Isle of Capri off on numbers; Goodyear busy; Skilled Healthcare trades on settlement buzz

By Paul Deckelman and Paul A. Harris

New York, Aug. 31 - The high-yield market closed out August about the way you would expect the final session of a month deep in the summer doldrums: little happening in the new-deal market and not very much going on in the secondary market either.

Here and there, however, there were a few blips.

Isle of Capri Casinos, Inc.'s bonds gave up ground on the news that the St. Louis-based gaming company had unexpectedly posted a loss in its fiscal first quarter. Traders saw such sector peers as MGM Resorts International easier in sympathy.

There was some activity in Goodyear Tire & Rubber Co.'s three series of bonds slated to be taken out using the proceeds of the Akron, Ohio-based tire making giant's recent $1 billion issue of new 10-year notes.

On the other hand, there was no trading seen in Titan International Inc.'s 2012 bonds, even after the company announced plans to tender for that paper, although it should be noted that the news broke pretty late on a sleepy summer afternoon when many market participants were already out the door.

There likewise was little activity seen in Saks Inc. paper despite a news report indicating it could be a takeover target. Ditto for Dean Foods Co.

Skilled Healthcare Group, Inc.'s bonds were seen trading around for the first time in nearly two weeks, in line with a surge in the Foothill Ranch, Calif.-based nursing home operator's shares. This was connected to a delay in its scheduled legal proceedings. That delay has sparked speculation in the markets that a settlement of the case - which produced a gigantic damage award against the company earlier this summer - could be near.

Visibility on September deals

The sails of the high-yield primary market continued to luff as expected on Tuesday.

No deals priced nor were any announced.

In an ongoing poll of high-yield syndicate officials, forecasts of September issuance remained measured.

A new issuance record for the month ahead is not likely, a syndicate banker said on Tuesday.

This prognostication is consistent with forecasts from other dealers polled during the late August primary market lull.

However, this source professed visibility on two to three deals likely to be announced and priced during the post-Labor Day week.

That total could represent a mix of straight-out a.m.-to-p.m. drive-bys, deals expected to price after one or two days of marketing, and full roadshow deals, the official said, but declined to furnish any names.

Economic headwinds

Technical forces remain sound, with continued cash inflows into junk, the banker said.

It remains to be seen, however, whether high yield will continue to rally heading into autumn.

Along with continued softness in the stock market, which traditionally makes the going tougher for junk bonds, the economic news remains negative, the source said.

"The employment numbers are very negative," the banker added.

"Everybody is waiting to see how well high-yield can hold in against such an economic backdrop."

Alliant for September

Alliant Techsystems, Inc. is expected to bring a new issue of high-yield notes to market in September, according to a mutual fund manager whose portfolio includes junk bonds.

Bank of America Merrill Lynch is expected to quarterback the deal.

The uses of proceeds will include the refinancing of $280 million of the company's 3% senior subordinated convertible notes due Aug. 15, 2024, which become putable on Oct. 1, 2010, the manager said, adding that those converts are presently out of the money.

Alliant Techsystems' 6¾% senior subordinated notes due 2016 are presently rated B1 by Moody's Investors Service and BB by Standard & Poor's, the source said.

New Goodyears hold up, older ones trade around

A trader said that Goodyear's new 8¼% notes due 2020 trading at 102½ bid, 102¾ offered, off a little from recent highs like 103½ offered, but still holding onto most of the gains those bonds have notched since Aug. 20, when the company priced $100 million of the notes as a fungible add-on to the $900 million of identical notes, which had been priced just 10 days earlier.

The first tranche of bonds, upsized from the originally announced $750 million, had priced on Aug. 10 at 99.163 to yield 8 3/8%; then the add-on had priced at 100.75 to yield 8.119%.

The proceeds from those two tranches, along with available cash, are to be used to redeem all $388 million of its remaining outstanding 7.857% notes due 2011, all $325 million of its 8 5/8% notes due 2011 and all $260 million of its 9% notes due 2015 on Sept. 29.

The trader said that there was some trading going on in those three bond issues following Monday's announcement of their planned redemption.

"You saw all three of those issues trading slightly above the call price, whatever yield that would be," estimating an effective yield of 3½% for what has now become 30-day paper."

He quoted the 7.857% notes at 106¾ bid, which he said was slightly above the likely call price to be set on the third business day before the redemption date. But the trading was "nothing too exciting."

He saw the 8 5/8% notes at 104.70, a little above the 104.313 redemption price that Goodyear announced, while the 9% notes were at 104.90, above the 104.5 announced redemption price.

New Tembecs still troubled

The trader meantime saw another recent new issue, the Tembec Industries Inc. notes due 2018, trading at 93 bid, 94 offered - down from the 95 bid, 96 offered recently seen around and well down from 98.717, where the $255 million deal priced on Aug. 10 to yield 11½%.

There was no fresh news out on the Montreal-based lumber and forest products company that might explain why its bond deal is having such a difficult time gaining traction.

"That tree is obviously not growing to the sky," he said.

Market indicators turn lower

Away from the new-deal world, a market source saw the CDX North American HY Series 14 index lose ¼ of a point on Tuesday for a second consecutive session, ending at 95¾ bid, 96 1/8 offered.

The KDP High Yield Daily index meantime eased by 5 basis points on Tuesday to end at 71.53, after having risen by 3 bps on Monday. Its yield rose by 1 bp to 8.37%, after having declined by 2 bps on Monday.

Advancing issues stayed behind decliners on Tuesday for a second straight session, trailing them by a six-to-five margin - a wider difference than the couple of dozen issues out of more than 1,400 tracked, which gave the losers the edge on Monday.

Overall activity, represented by dollar-volume levels rose by 35% on Tuesday, on top of the roughly 10% increase seen on Monday from Friday's very anemic levels.

Despite that nominal pickup of activity - although the bar was not set tremendously high - and being told that it seemed like a boring session, a trader replied, "You took the words right out of my mouth.

"There was not a whole heck of a lot" going on, he added, "just little odd pieces here and there."

Earnings affect Isle of Capri

A trader said that Isle of Capri Casinos' 7% notes due 2014 were trading around the 86 bid level, down 2 points in response to the gaming company's unexpected loss in the fiscal first quarter.

Another trader saw those bonds down 1½ to 2 points, quoting them around 86 bid, 87 offered. He said that other gaming credits like MGM Resorts International and Boyd Gaming Corp. were also lower by ½ a point to 1 point on sector symptathy, although he said that Isle "bore the brunt" of investor reaction to the company's numbers.

MGM's 7 5/8% notes due 2017, for instance, ended at the 78½ bid level, down a little more than a point. Boyd's 7¾% notes due 2012 closed the day at 101 bid.

In the three months ended July 25, Isle suffered a net loss of $2.7 million, or 8 cents per share, versus its year-earlier profit of $905,000, or 3 cents per share. The loss was attributable to reduced gaming revenue and costs related to the company's acquisition of Rainbow Casino in Vicksburg, Miss.

Wall Street was looking for a profit of about 10 cents or 11 cents per share.

Skilled settlement talk spurs trading

For the first time in nearly two weeks, Skilled Healthcare Group's bonds were trading around, and its equity soared in connection with a delay in the proceedings of a big class-action lawsuit involving the California nursing home operator.

That delay has sparked speculation in the markets that a settlement of the case, which produced a gigantic damage award against the company earlier this summer, raising the specter of a possible forced bankruptcy filing, may be near.

A market source saw Skilled Healthcare's 11% senior subordinated notes due 2014, which had been trading around the 90 mark earlier in the month - but which had not traded since then - get as good as the 94 level before coming slightly off that high to end just under 94.

However, those later trades at higher levels, presumably tracking the rise in the shares, were all for fairly small pieces. On a strictly round-lot basis - the first such large-block trades in the name in almost a month - levels hung in a little above 90.

At another shop, a trader saw a round-lot level of 90 3/8 bid, which he said was "pretty much unchanged" on "a couple of million traded."

Another trader saw the bonds up around 90 1/8 bid, 90 3/8 offered, which he said was in contrast to quoted levels around 86 or 87, which he saw on Monday following news of a legal setback for the company. But he said there had not actually been any trades at those lower levels after that negative news - in fact, he opined that before Tuesday, "there hasn't been a trade in the bonds in the last couple of weeks."

But there were trades on Tuesday "back up at the [90-ish] levels they traded at before [Monday's] news," as "people speculate that they're obviously working on a negotiation" of the legal case.

Skilled Healthcare's New York Stock Exchange-traded shares meantime jumped by 89 cents, or 36.03%, from Monday's closing levels, finishing at $3.36, just off their highs for the day. Volume of 1.4 million shares was 55% above the norm.

The shares zoomed, and the bonds saw renewed activity in the wake of the company announcement well after the close on Monday that the California state court proceedings in the case that were scheduled to resume on Tuesday have now been postponed until Thursday.

A complicated case

In early July, a jury in Humboldt County, Cal., hearing a class-action lawsuit against the company alleging that it understaffed its 22 facilities in the state awarded the plaintiffs in the case a whopping $677 million in statutory and compensatory damages, with the potential for additional hundreds of millions in the punitive damages phase of the trial, causing its bonds and shares to nosedive.

The bonds, which had been trading as high as 104 bid days before the July 6 verdict, plummeted into the high 60s right after the news, especially when analysts warned that the company might not be able to post a big bond needed to appeal the verdict and could be forced into bankruptcy.

However, both the bonds and shares began rebounding on investor hopes that a more affordable settlement might be reached between the parties or that the judge in the case might slash the huge damage award down to more reasonable levels. In mid-July, the bonds rallied from the high 70s to around the 85 level on the news that Skilled Healthcare and the plaintiffs had agreed to submit their dispute to mediation, opening the door to a negotiated settlement.

The bonds continued to move up to around 90 bid by early August as the settlement efforts continued, even as the company filed at that time for a mistrial, claiming bias on the part of one of the jurors, which had not been known at the time of the trial.

This past Friday, Superior Court Judge W. Bruce Watson quashed the company's motion for a mistrial, declaring that Skilled Healthcare had failed to meet its burden of proof to establish juror misconduct.

The judge also ordered the company to comply with California's minimum staffing requirements at its nursing homes. Skilled Healthcare filed a notice of appeal of that latter injunction, which stayed its enforcement pending a further ruling. The company's bonds were quoted at lower levels on Monday in reaction to the late-Friday news, though no actual trades were seen down there.

Watson also scheduled a hearing for Tuesday for further proceedings in the case, which must still enter its punitive damages phase before a final damage award can be set.

But in announcing late Monday that the Tuesday court session had been postponed, Skilled Healthcare said that "settlement discussions in the case are ongoing," which prompted Jefferies and Co. analyst Arthur Henderson to theorize that the delay could mean that a settlement is close, which could allow the company to avoid being forced into bankruptcy.

A bond trader agreed with that line of reasoning, declaring, "Clearly, there's very little reason to postpone a court hearing at this point in time, I would think, other than because the two sides went to the judge and said 'look, we're negotiating a settlement - can you hold off for a couple of days?' That's where that speculation comes from. It's just kind of a logical assumption to be made from the delay of the court hearing."

News fails to move some issues

However, there were a number of other issues with news out on them, but were nonetheless seen little moved in generally dull trading.

A trader saw Saks' 9 7/8% notes due 2011at 105¼ bid, 105½ offered, which he called pretty much unchanged on the session, despite a news report that the company could be a takeover target.

A second trader also saw those bonds in that context and said they were "where they were going into the news."

A market source saw the Saks bonds at 105 5/8, calling them up 1½ points from the previous close, but noted that that starting point was a smallish odd-lot trade late Monday. Going back to around mid-month, the last time the Saks bonds were traded in size, the bonds were essentially unchanged.

Saks' NYSE-traded shares were, meanwhile, up as much as 34% on the session before closing up 19.70%, or $1.30, to end at $7.90 per share on volume of 40.8 million shares, more than eight times the usual. This was spurred by a report in the British newspaper the Daily Mail that a consortium of U.S. and British firms may make a cash offer of $11 per share, or $1.7 billion in all, for the New York-based high-end department store operator.

Takeover buzz likewise lifted the shares of Dallas-based dairy products processor Dean Foods, but had little impact on its bonds. A trader said that "nothing Traced" in terms of any kind of significantly-sized transactions, while a market source at another desk saw only a some odd-lot trading in its 7% notes due 2016 and 6.90% notes due 2017, which both ended little changed around 93 bid.

News reports indicated that French foods company Groupe Danone SA is interested in Dean, which spurred brisk activity in the latter's call options.

And the source said there had been no trades in Titan International Inc.'s 8% notes due 2012, for which the Quincy, Ill.-based vehicular wheel manufacturer said it plans to tender. The notes were last quoted at mid-month around the 104 level.

Titan will offer tendering holders total consideration of $1,075 per $1,000 principal amount tendered, which includes a $30 per $1,000 consent fee for those tendering before the Sept. 14 consent deadline.

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