Select Medical back, others price too; Dana warns on outlook, cut to junk; funds see $200 million outflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 15 - Select Medical Holdings Corp. - which had announced just Tuesday that it was pulling its planned issue of 10-year floating-rate notes - made a dramatic reappearance Thursday, although a bit downsized from the original $250 million, successfully selling a tranche of $175 million 10-year floaters.

High-yield primary market sources also reported pricings from such issuers as gaming operators Kerzner International Hotels Ltd. and San Pasqual Casino Development Group, and Pacific Energy Partners LP. Price talk also emerged on pending offerings from NBTY Inc., Williams Scotsman Inc. and Panolam Industries Inc. InSight Health Services Corp. was heard to be readying a quickly emerging six-year deal for pricing Friday.

In the secondary arena, Dana Corp.'s bonds skidded lower after the Toledo, Ohio-based maker of automotive powertrain components revised its 2005 earnings outlook sharply downward, which in turn led Standard & Poor's and Fitch Ratings to both cut its credit levels to junk bond status, where Moody's Investors Service has had them all along. Some other automotive names, such as Delphi Corp. and Dura Operating, were seen trading lower on apparent sector sympathy.

Overall the high-yield market gave up as much as half a point on Thursday, with automotive names leading the plunge, according to sources.

Elsewhere, the bonds of newly bankrupt Delta Air Lines Inc. and Northwest Airlines Corp. were seen holding pretty much to the same levels they occupied late Wednesday, when the two beleaguered rival airline operators both filed for Chapter 11 protection, market participants now apparently regarding Delta and Northwest as - literally and figuratively - yesterday's news.

And as trading was winding down Thursday, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $199.5 million more left funds in the week ended Wednesday than left them. That more than offset the $84.5 million of net inflows seen in the week ended the previous Wednesday, Sept. 7.

Outflows have now been seen in two weeks out of the past three, and eight weeks out of the past 10. During that time, net outflows have totaled approximately $1.052 billion, according to a Prospect News analysis of the AMG figures.

For the year so far, outflows have now been seen in 28 weeks of the 37 since the start of the year, against only nine weekly inflows. Cumulative net outflows for the year total around $8.091 billion, according to the Prospect News analysis, down from about $7.891 billion last week.

The fund flow trends have moved through several distinct phases so far this year. After some vague meandering around in the first few weeks of the year, there was a 15-week stretch of outflows from mid-February through late May during which about $6.776 billion more left the funds than came into them, according to the Prospect News analysis. Then, after a few weeks in June and early July in which the fund flows followed a zig-zag pattern, alternating inflows with outflows, the trend again turned negative around mid-July, although inflows, again alternating with outflows, were seen in two weeks out of the last four.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high-yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Primary busy

Despite the overall weaker tone in the secondary, tight transactions seemed to be the order of the day in the primary market as four issuers priced a total of $920 million in four tranches. Two were quick-to-market issues - although one of those came in a slightly restructured and downsized version of the deal Select Medical Holdings Corp. pulled two days before. All four of the transactions priced at or tight to price talk.

Kerzner quick to market

Thursday's biggest deal in terms of dollar amount came from resort, casino and luxury hotel operator Kerzner International Ltd.

The company drove through with a $400 million issue of 10-year senior subordinated notes (B2/B) that it priced at par to yield 6¾%, on top of price talk.

Deutsche Bank Securities and JP Morgan ran the books for the debt refinancing issue.

San Pasqual a blowout

Meanwhile, trailing an investor roadshow, San Pasqual Casino Development Group priced a $180 million issue of eight-year senior notes (B2/B+) at par on Thursday to yield 8%, again on top of price talk.

Merrill Lynch ran the debt refinancing and project funding deal from the Indian gaming facility operator based near San Diego.

Earlier in the week a buy-side source told Prospect News that the deal was a blowout.

Pacific Energy upsizes

Also trailing a roadshow, Pacific Energy Partners, LP and Pacific Energy Finance Corp. priced an upsized $175 million issue of 6¼% 10-year senior notes (Ba2/BB-) at 99.544 to yield 6.3125%.

The yield came toward the tight end of the 6 3/8% area price talk. The deal was increased from $150 million.

Lehman Brothers and Banc of America Securities were joint bookrunners for the acquisition financing from the Long Beach, Calif., master limited partnership which is engaged in the business of gathering, transporting, storing and distributing crude oil and other related products.

Select Medical returns

Two days after postponing a similarly structured deal due to "market conditions," Select Medical Holdings Corp. returned to price an upsized, quick-to-market $175 million issue of 10-year senior floating-rate notes (Caa1/B-) at par to yield six-month Libor plus 575 basis points.

The interest rate came on top of price talk.

The completed transaction was upsized from $150 million, however the deal that Select Medical postponed on Tuesday was sized at $250 million.

Merrill Lynch & Co., Wachovia Securities and JP Morgan ran the books for the Rule 144A with registration rights issue. Those same bookrunners, listed in a different order, were running the books for the postponed offering. The syndicate listing order for the postponed transaction was JP Morgan, Merrill Lynch & Co. and Wachovia Securities.

The bonds that priced Thursday contain two additional years of call protection compared to the bonds in the postponed Tuesday transaction.

Holdings is the parent company of Mechanicsburg, Pa.-based Select Medical Corp., a specialty and long-term acute care provider at hospitals in 26 states.

The revived deal marks Select Medical's second pass (or third pass if you count the pulled deal earlier this week) at the high-yield market.

In early February EGL Acquisition Corp., which was merged into Select Medical Corp., priced a $660 million issuer of 10-year senior subordinated notes (B3/B-) at par to yield 7 5/8%.

The same trio of bookrunners - Merrill Lynch & Co., JP Morgan and Wachovia Securities - led that deal, which the company brought to help fund the $2.3 billion acquisition of Select Medical.

Shortly after Thursday's transaction a buy-side source spotted the company's new floater due 2015 trading at 100.75 bid, 101.25 offered. Meanwhile the 7 5/8% fixed-rate bond, also due 2015, was trading at 98 bid, 99 offered.

ResCare coming with $150 million

One new roadshow start was heard during the session.

Louisville, Ky.-based therapeutic, job training and educational support provider ResCare Inc. will begin a roadshow Friday for its $150 million offering of eight-year senior notes via JP Morgan and Goldman Sachs & Co.

Proceeds will be used to refinance debt.

Talking the deals

Elsewhere details surfaced on deals expected to price during what promises to be a busy Friday session in the primary market.

InSight Health Services Corp. talked its $250 million offering of six-year senior secured floating-rate notes at three-month Libor plus 500 basis points area and increased the first call premium, which takes effect on Nov. 1, 2006, to 103 from 102. Banc of America Securities has the books for the B2/B rated deal.

Talk is 7% to 7¼% on nutritional supplements company NBTY Inc.'s upsized $200 million offering of 10-year senior notes (B1/B+), via JP Morgan. The deal has been raised from $150 million.

Panolam Industries Inc. talked its $150 million offering of eight-year senior subordinated notes (Caa1/CCC+) at 10½% to 10¾%. Credit Suisse First Boston and Jefferies & Co. are the bookrunners.

And finally, in a transaction set to price on Monday, Williams Scotsman Inc. talked its $325 million offering of 10-year (B3/B) senior notes at 8¼% to 8½%.

Deutsche Bank Securities, Banc of America Securities LLC, Citigroup, Lehman Brothers and CIBC World Markets are joint bookrunners.

E*Trade remains above issue

A secondary trader said he had not seen any kind of aftermarket activity among any of the deals which priced Thursday, with most of them having come fairly late in the session. He did see E*Trade Financial Corp.'s new 7 3/8% notes due 2013 continuing to trade about a point above Wednesday's par issue price.

Dana drops

Back among the established issues, Dana took a dive after the company revised its 2005 full-year earnings outlook downward to a range of $90 million to $105 million, or about 60 to 70 cents per share, from its previously announced guidance of $196 million to $219 million, or $1.30 to $1.45 per share (both the original and the revised outlook excludes gains and losses on divestitures and asset sales, and other unusual items).

A market source saw Dana's 5.85% notes due 2015 fall four points to 84 bid, its 7% notes due 2028 and 7% notes due 2029 were each down more than three points on the session, to 83.5, while its 6½% notes due 2009 and 9% notes due 2011 were each off 2½ points, to 95.5 bid and 105.75 bid, respectively. The company's other issues were marginally lower.

A trader at another desk saw the 61/2s at 95 bid, 96 offered, down from 98 bid, 99 offered initially, while the 2029 7s fell back to 82 bid, 84 offered from 86 bid, 87 offered. He said that like the company's other issues, these ended up perhaps half a point from their intraday lows, but down about three to four points from Wednesday's close.

Dana's New York Stock Exchange-traded shares tumbled $2.92 (22.85%) to $9.86 on volume of 7.9 million shares, about eight times the average activity level.

In announcing the lowered guidance, Dana, which supplies axle, driveshaft, engine, frame, chassis, and transmission technologies to Detroit's Big Three and other automotive original equipment manufacturers, said that it was being "negatively impacted by continued higher-than-expected costs for steel and other materials, as well as increased energy costs. In addition, the company's commercial vehicle business has been unable to achieve projected cost reductions and is experiencing significant manufacturing inefficiencies."

It said that its automotive systems business "have been impacted by lower-than-anticipated light-vehicle production volumes on vehicles with significant Dana content."

Dana's statement said that it was "considering a number of significant measures, both operational and strategic, to improve our financial performance," although it did not elaborate.

Dana further said that the reduced earnings outlook might impact on its ability to comply with covenants in its bank credit facility, and said it would be in talks with its senior lenders on this.

And the company said that in addition to lowering its projections for full-year results, it will likely restate its second-quarter 2005 financial statements, primarily to correct inappropriate recognition of price increases in its commercial vehicle business during the second quarter.

That truckload full of bad news prompted both S&P and Fitch to cut Dana's corporate credit and senior unsecured debt ratings one notch to a junky BB + from BBB- previously.

"The dramatic drop-off in earnings guidance and lowered expectations for Dana's commercial vehicle business are much more significant than we expected," S&P credit analyst Daniel R. DiSenso said in his downgrade message. He said that Dana's operating performance in the first half of the year "was hurt by large unrecovered steel price increases and by lower production levels for light-vehicles in North America, which led to a 10% decline in earnings from continuing operations, excluding unusual items.

"Standard & Poor's had previously expected Dana's earnings to strengthen in the second half of 2005 given some improvement in light vehicle production schedules and some retrenchment of high steel prices. Because credit measures were already subpar for an investment-grade rating, it was especially critical for Dana to meet these performance expectations."

DiSenso also put the company's ratings on CreditWatch with negative implications.

Delphi, GM, Ford lower

Elsewhere in the autosphere, Delphi Corp.'s 6.55% notes due 2006 dipped to 79 bid from 82 previously, while its 6½% notes due 2009 and 2013 were each seen down about 2½ points, at 73 bid and 71 bid, respectively. The Troy, Mich.-based automotive electronics maker's 7 1/8% notes due 2029 retreated to 66 bid from 68.5.

Delphi's former corporate parent, General Motors Corp., was likewise on the downside, its benchmark 8 3/8% notes due 2033 down nearly a point at 81.25 and its 7 1/8% notes due 2013 a quarter-point lower at 89.25. Big Three rival Ford Motor Co.'s flagship 7.45% notes due 2031 fell a point to 81.25.

Dura Operating's benchmark 9% notes due 2009 were seen down more than two points to the 75 bid level, while TRW Automotive's 9 3/8% notes due 2013 lost half a point to 111.

Collins & Aikman gains on Ross interest

However, one automotive name seen higher was Collins & Aikman Corp., whose 10¾% notes due 2011 were seen a point better, at 40 bid, 41 offered. During the session, news emerged that financier Wilbur L. Ross - who already owns much of the bankrupt Troy, Mich.-based automotive interior components maker's bank debt - said he would be interested in bidding if Collins & Aikman were to put its U.S. operations up for sale.

A trader suggested that such an expression of interest from Ross might not necessarily be such a positive from a bondholder perspective, since the billionaire - who earlier in the decade rolled up the assets of bankrupt steel, coal and textile companies at fire-sale prices - "doesn't exactly pay top dollar" when he consolidates a troubled industry.

Another party which has expressed some interest in Collins & Aikman is rival interior components maker Lear Corp. Speaking at an automotive industry conference in Frankfurt, Lear's chairman and chief executive officer, Bob Rossiter, said that his company is still "evaluating strategic options for our interiors business," which Lear has suggested might be combined with Collins & Aikman's in a joint venture.

Without specifically mentioning Collins & Aikman, Rossiter said that "we are exploring many different options, some of which could be combinations with other businesses, some could be joint ventures, and it could also be sale of the business or just stay where we're at."

Lear, based in Southfield Mich., is the leading automotive seating supplier and also has a healthy business going in automotive electronics, but interiors - things like door panels, dashboards and acoustic materials - has proven to be less than stellar, leading the company to consider unloading it as one of its options.

Rossiter said that someone might ask "why did you get into [the interior business]?" and answered that rhetorical question, asserting that "there's a lot of good reasons why we got into the interiors business." Among other reasons, he said, was that his company's two biggest customers - GM and Ford - both encouraged Lear to get into the business, and "at the time we went into the business, it made a ton of sense."

Since then, however, the situation has changed, particularly with "some of the shrinkage that's taken place in the market," interiors is not the sure winner it once seemed, although he said that Lear "still provides a hell of a service to our customers," although he says that with that comes "an awful lot of capabilities, investment and people."

It has turned more into a straight components business, subject to rising raw materials costs and price wars, and he said, interiors as a business "is still far too fragmented," despite Lear's efforts to consolidate it through a series of acquisitions, "our customers still have little allegiance to suppliers all over the place. There's far too many suppliers all over the place - and," he said, tongue partly in cheek, "everybody's fighting to save their assets."

Overall, Rossiter said, "industry conditions remain challenging," and in response, Lear has implemented its global restructuring plan, aimed at eliminating excess capacity. That effort, he said, will cost the company $250 million to get a headcount reduction of between 5% and 7%. "It could go higher than that, and the actions will probably involve at least 20-plus facilities in Lear Corp., and we'll have a payback to two to three years."

Part of the strategy also involves a shift of production, where possible, to lower-cost companies, although he said "that also isn't cheap." Lear is also trying to streamline its organization and eliminate redundancies across the board.

Despite the auto sector's problems, "I believe that we can get out of this thing," the Lear CEO said. "We have some great programs and a great backlog there, a lot of new programs coming on, and that gives us high hopes for the future. We think we've got some great products and great growth coming with the Asians [carmakers]. There's a lot of good things happening. The unfortunate part of that it's taking place over the next two years, and during that time, we're spending. So [sales] volumes are going down, prices [charged to customers] are going down, times are pretty tough, and we're spending for growth - capex, engineering and tooling."

He added that "we believe that there's still opportunities for us to get quite a bit better."

Lear's 8.11% notes due 2009 were unchanged Thursday at 102.125, and its 5¾% notes due 2014 were also steady at 88.

Tembec rises

Apart from the automotive sector, traders saw Tembec Industries' bonds a little firmer, a day after the Canadian forest products company's paper fell several points after an S&P ratings downgrade.

Tembec's 7¾% notes due 2012 firmed half a point to 72.5, while its 8½% notes due 2011 and 8 5/8% notes due 2009 were also both up a half, at 74.5 bid and 78 bid, respectively.

Rural/Metro higher on earnings

A trader saw Rural/Metro Corp.'s bonds up several points, its zero-coupon notes due 2016 rising to 62 from 58.75 bid previously, and its 9 7/8% notes due 2015 at 105.5 bid, up four points on the session.

The rise follows the Scottsdale, Ariz.-based ambulance company's announcement earlier in the week that earnings for the fiscal fourth quarter swelled to $73.4 million ($2.95 per share), from $1.3 million (six cents per share) last year - although it should be noted that most of that gain was due to a $71.5 million deferred income tax benefit.

MGM Mirage's bonds were little changed on the news that the Las Vegas-based gaming and lodging giant will spend as much as $5 billion on a gigantic development project on the Las Vegas Strip. Its 9¾% notes due 2007 continued to hover at 107 bid, 108 offered, and its 5 7/8% notes due 2014 hung in around 96.25 bid, 97.25 offered.

The trader also saw "nothing exciting" going on with Delta or Northwest, a day after their respective bankruptcy filings. He pegged Delta's bonds in a 16.5 bid, 17.5 offered context, and Northwest at 23 bid, 24 offered, "about how they're gonna work out." Both companies' bonds now trade flat.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.