Levi bonds continue fall; MGM Mirage, Tom Brown price; funds lose $485.96 million

By Paul Deckelman and Paul A. Harris

New York, Sept. 11 - Levi Strauss & Co. bonds continued to "get rapped," as one trader put it, for a second straight session Thursday - with Moody's Investors Service creating further angst for investors by threatening a possible downgrade. Generally, trading was restrained, with some participants crediting the lack of activity to the distraction caused by ceremonies in New York and elsewhere marking the second anniversary of the 9/11 terrorist attack on the U.S.

Thursday's primary market session brought a drive-by deal from MGM Mirage. By the time the tumblers stopped spinning, the Vegas-based gamer had managed to cash in to the tune of $600 million, with a seven-year note that came at 6%. And oil and gas company Tom Brown Inc. brought $225 million of 10-years.

Late in the day, word began filtering down to whoever was still around - and there weren't many of those - that high yield mutual funds, considered a key barometer of overall junk market liquidity trends, had suffered a net outflow of $485.96 million in the week ended Wednesday, according to figures compiled by AMG Data Services Corp. of Arcata, Calif. and relayed to Prospect News by market sources.

The outflow brought to a quick halt the two-week winning streak which had seen the junk funds gain an amazing $4.401 billion - a record $3.258 billion of it in the week ended Aug. 27 and the remaining $1.143 billion inflow seen last week.

For the year to date, a total of $16.328 billion more has come into the funds than has left them, counting only those funds which report on a weekly basis and excluding distributions. That's down slightly from the previous week's cumulative total of $16.814 billion, according to a Prospect News analysis of the AMG figures. Inflows have still been seen in 22 of the 36 weeks since the year began.

The ample liquidity has fueled both the big new-issuance binge as well as the solid secondary rally which have prevailed for most of the year, although new-issuance dried up and the secondary market retreated during a five week stretch from mid-July through late August during which time some $4.9 billion more bled from the funds than came into them, the Prospect News analysis of the figures showed, as market timer money which had previously found high yield a comfortable place to park and pick up some hefty returns suddenly fled elsewhere, in line with an overall downturn in the fixed-income markets. The two week spurt of huge billion-dollar-plus inflows seemed to have revived the secondary and had jump-started the new-issue market. But market participants will weigh the current week's substantial outflow carefully to determine whither it is just a fluke or whether it possibly signals a return to the mid-summer market doldrums.

"When you figure that you had $4.3 billion come in over the prior two weeks, a breather is okay," one sell-side official commented as word of the outflow circulated through the market.

"The secondary is holding up reasonably well," added the source.

"New issuance has really gotten off to a strong start. And the Treasury environment for the most part has stabilized.

"After the pre-Labor Day lull I think we're at a healthy pace right now."

The outflow notwithstanding, word had it that there was plenty of money on the table for MGM Mirage's quick-to-market deal: $1 billion in the order book for what had hit the market bright and early on Thursday as a $400 million offering.

In any event the casino company raised, upsizing to $600 million of seven-year senior notes (Ba1/BB) which priced at par to yield 6% - a low yield that also sparked comment.

Price talk on the deal run by Banc of America Securities, Citigroup, Deutsche Bank Securities and JPMorgan was for a yield in the 6% area.

Terms were also heard on Tom Brown, Inc. and Tom Brown Resources Funding Corp.'s jointly issued $225 million of 10-year non-call-five senior subordinated notes due (Ba3/BB-). They priced at par to yield 7¼%.

The Denver-based oil and gas exploration and production company's notes came at the tight end of the 7¼%-7½% price talk, with Goldman Sachs & Co. running the books.

There were also terms on a Canadian dollar-denominated bought deal from TimberWest Forest Corp.

The Vancouver, B.C. priced a C$50 million add-on to its 7% senior debentures due Oct. 1, 2007 at 101.28 to yield 6.631%.

TimberWest has granted the underwriters a C$15 million over-allotment option. Merrill Lynch Canada Inc. led the deal.

The new issue calendar continued to build, Thursday.

Rayovac Corp. put the beam on an offering of $300 million of 10-year non-call-five senior subordinated notes, which are expected to price on or about Sept. 25, according to an informed source. No roadshow details were available as Prospect News went to press Thursday night.

Banc of America Securities is bookrunner on Madison, Wis.-based battery and lighting device company's deal. Citigroup is the co-manager.

Meanwhile Hines Nurseries, Inc. will start sowing the seeds Friday with a $175 million offering of eight-year non-call-four senior notes (B3/B).

The Irvine, Calif. commercial nurseries company hopes to price the deal late in the week of Sept. 15, via Credit Suisse First Boston.

And in a tender offer announcement, Station Casinos, Inc. expressed its intention to bring an offering of senior subordinated notes to fund the tender for $199 million of its 8 7/8% senior subordinated notes due 2008. Banc of America Securities and Deutsche Bank Securities are dealer managers on the tender. The consent deadline is Sept. 17. 2003.

Price talk of 9% area emerged Thursday on Dobson Communications Corp.'s upcoming $600 million of 10-year non-call-five senior notes (B3/CCC+), which are expected to price on Friday via joint bookrunners Lehman Brothers, Morgan Stanley and Bear Stearns & Co.

In emerging markets action Brazilian oil company Petrobras International Finance Co. sold an upsized $250 million add-on to its 9 1/8% senior notes due July 2, 2013 (Ba2) at 103.07, to yield 8.65%. Bear Stearns was the bookrunner. The deal was increased from $100 million.

The original $500 million priced at 99.196 on June 27, 2003 to yield 9¼%, so the company came away from the Thursday drive-by with a better rate.

And price talk of 9½% area was heard on the $200 million offering of senior unsecured notes - in seven-year non-call-four and 10-year non-call five tranches (B3/B+) - from Innova S de RL de CV.

The Mexican satellite television services-provider's deal is expected to price on Friday via Citigroup and JP Morgan.

An emerging markets source told Prospect News that the pace appears to be picking up, with regard to EM corporates.

"We are hearing that some Brazilian issuers are returning to the market," the sell-side official commented.

"We are also hearing that there are some first-time issuers expected in the next couple of months."

When the new MGM Mirage 6% senior notes due 2009 were freed for secondary dealings, they did not go very far, quoted perhaps as firm as 100.375 bid, 100.625 offered from their par issue price; a trader noted that while there seemed to be some demand for the new bonds, based probably on market players' respect for MGM Mirage, the third-biggest U.S. gaming operator, "at 6%, you'd better like the market or sell something against it."

Of more interest was the move in the new Tom Brown 7¼% senior subordinated notes due 2013, which also priced at par, but which began moving up right out of the gate, finally settling at a lofty 103.25 bid, 103.625 offered.

"Yeah, investors liked it," a trader observed. "I guess it was priced right."

Back among the established issues, he saw Levi "getting mushed again," quoting the San Francisco-based apparel maker's 11 5/8% due 2008 as having opened at 94.5 bid, 95.5 offered, but then falling to 92 bid, 94 offered. He also saw the company's 7% notes due 2006 down a deuce at 84 bid, 86 offered, and its 12¼% notes a point lower at 92 bid, 94 offered.

"And I think we'll see more sellers tomorrow," he added - although he covered against the possibility that this might not happen by mentioning that "we could see them bounce back though," with buyers coming in at lower levels."

"Levis got rapped alright" Thursday, another trader said, pegging the 12¼% notes at bid levels around 91-91.5 - well down from 94 bid, 95 offered on Wednesday.

Market participants noted that Moody's Investors Service seemed poised to follow the lead of Standard & Poor's, which on Wednesday had dropped Levi's debt ratings by two notches, to B from BB- previously, citing the jeans maker's announcement that the company will seek a temporary waiver under its existing credit facility as it finalizes a new $1.15 billion refinancing of its current secured bank credit facility and accounts receivable securitization program.

Moody's put the company's ratings, including the B3 rating on its senior unsecured bonds, under review for a possible downgrade, citing Levi's announcement "wherein the company stated it could not be certain it would be in compliance with all of its financial covenants as set forth in their existing credit facility dated January 2003, and that it would seek a temporary waiver until it could execute a refinancing of their credit agreement.

"The company also stated that it would incur significant restructuring charges as part of a cost cutting initiative with the hope of realizing significant savings in 2004 and beyond," Moody's said.

Beyond the covenant problems and likely large charges, Moody's also noted its concerns about "the rapid decline in the company's financial flexibility vis a vis its recently executed credit agreement, and weaker than anticipated year to date results than expected by Moody's at the time of the rating assignments, particularly in the areas of sales, higher working capital needs and higher debt levels."

A trader, while noting the threatened downgrade, asserted that "it was essentially a non-event; Moody's language was not much different than what S&P said earlier."

Yet another trader, who saw the Levi bonds "all over the place," declared that "once these things start sliding they just keep getting pushed down" as bearish sentiment takes over.

Elsewhere, the trader said that XM Satellite Radio's bonds "just keep getting better, with a lot of momentum."

He quoted the Washington-based satellite radio operator's zero-coupon/14% notes due 2014 at 80 bid, up from 79 bid, 80 offered on Wednesday; he noted that XM had announced this week that it had raised $150 million from a stock sale. It might use the proceeds either to fund the construction of a new satellite, if expected insurance monies don't come through, or, if they do materialize, for working capital and general corporate purposes, "which may include the repurchase or pre-payment of outstanding debt."

"Retail is still strong," a trader opined, "and supermarkets strong, but they're going to crap out at some point, they just have to."

He said such operators as Stater Brothers, Winn Dixie and Ingles Markets "all traded in the mid-90s like forever, with no excitement. Now, you have people just grabbing yield and it's at 101-103."

In that same category, he said, "Sealy Mattress 9 7/8%, that's another beauty, at par bid, 101 offered. C'mon - not too long ago, it was at 92 bid, 94. They sell mattresses," - so how much sudden interest could there be in the company or the sector?

"It's just interesting to watch," he said. "I believe we're going to see a correction at some point."

However, he saw Dutch international supermarket giant Royal Ahold - which he says is a whole different story from the other, smaller supermarket operators - firming, with its 8¼% notes due 2010 advancing two points to 106 bid.

"They were investment grade, then they fell back, and who knows, maybe they'll be going back there [to investment grade] again sometime."

A trader said that with the second anniversary of 9/11 looming large, "as you might expect, there was not a lot of activity today."

Another agreed that apart from the Levi story, not much was going on, especially with the eyes of many market participants riveted on the moving TV coverage of the ceremonies at Ground Zero. "I had my eyes on the screen all day," he acknowledged.

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