AK Steel up on U.S. Steel M&A rumors, Levi up on earnings; Stats ChipPAC prices

By Paul Deckelman and Paul A. Harris

New York, July 12 - AK Steel Corp. bonds were being quoted sharply higher in line with a major rise in the Middletown, Ohio-based specialty steelmaker's shares on market rumors - strictly unconfirmed at this juncture - that industry giant United States Steel Corp. may make a $13 per share bid for AK.

Also on the upside, Levi Straus & Co.'s bonds were seen better by about two to three points on the session after the venerable San Francisco-based apparel company reported strong fiscal second quarter results.

On the downside, Foamex LP's subordinated bonds tumbled - though its senior issue was not much affected - by Monday's announcement that the Linwood, Pa.-based maker of foam rubber products for the auto industry and other industrial users was issuing substantially lower guidance for the second quarter, and had hired an investment bank to help it evaluate possible options, in hopes of avoiding bankruptcy.

In the primary market, things remained quiet, with activity largely emanating from overseas - Ford Motor Co.'s European auto financing unit pricing a split-rated deal and Singapore-based Stats ChipPAC Ltd. also coming in with a new deal.

Overall the high-yield market continued to strengthen on Tuesday, with a sell-side source late in the day marking it slightly better.

"It was active in the morning as usual, and quiet in the afternoon," the source added.

Another source suggested that a perceptible amount of "risk tolerance" seems to be re-emerging in high yield, following a protracted period of risk aversion that followed on the heels of the downgrade of General Motors Corp.'s debt to junk, in the spring.

Stats ChipPAC goes "very well"

In the new issue market only one deal priced Tuesday, as semiconductor firm Stats ChipPAC Ltd. priced a $150 million issue of five-year senior secured notes (Ba2/BB) at par to yield 7½%, tight to the inwardly revised 7½% to 7 5/8% price talk.

The company initially talked the notes at a yield in the 7¾% area.

Credit Suisse First Boston and Deutsche Bank Securities were the bookrunners for the debt refinancing and general corporate purposes issue.

Just before the terms emerged, a source told Prospect News that the book on the $150 million offering contained $800 million of orders.

Later in the day sources said that the deal had gone very well.

One of the sources said that as the terms on the new deal were announced Stats ChipPAC's 6¾% notes due 2011 (also Ba2/BB) were yielding 7.55%.

"The new notes priced more or less right on top of where the existing ones were priced," the source commented.

Stats ChipPAC is headquartered in both Singapore and Fremont, Calif., and both straight-up high-yield players and emerging markets accounts had been looking at the deal.

Digicel to the starting line

Another corporate issuer that is expected to receive attention from both junk and emerging markets investors, Caribbean wireless operator Digicel Ltd., will hit the road on Thursday with a $250 million offering of seven-year notes (B3/B) via JP Morgan and Citigroup.

The company will use the proceeds to repay debt and fund capital expenditures.

CEDC, Schieder issue talk

Elsewhere Tuesday Poland's Central European Distribution Corp. (CEDC) talked its €310 million of seven-year senior secured notes (B2/B-) at the 8¼% area, with pricing expected to take place during the present week.

ING has the books.

And German furniture company Schieder Moebel Holding GmbH talked its €145 million offering of seven-year senior subordinated notes (B3/B-) at 10¼% to 10½%.

The deal, lead by Citigroup and WestLB, is expected to price on Wednesday.

Ford unit prices €1 billion split-rated deal

Also on Tuesday FCE Bank plc, a wholly owned subsidiary of Ford Motor Credit Co., priced €1 billion of split-rated two-year senior unsecured notes (Baa2/BB+/BBB) at a spread of mid-swaps plus 280 basis points, on the tight end of the mid-swaps plus 280 to 300 basis points price talk.

Dresdner Kleinwort Wasserstein, Lehman Brothers and WestLB ran the books.

The deal came less than a week after General Motors Corp. financing arm GMAC International Finance BV priced €500 million of two-year senior unsecured notes (Baa2/BB) at mid-swaps plus 337.5 basis points, on top of price talk.

Will summer 2005 sizzle?

With strength seen in the secondary market heading into the mid-point of the July 11 week, Prospect News continued asking primary market sources "When will the forward calendar begin to take on some heft?"

One sell-sider commented Tuesday that several factors appear to be in play right now in the primary market.

"These big overhanging LBO deals may be holding it back," the source said, referring mostly to the SunGard Data Systems, Inc.'s bond deal that is expected to show up next week. The company's $11.3 billion LBO financing includes a $3 billion high yield bridge. Some sources expect SunGard to show up next week with the entire $3 billion while others are anticipating some portion.

Prospect News learned Tuesday that there are five bookrunners on the bonds. Deutsche Bank Securities will be on the left. Citigroup and Morgan Stanley will also be bookrunners. The other two names were not disclosed during late Tuesday conversations.

"I don't think anybody wants to go right on top of these LBO deals," the sell-sider added.

"The refinancing trade has slowed down a little, but it still makes economic sense for these issuers to do it."

The source the expectation that refinancing business could soon appear in the high yield oil and gas exploration and production sector, as well as from gaming.

The sell-sider also pointed out that it is summer, a season during which slower junk market activity is not unusual.

AK Steel soars on acquisition talk

Back among the secondary issues, stainless steel maker AK's bonds were gleaming, with a trader quoting its issues up three points across the board, including its 7 7/8% notes due 2009 seen at 94 bid, 95 offered.

A market source at another desk saw those bonds having moved up four points on the day to 94.25 bid, while its 7¾% notes due 2012 were likewise up four, at 89.5 bid.

Pittsburgh-based integrated steel giant United States Steel's 9¾% notes due 2010 meantime firmed to 108.25 bid from 107.75, while its 10¾% notes due 2008 were seen half a point better at 111.75.

The first trader said that the AK bonds - which had also firmed on Monday - were going up for much of the day Tuesday while "no one really knew why they were going up until the end of the day, and then someone came out and said it was because of the [U.S. Steel] rumor."

AK's New York Stock Exchange-traded shares jumped 62 cents (8.39%) to $8.01 on volume of 14.3 million shares, more than three times the usual turnover in the name.

The takeover talk boosted the bonds and shares even as Merrill Lynch & Co. sounded a bearish note, lowering its earnings estimates for both companies, citing lower steel prices. The brokerage reduced its 2005 profit estimate for AK Steel to $1.50 per share from $1.80 previously, and lowered its 2006 estimate to $1.20 from $1.75. It cut its price target on the stock to $12 from $20.

At the same time, Merrill cut its second-quarter earnings estimate for U.S. Steel to $2.25 a share from $2.50, reduced its 2005 earnings forecast to $8.50 a share from $9.80 and lowered its 2006 profit prediction to $6.60 from $7.70. It cited an extended outage at the company's big Gary, Ind. works as a key factor.

Media reports say that analysts are skeptical about the rumors of a U.S. Steel buyout bid for AK (one Internet rumor site threw out $13 per share, well above what the stock trades for, as a likely price), noting that AK, like many other steel companies, has a substantial burden of pension obligations, perhaps totaling as much as $3 billion. They also notes that consolidation or merger speculation buzz involving AK and U.S. Steel surfaces from time to time - but nothing has come of it - so far.

Levi higher on earnings

Elsewhere, Levi Strauss bonds were better following the release of the company's fiscal second quarter results and a conference call during which management scorned the notion of going on an acquisition binge and instead said that the top priority is improving profitability and then using some of that profitability to further lower the company's debt (see related story elsewhere in this issue).

Foamex 9 7/8s, 121/2s plunge

On the downside, Foamex's junior bonds pretty much collapsed in the wake of Monday's warning that it expected a "challenging" second quarter, and that results for the quarter would come in well below its prior expectations, although it did not give any specific numbers.

Foamex also said it retained investment banking firm Miller Buckfire & Co. to help evaluate strategic alternatives.

Traders saw the company's 9 7/8% notes due 2007 drop to as low as 30 bid from prior levels around 42.5, and said that those bonds were now trading flat, or without their accrued interest - equivalent to an additional loss of several points off the nominal price.

Also taking a dive were Foamex's 13½% notes scheduled to come due on Aug. 15. Those bonds - which were recently trading around 90 bid - have come down sharply over the last several sessions, with traders noting that holders of its 10¾% senior notes due 2009 have petitioned the company not to pay those bonds off when they mature.

The 131/2s had fallen to offered levels as low as 70 on Monday, with no bids, but on Tuesday, they slid down to 50 bid, 55 offered.

A trader said that "they really ought to be trading down at the same 30 level as the 9 7/8s, since if they go bankrupt, those bonds are pari passu with the '07s."

Despite the bad news, the 10¾% notes have still managed to hang onto most of their value, with a trader seeing them only having gone down to 82.75 bid from 84 previously, and another saw them at 82 bid, 84 offered, and still trading with their interest.

Foamex's Nasdaq-traded shares fell into penny-stock territory, swooning 32 cents (29.92%) to close at 74 cents, on volume of 845,000 shares, about nine times the usual activity level.

Other auto names quiet

Apart from Foamex, automotive names were seen pretty much quiet, traders said, with Collins & Aikman Products Co.'s 10¾% notes due 2011 unchanged at 28.5 and Delphi Corp.'s 7 1/8% notes due 2029 perhaps half a point down at 74.5, while its 6½% notes due 2009 were a touch better at 88.375 bid.

Calpine lower

Calpine Corp.'s bonds were in retreat, with a trader citing the San Jose, Calif.-based power generating company's announcement of the results of its previously announced tender offer for its 9 5/8% first priority senior secured notes due 2014, "and apparently, only $138 million of the notes were tendered (see related story elsewhere in this issue), not a lot of people tendered. So basically, they're not going to be able to refinance their first-lien debt, so they're going to actually have to tender for the second-lien notes, which pushed the subs down."

The trader saw the company's 8½% notes due 2008 at 69 bid, 70 offered, down 2½ points, while its 8½% notes due 2011 lost about two points to 66.5 bid, 68 offered. The trader also saw the 8¾% notes due 2007 at 79 bid, 81 offered, down 1½ points. It was "another active one today."

But apart from individual names about which there was news, "there was not really anything going on today," another trader said, pegging the overall market up ¼ to ½ point. "The market was very firm. A lot of people were looking for paper, but there was not a lot around. It was very quiet."

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