Duane Reade roars on buyout news, Rite Aid rallies too; junk seen firmer; Sitel eyes deal

By Paul Deckelman and Paul A. Harris

New York, Feb. 17 - The news that pharmacy industry leader Walgreen Co. will buy New York's dominant drugstore operator, Duane Reade Inc., in a $1.1 billion deal that includes the assumption of over $400 million of the Manhattan-based company's debt, pushed Duane Reade's 11¾% notes due 2015 up by nearly 20 points in active trading, investors operating upon the assumption that Walgreen will find it cheaper to take out the high-coupon debt - even with a make-whole call - than to leave it outstanding and pay heavy interest costs.

The good news was not limited to Duane Reade; sector peer Rite Aid Corp.'s bonds also pushed up by several points in very active dealings, even though the Duane Reade deal will strengthen Rite Aid's larger rival.

Also on the buyout front, General Growth Properties Inc.'s bonds extended the gains notched on Tuesday on the news that rival shopping-mall operator Simon Property Group Inc. had made an unsolicited $10 billion offer to buy Chicago-based General Growth out of bankruptcy. The latter company has rejected Simon's offer as inadequate, but industry observers believe either Simon or other potential buyers who may step forward could come up with a sweeter deal.

There was some upside seen in Harrah's Operating Co. Inc. bonds, even with no concrete news about the Las Vegas-based gaming giant.

Overall, traders said that high yield - which had been stumbling and staggering last week amid mutual fund redemptions and postponed or pulled primary-market deals - managed to put together a second straight strong session, as major statistical indexes rebounded from their recent lows.

The high-yield primary market failed to generate any hard news on Wednesday, market sources said.

Apart from recent volatility, which has caused the delay, postponement or conversion of more than a dozen deals since the beginning of the year, potential issuers are entering a quiet period in which third-quarter 2009 financial numbers must be replaced by fresher fourth-quarter numbers to clear the way to the new issue window, sources add.

As was the case Tuesday, the Wednesday session came to an end with just two deals on the active forward calendar.

TreeHouse Foods, Inc. is marketing a $400 million offering of eight-year senior notes (expected Ba2/confirmed BB-), an acquisition deal being led by Bank of America Merrill Lynch and Wells Fargo Securities.

And RDS Ultra-Deepwater, Ltd. is on the road with a $260 million offering of seven-year senior secured notes via Jefferies.

Proceeds from that deal will be used to purchase PetroRig III, a sixth generation ultra-deepwater semi-submersible drilling rig.

Market indicators extend Tuesday gains

A trader saw the CDX Series 13 index gain 5/8 point on Wednesday to end at 95¾ bid, 96¼ offered, after having risen ¼ point on Tuesday.

The KDP High Yield Daily Index meanwhile jumped 65 basis points on Wednesday to finish at 69.95, building on the 3 bps gain on Tuesday and Friday's 5 bps advance. Its yield tightened by 22 bps to 8.56%, after having widened by 2 bps on Tuesday.

Advancing issues topped decliners for a second consecutive session on Wednesday, by a better-than eight-to-five margin.

Overall market activity, as measured by dollar-volume levels, soared by 45% from Tuesday's restrained post-holiday levels.

A trader said that "the market got whacked around last week," but now, "it feels better than it has in a week or two weeks, citing a recovery in equities over the last few sessions."Some of the stuff that got hit pretty hard [recently] is better today."

For instance, he said that one of Junkbondland's favorite market bellwether bonds, Community Health Systems Inc.'s 8 7/8% notes due 2015, had traded as low as 100¾ in round-lot dealings last Thursday and had been around 101 1/8 later Thursday and early on Friday.

In Wednesday's trading, which preceded the Franklin, Tenn.-based hospital operator's release after the close of its fourth-quarter earnings, the bonds had moved back up to the 103½ level.

"Some stuff got pretty hard" the last few days, the trader said. "But it's better."

He saw Appleton Papers Inc.'s recent offering of 10½% senior secured notes due 2015 as having bounced back to around 91¾ bid, 93 offered, up from the 89 bid levels seen on Tuesday. The Appleton, Wis.-based coated paper producer's $305 million issue had priced on Jan. 29 at 98.035 to yield 11%, but had dropped pretty consistently since then to around current levels.

Duane Reade rallies on Walgreen news

The big news of the day was Number-One U.S. drugstore operator Walgreen reaching an agreement with Duane Reade to buy the New York pharmacy powerhouse for $618 million in cash and to assume $457 million of Duane Reade debt, including its $300 million of 11¾% guaranteed senior notes due 2015.

A trader said that those bonds - which last week had been trading around the 107 level - "instantly" zoomed to above 123 bid at the open on Wednesday. He saw them mostly trading in a 1231/2-124½ range, going home at 124.

"Odd pieces did go higher," he said, with peak levels at 126, although they later came off such heights.

"There was very good volume in Duane Reade," he said, with over $11 million of the bonds having changed hands.

There was considerably less activity in the company's other issue - the $51.7 million of remaining 9¾% notes due 2011, which were seen having edged up to around the 102 level in tepid trading, little changed on the day.

The 2015 notes are not callable until Aug. 1, 2012, when they can be redeemed at a price of 105 7/8. However, the stratospheric levels to which those bonds moved suggest that long before that time, Walgreen will have taken the bonds out, most likely via a make-whole call at 50 bps over Treasuries.

Adam B. Cohen, the founder of Covenant Review, which does in-depth analysis of covenants in the indentures of bonds involved in takeovers or other special situations, told Prospect News that that although Walgreen said in its press release announcing the deal that it's going to assume the Duane Reade debt, "that doesn't mean they're not going to pay it off right away."

He said that because the high-coupon bonds are so expensive - annual interest on them amounts to $35.25 million - and given the disparity between the Duane Reade bonds and Walgreen's own corporate debt, which currently yields around 4.8%, "for them to keep paying that kind of interest rate [until the first call date] doesn't make any sense." Keeping the bonds outstanding for any appreciable length of time would have the added downside that Walgreen would then have to make further regulatory filings on them and be sure to remain in covenant compliance - added needless headaches for the acquirer.

He further noted that on the conference call following release of the news, Walgreen's chief financial officer, Wade D. Miquelon, obliquely indicated that the bonds would somehow be taken out, since he answered a question about likely savings and synergies from the acquisition by saying that Walgreen's projections don't even take into account the debt savings that the deal would produce. "We're not [even] calculating the debt savings," the CFO said.

As to how Walgreen plans to take the 2015 bonds out, Cohen, in a Covenant Review research piece on Duane Reade on Wednesday, looked at the various options available to the drug giant and arrived at the conclusion that although it's expensive, a straight make-whole call is probably the quickest and simplest way or taking the bonds out.

He raised the theoretical possibility that Walgreen might buy Duane Reade stock prior to the deal's closing, with Duane Reade then able to use those proceeds to purchase 35% of the issue, or $105 million , under its equity clawback provision at 1113/4, plus accrued and unpaid interest - far less than what it would cost to take out that segment of bonds via the make-whole call -- but he concluded that the indenture language made such a move highly problematic, and subject to challenge from resentful bondholders who might feel the company is trying to pull a fast one.

"If I were holding the bonds, and an investment-grade company with Walgreen's market cap was going to try to be a little cute, or aggressive on the indenture, I would definitely challenge it," he declared. He said that that Walgreen's management would likely want to "pay a little more money to avoid a silly distracting argument. It's a pretty good idea just to pay and not try to be clever."

He concluded that "if the acquirer were some sponsor-based LBO company, maybe it would be a different conversation - but in the context of Walgreen, I think they'll just pay it off and be done with it."

Rite Aid rises with Duane Reade

A trader said "people put money into it [Duane Reade], and that's why they jumped, and Rite Aid went right along with it."

Another trader said that "somebody putting that type of a bid, or multiple, on Duane Reade, kind of re-values the market" for drugstore companies, "and makes Rite Aid look that much more attractive."

He saw the Camp Hill, Pa.-based drugstore chain's 9 3/8% notes due 2015 rack up close to $30 million of volume, making it one of the session's most actively traded junk bonds. He saw "a lot of" the bonds trading between 82 and 821/2, which he called up about 4 to 4½ points. "They were a little higher or a little lower, depending on what part of the day it was."

At another desk, a market source said the Rite Aid bonds gyrated between highs as good as 85 and lows around 811/2, the latter level seen around the end of the day, and called it a 2 point gain on the session.

One of the traders said the Rite Aid 9½% notes due 2017 "was the other big-volume guy," in the company's capital structure, with over $20 million having changed hands. He saw the bonds trading around a 791/2-80½ context, with a lot of transactions right around the 80 mark, which he termed about a 4 point rise on the day.

A trader cited "a run up in drugstores" in the wake of the Duane Reade-Walgreen news. He said that Rite Aid's 10 3/8% notes due 2016 firmed up to 103¼ bid, 103¾ offered, versus Friday levels around 100½ bid, 101½ offered. "Based upon what somebody [i.e. Walgreen] is willing to pay, drugstore franchises are worth a little more," he said.

A trader said that away from Duane Reade and Rite Aid, "you had bits and pieces trading here and there. I'd say the market was up a little overall."

"The real theme was kind of hits and misses, left and right. I'm not seeing anything that's jumping out."

Rouse rally rolls on

A trader saw Rouse Co.'s 8% notes that were to have matured last year trading between 109½ and 110½ before tightening up a little to a closing level around 109¾ bid, 110 offered, up a little from 109¼ bid, 109¾ on Tuesday, "up a good ¼ to ½ point," on top of the 2 to 4 point gain seen in the bonds on Tuesday on the news that Simon Property Group had made an unsolicited bid for Chicago-based Rouse's bankrupt parent, General Growth Properties Inc.

A market source at another shop saw the 8s staying around that 109 area, little changed, with over $20 million traded, while its 7.2% notes due 2012 were nearly 2 points better, just below the 112 mark, while its 5 3/8% notes due 2013 gained nearly 3 points to end around 108. The latter two issues saw some round-lot trading, but not as much as the 8s.

Harrah's heats up

A market source quoted Harrah's Operating's 11¼% notes due 2017 up 1¾ points on the day at 1041/2, on brisk volume.

At another desk, Harrah's 10¾% notes due 2016 rose more than 3 points to end around 77.

And the company's 10% notes due 2018 also ended the day at 77, which a market source called a more than 6 point gain.

There was no fresh news seen out on Wednesday about the gaming concern, although a lengthy piece in Wednesday's editions of the Las Vegas Sun painted a generally optimistic picture about Harrah's efforts under CFO Jonathan S. Halkyard to cut its debt and extend the maturities of its bonds and loans.

Also in the gaming sector, a trader said that Trump Entertainment Resorts, Inc.' 8½% notes due 2015 are trading "in the single digits, around 1 or 2" pennies on the dollar, with no activity on Wednesday, even amidst news stories touting the coming battle of the billionaires, as lawyers for former chairman Donald J. Trump and large bondholder Carl C. Icahn sparred with dueling court documents ahead of next week's expected bankruptcy court showdown; each tycoon is backing a different restructuring plan for the Atlantic City, N.J.-based gaming company that still bears The Donald's name - which he is attempting to restrict Icahn from using as a brand for the company in the event the latter's plan succeeds.

Blockbuster investors ignore downgrade

A trader said that Blockbuster Inc.'s bonds "seemed to be up a little bit," quoting its 11¾% senior secured notes due 2014 as trading within a 68-70 context, with a few trades at 68½ bid, before going out at 68½ bid, 70 offered. Earlier in the week, they had been around the 66 level, "so they're up slightly."

He saw the 9% senior subordinated notes due 2012 "pretty much unchanged" on the day at 18, versus 18 to 18¼ on Tuesday.

At another desk, a trader saw "active trading" in the 9s around 18, after having traded between 18 and 19 all day, "so call it down a point." He saw the 11¾% notes ending around 68-69 which he called up a point on the day, after starting the day at 67-68.

Investors apparently paid little heed to Standard & Poor's cutting the Dallas-based movie-rental store chain operator's corporate credit two notches to CCC, with a negative outlook, saying it was vulnerable to a possible debt default.

Auto names unchanged to higher

A trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 "pretty much unchanged" around a 28-28½ context. Another trader also saw them unchanged around 28¼ bid, 29¼ offered, while seeing GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 up 2 points on the day at 87 bid, 89 offered.

A market source at another desk saw the GM benchmark bonds up a point on the day at just under the 29 level.

NewPage holds gains

A trader said that NewPage Corp.'s bonds - strong the past several sessions in the wake of last week's announcement of a new chairman and chief executive officer for the Miamisburg, Ohio-based coated paper company - were "holding their own," little changed from the levels to which they have firmed - 53-55 for its 10% notes due 2012 and 921/2-93½ for its 11 3/8% notes due 2014.

Sector peer Catalyst Paper Corp.'s 8 5/8% notes due 2011 were "bouncing around there" in an 851/2-86½ range, while Verso Paper Corp.'s 9 1/8% notes due 2014 were at 89 bid, 90 offered.

Six Flags steady as bondholders clash

A trader saw Six Flags Inc.'s bonds quoted in a 28-30 range and ending around 28 bid, 29 offered, with

"no activity that I saw," apparently unfazed by the continued dispute in the bankruptcy court hearing the company's reorganization over competing restructuring plans backed by rival groups of bondholders. Some creditors on Wednesday asked the judge overseeing the case to order federal mediation, in the hopes of heading off a trial that would pit the bondholder groups against one another.

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