Visteon, Metaldyne off on S&P downgrade warning; Amkor rises on default hopes

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - Bonds of Visteon Corp., Metaldyne Corp. and other automotive parts suppliers were seen lower Monday in the wake of Ford Motor Co.'s big announcement Friday that it will

cut output in the third and fourth quarters. Investor pessimism about the parts supplier sector deepened when Standard & Poor's put Visteon, Metaldyne and a number of other supplier companies under scrutiny for possible downgrades, citing liquidity concerns in the wake of reduced business from Ford.

Outside of the automotive area, Amkor Technology Inc.'s bonds were seen up several points - with a trader opining that expectations that the Chandler, Ariz.-based semiconductor manufacturing services provider will be in technical default because of missed financial reporting deadlines could, paradoxically, turn out to be favorable for its bondholders.

The primary arena remained becalmed, with participants not expecting any kind of real activity this week, or next, but merely looking ahead to post-Labor Day activity.

Back in the secondary market, Ford's Friday announcement continued to create turbulence in its wake, as S&P cautioned that it will review its ratings for eight auto component suppliers for possible downgrades in light of the planned production cutbacks at the Number-Two domestic automaker.

Among them was one very familiar high-yield market name, former Ford unit Visteon, as well as several other names which also show up fairly often, such as Metaldyne, Hayes Lemmerz International Inc., Cooper-Standard Automotive Inc. and Mark IV Industries Inc.

Also put on CreditWatch with negative implications were the ratings of Plastech Engineered Products Inc., Citation Corp., and Yazaki International Corp. The latter company's debt is currently rated BBB-, while the other seven companies are all junk issuers of one ranking or another.

S&P warned that the cutbacks announced on Friday by Ford - which will cut third-quarter production by 78,000 units, or 11%, from last year's levels, and will slash fourth-quarter output by 21%, or 168,000 units, versus a year ago, and sees a 9% full-year decline from 2005 levels - "will adversely affect on several fronts those suppliers with substantial Ford exposure." The ratings agency further remonstrated that "fourth-quarter cash flow and liquidity will likely be reduced from previous expectations, perhaps significantly."

As Ford's single largest supplier, one-time subsidiary Visteon stands to take perhaps the biggest hit from any Ford cutbacks, and its bonds were down accordingly. A trader saw the Van Buren Township, Mich.-based parts maker's 8¼% notes due 2010 down 2 full points at 96 bid, 98 offered, while its 7¼% notes due 2014 were likewise down a deuce at 86 bid, 88 offered.

A trader at another desk saw the Visteon 81/4s start the day at 99, fall as low as 96 during the session, before coming slightly off that low point to go home at 96.5 bid, 97.25 offered.

"There was definite follow-through" from Friday's news he said, "with the parts guys all getting beat up."

Besides the Visteon retreat, he saw Metaldyne's 10% notes due 2013 off 1½ points on the session at 94.5 bid, 95.5 offered, and its 11% notes due 2012 down some 2½ points at 78.5 bid, 79 offered.

A market source at another desk saw the Plymouth, Mich.-based metal stamping company's 10s more than a point lower at 95.375, but saw the 11s slide a full 5 points on the day at 79.

Among bonds in the other names cited by S&P, Hayes Lemmerz's 10½% notes due 2010 were seen by a trader to be off 2½ points at 80 bid, 82 offered, while Cooper-Standard's 8 3/8% notes due 2014 were off 3 points at 75.5. However, the latter company's 7% notes due 2012 were seen actually up ½ point at 86.5 bid, a market source said, while Mark IV's 7½% notes due also managed to inch upward to 101.125

The ratings agency also said that other auto suppliers not placed on CreditWatch will likely face similar problems during the rest of 2006, but should have greater flexibility to deal with them. That comforting proviso did little Monday to help the bonds of such suppliers not named in the S&P downgrade warning, such as Lear Corp. A trader saw the Southfield, Mich.-based automotive seating and interior components maker's 8.11% notes due 2009 down 2 points at 96 bid, 98 offered, while its 5¾% notes due 2014 were down 1½ points at 80.25 bid 80.75 offered. Another trader saw American Axle and Manufacturing Inc.'s 5¼% notes due 2014 down a point at 82.75.

A trader saw Ford's own flagship 7.45% notes due 2031, which lost a point on Friday, when many of the company's other, less-traded issues seemed to be holding their own, also fall another 2 points on Monday to 75.25 bid, 76.25 offered. He saw financing arm Ford Motor Credit Co.'s 7% notes due 2013 a point lower at 90 bid, 90.5 offered, while Ford arch-rival General Motors Corp.'s 8 3/8% notes due 2033 were also a point lower, at 82.75 bid, 83.25 offered, and GM's financial unit, General Motors Acceptance Corp. was unchanged at 99.25 bid, 99.75 offered on its 8% notes due 2031.

Auto retailers steady

While the automakers, and their parts suppliers, were lower pretty much across the board, a trader said that one automotive area that has not gone down - yet - is such automotive retailer names like Sonic Automotive Inc., whose 8 5/8% notes due 2013 were seen holding steady at 99.5 bid, par offered, United Auto Group Inc., whose 9 5/8% notes due 2012 were hovering at 105 bid, 106 offered, and Asbury Automotive Group Inc., whose 9% notes due 2012 "found a buyer" at 98.75 bid, par offered, while its 8% notes due 2014 were steady at 97.5 bid, 98.5 offered.

However, he said, that fragile equilibrium is not likely to last long; although "we haven't seen much activity" in that part of the autosphere, he said, "if some size [trades] were to come out, it would change the market."

Amkor rises

Apart from the auto names, Amkor's bonds were seen better, with a trader quoting its 7 1/8% notes due 2011 two points better at 105 bid, 106 offered, and a market source at another shop seeing its 7¾% notes due 2013 up 2¼ points at 94.5. At yet another desk, its 9¼% notes due 2016 were seen up nearly 2 points at 95.5 bid.

Amkor said last week that it plans to re-state financial results going back seven years to correct the way stock options compensation was handled in the past - but that is keeping the company from a timely filing of its quarterly results, with two banks that are trustees for its noteholders warning that if the situation is not remedied within 60 days, an event of default will have occurred under the bonds' indentures, allowing the trustees or holders of 25% to accelerate the debt and seek immediate repayment.

So why would the bonds be up in the face of such a daunting challenge?

One trader theorized that the company might "cure its technical default by offering [bondholders] either a fat consent solicitation" to waive the defaults, "or at least a partial tender for the bonds." He cited past precedent, noting that similar situations had been resolved that way by companies such as Navistar International and Carmike Cinemas, "when their bonds were in the low 90s, and they got their hands on bank financing to be able to swing such transactions. It's just one of those wacky things."

Casinos rise

A trader said he was "starting to see gaming names move up," noting that Station Casinos Inc.'s recently issued 7¾% notes due 2016, which were "trapped around 101 last week," had now moved up to 102 bid, 102.75 offered.

At another shop, the Las Vegas-based local-oriented casino operator's 6½% notes due 2014 were seen up 1 5/8 at 92.5 bid, while the bonds of such sector peers as MGM Mirage, Mandalay Resort Group and Trump Entertainment Resorts Inc. were all also about a point higher.

Pilgrim's Pride lower

On the merger and acquisition front, Pilgrim's Pride Corp.'s plan to acquire smaller rival poultry producer Gold Kist for $1 billion, plus the assumption of $144 million of Gold Kist debt, caused the 9¼% notes due 2013 of Pittsburg, Tex.-based No. 2 producer Pilgrim's Pride to drop to 98.5 bid from 102 previously, a market source said, although its 9 5/8% notes due 2011 were unchanged at 104.5, a market source said. GoldKist is considering Pilgrim's Pride's unsolicited offer.

And news that 5.6% shareholder Barrington Capital Group LP, an activist hedge fund, wants to open talks with Warnaco Group Inc.'s management aimed at pushing it to seek a possible sale of the apparel company - known for such familiar clothing labels as Calvin Klein Jeans, Nautica and Speedo - had little or no impact on Warnaco's 8 7/8% notes due 2013. They "never trade," a market source said, quoting them unchanged on the day at 103.

Primary looks to September

A senior high yield syndicate official marked the broad junk market down an eighth of a point on news that crude oil prices rose and stock prices were down on Monday.

Meanwhile the primary market remained dead quiet as the Aug. 21 week got underway, with sources continuing to forecast that the new issue side will be slow through the two weeks of August dog days that are left to play out before an anticipated ramp up after the Labor Day break.

Hence sources have been peering off toward the horizon to see which of the deals that have been lingering on the shadow calendar are likely to emerge as September business.

Monday's discussions produced one more transaction for the expected September calendar.

Energy Partners-Stone Energy expected

Energy Partners, Ltd.'s acquisition of Stone Energy Corp. is expected to bring $730 million of senior unsecured notes to the high-yield market during September, according to a buy-side source who spoke Monday on background.

Banc of America Securities LLC, which has provided $730 million of bridge financing in a deal that closed last Friday, is the expected bookrunner, the source added.

Including that transaction on the Prospect News calendar of anticipated September deals takes the month's expected total - with eight-and-a-half sessions remaining until the three-day Labor Day break - to approximately $4 billion.

Other expected September deals include Michaels Stores Inc.'s approximately $1.4 billion LBO transaction, and $750 million apiece from BPC Holding Corp. (Berry Plastics) and Georgia Gulf Corp., the former to fund an LBO, the latter for an acquisition.

The run-up to '07

Prospect News asked a high yield investor on Monday what factors are most likely to drive the junk bond market through the final four months of 2006.

The source said that the most obvious one is interest rates.

Right now investors appear to be positioning for a continued pause - if not an outright halt - to the two-year-plus cycle of interest rate tightening by the Federal Reserve Bank...a cycle that has taken the short-term rate from a low of 1% to its present 5¼%.

That cycle came to a close on Aug. 8 which was the first meeting of the Fed's policy-making Federal Open Market Committee in over two years that did not result in a 25 basis points bump to the short rate.

The source said that given the macroeconomic circumstances now at play in the United States, rising fuel prices, a slowdown in the housing market and a decline in consumer confidence, you would intuitively expect investors to be focusing on short- to intermediate-term paper.

Instead, the investor said, intermediate- to long-term paper has lately been performing the best.

"It's trading the way equities are supposedly going to be trading as people are making their minds up that Bernanke has quit raising rates," the investor said, adding that despite Monday's sell-off in the stock market, equities have been rallying.

Another factor that could mitigate the performance of junk in the run-up to 2007 is consumer sentiment late in the present year, the source said.

"Are consumers going to spend any money, come Christmas?" the investor asked, and related that an article in Monday's Wall Street Journal reported that middle-income consumers are moving away from higher priced consumer goods.

Another factor, the source said, is that there remains a considerable amount of cash to be put to work in junk, a technical force that may be canceling out any recent re-pricing of the high yield asset class.

A lot of that cash is institutional money, the investor added, asserting that it springs from coupon payments as well as from bonds that have recently been called away.

Just as market-watchers have been toasting the emergence, at long last, of a buyer's market in junk, those forces have been serving to crimp the supply of paper.

"So there has not really been any kind of repricing," the investor asserted, citing the JP Morgan High Yield Index's yield to worst of 8.58%, which is eight basis points tighter on the month.

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