Hanger Orthopedic hung out to dry on filing delay; MGM Mirage sells upsized quickie deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 11 - MGM Mirage was heard by high yield syndicate sources to have sold a quickly shopped, upsized offering of eight year notes on Wednesday. Also on the new-deal scene, Qwest Communications International Inc. said that its Qwest Corp. subsidiary would be selling $500 million of new seven-year notes. Market sources said they expected a pricing Thursday. That's also when Collins & Aikman Products Corp. is expected to take another crack at the junk bond new-issue market, after having pulled a prospective deal off the table in May due to unfavorable market conditions.

In the secondary market, Hanger Orthopedic Group Inc. was the "horror show du jour" said a trader, who saw the Bethesda, Md.-based prosthetic patient-care center operator's 10 3/8% notes due 2009 collapse to 82 bid, 84 offered from prior levels at par after the company announced that it was postponing its quarterly earnings report, which was to have been issued this past Monday, in order to "complete certain accounting reviews." The company is now scheduled to report this coming Monday after the market closes, with a conference call for investors and analysts on Tuesday.

The trader said that after Hanger announced late Monday that it would delay its results by a week, the bonds still hovered around par because "people did not catch on" to the company's weak financial position.

But by Wednesday morning, enough people were aware of what was up for the bonds to open at a wide 91.5 bid, 94.5 offered, and actually recovered to about 92.25 bid, 93.25 offered, before heading radically southward in late-day dealings to end at 82 bid.

"Hanger probably won't pay their coupon [on the 10 3/8% notes] on Monday, and we'll probably see a downgrade to CCC within the next two or three days," the trader said.

At another desk, a market source quoted the 10 3/8% notes as having dropped to 89 bid from prior levels around 100.5 bid, although he acknowledged that he had heard "they may have dropped even more than that." He quoted Hanger's 11¼% notes due 2009 as having fallen in tandem with the 10 3/8s to about 90 bid by mid-afternoon, down from 101.

Hanger's New York Stock Exchange-traded shares meanwhile nosedived $3.87 (40.69%) to $5.64. Volume of 3 million shares traded was 10 times the usual turnover in the name.

In announcing that it would delay the release of the quarterly data, Hanger said that the accounting matters causing the delay "have no relation to the [recent] allegations of billing discrepancies at the patient care center in West Hempstead, N.Y."

Hanger said separately that its preliminary review of the billing problems indicated that they were not widespread but rather would largely be confined to that one center out of its 614 facilities in 44 states. It said that it "does not believe the resolution of the matters raised by the allegations will have a materially adverse effect on the company's financial statements."

An analyst said that Hanger faces a coupon payment Monday on the 10 3/8% notes of $10.375 million. He said in a research note that the company indicated that as of Aug. 6, cash on hand was $14.6 million, "which is enough to pay the coupon but leaves Hanger in a poor operating position."

"Indeed," he added, "it is unclear whether the company can even make the payment, since it is in violation of its bank debt" covenant.

He noted that "based upon current results the company will be in violation of the total leverage covenant in the credit agreement." That covenant calls on Hanger to have a maximum total leverage ratio of no more than 4.25x EBITDA, which would decline to 3.5x in the final calendar quarter of the year. Meantime, using company figures, the analyst, using the company's own earnings and debt estimates, projected that gross leverage would approach 5.5x.

"Management is scheduling a meeting with lenders to address the issue, but Hanger will not have access to its revolving credit facility at this time," the analyst said.

Toys 'R' Us down on split talk

Elsewhere, Toys 'R' Us Corp. said that it was exploring various restructuring options - including getting out of its underperforming core toy business altogether and focusing on its lucrative Babies 'R' Us operations.

The Wayne, N.J. specialty toy retailer's statement that it would separate the booming baby-merchandise business from the sagging toy store operation and might leave the toy business is seen as an admission that it is unable to effectively compete with big-volume discount retailers such as Wal-Mart Stores Inc. and Target Corp. Competition from the discounters has already driven several rival toy store operations, including KayBee Toys and FAO Schwartz's corporate parent, into bankruptcy.

A trader said that Toys 'R' Us notes initially traded up before investors caught the full impact of the company's message and then traded back down, with its 7 78% notes due 2013 finishing at 99 bid, par offered, down two-and-a-half points on the session.

Another trader saw the Toy bonds down about three points across the board, with the 7 5/8% notes due 2011 ending at 100.5 bid, 101.5 offered and its 8¾% notes due 2027 at 99 bid, 101 offered.

"It sounds like they're going to spin off Babies 'R' Us," he said, "and then put all of the debt in the parent company" that they would leave behind to focus on running the thriving baby business, which the first trader said was "the big cash cow."

Dillard gains on card sale

Also in the retailing end, a market source saw Dillard's Inc. debt trading at higher levels, helped by the Little Rock Arkansas-based department store operator's statement Monday that it planned to sell its store credit card operation to GE Consumer Finance for $1.25 billion in cash plus assumption of $400 million of securitized debt. Dillard's then would use the proceeds to reduce its own debt.

Traders said that Dillard's notes were being quoted higher but on little real trading, as the bonds don't really trade around much.

The source quoted Dillard's 6 7/8% notes due 2005 as having firmed to 102.75 bid from 101.875, while its 7 3/8% notes due 2006 pushed up to 105 bid, from 103.75, and its 9 1/8% notes due 2011 tacked on two points to close at 110.

Bally steadies at lower levels

Bally Total Fitness Holding Corp.'s notes, which had been gyrating at lower levels Tuesday after the Chicago-based fitness club operator announced plans to delay filing its 10-Q second quarterly results with the Securities and Exchange Commission and will restate some prior results, all due to accounting problems, were seen to have pretty much steadied.

Bally's 9 7/8% notes due 2007 were seen at 84.5 bid, and its 10½% notes due 2011 were quoted at 96, pretty much unchanged on the day.

An analyst said that Bally's "had minimal reaction today - maybe off ½ point - on the predictable Moody's news that the credit had been placed on review" for a possible downgrade. Bally's "has given the market a lot to digest in the second quarter: the SEC investigation into its accounting change/restatement, announced in the first quarter, the change in auditors to KPMG and management departures."

Against that backdrop, the postponement of the results "should hardly come as a surprise in the wake of all of this, especially with the new auditor completing due diligence and the significant level of internal and external scrutiny. Better to delay than have to restate again in a few quarters."

He further indicated that even with Bally's current challenges, "I think the market sees the substantial value in this name, due in part to Bally's monetizable accounts receivable balance of nearly $300 million."

Drive-bys back

The drive-by deal drove back into the junk bond primary market on Wednesday, as MGM Mirage came in with a $500 million offering and left having completed an upsized $550 million.

And early in a session that one investment banker referred to as "a little choppy," Qwest Corp. rang in with a $500 million offering that it hopes to price on Thursday.

Meanwhile another sell-sider mulled Tuesday's quarter-point hike in the short term interest rate by the Federal Reserve

The official wondered in light of a summer that has been thus far somewhat disappointing with regard to economic numbers whether the Fed might sit tight in September.

"Ultimately I believe they will bump it another 25 in September," the sell-sider conjectured.

"After that it's uncertain though. If we're still not producing jobs by then I think they might begin to show some restraint."

MGM Mirage upsizes drive-by

The day's biggest and only dollar-denominated deal came from Las Vegas hotel and casino resort operator MGM Mirage.

In a Wednesday drive-by the company priced an upsized, quick-to-market $550 million of eight-year senior notes (Ba1/BB+) at par to yield 6 ¾%.

The debt refinancing deal, via Banc of America Securities and Citigroup, came at the tight end of the 6¾%-6 7/8% price talk and was increased from $500 million.

In trading, the new MGM Mirage bonds were quoted at par bid, 100.5 offered, unmoved from their par issue price earlier in the session.

Crown downsizes

Meanwhile on the eastern shores of the Atlantic Ocean, Crown European Holdings SA priced a downsized €350 million of seven-year notes (Ba3/BB) at par on Wednesday to yield 6¼%.

The debt refinancing from the subsidiary of Philadelphia-based packaging products supplier Crown Holdings, Inc. came at the 6¼% area talk, which had been revised from 6%-6 1/8%. The deal was reduced from €460 million.

Citigroup was the bookrunner.

In a Wednesday press release Alan Rutherford, executive vice president and chief financial officer of Crown Holdings, commented "We are extremely pleased with the demand for this issuance which we believe to be one of the largest and most competitively priced euro high yield offerings to date in 2004."

According to Prospect News data, the only other European junk bond offering to achieve such a low yield this year was ProSiebenSat.1 Media AG's €150 million priced on May 13.

Qwest to price on Thursday

Also appearing with a quick-to-market offering during the session was Denver-based provider of voice, video and data services Qwest Corp.

Price talk is 8%-8¼% on the company's $500 million of seven-year senior notes (Ba3/BB-/BB), which are expected to price on Thursday, via Goldman Sachs & Co.

Proceeds will be used to partially fund a tender for the company's 7.2% notes due Nov. 1, 2004 and for general corporate purposes including funding or refinancing investments in telecommunications assets.

Meanwhile price talk is 8½%-8¾% on THL Buildco Inc. (Nortek Inc.)'s planned sale of $625 million of 10-year senior subordinated notes (B3/B-), expected to price on Thursday afternoon via UBS Investment Bank.

Price talk is 9¾%-10% on Norcraft Holdings LP/Norcraft Capital Corp.'s upcoming $80 million proceeds of eight-year senior discount notes (Caa1/B-), also expected on Thursday afternoon, also via UBS.

And price talk emerged Wednesday on Rainbow National Services LLC/RNS's $800 million two-part deal, which is expected to price on Friday morning:

Talk is 8½%-8¾% on $250 million of eight-year non-call-four senior notes (B3/CCC+) and 9¾%-10% on $550 million of 10-year non-call-five senior subordinated notes (Caa1/CCC+).

Banc of America Securities, Bear Stearns & Co., Credit Suisse First Boston and JP Morgan are joint bookrunners.

Finally, price talk on Secunda International Ltd.'s $125 million of eight-year senior secured floating-rate notes (B2/B) is three-month Libor plus 600-625 basis points.

The deal, led by RBC Capital Markets, is expected to price late in the present week or early in the week of Aug. 16.

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