash flow, so [its nationalization] would definitely hurt, for sure." While "the distributions aren't even all the time," he estimated that Electricidad de Caracas accounts for approximately 7% to 10% of the parent's consolidated cash flow of some $1.1 billion annually, or anywhere from $70 million to $110 million.

The real question, he said, is not the cash flow - but "what kind of compensation the investors would get - and that remains very unclear." He said that "if [AES] were to lose all of that cash flow without any compensation, they could weather that sort of hit - but it would hurt their credit profile for sure."

On the other hand, he said, "if they get some sort of compensation for the lost stake in EDC, that would obviously help to offset that."

With few details out on just how Venezuela intends to take over Electricidad de Caracas and what kind of payment - if any - might be made to AES and the other owners, there's all kinds of speculation floating about - even that the Chavez regime may be bluffing, its tough talk about nationalization a negotiating tactic aimed at forcing the U.S. company to cough up much of its profits from Electricidad de Caracas or sell it a major stake on buyer-friendly terms - or else wind up with nothing to show for its efforts.

Orsky acknowledged that "they could be going down that path. It's really hard to know, because Chavez is writing the book as he goes. There's no template to look at - he's one of a kind, and that's what makes this situation so fluid.

"He kind of changes the rules to suit himself as he goes along - so as an investor, there's not a lot of certainty. You can't fall back on some legal framework to save you, it doesn't appear, because he changes the framework."

Looking at what impact all of this might have on the debt in AES's capital structure, he said that its senior secured notes "tend to move a lot less," precisely because they are secured, with investors thus pretty much shielded from the potential downside. He said that its 2009 unsecured paper "is really short [dated] and doesn't tend to move all that much. The company's longer-dated unsecured notes "would be more susceptible to movements" in response to the news - but weren't on Tuesday.

"In general, high yield has been really strong" of late, "and we haven't seen a lot of downdraft, even when the news has not been so great. Otherwise, [besides the Venezuela situation], the company has been doing pretty well, so maybe the investors are kind of giving them the benefit of the doubt."

Six Flags extends gains

Elsewhere, Six Flags' 8 7/8% notes due 2010 were seen up a point or so, extending the gains from last week on its asset sale news. A trader saw the bonds having firmed to the 99.25-99.75 level.

The trader said that while the $312 million in anticipated proceeds was not as much as expected, it was okay, "given the class of assets they sold," particularly since the company did not sell its Magic Mountain park near Los Angeles - that alone, by his calculations, would have doubled the price tag.

While the trader said he is not counting on much debt buy back as a result of the lower proceeds figure from asset sales, the money will help with operating costs and "some" pay downs.

That having been said, however, the bottom line is the jury is still out on Six Flags, he thinks.

"2007 is critical. They have to increase the headcount going through the turnstiles," although "the wheels are definitely turning" toward this end.

Even if the economy slows down in 2007 he sees Six Flags having a good chance of executing a turnaround - and might even have a better chance if the economy tanks.

Although that sounds counterintuitive, his theory is based on the notion of Six Flags emerging as the un-Disney in the theme park industry - the main alternative destination to Disneyland and Disneyworld, which he described as "entirely what they are positioning themselves to be."

In a down economy, he says, a family might not be able to afford to go to the Disney parks - but could swing going to Six Flags at a relatively modest cost of $40 per head per day, cheaper than Disney parks by at least 50%, or maybe even more.

Aramark a 'riot'

An investor told Prospect News that 2007's debut megadeal, Aramark Corp.'s $1.78 billion two-part offering of senior notes (B3/B-), is turning into "an absolute riot."

The source said that the order book for the combined two-part deal, which is expected to price on Wednesday, is said to be over $12 billion.

Last Friday Aramark announced that it had downsized the bonds to $1.78 billion from $2.27 billion, shifting $490 million to its term loan B.

The reason, sources around the market said, was that the company's bank deal was, like the bond deal, "blowing out."

The Philadelphia-based professional food, hospitality and facility management services company is now offering a $500 million tranche of eight-year floating-rate notes, with price talk of three-month Libor plus 350-375 basis points, and $1.280 billion of eight-year fixed-rate notes, with price talk 8½% to 8¾%.

A planned $570 million tranche of senior subordinated notes tranche has been withdrawn.

The LBO deal, which is being led by JP Morgan and Goldman Sachs, is set to price Wednesday morning.

The investor said that both tranches are now expected to price on the tight end of price talk.

Open Solutions talks $325 million

Open Solutions Inc. talked its $325 million offering of eight-year senior subordinated notes (Caa1/CCC+) at a yield in the 9 7/8% area on Tuesday.

The LBO deal, which is being led by Wachovia Securities, JP Morgan and Merrill Lynch, is expected to price on Thursday.

The investor told Prospect News that Open Solutions is going very well, and added that the company appears to be getting a good deal given the triple-C ratings from both Moody's and S&P, the fact that the notes are subordinated, and the Rule 144A for life structure of the sale.

Meanwhile Tube City IMS Corp. talked its $250 million offering of eight-year senior subordinated notes (B3/B-) at 10% to 10¼% on Tuesday.

The Credit Suisse-led deal is expected to price on Thursday.

Hitting the road

Meanwhile on Tuesday, news surfaced regarding offerings that will be marketed via investor roadshows.

Alion Science & Technology Corp. will begin a roadshow on Thursday for its $200 million offering of eight-year senior notes (CCC+), a debt refinancing deal via Credit Suisse.

Alion is a McLean, Va., technology solutions provider delivering technical expertise and operational support to the Department of Defense.

And the roadshow starts Wednesday for Coral Gables, Fla., telecommunications and energy infrastructure company MasTec, Inc.'s $150 million offering of 10-year senior notes (B1/B+).

Morgan Stanley has the books for the debt refinancing.

A hot market

The investor who spoke to Prospect News on Tuesday said that the junk market is currently quite hot, but perhaps a little less so than had been the case at the close of 2006.

"It ended the year very hot, and judging from what you hear about the deals that are going to price this week it's still a hot market," the source said.

"The secondary market is not running like it was at the end of last year, but that's probably because people are buying the new issue calendar."

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