Park Place, Tembec break through 8% with new deals; steel ruling not much help, so far

By Paul Deckelman and Paul A. Harris

New York, March 5 -Tuesday the high yield primary market saw two drive-by deals zoom up to the window and drive off with financings the issuers must have found agreeably priced - both broke through the 8% barrier.

Meanwhile the beleaguered domestic steel industry got a helping hand Tuesday from Washington, but the announcement that the U.S. would impose tariffs on foreign producers came too late in the session to do much for the steelers' junk bonds, and, in a figurative sense, may be too late to help the industry period, some observers said.

In addition to pricing their offerings at yields below 8%, Park Place Entertainment Corp. and Tembec Industries Inc. both managed to upsize their new issues.

One syndicate official, noting the sub-8% yields on both deals in addition to Entercom, which priced on Feb. 27 at a yield of 7 5/8%, commented: "The market's not scared of seven-handles anymore, apparently.

"I think now is the exact window where you're going to hit the low, as far as interest rates go, as far as spreads go," this official added.

"As Treasury spreads widen, as the Treasury bond increases in yield, you're going to see higher coupons in general.

"So right now you've got a hot market. You've got low interest rates, more or less. You've got a lot of cash in the mutual funds, and in the investors' hands. So you've got more or less one of the best financing opportunities for high yield companies that you've had in years."

Park Placed increased its offering of eight-year notes (Ba2/BB+) to $375 million from $300 million and priced it at par to yield 7 7/8%, according to market sources. Price talk had been 7 7/8%.

Matt Maddox, Park Place's executive director in charge of corporate finance, told Prospect News on Monday that recent gaming credit transactions in the high yield, including Penn National Gaming's $175 million add-on priced Feb. 21 to yield 9% and Mohegan Tribal Gaming Authority's $250 million priced Feb. 12 to yield 8%, had captured the company's attention as it weighed its decision to bring the deal.

Tuesday also saw the emergence and pricing of an upsized drive-by offering from Tembec. The company sold $350 million of 10-year senior notes at par to yield 7¾% via Goldman Sachs. The sale was increased from $275 million)

Tembec's CFO Michael J. Dumas told Prospect News shortly after the pricing late in Tuesday's session that the company finds the interest rate quite agreeable (see story elsewhere in this issue).

Noting that there are presently "good names coming on the new issue market," one buy-side source told Prospect News Tuesday that although the market it presently volatile and that credits must be judged individually on their merits recovery may be underway.

"People have been trying to pick the time when it's perfect to buy," this high yield portfolio manager said.

"I think we've had a lot of data in the very recent period that is giving people a higher degree of confidence that we're skimming along the bottom. And who knows how steep of a recovery we're going to see?

"However, people are adding credit risks, but are doing so on a selective basis.

"The forward calendar has built a lot in the past couple of days," the source added. "We estimate that it's about $3 billion now.

"And these are good names, ones that we consider core holdings."

Among the data this portfolio manager tracks is Merrill Lynch's "distressed ratio." This portfolio manager specified that improvement in the ratio tends to predict a lower peak default rate, and improving returns in the high yield.

According to Martin Fridson, chief high yield strategist for Merrill Lynch, the ratio has indeed been improving.

Noting that Merrill Lynch defines the distress ratio as the percentage of issues in the Merrill Lynch High Yield Master Index outyielding Treasuries by 1,000 basis points or more, Fridson specified that at the last observation date of Feb. 15, the ratio was 22.6%, down from 23.7% one month earlier and down from a recent peak of 29.6% in October 2001.

"The last time we saw a reading this low was September 2000, when the distress ratio was 19.8%," Fridson added.

"Changes of five percentage points or more have consistently been followed by changes in the same direction in the Moody's issuer-based default rate, on a trailing-12-months basis.

"The connection with high yield market performance is looser, because the default rate is one of only several factors affecting returns," Fridson added. "Changes in secondary market liquidity and money market indicators also play a role.

"But yes, all else being equal, the drop in the distress ratio since last fall is an encouraging development for high yield investors."

Meanwhile in Monday's primary market activity one more drive-by pulled up. Sinclair Broadcast Group, Inc. will $300 million of 10-year senior subordinated notes (B2/B). That deal, via joint bookrunners Wachovia Securities, Deutsche Banc Alex Brown and J.P. Morgan, is set to price late Wednesday.

And price talk in the 11¾% area was heard Tuesday for Shop at Home, Inc.'s $135 million of seven-year senior secured notes (B3/CCC+). That deal, via bookrunner Fleet Securities, is set to price late this week, according to a syndicate source.

In the secondary, it was "more of the same old same old," a trader said of the generally muted market. "Things were quoted higher, although it's a lot more (interesting) when things are lower. But all and all, it's been pretty quiet, not just today, but the last four or five days. There's not a lot of new issues coming to market and a lot of the retail focus has been on the performance of the stock market and that definitely takes away from some of the focus that we get here."

Another trader noted that "this is a pretty busy week" for industry conferences, with Lehman Brothers hosting its High Yield Bond and Leveraged Loan Conference in Lake Buena Vista, Fla., Bear Stearns & Co. hosting a Media, Entertainment and Information Conference in Palm Beach, Fla. at which a number of high yield issuing firms are making presentations, and Raymond James' equity conference in Orlando, Fla., again where many high yield companies are presenting. With all of this going on, he said, "a lot of buyside accounts are just not around, and hence, the liquidity is pretty low, which does not bode well" for the junk market.

The trader noted that there seemed to be very little market impact from the news, announced fairly late in the session, that the U.S. would impose tariffs of anywhere from 8% to 30% on certain foreign producers. Those tariffs are scheduled to go into effect March 20 and will remain in effect for three years. They cover flat-rolled steel and 11 other steel product imports from a long list of countries, including members of the European Union, Japan, Russia, Ukraine, China and South Korea. Steel produced in such major U.S. trading partners as Canada and Mexico, as well as some developing countries, is exempt. The EU and other affected foreign producers reacted in anger and threatened to lodge a protest with the World Trade Organization, but American steel companies expressed approval of President Bush's proclamation, even though it falls short of the four-year 40% tariff they had been seeking.

News services first reported rumors of the expected imposition of the tariffs, which were confirmed by the White House at mid-afternoon, "too late in the day for the market to react," the trader said. "Maybe tomorrow at the opening, we'll get a better indication of the market's reaction to this he said."

Late in the day, Bethlehem Steel Corp.'s 10 3/8% and 8.45% notes were both heard unchanged around 13 bid, the same level at which Weirton Steel's 10¾% and 11 3/8% notes were quoted, also unchanged on the day. National Steel's 9 7/8% notes were at 22 bid and its 8 3/8% paper at 25.75. Among the financially better high yield steel names, AK Steel's 9 1/8% notes were up ¼ point to 104.5 bid, while its 7 7/8% notes were a point higher at 101. United States Steel's 10¾% notes were unchanged at 98.5 bid.

But a distressed-debt trader opined that not only was the announcement too late to really affect Tuesday's bond trading, it was too late, period. "They waited too long, they waited till all the steel companies were bankrupt to give them protection, so what good is it going to do? Leave it to the government" to mess things up.

Technically, he was slightly overstating the case in declaring that "all" of the steel companies were bankrupt. But in substance, he's not too far wrong, with a long list of high yield steelers cut down by import competition currently or recently restructuring in the courts, including Bethlehem, LTV Corp., Wheeling-Pittsburgh Steel, Geneva Steel and Gulf States Steel, to name the most prominent.

The other trader agreed that in the high yield steel patch, only AK Steel, Oregon Steel and U.S. Steel remained as viable investments, with virtually everyone else either bankrupt already or headed in that direction.

He also noted a Wall Street Journal report Tuesday - overshadowed by the later announcement of the tariffs - that Washington would not step in to assume the "legacy costs" of pensions and health benefits for steel plant retirees, which have swollen costs and dragged down the finances of Bethlehem and many other steelmakers. "That means that U.S. Steel is not going to do that purchase" of Bethlehem, National and perhaps one or two other struggling steelmakers, whose acquisition by the financially solvent Pittsburgh-based integrated steel giant had been conditioned on the federal government picking up as much as $10 billion in legacy costs, he said.

The steel industry's problem is that with the industry now much smaller than it used to be and holding onto a shrinking slice of the world steel market - but with just as many, if not more retirees from those better times as operations contract and plants close, "you have twice as many pensioners as workers, and that's far too much. At Bethlehem especially, its something like 10-to-1, with about 18,000 employees working to support something like 200,000 pensioners," he said.

Even other industrial companies, such as the automakers, don't have the kind of legacy costs that the steelmakers have because their union contracts are different, the trader continued. The level of the steel pensions "is ridiculous" given the companies current financial problems, he said, and "now, Bethlehem and U.S. Steel are looking for the government to help out, and that's not going to happen." What all of this would mean for investors in the industry - the government declaration and the apparently continuing legacy cost problem - would not become clear at least till Wednesday's session, he said.

Elsewhere, things were "really quiet," the distressed-debt trader noted, with Kmart Corp.'s senior paper and Exodus Communications Inc.'s bonds "hanging in" at levels around 43-44 bid and 20.5-21.5 bid, respectively.

Among other troubled telecom operators, Global Crossing's debt, which had been seen having risen about a point Tuesday to the 4-4.5 bid level on news reports that suitors other than Hutchison Whampoa Ltd. and Singapore Technologies Pte Ltd. might emerge to give the company's creditors more for its assets, remained at that higher level. The bonds of beleaguered Web hosting company Globix Corp. - which sought Chapter 11 protection on Monday - were unchanged, its 12.5% notes quoted at 14 bid. Williams Communications Group Inc. 10 7/8% notes were also unchanged around 14.

Over on the investment grade side of the ledger, an early advance by Qwest Communications notes quickly melted away after the Denver-based regional phone service provider's senior unsecured debt ratings were cut down a notch to Baa3 - the last stop before junk bondhood - by Moody's Investors Service, which expressed its "concerns about Qwest's ability to resolve substantial near-term debt maturities" and threatened that another downgrade, this one to junk status, remained a possibility. The company's daunting challenges include its need to negotiate a waiver under its $4 billion bank credit line, and to repay some $850 million of long-term debt which will come due in July.

News of the downgrade caused the bonds to surrender their early tightening of as much as 30 basis points, and by the end of the day, some issues, such as Qwest's 7.9% notes due 2010, were quoted at a bloated 475 basis points over the comparable Treasury issue, far wider than bid levels around 400 basis points over before the downgrade.

Another investment grade issue which, like Qwest, has recently run into liquidity concerns and has attracted at least passing attention from junk marketeers, is Tyco International, whose debt, such as its 5.80% notes due 2006, fell two points Tuesday, the bonds ending at 89 bid.

Back among the pure junkers, Xerox Corp., bonds were seen firmer, the 9¾% notes moving up to 91 bid from Friday's levels around 88.5.

And among the newly priced issues, Tembec Corp.'s new 7 3/8% notes, which had priced at par, closed at 100.5 bid/101 offered.

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