Novelis prices giant deal; phone bonds continue SBC-related gains

By Paul Deckelman and Paul A. Harris

New York, Jan. 28 - Just as the week began with the pricing of a huge offering of new bonds - Intelsat's $2.55 billion three-part mega-deal - it ended on a similar note Friday, as Novelis Inc. successfully brought a $1.4 billion 10-year note issue to market. Knowledge Learning Corp. and Eye Care Centers of America were also heard to have priced 10-year deals, although these were considerably smaller than Novelis'.

Upwardly revised price talk was meantime heard on Uno Restaurant Holdings Corp.'s coming issue of six-year secured notes.

In the secondary arena, bonds of AT&T Corp. and MCI Inc. were up for a second consecutive session- particularly the latter company's 10-year notes - as speculation continued that regional Bell operating company SBC Communications Inc. is likely to acquire its former corporate parent, AT&T, with MCI seen possibly in play as a potential acquisition target should other large RBOCs be looking to beef up in response.

Altogether nearly $1.81 billion priced in three tranches on Friday in the high-yield primary market.

Leading the way was a massively oversubscribed $1.4 billion issue from Montreal aluminum and packaging company Novelis.

That brought the week of Jan. 24 to a close with just under $7 billion of business having been transacted in the new issue market.

Outflows may be taking a toll

One sell-side source, examining the terms of Friday's transactions as well as other primary market news, suggested that the continuing outflows from high-yield mutual funds could finally be registering an impact on the primary market. On Thursday AMG Data Services reported a $759.5 million outflow for the week to Jan. 26, leaving nine of the past 10 weeks in negative numbers.

The source specified that two of Friday's three deals, Novelis and Eye Care Centers of America, priced wide of price talk.

Novelis Inc. priced its $1.4 billion of 10-year senior notes (B1/B) at par yield 7¼%, 12½ basis points wide of the 7% area price talk.

Citigroup, Morgan Stanley and UBS Investment Bank were the bookrunners for the debt refinancing deal.

Meanwhile Eye Care Centers of America sold $152 million of 10¾% 10-year senior subordinated notes (Caa1/CCC+) at 98.495 on Friday to yield 11%, a full 75 basis points wide of the 10% to 10¼% price talk.

The deal, which generated $149.7 million of proceeds, was led by JP Morgan.

The San Antonio, Texas-based optical retail chain is using the proceeds to fund an LBO.

In addition to two of Friday's three deals coming wide of talk, the sell-side source also made note of Thursday's cancellation of Di Giorgio Corp.'s junk bond deal.

Further, the sell-sider said, on Friday the market heard outwardly revised price talk on Uno Restaurant Holdings Corp.

Talk on the Boston restaurant company's $140 million of six-year non-call-three senior secured second-lien notes (B3/B-) widened to the 10% area from the 9¾% area.

The Banc of America Securities-led deal is expected to price on Monday.

Add to that, the source said, rumors are now rampant in the market that Atlantis Plastics Inc. is conferring with bookrunner Bear Stearns & Co. with regard to a considerable restructuring of its planned $125 million of seven-year senior subordinated notes (Caa1/CCC+), proceeds from which are to be used to repay debt and fund a dividend to shareholders.

"The thing is," said the sell-sider, "if you keep getting substantial money outflows, sooner or later it's bound to have some negative impact, because whether the high-yield mutual fund flows are representative and indicative of the liquidity of the asset class, or not, that's the stable money.

"The hedge funds, on the other hand, are very opportunistic."

Quiet but not weak

Meanwhile a buy-side source, speaking on background, told Prospect News on Friday that the primary market seems to be in working order.

The investor said that the above-mentioned Novelis deal in particular appeared to have gone quite well.

"It was played by some of the higher grade portfolios and it was massively oversubscribed," the investor said.

"They cut everybody back but they brought it with a higher yield."

Prospect News followed by asking this investor whether or not the fact that two of Friday's three deals had come wide of talk could be read as an indication that the investment banks are becoming too aggressive in pricing deals.

"Yes and no," the buy-sider responded.

"You see triple-C deals coming at 8½% and single-B deals coming at 8%, and in some cases in the 7s.

"Sometimes they cheapen these deals up, but they come well subscribed and they seem to trade okay.

"The market seems quiet, but I wouldn't call it weak."

And as to the sell-sider's color, above, that the continuing outflows from the high-yield mutual funds are at long last making themselves felt in the primary market, the investor was inclined to believe otherwise.

The high-yield asset class remains notably liquid, the source maintained.

"Mutual funds are a fraction of the business," the buy-sider said. "You have hedge funds and insurance money, for example.

"And we have had a lot of bonds called," the source added. "And there has been coupon income.

"I think that there is plenty of cash in the mutual funds. And insurance funds continue to add money to the sector. They are a much bigger part of the market than mutual funds."

Knowledge Learning at tight end of talk

Elsewhere Friday, Knowledge Learning Corp. priced $260 million of 10-year senior subordinated notes (B3/B-) at par to yield 7¾%, the only one of Friday's three deals to price at the tight end of price talk - 7¾% to 8% in this case.

Credit Suisse First Boston, UBS Investment Bank and BNP Paribas were joint bookrunners for the acquisition financing from the San Rafael, Calif.-based provider of early childhood educational programs and services.

Two for the road

In addition to Friday's pricings, two companies announced roadshow starts for junk bond offerings.

Builders Firstsource Inc., a Dallas-based building materials company, will begin a roadshow on Monday for $250 million of seven-year non-call-two second-priority senior secured floating-rate notes (expected ratings B3/B-).

The UBS Investment Bank and Deutsche Bank Securities led dividend funding and debt refinancing deal is expected to price on Feb. 8.

And Cleveland, Ohio valve manufacturer for the automotive industry Hilite International Inc. will present its $150 million offering of seven-year non-call-three senior subordinated notes (expected ratings B3/B) on Wednesday at the JP Morgan High Yield Conference.

The debt refinancing deal is expected to price late in the week of Feb. 7, via JP Morgan.

Finally on Friday, talk of a yield in the 9¼% area was heard on Mauser Beteiligungs GmbH's €175 million of eight-year non-call-three senior notes (Caa1/B-), which are expected to price Monday in London, via Citigroup.

Novelis jumps in trading

When Novelis' new 7¼% senior notes due 2015 were freed for secondary dealings, they were heard to have traded as high as 102.25 bid on the break before coming in from that peak level to finish at 101.75 bid, 102.25 offered, still well up from their par issue price earlier in the session.

Eye Care Centers' 10¾% senior subordinated notes due 2015, which had priced at 98.495, were heard to have later settled in at 98 bid, 99 offered.

Among issues which priced on Thursday, Hexcel Corp.'s 6¾% notes due 2015 were seen to have traded up slightly to 100.5 bid from their par issue price, but then backed off to end at 99.75 bid, 100.25 offered.

That was also the level to which Gregg Appliances Inc.'s new 9% senior notes due 2013 were heard to have traded down to, from their par issue price.

A trader remarked that none of the relatively illiquid smaller deals, done for issuers who were not exactly household names in junk bond land, set anything on fire.

AT&T, MCI gain

Back among the established issues, it was a second consecutive session in which the bonds of rival long-distance players AT&T Corp. and MCI Inc. were seen to have firmed, amid speculation that AT&T is in talks with former unit SBC Communications to be acquired. SBC is the successor company to several of the "Baby Bells" that were spun off from "Ma Bell" in the early 1980s when a federal judge ruled that the then-huge telecommunications company had way too much control over both local and long-distance phone service in the United States.

What a difference two decades makes. AT&T, once the dominant long-distance provider, is still the biggest in its field, but now faces a stiff challenge from players such as Number-Two MCI and from Number-Three Sprint Corp. It has been shrinking itself over the past few years, having sold its wireless service to Cingular Wireless - partly owned by SBC - and having also spun off its equipment business into the company now known as Lucent Technologies Inc., and having abandoned its local residential telecom service in certain markets to instead concentrate on its core long-distance service, which it provides to a still-impressive roster of blue-chip business clients. Those clients are seen as the big prize that SBC is after, along with AT&T's far-flung network, and published reports say it is seriously pursuing a deal for something in the neighborhood of $15 billion to $16 billion.

Those news reports of ongoing talks - still not officially confirmed by either party to the supposed negotiations - have given AT&T's bonds a definite boost this past week, with most of the gains seen on Thursday and some follow-up appreciation on Friday.

A trader quoted its 9¾% notes due 2031 up a point on the day to 124 bid, 124.5 offered. He said that those bonds were "up from around a 120ish level earlier in the week. It's been a decent week for them, although there was not the same magnitude of movement today [Friday]."

At another desk, its 8% notes due 2031 were seen up nearly two points to 125.25.

While some of the AT&T bonds were being quoted in dollar terms like the junk bonds which they technically are, at Ba1/BB+, they mostly still trade on a spread versus Treasuries basis off the high-grade desks at many bond houses in view of their former status as investment-grade instruments.

A trader saw the 8% notes, for instance, as having tightened Friday to a bid level equivalent to 292 basis points over the comparable Treasury, and an offered level 288 bps over, from late Thursday levels around 295/290.

He saw AT&T's 7.30% notes due 2011 at 203/197 Friday, a bit tighter than Thursday's close at 208/202, but considerably tighter than the 245/240 level at which the bonds traded "before all of this [SBC speculation] started."

And he saw its 6% notes due 2009 at a spread of 88/78 Friday, much below the 110/120 before the SBC news began circulating.

Another market source was quoting AT&T's 6½% notes due 2013 bid at 180 bps over Treasuries, considerably tighter than the bonds' recent bid levels around 250 bps over. He translated that in dollar terms to a move up to 103.55 from 98.69 before all the takeover talk began

MCI better

That takeover talk has also been a bell-ringer for the MCI bonds, with traders speculating that should SBC actually acquire AT&T, rival RBOCs such as Verizon Communications Inc. or BellSouth might seek to acquire MCI, not so much for its consumer business, which is clearly declining, as is AT&T's, as for its network, and its roster of customers, which includes many government agencies.

MCI's market capitalization is about $6 billion - considerably less expensive than the cost of buying AT&T - and it has something like $5.5 billion of cash on its balance sheet.

That makes the company a potentially attractive target, despite its checkered past - while AT&T has always been considered among the bluest of the blue chips, MCI, in its previous incarnation, was the former WorldCom Inc., brought down by massive alleged accounting fraud and forced to restructure through the bankruptcy courts earlier this decade.

And that has boosted the bonds, particularly its 8.735% notes due 2014. A trader saw those bonds at 107.75 bid, 108.25 offered, up at least a point on the day, on top of several points of gains Thursday.

"It's got a little more call protection, a little more spread to it, a little more compression," he theorized.

The company's other issues, he said, were up "a little bit, but not like that [2014 bond]," with the 7.688% notes due 2009 up about ¼ point at 103.75 bid, 104 offered. The 6.908% notes due 2007 "didn't do a thing all day," staying at 102 bid, 102.5.

Another trader saw the 8.735s at 108.125 bid, 108.375 offered, which he said was about four points better over the course of the two days that the takeover buzz has dominated the market.

Elsewhere, he said, not much was going on. "It seemed like the market was closing early," he said. "I got very few messages in the afternoon. It was weird."

The other trader said there was "really nothing going on and no major companies releasing quarterly results," a situation he said would likely be remedied during the coming week.

One earnings related development was a half-point fall in Sanmina-SCI Corp.'s 10 3/8% notes due 2010, which declined to 113.75, after the contract electronics manufacturer reported weaker than expected first-quarter results Thursday. Its Nasdaq-traded shares were one of the biggest losers Friday, down $1.05 (14.15%) to $6.37. Volume of 45 million was more than six times the norm.

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