Standard Aero, Secunda deals price; Hanger higher after coupon payment, before bank meeting

By Paul Deckelman and Paul A. Harris

New York, Aug. 17 - Standard Aero Holdings and Secunda International Ltd. were heard to have priced new deals Tuesday as the primary market picked up a little from a pretty much moribund Monday.

Hanger Orthopedic Group Inc. was heard to have firmed smartly for a second straight session, as the Bethesda, Md.-based operator of orthopedic medicine and prosthetic clinics confirmed on a conference call that it had, indeed, made the scheduled coupon payment Monday on its 10 3/8% notes due 2009 and said that it will confer with its bank lenders Wednesday and expects to have the credit facility covenant violation problem that's blocking access to the facility cleared away by Labor Day, at the latest (see separate story elsewhere in this issue).

Tuesday's primary market session produced terms on two deals amounting to slightly more than $323 million of proceeds as sources on the syndicate desks advised Prospect News that the exceptionally busy summer of 2004 may be winding down.

Although sources have expressed the expectation that the run-up to Labor Day could easily produce one or more drive-by deals, one source on Tuesday was skeptical.

"It's beginning to look like we are entering the dormant period that you customarily see during the two weeks before Labor Day," the investment banker said, adding that the buy-side seems increasingly to be disappearing from the scene, as it customarily does in late summer.

Standard Aero inside of talk

Terms emerged Tuesday on Standard Aero Holdings' acquisition deal via JP Morgan and Lehman Brothers.

The company sold $200 million of 10-year senior subordinated notes (Caa1/B-) at par to yield 8¼%, inside of the 8½% area price talk.

Proceeds will be used to help fund the Carlyle Group's acquisition of the Winnipeg, Manitoba-based aircraft engines services provider from Dunlop Standard Aerospace Group for $670 million.

When the new Standard Aero 8¼% notes were freed for secondary dealings, a trader saw them initially move a little lower. "They came at par and now they're offered at par," he said.

But at another desk, a trader later saw the new bonds firm after that inauspicious beginning, quoting the notes as having improved to 101.375 bid, 101.625 offered.

Secunda brings $125 million floaters

Also pricing a deal was Halifax, Nova Scotia-based provider of supply and support services to the offshore oil and gas industry Secunda International Ltd.

The company sold $125 million of six-year senior secured floating rate notes (B2/B) at 98.50. The coupon will float at three-month Libor plus 800 basis points.

Price talk on the debt refinancing deal of three-month Libor plus 800 basis points had been revised from Libor plus 600-625 basis points.

Late last week the RBC Capital Markets-led transaction had been slightly restructured, with the company increasing the call protection to two years from one year.

Setting the stage for summer's finale

If the above-quoted primary market source's color is accurate and depleted buy-side ranks actually do send the new issue market into dormancy, the uncharacteristically busy summer of 2004 figures to end not with a bang but with a whimper.

With Tuesday's two transactions in the bag, the forward calendar slips to slightly above half a billion, with four deals totaling $530 million expected to price prior to Friday's close.

Price talk emerged Tuesday on three of those four deals:

* Talk is three-month Libor plus 450-475 basis points on Parker Drilling Co.'s $150 million of six-year senior floating-rate notes (B2/B-), via Lehman Brothers and Banc of America Securities,

* Talk of 100-100.75 emerged on Ply Gem Industries, Inc.'s $105 million add-on to its 9% senior subordinated notes due Feb. 15, 2012 (B3/B-), via UBS Investment Bank, Deutsche Bank Securities and JP Morgan, and

* Talk of 11¾%-12% emerged MQ Associates, Inc.'s $85 million proceeds of eight-year senior discount notes (Caa1/B-). JP Morgan is the bookrunner this deal from the parent of MedQuest, Inc.

All three transactions are expected to price on Wednesday.

Also in the market is Securus Technologies, Inc., with a deal that some observers had expected to price late in the week of Aug. 9.

The Denver-based company, which supplies secure communications for inmate populations, is selling $190 million of eight-year senior notes (B3/B+) via Credit Suisse First Boston and Morgan Stanley.

Price talk is 11%-11¼%.

Softness in secondary carries over to primary

In the Aug. 17 issue of Situation Room, Banc of America Securities' daily debt market commentary, head of debt research David Goldman and his team observe that recent softness in the high yield secondary market has lately extracted a price from new issuers.

"With total new issue supply totaling $8.3 billion over the past two weeks ($4.3 billion last week and $4 billion the week before), the high yield primary market is much more active than what one would expect in typical slow summer months," Goldman and company observe.

"Sharp declines in Treasury yields in the past weeks have induced opportunistic high yield issuers to come to market. However, the high yield secondary market has also experienced some softness in the same period (the High Yield Broad Market Index spread widened by 22 bps from July 30 to Aug. 13, 2004) - and that in turn has exerted upward pressure on the cost of financing. As a result, the average offering STW [spread to worst] for single B transactions has jumped from 432 bps in July to 517 bps so far in August, while the average offering YTW [yield to worst] rose from 8.65% to 9.39% in the same period."

M&A outdistancing refi deals

Goldman and company also observe in Tuesday's Situation Room that junk deals brought to fund merger and acquisition activity continue to outpace debt refinancing deals.

"M&A activities have been steadily on the rise in 2004 and they have gathered momentum in the third quarter of 2004," the Banc of America Securities debt researchers observe. "While we are only halfway through the third quarter, high yield new issuance proceeds used for M&A purposes have already totaled approximately $8.2 billion - that's 73% of the M&A related [high yield] issuance in full 2Q 2004 (of $11.2 billion). Moreover, quarter-to-date M&A related issuance accounted for 47.5% of the total supply volume of $17.2 billion, narrowly overtaking refinancing as the primary use of proceeds in the High Yield space.

"This figure reflects both the increase in M&A activities and a slowing down in debt refinancing, which was the dominant use of proceeds in 2003 as well as in early 2004."

Hanger climbs again

Back among the established issues, Hanger Orthopedics notes made it two straight sessions of strong rebound from the lows the bonds hit last week when it was announced that the company would delay its second-quarter earnings for a week, to this Monday, and that it was in violation of a credit facility covenant, choking off its access to the financial lifeline.

That bad news caused the 10 3/8% bonds to swoon to as low as 82 bid from prior levels at par, although they had recovered a little to end around 86 bid by Friday. The bonds then jumped to 89 on Monday as word circulated around the market that the company had apparently paid the coupon - even though the $10.375 million payment would take up more than half of its remaining available cash.

On Tuesday the bonds "were definitely up," a trader said, quoting them as having risen to 92.5 bid, 93.5 offered. Another trader saw them at a slightly wider 92 bid, 94 offered.

Hanger, which released second-quarter earnings on Monday after the close, said on a morning conference call that it had indeed made the coupon payment on the 10 3/8% notes, and said that it was scheduled to meet with its bank lenders Wednesday to seek a waiver or an amendment of the total leverage ratio covenants in its term loan and credit revolver facilities that it is currently in violation of, with the problem expected to be history by the Labor Day weekend.

Company executives told the analysts and investors on the call that it had "sufficient" liquidity and cash flow to get by until it can reach agreement with the banks - but they said that just as a precaution, and to discharge their fiduciary duties to their company's shareholders and bondholders, they would seek a forbearance agreement from the bank creditors, which would immediately restore Hanger's access to its revolver.

Calpine better on Canada sale

Elsewhere, Calpine Corp. bonds were seen anywhere from half a point to a point higher, following the San Jose, Calif.-based electric power producer's late-Monday announcement that it would sell all of its Canadian natural gas reserves and petroleum assets to PrimeWest Energy Trust for a total purchase price of $625 million, less adjustments to reflect a July 1 effective date.

Calpine's bonds were "better, mostly in the short stuff," said a trader, who quoted its 8¼% notes due 2005 up three-quarters of a point at 95.25 bid, 96.25 offered, while its 10½% notes due 2006 were a point ahead at 90.25 bid, 91.25 offered.

At another desk, Calpine's 7¾% notes due 2009 were seen up a point at 61 and its 8½% notes due 2011 were half-point gainers at 61.5, although Calpine's 8½% notes due 2010 were steady at 77.

Calpine said that net proceeds from the sale of the Canadian gas assets will be used to repay the amount outstanding under its existing $500 million first lien debt, with any remaining proceeds to be used in accordance with the asset-sale provisions of Calpine's existing bond indentures.

Following the repayment of its existing first-lien debt, Calpine expects to issue up to approximately $700 million of new first-lien debt.

In another piece of Calpine-related news, the Calpine Power Income Fund - an unincorporated open-ended electrical power asset investment trust managed by Calpine Canada Power Ltd. - confirmed news reports that it is in discussions with parent Calpine about a potential preferred equity investment in Calpine's Deer Park facility in Texas. Neither the company nor the fund gave any word on the size of the potential investment.

MCI unchanged on Leucadia stake

News that Leucadia National Corp. has amassed a 4.96% equity stake in MCI Inc. seemed to underwhelm the junk market Tuesday, as traders reported that the Ashburn,. Va.-based long-distance carrier's bonds were unchanged on the day.

They quoted MCI's 5.908% notes due 2007 at 97.5 bid, its 6.688% notes due 2009 at 92.5 and its 7.735% notes due 2014 at 89.75, all unchanged.

MCI's notes had pushed up solidly some weeks ago when Leucadia, a New York-based diversified holding company, filed with federal antitrust regulators for permission to acquire up to 50% of the Number-Two U.S. long distance operator, which emerged from bankruptcy back in April. The regulators let an Aug. 9 deadline slide by without issuing any objections to such an acquisition.

But the feeling in the junk market was that Leucadia's accumulation of just under 5% of MCI's stock doesn't exactly float anyone's boat.

"No, I wouldn't think so," said one trader, commenting on the fact that the MCI bonds had gone nowhere on the news.

Another trader opined "I don't think there's anything in that number that's compelling" - not unless Leucadia acquires a deep-pocketed strategic partner.

He noted that Leucadia would have to pay $2.5 billion for half of MCI's stock, and would probably incur additional costs from change-of-control puts on the phone company's bonds. Meanwhile, he said, Leucadia's own market capitalization was only in the $3.5 billion range - meaning that in his judgment, MCI is too big a fish for Leucadia to swallow half of all by itself.

"It's nice that they've bought a certain number of shares - but they don't have the wherewithal to do the whole thing," he declared.

J.C. Penney steady

The trader saw J.C. Penney Co.'s bonds little changed, even as the Plano, Tex.-based retailer reported operating earnings of $72 million (23 cents per share), for the fiscal second quarter ended July 31, versus a year-ago loss of $3 million ( three cents a share).

Penney's 7 3/8% notes due 2008 stayed at 109.25 bid, 110.25 offered, unchanged on the day.

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