Level 3 bonds firm on tender for 103/4s; Sea Containers weakens; Anvil off on hedge fund liquidation

By Ronda Fears

Memphis, Dec. 13 - Traders said the distressed bond market felt a little softer Wednesday overall, but there were no big concerns that cash ready to be put to work in the space had dried up or anything of that nature.

"The market was a little on the soft side today," said one distressed bond trader. "There has been a lot of new issuance," he noted, mentioning Ford Motor Co.'s mega bond deal last week. On the plus side, he said it was a thin market Wednesday outside of the go-go names like Ford. "It was not as active as last week."

Moreover, traders said they expect fund managers to continue to stuff their portfolios with additional positions through year-end as they look to put capital to work and, thereby, hopefully boost their commissions.

But word of the blow up Wednesday of Ritchie Capital Management Ltd.'s flagship hedge fund, the Ritchie Multi-strategy Global Fund, was the source of some chatter in the market, but traders said it did not register in terms of a big selloff or speculation of massive liquidations in distressed paper. The Geneva, Ill.-based firm is reportedly negotiating to sell the fund's assets to an undisclosed third party.

That said, traders said there was talk that another hedge fund was liquidating, and that resulted in the sale of a decent chunk of Anvil Knitwear Inc. bonds, but it did not involve Ritchie. The New York-based sportswear manufacturer, which filed for bankruptcy in October, saw its 10 7/8% notes due 2007 drop a half point to a point to 66 bid, 66.5 offered.

Weakness in the broader distressed market aside, bankrupt airline paper continued to climb for the most part although Delta Air Lines Inc.'s steam was dwindling with the bonds described as maybe better by a point in the 66.5 bid, 67.5 area. Northwest Airlines Corp.'s bonds did better, but traders said the paper merely went back to the 95 area Wednesday after dropping to the 92 area on profit taking Tuesday.

"Until some news breaks one way or the other with Delta and Northwest, it's just shuffling paper, a lot of guys trading it one way one day, another the next," one trader remarked.

On bank desks, Calpine Corp.'s second-lien bank debt levels came in a touch on Wednesday as it just needed to take a breather after spending the previous two sessions on the rise, according to a trader.

The second-lien paper closed the day at 114 bid, 114½ offered, down from Tuesday's closings levels of 114¼ bid, 115 offered. On Monday, the paper had gone out at 113½ bid, 114½ offered after gaining about a point in trading. The recent run-up has been a result of the San Jose, Calif.-based independent power producer's decision to pay current on its second-lien loan.

Level 3 makes good on refis

Back in bonds, Level 3 Communications Inc. made good on its refinancing plans with a $500 million add-on to its 9.25% notes due 2014 with the proceeds earmarked for a tender at 109 for the 10¾% notes due 2011, but some players were not altogether happy with the offer price.

"It would seem like a good idea, but it will lower my income slightly and trigger some capital gains taxes," said one buysider.

"Crowe and the management team are failing on their (self selected) internal metric of delivering shareholder value. I've seen their 'objectives.' There are lots of buts, ifs, ands, this and thats. Down the road, though, this hopefully will help shore up the balance sheet, but it could get expensive for them. The next issue to get tagged will be the 12¼% issue, I suppose, and that has been trading around 114."

The 103/4s gained about 1 point to the tender level, and traders said the news propped up other 2010 and 2011 issues, or maturity time frame of paper targeted by Level 3 for refinancing. The 11½% notes due 2010, for example, were seeing trading in the 106.25 area versus 105 on Tuesday.

Others, however, were heartened by Level 3's move, in part because the refinancing effort would slowly reduce risk on the remaining debt issues.

"It was a good call. The company can do much more financial engineering than they did and save a bunch of dough," a trader said.

Another buysider said, "With the bonds trading way above par and our effective rates dropping, there is absolutely no debt risk left. Each of these offerings refinances a chunk of debt at lower rates. The difference drops straight to the bottom line."

When the Broomfield, Colo., internet backbone company sold the $600 million 9¼% issue in October, proceeds were slated to fund the construction, installation, acquisition, lease, development or improvement of any assets to be used in the company's communications business, including the cash purchase price of any past, pending or future acquisitions. That deal, which was priced at par, was upsized from $400 million when it priced. Terms on the add-on were not available Wednesday.

Solo Cup layoffs fall short

Delivering on its promise to investors, Solo Cup Co. announced Wednesday that it is implementing its first major initiatives under the plan - a reduction of 5% of its workforce, which is expected to generate $9 million in annual savings. But the measure was seen falling short of expectations, a trader said, and Solo's 8½% notes due 2014 fell 2.5 points to 86 bid, 87 offered.

"I think the market was expecting something more," the trader said. "Also, there was a conspicuous lack of discussion about any asset sales, which they had been talking about."

Solo has been working on shoring up its balance sheet and performance for months, and the plans were outlined in presentations to bankers and creditors last week.

"This program is designed to address challenges facing the business directly while allowing us to build on our strengths," said Solo chief executive Robert Korzenski, in a news release. "We are moving aggressively to implement the changes necessary to turn our business around."

In addition to the layoffs, Solo is also taking steps to increase productivity in its manufacturing facilities. The company is working in the plants on a range of initiatives focused on achieving operational efficiencies. The facilities plan to increase productivity through refining processes, increasing machine utilization and reducing material scrap.

Concurrently, Solo has begun related work to improve purchasing and inventory management. The company believes that collectively these actions will contribute to supply chain efficiencies and cost reduction.

Sea Containers drops 2 points

With a couple of sellers offering Sea Containers Ltd. bonds for sale, traders said buyers took advantage and pulled back bids by a couple of points Wednesday.

The 10½% notes due 2012 went out at 70 bid, 71 offered, down from 72. The 10¾% bonds due 2006, which pushed the Bermuda-based maritime group into bankruptcy last month when it could not pay off the $115 million issue, were not seen moving.

There had been a steady uptick in Sea Containers bonds in recent weeks on speculation in reports from Finland of a possible sale of its SuperSeaCat ferry operator unit, but nothing more has surfaced along those lines.

Observers had speculated that Sea Containers' SuperSeaCat fast ferry business would be a good fit for the Finland ferry group Viking Line. Sea Containers has already sold its Finnish ferry business Silja Line for €450 million.

Salton sellers ahead of Friday

Salton Inc.'s bonds were sold off Wednesday, too, by as much as 9 points, though not in a big way as far as volume goes, traders said. The impetus was the upcoming deadline on Friday for Harbinger Capital Management Partners Master Fund I, Ltd. to complete due diligence on its proposed merger of Salton with rival small appliance maker Applica Inc.

The 12¼% senior subordinated notes due 2008 were not traded heavily, a trader said, but moved to 80 bid, 81 offered from Tuesday's close of 89. The issue was trading at about 90 in mid-November when the Lake Forest, Ill.-based small appliance maker inked an exclusivity agreement with Harbinger barring it from any other acquisition talks for the next month.

Harbinger, part of the well-known New York-based hedge fund under the umbrella of the investment firm Harbert Management Corp., is in talks with Salton about a possible merger with Applica, which agreed in October to be acquired by 40% owner Harbinger.

Harbinger said it expects to complete due diligence on Salton and line up funding commitments for a transaction by Dec. 15.

Another market source said he pegged Harbinger's offer to come in at around a 30% premium to where the stock is trading, and expects that the debtholders will do "fairly well" in the transaction. Salton shares on Wednesday closed on the New York Stock Exchange with a 2% gain to $2.58.

"I make the line at $3.45 a share, in cash. It's not worth going through the reasons. The simple answer is that $3.45 is about a 30% premium to recent market price and that is enough to buy the peace and send everyone home," the market source said.

Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances. Miramar, Fla.-based Applica makes and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker and Belson brand beauty salon products.

In October, Salton hired Houlihan Lokey Howard & Zukin Capital Inc. to conduct a strategic review of its business, with the possible sale among the potential options. That followed Harbinger's suggestion of a merger with Applica. Besides controlling Applica, Harbinger is also a major Salton investor, with 30,000 shares of Salton's series A voting convertible preferred stock, convertible into more than 15% of the company's common stock.

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