Rite Aid falls on bad numbers, lowered outlook; Tribune off as buyout goes through; Select Medical gains

By Paul Deckelman and Paul A. Harris

New York, Dec. 20 - Rite Aid Corp. bonds were seen down by several points across the board Thursday after the Camp Hill, Pa.-based drugstore chain operator reported a wider loss for its fiscal third quarter than both market expectations and the loss it reported a year ago.

Also on the downside, by several points, were Tribune Corp. bonds, investors probably not much impressed with the completion by billionaire mogul Sam Zell of his takeover of the venerable Chicago-based media giant, nor by the steps which the new owner announced, aimed at getting the company's fortunes back on track.

Residential Capital LLC's bonds were lower amid more bad news for the Minneapolis-based mortgage lender, including the failure of its now-completed tender offer to cut its debt anywhere near the target the company outlined. ResCap got a further headache when it was named as a defendant in a big lawsuit brought by the NAACP against major players in the mortgage lending industry.

On the upside, Select Medical Corp.'s bonds continued to gain, a trader said, on favorable developments in the healthcare industry.

And Tembec Inc.'s bonds continued their rise on Wednesday's announcement of the Montreal-based forest products company's ambitious plan to cut its debt load by over $1 billion.

Meanwhile, the primary market remained on its end-of-year hiatus.

Indexes point lower

A trader saw the widely followed CDX junk bond index down 1/8 point at 95½ bid, 95¾ offered. The KDP High Yield Daily Index declined by 0.16 to 77.60, while its yield widened by 5 basis points to 8.75%. In the broader market, advancing issues were about even with decliners, and market volume was about 13% higher than Wednesday's levels.

A trader said that with the 2007 finish line now clearly in sight, "activity has been very sparse." He characterized the market as "wishy-washy" in "very light trading."

He said the market "still has a bottom to it, to a certain extent, but nobody's reaching for anything."

Another trader said that "it was kind of a slow day all around," He said that "there were a couple of quick busts in the morning. Then it was slow after that."

A high yield syndicate official said that the broad market was flat on Thursday, with very little activity.

There was no activity in the primary market.

Some primary market participants had already left for the holidays when Prospect News attempted to reach them on Thursday.

Other primary market sources said that no further new issuance is anticipated for the remainder of 2007.

And although weekly funds flows numbers customarily circulate the market late Thursday afternoon, well after the session's close sources said that no figures had been heard.

Rite Aid numbers, forecast a bitter pill

Rite Aid "was down a point after the numbers, because the numbers were weaker and their guidance was lower," a trader said, with the company's 8 5/8 notes due 2015 seen down 3 points on the session at 82. Its 9½% notes due 2017 were down more than 2½ points to the 85 level, while its 7½% notes due 2017 were seen off nearly 2 points at 89.

Another trader saw the 71/2s down 2 points at 87 bid, 88 offered, while its 9¼% notes due 2013 sagged 3 points to 87.5 bid, 88 offered.

Rite-Aid bonds "got smacked," yet another trader said, citing the disappointing earnings. The

trader said the senior unsecured debt, like the 9½% 2017 notes, fell 3 to 4 points on the session, closing around 83. The senior secured bonds were also lower, though "not as much" as the unsecured debt, he added. He pegged the 7½% notes around 89.

Rite Aid's New York Stock Exchange-traded shares swooned by $1.30, or 31.71%, to end at $2.80. Volume of 75.1 million shares was nearly 7 times the usual daily handle.

The bonds and shares fell as the company reported a loss attributable to common shareholders of $93 million, or 12 cents per share in the three months ended Dec. 1. That was considerably wider than the year-ago loss of $6.82 million, or a penny per share, and also exceed the 7 cents per share of red ink that Wall Street was looking for.

Perhaps even worse from an investor point of view, the company lowered its guidance from previously announced levels, now believing that fiscal 2008 sales will come in somewhere between $24.3 billion and $24.6 billion, down from its September forecast of $24.5 billion to $25.1 billion. Rite Aid also expects to lose between $161 million and $192 million in fiscal 2008, considerably more than its earlier prediction of $78 million to $161 million.

"I think there were actually two reasons" for the lowered outlook, said Aqeel Merchant, an analyst with Libertas Partners in Greenwich, Conn.

"One was that they didn't see the cough and cold season as strong" as a year ago, "- and thank God for that. The other was I thought there was a little bit of weakness as well on the front end" - i.e. the non-pharmaceutical part of the drugstore business, including sales of such non-medicine items as cosmetics, books and magazines, film and developing, videos, food items, clothing, small consumer electronics and the like.

Merchant's colleague at Libertas, analyst Bob Lupo, noted that usually those front-end sales - along with the drugstores' position in the whole "health-care chain" along with doctors and patients - help to "insulate" companies such as Rite Aid and its industry rivals like Walgreen's, CVS and Duane Reade from overall softer retail industry trends more apparent in other kinds of stores. But that apparently was not the case this time around.

No buyout boost for Tribune bonds

Elsewhere, a trader said that "Tribune keeps getting hammered. They keep drifting down, looking for a bid."

He saw the company's bellwether 5¼% notes due 2015 trading down to 58, leaving them offered there, which is down another 2 or 3 points in light trading. A few days ago, he said, "they were offered in the low 60s - so they just keep going down."

"Not too many people," he opined, "have much confidence in Sam Zell."

The billionaire tycoon on Thursday completed his $13 billion takeover of the media giant, whose properties include such well-known names as the Chicago Tribune, the Los Angeles Times, the Baltimore Sun and the New York suburban powerhouse newspaper Newsday, as well as broadcasting interests and the Chicago Cubs baseball team.

But the takeover comes at a time when traditional newspaper properties are seeing their circulations and ad revenues on the decline, hurt by competition from TV and the internet.

Zell, whose background is in real estate rather than media, announced that he was taking personal command of the company, appointing himself chairman of the board and chief executive officer, although he said that he would not hold the latter job indefinitely.

Meanwhile, Standard & Poor's said it lowered Tribune's corporate credit rating to B from B+ and removed the ratings from CreditWatch with negative implications.

Also downgraded were the issuer's secured loans to BB- from BB, secured notes to CCC+ from B- and unsecured bridge loan to CCC+ from B-. The outlook is negative.

S&P said the downgrade reflects the completion of the second step of the company's leveraged buyout, which will leave Tribune with leverage of more than 9.5 times pro forma for new debt issued.

Residential Capital retreat continues

Residential Capital's bonds were lower, as the company completed its previously announced tender offer to buy back $750 million of four short-term issues - though holders tendered far less than that amount and the company did not raise the consideration it was offering.

A trader saw one of those issues, its 6 1/8% notes due 2008, down 1½ points at 78 bid, 80 offered, while its 6 7/8% notes due 2015 lost 3 points at 60 bid, 62 offered. Its 8% notes due 2013 were "down 3 or 4 points" to around 60 bid, 62 offered, another trader said, adding: "But who knows how they've jumped around."

ResCap was also named as a defendant in a lawsuit filed against a number of leading mortgage companies by the NAACP, alleging institutionalized racism in lending industry practices.

Legislative boost for Select Medical

On the upside, Select Medical's 7 5/8% notes "were up a couple of points" to 86.5, a trader said, citing the introduction in Congress of legislation that would benefit operators of long-term acute hospitals, such as Mechanicsburg, Pa.-based Select Medical.

"There was a lot of interest in that bond."

Tembec rise continues

A trader saw Tembec's bonds up again, on top of the 3 to 4 point gains posted Wednesday on news of its $1.2 billion debt-reduction plan. On Thursday its 8 5/8% notes due 2009 were seen up 2 points at 50 bid, 51 offered.

Another trader saw those notes 2 points better at 50.5 bid, 52.5 offered, and said the company's other bonds, such as its 8½% notes due 2011 and 7¾% notes due 2012 were each up 1½ points, to 45.5 bid, 46.5 offered and 44.5 bid, 45.5 offered previously

Sea Containers floats along

Also on the upside, a trader said, was Sea Container Ltd. He saw the Bermuda-based transportation company's bonds pushed up by "a net short in the Street and everyone is scrambling to find bonds."

He saw the 10½% notes due 2012 "reach levels we haven't seen in a while. They were languishing in the low 60s - now they're 65.5 bid, 66.5 offered." Beyond the technical factors, he had no other explanation for the bonds' rise.

2008's first deals

One sell-side source told Prospect News on Thursday that Clear Channel Communications Inc.'s $2.6 billion high-yield bond offering is expected to be one of the first LBO deals to come to the market in the new year.

Morgan Stanley, Citigroup and Deutsche Bank Securities will lead the deal which will be comprised of a $1.1 billion tranche of senior cash-pay notes and a $1.5 billion tranche of senior PIK notes. Both tranches are expected to come with eight year maturities.

Proceeds from the credit facility and the bonds will be used to help fund the leveraged buyout of the company by Thomas H. Lee Partners, LP and Bain Capital Partners, LLC.

Also expected early in the new year is Sequa Corp.'s $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+) via Lehman Brothers, according to sources.

In addition one source said that Mylan Inc.'s $330 million offering of senior notes, via Merrill Lynch, Citigroup and Goldman Sachs is expected to be among 2008's first deals.

Proceeds will be used to refinance debt from the acquisition of Merck KGaA's generic pharmaceutical business.

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