Gap bonds firm as retailers off to a flying start; Sinclair Broadcast plans add-on deal

By Paul Deckelman and Paul A. Harris

New York, Dec. 3 - Gap Inc.'s bonds were seen firmer Tuesday, as retailers across the country were cautiously optimistic about the prospects for the holiday shopping season, following the strong performance seen over the Thanksgiving weekend - the traditional start of the end-of-the-year consumer buying binge.

In the primary sector, Sinclair Broadcast Group Inc. was heard to be planning to bring a $150 million add-on-deal to market by the middle of the month, while Sanmina-SCI Corp. is expected to hit the road on Thursday with a $450 million bond offering. Thursday is also when Ball Corp. is likely to price its $200 million of 10-year bonds.

Back in the secondary sphere, The Gap's bonds "were very active today," a trader said, quoting the San Francisco-based apparel retailer's 6.90% notes due 2007 at 98.75 bid. Another trader noted that the company's notes had moved up to those levels from prior levels around 95-96 a week ago.

Retailers "remain better bid on weekend sales," a market source said, following reports that consumers had hit the malls on the day after Thanksgiving - the traditional "Black Friday" shopping rush - and had continued to shop till they dropped all weekend.

Retailers are hoping that consumer sentiment, even in the current still-soft economy, has the average American heading for the malls or the Main Street stores to empty his or her wallet into their cash registers - something that really didn't happen last year in the face of the pall which the events of Sept. 11 had thrown over both the economy and any feelings of holiday cheer and a desire to spend, spend, spend.

Gap - the corporate parent of the eponymous Gap stores as well as Old Navy and Banana Republic - is being carefully watched. After two-and-a-half straight years of posting year-over-year declines in the monthly comparable-stores sales results - the key measure of a retailer's performance - Gap last month surprised some in the market by managing to bang out a gain in its October sales versus a year earlier.

There are predictions that Gap will be able to will deliver strong single-digit comps - a sharp swing from last year's deep double-digit losses.

Of course, some analysts have urged caution, noting that last year's levels were very low in the wake of 9/11 (particularly for Gap, which had maintained busy Banana Republic and The Gap stores right in the destroyed World Trade Center) - meaning that an improvement from those low levels would not be such a big deal to write home about. Others, however, believe that an improvement - even from the depressed levels of a year ago - would give Gap a strong psychological boost, and would give its bond and stock investors a psychological safety blanket to cling to.

While the bonds were firmer on Tuesday, the company's shareholders were more cautious Tuesday, taking the stock down 24 cents (1.50%) to $15.75 on New York Stock Exchange volume of 12.7 million shares, roughly double the usual.

A trader meantime saw little or no impact on the high yield bonds of other retailing companies, including J.C. Penney, Saks Fifth Avenue and Dillard's Department Stores, as well as drug chain Rite Aid Corp. and bankrupt discounter Kmart Corp. A distressed-debt trader said the latter's bonds continue to languish at bid levels around 21-22.

Troy Mich.-based Kmart is coming up in a few weeks on the first anniversary of last January's Chapter 11 filing; although the chain closed 283 of its 2,114 stores earlier this year, the closure of the stores - generally the most underperforming locations - has not given the company the big boost in gross margins it had been hoping for; according to published reports, plans are on the drawing board for a second round of store closings, with estimates as high as 567 additional locations being bandied about.

Elsewhere, United Airlines continued its fight to stay out of bankruptcy, with all eyes centered on Thursday's vote by its 13,000 mechanics - the lone employee group holding out on approving proposed wage cutbacks and other concessions that the airline says it must have if it is to have any hope of getting a $1.8 billion federal loan guarantee. The mechanics last week nixed a $700 million concession package, although their leaders went back to the bargaining table with the carrier, tinkered around with the package and came back with an alternative to be voted upon on Thursday.

The rejection by the mechanics caused its bonds, such as the 10.67% notes due 2004, which had pushed as high as 32 bid last week on expectations the airline would get its concessions, to fall to as low as the 20-21 level after the mechanics shot the deal down; they bounced back Monday into the upper 20s on the announcement that a new deal had been hammered out and would be voted on by the mechanics.

And there the bonds sat on Tuesday. A trader quoted the notes unchanged at 28 bid/28.5 offered, with "everyone biding their time and the clock ticking, now down to nine days." He was referring to the remaining time on the grace period invoked by the airline as it said Monday that it would delay payment of $375 million of airline equipment certificate debt which came due on Monday. The airline has until Dec. 12 to make the payment. That delay in payment has also started the clock ticking on another $545 million of debt, including a $500 million deal United negotiated last month with the German bank Kreditanstalt fur Wiederaufbau.

On Tuesday, UAL announced that it will lay off another 352 pilots over the next two months as part of its plan to decrease its flying schedule next year. The company will cut 220 pilots' jobs on Jan. 6 and another 132 on Feb. 7, reducing its current total of 8,600 pilots by an additional 4 percent.

And United said it would said it cut its cadre of corporate officers by nearly a fifth and squeeze wage concessions from the remaining executives - a move the cash-strapped airline said will save more than $60 million.

News reports meantime said that even as it was maneuvering to try to stay out of bankruptcy, the carrier was getting close to lining up $1.5 billion of debtor-in-possession financing as a contingency for use in case it is eventually forced into a Chapter 11 filing; sources close to the talks with J.P. Morgan Chase, Citigroup, Bank One and GE Capital said the negotiations with the banks are ongoing but could be wrapped up by the week's end.

Back on the ground, a trader said that Nextel Communications Inc. debt, recently firming smartly on investor sentiment of an improving wireless telecom sector, "gave a little back" in line with a generally lower stock market, which tended to throw something of a wet blanket over the junk market. He saw Nextel's benchmark 9 3/8% senior notes due 2009 off half a point, at 92 bid/92.5 offered.

On the upside, he saw "a few buyers come out" for Trump Atlantic City Associates' 11¼% first mortgage notes due 2006, which were up a point-and-a-half on the session at 78.5 bid/79.5 offered.

And he saw Charter Communications Holdings Inc. 8 5/8% notes due 2009 having gained up to 50 bid/51 offered from prior levels at 48 bid/49 offered.

Another trader also saw the bonds of the St. Louis-based cable operator at that level - and wondered why.

He noted that last week, a Goldman Sachs equity research report had indicated that the Number-4 U.S. cabler might issue new equity and sell it to controlling shareholder Paul Allen or other holders and use the proceeds to take out some of its debt, or might swap the equity for outstanding debt.

"But that's old news," he said (the bonds had risen several points last week on the news). Given Charter's still-considerable problems, including a mountainous $17 billion pile of debt, difficulty in holding onto its basic cable subscribers, and regulatory probes of the company, "I don't see any reason for [those bonds] to move up."

He also downplayed the notion that Allen, the billionaire Microsoft Corp. co-founder who then founded Charter, might step in to buy the stock so Charter could reduce the debt. "Personally, I think Paul Allen will do nothing," he flatly declared. "He has no reason to."

In the primary San Jose, Calif. electronics manufacturer Sanmina-SCI announced a new offering of $450 million of seven-year non-call-four senior secured notes (expected ratings B2/B) with a roadshow anticipated to begin Thursday, according to market sources. The deal is expected to price Dec. 18 or 19 via a syndicate of investment banks that includes Goldman Sachs & Co., JP Morgan, Salomon Smith Barney, Banc of America Securities and Scotia Capital.

The market also learned Tuesday that Sinclair Broadcast will attempt to do a second add-on to its 8% senior subordinated notes due March 15, 2012 (existing ratings B2/B).

The new add-on, of $100-$150 million, is expected to price in mid-December, and is contingent upon completion of the tender offer.

JP Morgan, Deutsche Bank Securities Inc. and Wachovia Securities, Inc. are joint bookrunners. UBS Warburg is co-manager.

The original $300 million priced on March 6, 2002 and the Baltimore-based broadcasting company priced a $125 million add-on to this issue on Oct. 25.

During Tuesday's session Bear Stearns & Co. analyst Mike Taylor told Prospect News that November 2002 was the first month since June in which high yield original new issuance surpassed fallen angel volume - but that the market should not look for a repeat in December.

Recently Bear Stearns reported that November high yield original new issuance was $4.7 billion while fallen angel volume for that month was $4.5 billion.

"I think that was a blip on the radar screen," Taylor commented. "It was helped by the fact that there weren't significant downgrades in November. I think that is going to change during December and revert back to the trend in which fallen angels surpass new issuance.

"We've had over $100 billion of fallen angels," Taylor added.

"With El Paso's downgrade by S&P, which followed Moody's downgrade at the end of November, we now have close to $10 billion of fallen angels [for the month]. You're certainly not going to get that in new issuance."

Consistent with other market color heard recently by Prospect News, Taylor said the present rally hinges on technicals rather than on a buy-side cultivating a strong belief in a recovering economy.

"We had a lot of mutual fund inflows," he said, "more than average over the past two months. So issuers took advantage and opportunistically priced deals.

"We have swung pretty far, pretty fast from what some people said were oversold levels to overbought levels. I'd be concerned of a snapback, especially given that a lot of the names that rode up are in the more volatile, distressed sectors."

Asked if the recent rate cut by the Federal Reserve provided a spark that conceivably ignited the present rally in junk, Taylor said he did not see it that way.

"It was an excuse for a rally," he said. "But the Fed had cut rates so much already and the economy wasn't improving. To do it again wasn't a move likely to change fundamentals and earnings.

"I think you just got to an oversold level," the Bear Stearns analyst stated.

And Taylor declined to side with market observers who have lately taken to characterizing present conditions as a seller's market.

"An issuer is not going to get away with pricing a sloppy deal," he said. "Even though buyers have money to put to work they are still going to be particular about covenants."

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