Primary skips vacation as new deals emerge; Delta bonds earth-bound on cash worries, bankruptcy warning

By Paul Deckelman and Paul A. Harris

New York, Aug. 9 - Activity in the high-yield primary market was seen as slow Monday, with no new issues having priced by the time activity rolled up for the day. But it was hardly a typical August Monday: Sino-Forest Corp. was heard to have a solid order book for its upcoming offering of seven-year guaranteed senior notes and several prospective issuers - Standard Aero Holdings, MedQuest, Inc.'s holding company, Newfield Exploration Co. and Ply Gem Industries - were heard to be hitting the road to market their deals.

In the secondary, "It was very slow, very boring, very lethargic," a trader lamented. "Everyone is waiting for Godot " - or at least, waiting to see whether the Federal Reserve holds off on an expected interest rate rise at Tuesday's scheduled Federal Open Market Committee meeting in view of new economic data showing the recovery is not as robust as previously thought.

"Nobody cares" about doing much of anything," the trader continued. "They're waiting for the Fed, or for oil [prices to drop] or the economy or terrorism - waiting for something."

One of the few names which definitely was a feature was Delta Air Lines Inc., whose bonds were heard having fallen sharply across the board after the Atlanta-based air carrier warned that it would have to tap its cash reserves to fund its ongoing operations, and could conceivably face Chapter 11.

Delta warned in its 10-Q filing with the Securities and Exchange Commission that "our unencumbered assets are limited, our credit ratings have been substantially lowered and our cost structure is materially higher than that of our competitors. Except for our existing commitments to finance our purchase of regional jet aircraft, we have no available lines of credit. We believe that, unless we achieve significant reductions in our cost structure, we will be unable to access the capital markets for new borrowings on acceptable terms."

It said that "continued losses of the magnitude we recorded in 2003 and in the six months ended June 30, 2004 are unsustainable, and we have significant obligations due in 2005 and thereafter, including significant debt maturities, operating lease payments, purchase obligations and required pension funding. We are intensively engaged in an effort to identify and obtain cost reductions from our key stakeholders and to implement new strategic business initiatives in order to effect a successful out-of-court restructuring, but there can be no assurance this effort will succeed.

"If we cannot make substantial progress in the near term toward achieving a competitive cost structure that will permit us to regain sustained profitability and access the capital markets on acceptable terms, we will need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code."

A trader said that Delta "is down to $2 billion of cash from $2.7 billion at the beginning of the year, and they said they would probably have a burn rate in the second half of the year similar to what they had in the first half of the year. They're trying to get a 35% cut out of the pilots, which is about a $1 billion of savings, and they really haven't gotten anywhere yet."

With crude oil prices continuing to hover around $45 a barrel - and those costs ultimately passed on to the end-users of distillate products, such as airlines that consumer enormous quantities of increasingly expensive jet fuel - "unless this oil turns around - all of 'em are going to go out of business," sooner or later, the trader concluded.

"Delta is a piece of crap," a second trader flatly declared. "They're going to file [for Chapter 11 protection]. This [news that the company has to access its cash reserves] can't be a surprise to anybody."

He saw Delta's 7.70% notes due 2005 as having come down to 48 bid, 49 offered from prior levels in the mid-to-lower 50s, with Delta's 2008 bonds at 36.5 bid, 37.5 offered, its 2010 notes at 35 bid, 36 offered, and its 8.30% notes due 2029 at 28.5 bid, 29.5 offered, in from recent levels in the lower 30s.

Another trader saw the 7.70s at 46 bid, 48 offered, down eight points from where they were last week, while its 7.90% notes due 2009 were seven points lower, at 32 bid, 34 offered, and the 8.30s were at 28 bid, 29 offered. The latter bond, he said, was off only about three points - but it had a shorter distance to fall.

Noting the steeper declines taken by the shorter-term debt, he warned that "prices are converging," with all of the debt moving in the direction of being at the same level, sooner or later. "If they file, it will all get the same return," regardless of coupon or tenor, all other factors such as place in the company's capital structure being equal.

Delta's New York Stock Exchange-traded shares, meanwhile lost 13 cents (3.16%) to $3.98 on Monday.

Delta said in its filing that falling yields and rising fuel prices have caught the carrier in a bind. And it said that with a number of its rivals, such as American Airlines, US Airways and United Airlines had "significantly reduced their costs through bankruptcy or the threat of bankruptcy. As a result, our unit costs have gone from being among the lowest of the hub-and-spoke airlines to among the highest, a result that places us at a serious competitive disadvantage." US Air went bankrupt, emerged and is still struggling; United is still in Chapter 11, and American managed to successfully use the threat of bankruptcy to force additional concessions out of its pilot's union and other employees, as Delta hopes to do.

Charter steady despite earnings

Elsewhere, traders saw little or no movement in the bonds of Charter Communications Inc. even following the release of the St. Louis-based cable operator's second-quarter numbers and its conference call.

Although Charter posted a wider second-quarter loss, it said that revenues were up. It also touted recent developments settling most of the legal problems that grew out of its accounting irregularities discovered over the past two years, and said it remains committed to de-leveraging its balance sheet - although it was short on details as to how that might actually be done (see related story elsewhere in this issue).

A trader said that Charter's bonds were "pretty much unchanged," quoting the company's 9.92% notes due 2011 steady at 75 bid, 76 offered, while at another desk, a trader saw Charter's 8¼% notes due 2007 at 88 bid, 89 offered, its 10% notes due 2009 at 79.5 bid, 80 offered and its 11 1/8% notes due 2011 at 80 bid, 81 offered, "all pretty much unchanged to maybe down a quarter [of a point]." He also saw Charter's 11¾% notes due 2011 were at 60 bid, 61 offered, also unchanged.

Cablevision better on results

Another cable name out with earnings, Cablevision Systems Corp., did manage to go somewhere on the release of its numbers, with the Bethpage, N.Y.-based cabler's bonds seen up a point or so, even though the company posted a net loss for the quarter, earnings impacted by operating losses from its VOOM satellite television operations. On the upside, Cablevision said revenues rose a hefty 25% to $1.2 billion and raised its forecasts for revenue and cash flow growth for 2004. Cablevision also boasted a gain in basic video subscribers and new phone customers.

Its 8 1/8% notes due 2009 were seen having firmed to 104.25 bid from 103 previously, while its 6¾% notes due 2012 were three-quarters of a point better at 96.75 bid and its 7¼% notes due 2008 bumped up to 103 bid from 101.25 before.

Cablevision was "up a bit," another trader said, its 8% notes due 2012 pushing two points higher on the session to 98.5 bid, 99.5 offered.

Dobson lower

Another communications name in the news was Dobson Communications Corp., whose 8 7/8% notes due 2013 were seen having tumbled to 67 bid, while the 10% notes due 2011 of its American Cellular Corp. subsidiary fell to 78 bid in late dealings ahead of the Oklahoma-based rural telecom provider's after-market release of its second-quarter data. Both bonds were indicated down at least a few points from previous levels.

The fall came even as Dobson reported EBITDA for the quarter ended June 30 of $85.7 million, versus $70.5 million a year ago. It had a net loss of $15.9 million (12 cents a share), versus year-earlier earnings of 224.4 million, or $2.49 per share.

Despite the stronger EBITDA performance in the quarter, the company revised second-half guidance in this area and several other financial measures downward. It said second-half EBITDA will be in a range of $166 million to $176 million, which would result in full-year EBITDA of $335 million to $345 million.

Dobson had previously anticipated 2004 EBITDA in a range of $390 million to $425 million.

Primary looking to busy August

No junk bonds were issued as the Aug. 9 week got underway, sources told Prospect News on Monday.

However, one sell-sider added, for an August week the present one has an impressive amount of business that is expected to get done. And what's more the forward calendar is continuing to build.

"The primary market is hanging in there," said the source.

"Nothing priced today but we have deals on the road and the next two weeks are going to be busy ones.

"And the buy-side still has cash to put to work," the official added.

"People will be paying attention on Tuesday to see what the Fed has to say. And of course rising rates are never good for the bond market.

"But then again the equity market is pretty choppy right now."

Two more for Tuesday

Tuesday's primary market session figures to see terms emerge on no fewer three deals.

Price talk of 7½%-7¾% emerged Monday on Century Aluminum Co.'s planned $250 million of 10-year senior notes (BB-), which is expected to price Tuesday afternoon via Credit Suisse First Boston, Banc of America Securities, Goldman Sachs and JP Morgan.

And price talk is 9%-9¼% on Sino-Forest Corp.'s offering of $200 million to $300 million of seven-year guaranteed senior notes (Ba2/BB-), expected to price on Tuesday. Morgan Stanley will run the books for the Rule 144A/Regulation S offering.

A market source said that the Sino-Forest books closed Monday in Asia and Europe and added that there are $550 million of orders.

Late last week talk of 11%-11¼% was heard on Securus Technologies' upcoming $190 million of eight-year senior notes. That deal, via Credit Suisse First Boston, Morgan Stanley, is also expected to price on Tuesday.

Four more before Labor Day

Timing emerged Monday on four more deals that figure to be completed before the pivotal Labor Day holiday.

Newfield Exploration Co. will commence a three-day roadshow on Tuesday for $300 million of 10-year senior subordinated notes (expected ratings Ba3/BB-), which are scheduled to price on Thursday.

Morgan Stanley will run the books for the acquisition financing from the Houston-based independent crude oil and natural gas exploration and production company.

The roadshow also starts Tuesday for Standard Aero Holdings' $200 million of 10-year senior subordinated notes (Caa1/B-), which are expected to price in the middle of the week of Aug. 16.

JP Morgan and Lehman Brothers are the bookrunners for the acquisition deal from the Winnipeg, Manitoba, Canada-based provider of turbine engine maintenance, repair and overhaul for aircraft engines and industrial gas turbines.

A Tuesday roadshow start is also planned for Ply Gem Industries, Inc.'s $105 million add-on to its 9% senior subordinated notes due Feb. 15, 2012 (B3/B-).

The UBS Investment Bank-led acquisition deal is expected to price in the middle of the week of Aug. 16.

And MQ Associates, Inc., the parent corporation of MedQuest, Inc., will start a roadshow Thursday for an $85 million proceeds offering of eight-year senior discount notes (Caa1/B-), with pricing expected early in the week of Aug. 16.

JP Morgan will run the books for the dividend deal from the Alpharetta, Ga.-based operator of outpatient diagnostic imaging centers.

Citi strategist sees high yield at crossroads

Citigroup high yield strategist John Fenn, writing in the High Yield Recap from last Friday's Bond Market Roundup, the Citigroup strategy weekly, sees a lack of conviction in the market's present technicals.

"At this time, we see the market at a crossroads waiting to choose a direction as valuations have gotten tight again, Treasury rates have been bouncing around from headline to headline, yet issuer fundamentals continue to improve," writes Fenn.

"Of course, the philosophical impasse is further magnified by the time of year. The summer slowdown has clearly been evidenced by a lack of flow, when we find names not trading for days at a time.

"Even the mutual fund flows showed the distinct lack of conviction, or, at the very least, indicated that there are not too many people around as we head into August. (That really cannot be the case when you consider that it was this week a year ago that the market saw its record weekly outflow of $2.55 billion.)

"Regardless, AMG reported that high yield mutual fund experienced outflows of merely $29.4 million for the week ended August 4. However, with monthly reporters indicating an inflow of an underwhelming $40.5 million, July finished up as the first positive funds flow month of 2004."

Citi's Fenn sees floaters cheap

Noting that the Aug. 2 week saw three floating-rate junk bond transactions, Crompton, Borden, and AMC Entertainment, Fenn noted that in two of the three cases - he called AMC an exception and pointed out it priced after the huge Treasury rally Friday - the spreads to Libor came at 65 basis points or more versus the asset-swapped spreads on the corresponding fixed-rate deals.

"While we have always viewed the floating rate market cheap, the swapped spread to fixed has typically been more in the 50 bps neighborhood," Fenn wrote. "Why are spreads pushing out? It is somewhat hard to say, but there has been a significant amount of floaters offered in the market during 2004 - 25 transactions with at least another six coming out of euro deals.

"While still a relatively new product for high-yield investors, that would certainly indicate good demand. In a rising rate environment, one would think there would be more of a push to buy the floating rate paper," Fenn said.

He described floater buyers as "a bit more opportunistic" and suggested that in a buyers market as at present they are "simply pushing harder on rate."

While cheap to the investor, floaters are also "a terrific vehicle for the issuer with low initial Libor rates and structurally favorable terms (although some call schedules are getting more prohibitive).

"We still view the floaters as cheap and recommend them to clients," Fenn said.

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