Beazer bonds bounce crazily on bankruptcy buzz; CEVA ups price talk on downsized deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 1 - Beazer Homes USA's bonds gyrated around wildly at mostly lower levels on rumors that the troubled homebuilder would file for bankruptcy - rumors which Beazer took pains to deny, a move that sent the bonds back up off the lows, although they ended down on the day.

Another big loser was Six Flags Inc., although there was no firm news out on the New York-based theme park operator, whose bonds had gone on a wild roller-coaster ride downward last week after the company reported disappointing second-quarter numbers.

On the upside, General Motors Inc.'s bonds drove higher - even as domestic carmakers reported their smallest-ever combined market share.

In the primary market, higher price talk was heard on CEVA Group plc's downsized and restructured deal, as the company tries to get investors on board for the deal in a difficult market for new issuance.

Beazer bothered by bankruptcy buzz

"All kinds of things were moving around," a trader said, "at all kinds of prices and all kinds of volume levels."

Certainly "the biggest mover," as one trader put it, was Beazer Homes, whose bonds fell sharply in the morning, tumbling into the 60s pretty much across the board from prior levels in the mid-70s to mid-80s, as bankruptcy rumors swirled around the problem-plagued Atlanta-based homebuilder.

However, its bonds came off those lows after the company denied that any kind of filing was imminent, regaining some, though by no means all of their lost ground, with most issues closing in the 70s - up from those lows, but around 4 to 7 points lower on the session.

"There were close to 20 point swings," said one trader. "When people hear 'bankruptcy' and are unsure about [a company's numbers], this is what happens."

He said "the most fun one" - at least to watch, if not necessarily to hold - was the 4 5/8% convertible notes due 2024, which started the day in the 60s. "Then the bad news came out," as the bankruptcy talk started rebounding around the market, and the low trade was 62 bid, 63 offered. He saw the bonds ending the day around 74 bid, 75 offered. "It was a good one to watch, because you could see the range of these things," he added.

He said the 8 1/8% notes due 2016, the company's longest-dated straight bond issue, started at around 83, then went down to around 68, before ending the day around 78. "That one was quoted more than it actually traded," while he saw the converts "trade a lot."

Overall, the company's bonds saw "wild swings - from the 80s, down to the 60s-70s, then back up to the 70s. That's like 15 down, and another 10 up. They were pretty wildly swinging, ending down around 6 points a day - but it was a lot lower, about 16 lower."

The company's 8 3/8% notes due 2012 were among the most actively traded high-yield bonds of the day. A market source pegged the bonds at about 78 bid, down some 6 points from Tuesday's finish. At one point in the morning, egged on by the bankruptcy talk, the bonds fell down to about the 69 level. Although they snapped back as high as the mid-80s, they went home well on the downside.

Its 8 5/8% notes due 2011, which had gone home on Tuesday at 87 bid - which a trader on Tuesday said was actually up a point on the day - opened about 2 or 3 points lower, swooned into the upper 60s, but then came part of the way back to finish at around 79.5, down more than 7 points on the day.

Beazer's New York Stock Exchange-traded shares meantime plunged $2.51, or 17.94%, to $11.48, and at one point fell as low as $8.10, a 42% nosedive from Tuesday's close. Volume of 37.2 million was over 14 times the norm.

Beazer's bonds and shares got hammered down as rumors made the rounds of the market that company - already beset by the overall troubles of the U.S. housing industry and facing separate investigations by the Securities and Exchange Commission and even the FBI - would soon file for bankruptcy.

"We do not know where these scurrilous and unfounded rumors started," Beazer said in a mid-morning news release, which did cause its bonds and shares to climb from their respective low points of the day.

Beazer - hard hit by the downturn that has dragged down the entire homebuilding industry - is awash in a sea of red ink. Last week, the company reported that in the quarter ended June 30, it slid into the red with a loss of $123.01 million ($3.20 per share) from its year-earlier profit of $102.62 million ($2.37 per share). In the latest period, Beazer was forced to book pretax charges of $188.5 million as it wrote down the value of inventory and goodwill and forfeited options on land purchases.

However, from a liquidity standpoint, the company would seem to be in decent shape, even as the industry suffers its worst downturn since the early 1990s. Beazer last week announced that it had entered into a four-year $500 million revolving credit agreement and further said that it expects to end the year with more than $300 million in cash. The company already had more than $100 million in cash on hand at the end of the June 30 quarter.

Besides the bad business conditions bedeviling all home builders, which wave been especially highlighted lately following the collapse of the subprime mortgage lending industry that serviced a large and lucrative segment of the homebuying public, Beazer has some of its own unique problems.

The company recently revealed that the SEC has upgraded its probe of whether company officials had violated any securities laws into a formal investigation from its earlier informal inquiry.

And the federal Justice Department is looking into allegations, first reported in the Charlotte Observer newspaper, that overly aggressive sales tactics by the company had contributed to an unusually high foreclosure rate among homebuyers in its development in the Charlotte, N.C. area. While Beazer has acknowledged that it received a grand jury subpoena for documents related to its mortgage business from the U.S. Attorney's Office for the western district of North Carolina, it has denied media suggestions that it is under investigation for possible fraud, and company officials denounced an FBI statement announcing such a probe as overly broad in scope and "unauthorized."

Standard & Poor's took note of Beazer's troubles on Wednesday, cutting its corporate credit and senior unsecured debt ratings on Beazer to BB- from BB previously, while keeping a negative outlook.

S&P said that the downgrades reflect further deterioration in Beazer's homebuilding operations, which prompted additional non-cash charges and another quarterly earnings loss, as well as continued weakening of key credit metrics.

The ratings agency also cited the potential for distraction at this difficult time of the ongoing federal investigations.

While the homebuilding sector in general has recently been hurt by consumer fears about the economy and a tightening of credit in the wake of the subprime mortgage market debacle, Beazer's slide was seen having little or no ripple effect Wednesday among its sector peers.

A trader said that Red Bank, N.J.-based builder K. Hovnanian Enterprises Inc.'s 6% notes due 2010, for instance, stayed at 92 bid, 93 offered all day, "kinda unchanged."

Six Flags takes a drop

Outside of the housing sphere, there was little shelter Wednesday for holders of Six Flags Inc. debt, which was seen solidly lower, along with the company's shares, which fell 15%.

"It just dropped off at the end of the day," a trader said, quoting the company's 9¾% notes due 2013 at 74 bid, 76 offered, down 4 points on the day, on "no news, no nothing."

Six Flags, another trader said, were "closing not so good," with the company's 9 5/8% notes due 2014 dropping to 74 bid, 75.5 offered, down from 78 bid, 80 offered on Tuesday, while its 9¾% notes due 2013 finished at 78 bid, 79 offered, down from 81.5 bid, 82.5 offered.

GM takes an upside ride

A trader said that "all of the activity" in the automotive arena "was in the big names" rather than the smaller, troubled auto parts providers. "There's hundreds of millions of the stuff trading each day," he declared.

He saw GMAC LLC's 8% notes due 2031 "whipped around," trading down as low as 90 bid, 91 offered and as high as 95 bid, 96 offered.

Those bonds finally closed at 93.5 bid, 94.5 offered, "up a point or so, 1 or 2" while GM's 8 3/8% benchmark notes due 2033 were closing around 83 after having firmed from lows around 80 bid, 81 offered, although they went as high as 85 bid, 86 offered, before coming down from those peaks to close around the mid-point of the range, the trader said."

On the day, he said, the bonds had "bounced [upwards] around a point from where they were [Tuesday], so I don't think they were that much different from [Tuesday].

Another trader saw the GM benchmark bonds up ¾ point on the session at 92.5 bid, 93 offered, although he saw GM arch-rival Ford Motor Co.'s 7.45% notes due 2031 down ¼ at 76 bid, 76.5 offered.

The bond movements came against the ominous backdrop of new statistics showing Detroit's Big Three automakers combined share of the U.S. market dropping below 50% percent in July for the first time ever, at 49.5% - and only 48.1% if you exclude the foreign nameplates they own like Saab, Volvo, Land Rover and Jaguar.

But a trader said that even though GM's monthly numbers "were not as well as they had been hoping for", the giant carmaker's benchmark bonds were up 2 points on the day at 83 bid, 84 offered, and up 6 points over the past two sessions.

Another source saw GMAC's 8% notes ending up nearly 5 points in heavy trading at 97 bid.

Broad market better

Looking at the broader market, a trader said that "bonds were better," with the widely followed CDX index of junk performance up ¾ point on the session at 92 3/8- 92 3/4.

He said there really wasn't that much trading going on in cash bonds, but rather credit default swaps contracts were active. With the equity markets swinging wildly back and forth between gains and losses all day, he said that CDS contracts were trading "wider, narrower, wider, narrower" by 10 bps at a time.

Another trader said that overall, "it was hard to tell" about the junk market on Wednesday. "Things seemed to be like they wanted to do something - but they could never get going anywhere."

High yield syndicate officials left work Tuesday amid fresh news of spreading damage in the subprime mortgage sector, and then came to work Wednesday morning hearing that equity markets in Asia and Europe were sucked into the whirlpool that pulled U.S. stocks lower on Tuesday.

Hence they were braced for the worst on Wednesday.

However the consensus at the close was that "it wasn't as bad as it could have been."

One official said that junk was down but relatively unchanged, and not as bad as people feared it would be, given the equities sell-offs in Asia and Europe.

The source asserted that junk and equities have been closely correlated of late.

Another official had more or less the same color, specifying that there were signs of strength in the junk market during the Wednesday session, but trading was very light.

Meanwhile the primary market remained dormant.

As August got underway only one potential transaction was producing any news: CEVA Group plc upped the price talk on a deal that it had already restructured and drastically downsized.

CEVA hikes talk

CEVA increased the price talk on its $400 million offering of seven-year second-lien notes (B3/B-) on Wednesday.

The revised talk has the notes pricing with a 10% coupon at a significant discount to yield 11%. Previously the notes were talked at 10% area with an issue price of par.

Sources were expecting terms to emerge Wednesday, however as Prospect News went to press no terms were available.

The CEVA bond deal was launched at $1.4 billion equivalent.

However on Tuesday the company slashed it by $1 billion equivalent, replacing proposed dollar-denominated and euro-denominated senior unsecured bonds with bridge financing.

The company, which is in the debt markets to help fund its acquisition of Netherlands-based logistics and supply chain management company, EGL Inc., meanwhile restructured the remaining $400 million tranche of second-lien secured notes, eliminating proposed euro-denominated tranches and floating-rate tranches.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. are joint bookrunners.

The mood

A senior high yield syndicate source in London told Prospect New on Wednesday morning that it is an extremely bad time to place new junk bonds.

Around 3 p.m. London time, with the European stock markets in retreat trailing the sound beating which the Asian bourses had taken, this official said that in London the markets were "ugly."

The source added that the iTraxx Europe Crossover index, which tracks sub-investment grade securities, gapped to a 475 basis points spread on Wednesday, after having dipped under 400 for a while on Tuesday.

Around 3 p.m. London time the source spotted the index at 440 bid, 435 offered.

This official, who had lately engaged in some pre-marketing activity, observed that investors seem to be asking themselves "Why should I buy at par today if I can buy at 99 tomorrow?"

The official added that no one seems willing to "dip a toe" in the present market.

They are so beat up from the securities presently in their portfolios that they "can't get their heads out of the sand to look at anything new," the source asserted, adding that the situation is not conducive to new issues at all.

Adding to the sour mood in London, the official said, is the lingering bad taste from Alliance Boots' £1.75 billion of second-lien and mezzanine debt backing the £11.1 billion LBO led by Kohlberg Kravis Roberts & Co.

"People are sort of acting as if that second-lien deal was done last week, but it was not," the source asserted."

"It doesn't sound as if it is going to get done."

However, this source expressed the opinion that the sell-off seen in high yield since late June is "way overdone," and added that in prior sell-offs of this magnitude both the technicals and the fundamentals were bad.

"The fundamentals are not bad now," the official said.

Nevertheless, the high yield market has some obstacles to overcome in order to regain the orderly gait seen throughout most of the first half of 2007.

The most formidable is a huge backlog of debt taken down by underwriters, in the form of bridge loans, which must be digested, and ultimately repriced.

"And the eight-times leverage and nine-times leverage deals just won't happen," the official insisted.

Massive pipeline

Later on Wednesday, after the New York close, another leveraged markets investment banker also said that the backlog of debt being taken down by underwriters, in the form of funded bridge loans, will likely pose a significant challenge in the months ahead.

The source said that the combined junk bond and bank loan pipeline is approximately $300 billion, and added that about seven deals make up nearly half of that amount.

"That came out in the late Spring and early Summer, May and June, when markets were really good. And it was a very active time for private equity funds," the official added.

"Right now we are starting to see some significant signs of trouble in distributing that debt.

"I don't think any of the banks are actively looking to write commitments for anything right now.

"Banks are going to look for some sign that they are going to be able to distribute some paper before they are willing to reload."

© 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.