ServiceMaster gyrates on TruGreen spinoff plans; NII, Washington Mutual, Momentive busy

By Paul Deckelman

New York, Nov. 18 - The ServiceMaster Co.'s bonds were seen among the busiest issues of the day in the high-yield and distressed markets on Monday, traders said, rebounding solidly after having slid in Friday's dealings following the company's release of quarterly numbers.

Traders said that investors seemed reassured by the company's announcement of its plans to spin off the underperforming TruGreen lawncare division - a divestment that analysts say positions the company well for a possible future IPO.

Elsewhere, traders saw continued brisk dealings, at firmer levels, in the various bonds of international cellular provider NII Holdings Inc.

Washington Mutual Bank's bonds were better on the news that J.P. Morgan Chase & Co. had agreed to a compromise with federal officials regarding liability for sales of mortgage securities at the failed savings and loan institutions, whose banking operations were taken over by J.P. Morgan at the start of the 2008 financial meltdown.

Momentive Performance Materials Inc.'s bonds were actively traded on Monday, as investors tried to interpret the specialty chemicals company's latest quarterly report. However, despite better revenue and EBITDA numbers, a well-known research service maintained a wary stance about the company's financials.

There was a falloff in activity levels for Caesars Entertainment Corp., whose 2018 bonds had topped the most-actives list on Friday.

And despite sharp slide in SuperValu Inc.'s shares following a downgrade by Goldman Sachs & Co., traders saw little activity in its bonds.

ServiceMaster surges

A trader said that ServiceMaster's 7% notes due 2020 "bounced back" after the Memphis-based provider of home maintenance and cleaning, extermination, lawn care and other types of services released an 8-K filing with the Securities and Exchange Commission in which it outlined its plans to largely divest itself of its underperforming TruGreen lawn care business via a spinoff.

"They talked about an IPO within a year, along with the spinoff of TruGreen," he noted. "That enabled the bonds to bounce 2 to 4 points, depending on whom you talked to."

He saw those bonds having come back up to around the 97 bid neighborhood from their lows around 93 or 94 on Friday.

"ServiceMaster is the volume leader," he said.

A market source at another desk said that by the close, at least $30 million of those bonds had changed hands, easily vaulting the credit to the top of the junk most-actives list. He saw the bonds up nearly 2 points on the day, at just under the 97 bid level.

"A bunch were trading," another trader observed

"They were trading with a 94 handle [on Friday], so those bonds were up maybe 3 points today."

He added, "Interestingly, the bonds were trading at 97 or 98 on Thursday. They opened up Friday [after the release Thursday of third-quarter preliminary results] trading down - 96, 951/2. And it looks like they were trading down at 94 by the end of the day.

"So all of the losses that they registered on Friday - it looked like they recouped much of what they lost, rallying back around 3 points today," the trader added.

Earnings, he said, "must have driven Friday's decline, but what they came out with today probably put some legs under it."

Monday's filing reiterated more prominently what the company had said in its 10-Q quarterly filing that was released on Thursday: ServiceMaster is planning to spin off TruGreen business through a tax-free, pro rata dividend to the stockholders of the parent company, with a target effective date of Dec. 31.

The company noted that over the past two years, "TruGreen's financial performance has declined substantially, in contrast to ServiceMaster's other business segments."

The company incurred about $1.6 billion total of impairment charges to TruGreen's goodwill and trade name - $913 million in 2012 and $673 million in the first nine months of this year.

Should it successfully jettison TruGreen, such a development "would accelerate a future public offering of Holdings [i.e., the parent company], the proceeds of which we currently expect to use primarily to reduce ServiceMaster's indebtedness."

The game plan, the company said, is to pursue an IPO within one year of the separation of TruGreen, subject to prevailing market and business conditions and regulatory review.

The filing projected that ServiceMaster's leverage ratio - defined as total indebtedness, less cash and cash equivalents, divided by Operating Performance - as of this coming Dec. 31, both before and after giving pro forma effect to the spinoff transaction, will be about 7.6 times.

NII activity continues

Elsewhere, a trader said that NII Holdings' bonds "continue to be active," just as they were all of last week. He called the notes "marginally better."

Reston, Va.-based Latin American wireless company's NII Capital Corp. subsidiary's 10% notes due 2016 were quoted going home at 62½ bid, up around 1½ points versus Friday's finish, on volume of more than $11 million.

The company's 8 7/8% notes due 2019 were seen up two points at 52½ bid, with over $9 million having traded.

WaMu bonds busy

One of the traders said that Washington Mutual's bonds "were a little more active as more news comes out about J.P, Morgan and its settlements with the [Justice Department]. So those bonds rallied about a point," finishing up around 32.

A market source quoted those bonds around 31¾ bid, on busy volume of over $19 million.

J.P. Morgan acquired WaMu's banking operations during the nation's financial crisis in 2008, after the Seattle-based savings and loan slid into receivership.

The banking giant had long insisted that the settlement costs related to soured mortgage bonds that WaMu had issued during the frothy housing boom that preceded the financial collapse should be the responsibility of a Federal Deposit Insurance Corp. receivership that liquidated the thrift's assets.

However, news reports Monday indicated that J.P. Morgan - in the midst of heated negotiations with the government aimed at settling over $13 billion of government claims against the big bank - had expressed a willingness to give up its ability to pursue the FDIC receivership for those costs, although no language has been finalized yet.

Momentive movement seen

A market source said that Momentive Performance Materials' 8 7/8% notes due 2020 had gained ¼ of a point to go home at 104¾ bid.

However, a trader who saw the company's 11½% notes due 2016 declared that "stuff traded off - but the movement was more or less sideways." He saw the bonds go out in a 71-72 context.

Columbus, Ohio-based chemical maker Momentive reported third-quarter numbers last week, including net sales of $604 million versus $571 million in the prior-year period, and operating income of $7 million versus a year-earlier operating loss.

However, at the Gimme Credit independent research service, senior analyst Evan Mann remained wary, noting that those improvements were "primarily driven by the company's ongoing cost reduction efforts, not a rebound in underlying business fundamentals. Meanwhile, free cash flow (cash flow from operations less capital spending) remained in negative territory, total debt continued to inch higher, and while liquidity is adequate for now, it is less than robust."

Mann, who rates the company's bonds as "underperform," warned: "The slow EBITDA recovery is concerning, especially when combined with free cash flow shortfalls and uncomfortably high leverage." He predicted that the company would have to modify its capital structure over the intermediate term.

Less Caesars action seen

Caesars Entertainment's bonds dominated the junk/distressed most-actives lists on Friday, with its two tranches of 10% notes due 2018 issued by its predecessor entity, Harrah's Operating Co., accounting for over $90 million of volume.

But on Monday, a trader said, the Las Vegas-based gaming giant's notes were "not anywhere nearly as active as Friday."

He saw the bonds "maybe a smidge better," at around a 49 to 49½ bid context, calling that up ½ of a point at the most.

The company's 8½% notes due 2020 closed at 95¾ bid, little changed on the day, with turnover of around $8 million.

SuperValu a no-show

And several traders said they saw no activity at all in SuperValu's 8% notes due 2016, which were last seen trading last week around the 111¾ bid mark.

The notes were silent, even as the Eden Prairie, Minn.-based supermarket chain operator's New York Stock Exchange-traded shares slid some 60 cents on the day, or 8.72%, to end at $6.28. Volume of 9.9 million shares was 2½ times the norm.

The stock got crushed after Goldman Sachs downgraded it to sell from a neutral previously and cut its target price to $6 from $8.

Goldman analyst Stephen Grambling argued in a research note that cutbacks in food stamps programs would adversely affect results at the company's low-priced Save-a-Lot store chain and also said that SuperValu chains face increasingly heavy competition from larger and better-funded competitors like Wal-Mart.

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