Steel issues stronger in otherwise quiet market; Baxi, Aker Kvaener price

By Paul Deckelman and Paul A. Harris

New York, March 19 - Steel issues were heard higher Friday, in the wake of the successful pricing Thursday of Ispat Inland ULC's $800 million two-tranche offering and general investor sentiment that the formerly beleaguered industry might finally be getting its act together after several extremely rocky years.

Four issues priced during the Friday primary market session, which was described by one sell-side source as a "relatively flat" one.

Late Friday the sell-side official pointed to the 109-plus point decline in the Dow Jones Industrial Average and to Thursday's news from AMG Data Services that high yield mutual funds underwent a $264.8 million outflow for the week ending March 17.

"The news on the fund flows has been mixed," said the source. "And to the extent that the performance of high yield tends to be closely pegged to the equity market, the news there has not been very positive over the past two weeks.

"But the feeling is that there is still cash out there to put to work. And deals are getting done at attractive rates."

Aker Kvaerner upsizes offering

Norwegian oil and gas engineering and construction services company Aker Kvaerner priced Friday's biggest deal, an upsized issue of €260 million of seven-year senior second priority lien notes (B2//BB) at par to yield 8 3/8%. The deal was increased from €250 million.

JP Morgan, Barclays Capital, Nordea and SG Cowen were the underwriters of the refinancing deal, which came in the middle of the 8¼%-8½% price talk.

One notable detail in the Aker Kvaerner terms has to do with the call protection. The non-call three notes can be redeemed on or after June 15, 2007 at 108.375, or par plus the entire coupon.

On Wednesday Riverdeep Group Ltd. priced an upsized issue of €225 million of seven-year senior notes (B3/B-) at par to yield 9¼% and it too came with a non-call-three structure in which the first call is at par plus the entire coupon: 109.25.

Market sources told Prospect News throughout the week of March 15 that novel redemption features such as those seen on Aker Kvaerner, Riverdeep and other recent deals are evidence of investor pushback, which is presently said to be at play in the new issue market.

Standard Commercial, Baxi complete deals

Terms also emerged Friday on Standard Commercial Corp.'s $150 million of eight-year senior notes (Ba3/BB+), which priced at par to yield 8%, at the wide end of the 7¾%-8% price talk.

Deutsche Bank Securities and ING ran the books for the refinancing deal from the Wilson, N.C. independent leaf tobacco dealer.

Meanwhile Baxi Holdings Ltd. and Heating Finance plc priced £100 million of 7 7/8% 10-year mezzanine notes (B2/B) at 90.392 to yield 9 3/8%, according to an informed source.

Price talk was 8%-8¼% coupon at a discount to yield 9½%-9¾%

Royal Bank of Scotland ran the books on the acquisition deal from the Derby, England heating products company.

And late Friday Prospect News heard that Interactive Health Finance Corp. priced its deal via Jefferies.

The company was in the market with $85 million proceeds ($100 million face) of seven-year senior notes (B2/B-) - restructured from an $80 million par bond - which were expected to price at 85.0 to yield 10¾%-11%.

However no terms on the deal were available as the newsletter went to press.

A trio of roadshow starts

News of three new roadshow starts circulated the market on Friday.

Roadshows will take place Wednesday in Europe for NTL Cable plc's £800 million equivalent of senior notes due 2014 (B3/B-) in sterling, dollar and euro tranches, with a U.S. roadshow to follow.

Deutsche Bank Securities and Goldman Sachs & Co. will run the books for the debt refinancing deal from the New York City-based cable firm.

Hercules Inc. announced in a Friday press release that it will market $250 million of 30-year senior subordinated notes on a roadshow scheduled to run March 22-26.

Credit Suisse First Boston will run the books for the Wilmington, Del.-based manufacturer and marketer of specialty chemicals and related services, which will use the proceeds to refinance debt.

And Vicorp Restaurants will begin a roadshow on Tuesday for $150 million of seven-year senior notes (expected B2/confirmed B), which are expected mid-week during the week of March 29.

JP Morgan and CIBC World Markets are joint bookrunners on the divided payment/debt refinancing offering from the Denver-based owner-operator of Village Inn and Bakers Square restaurants.

Talk on ITC^DeltaCom

Finally on Friday, price talk emerged Friday on both tranches of ITC^DeltaCom, Inc.'s $300 million of second priority senior secured notes (Caa2/CCC+), which are expected to price early in the week of March 22, with tranche sizes remaining to be determined.

The company plans to sell seven-year non-call-four fixed-rate notes and six-year non-call-two floating-rate notes, talked at the 11% area and Libor plus 700 basis points respectively.

Banc of America Securities and Bear Stearns & Co. are joint bookrunners.

Fridson focuses on floater uptick

In Friday's edition of Leverage World, the weekly publication of high yield strategy, junk bond guru Martin Fridson remarked upon a dramatic increase in the issuance of floating-rate notes.

"High yield investors have purchased $4.4 billion of floating-rate debt this year," Fridson wrote. "That is almost 20 times the volume of floating-rate issuance in the comparable 2003 period."

While total issuance has risen sharply, floaters have increased their share to 11.69% from 1.16%.

Fridson went on to note that historically junk-rated companies have not demonstrated an eagerness to issue floating-rate debt.

"High yield issuance has been dominated by industrial companies with assets heavily concentrated in plant and equipment," he said. "The cost of such assets, namely, annual depreciation charges, does not fluctuate with changes in interest rates. Accordingly, industrial issuers have preferred to limit the uncertainty of their cash flows by locking in their coupons. If an industrial company's new borrowing cost declines, through either a general drop in interest rates or a reduction in the issuer's risk premium, the issuer can get out from under the burden of the old debt by exercising call options included in its fixed-coupon offering."

Nor has the buy side provided "a natural audience" for non-investment grade floating-rate deals, Fridson added.

"High yield mutual funds do not need to match a specific cost of liabilities," he observes. "Without being completely indifferent to credit risk, they strive to offer the highest absolute yield. In general, that objective is better served by a longer-dated, fixed-rate deal than by an instrument that floats off a money market benchmark such as the London Interbank Offered Rate (Libor)."

He cited the recent offer from Qwest. Its floater had an initial coupon of Libor plus 150 basis points, or 4.63% while the seven-year bond priced the same day yielded 7.375% and the 10-year bond 7.75%.

"For pure yield-maximizers, the floater was simply not competitive," Fridson said. "Certainly, mutual fund managers are conscious of total return, as well as yield, so they cannot ignore the price drop they face on fixed-rate, but not floating-rate bonds, in the event of an interest rate surge.

"Their concern about total return is largely a matter of relative return, however. If Treasury rates were to rise so sharply that the average high yield fund experienced a negative total return for the year, a high yield mutual fund manager who posted a 0% return would be deemed to have done a good job."

Ispat 93/4s up in trading

When the new Ispat Inland 9¾% senior secured notes due 2014 were freed for trading, they were being quoted at 100.125 bid, 100.375 offered, up from their late-Thursday issue price at 99.212. The company's new floating-rate notes due 2010 meantime straddled their par issue price at 99.875 bid, 100.375 offered.

The pricing of the big deal was seen as a good sign for the steel sector, a trader said, noting that the sector was the only place he saw any action on an otherwise "blah" Friday that seemed mostly dominated at many desks by discussion of the ongoing college basketball playoffs, as "March Madness" and "quadruple witching" and its attendant market volatility struggled for dominance on Wall Street and kept most junk bond players on the sidelines. Another trader also mentioned that JP Morgan was having a conference "and about 600 junk bond guys were there - meaning nothing was going on back here."

The first trader saw the whole steel sector unchanged to firmer in an otherwise soggy market, given a boost by investment-grade steelmaker Nucor Corp.'s announcement Friday almost doubling its previous quarterly earnings forecast due to higher prices and strong demand. A second steel company, Steel Technologies Inc., also forecast an increase in quarterly earnings, citing higher prices.

That helped boost the stock of various steelmakers, and the effect was seen on their bonds, he said.

"That area is hot," he declared, "the stocks outperformed on the day, and the bonds all went up," or at least, held their prior gains.

AK Steel up

He quoted AK Steel Corp.'s 7 7/8% notes due 2009 as having risen a point to 90.5 bid, 91.5 offered, while the Middletown, Ohio-based steelmaker's 7¾% notes due 2012 were three-quarters of a point better at 87.75 bid, 88.75 offered.

Other names in the sector were also "perking up," with Oregon Steel Corp.'s 10% notes due 2009 pushing up to 96.5 bid, 98.5 offered, up from prior levels at 95 bid, 97 offered.

At another desk, the Oregon Steel bonds were seen at 97.5 bid, up a point.

The trader also saw Steel Dynamics Corp.'s bonds up half a point, at 111.5 bid, 112,5 offered, while Ameristeel was up a quarter point, at 113 bid,. 114 offered, and U.S. Steel Corp.'s 9 ¾% notes unchanged, but at a strong 113.5 bid, 114.5 offered.

The trader noted that besides Nucor upping its profit estimates, "the EU upped production again, for about the fourth month in a row, to take advantage of the higher prices."

The steel industry, after a long shakeout "has pricing power, probably for the first time in 10 years. This $800 million Ispat deal went out, and traded up in a market environment that's mediocre at best. That's a big deal."

He noted that even though Ispat "is a triple-C credit (Caa1/B-), they've got some things in their favor - they've got the largest furnace in North America that's coming on stream, and is state of the art. That should help out a lot.

"So there are a lot of good things happening in that industry right now, I think they'll get to a point where they'll be getting an increase in cash flow and they'll start retiring some debt instead of issuing it all the time."

Elsewhere, things were very quiet; one trader said everyone was focused on "who's going to the next round" of the basketball playoffs.

aaiPharma Corp.'s 11% notes due 2010, which had "gotten whacked" for two sessions, falling down to about 91 bid from prior levels in the upper 90s, as the Wilmington, N.C. -based pharmaceuticals maker announced that it had filed a notice with the SEC that its 10-K annual report would be delayed to March 30 from the original March 15 deadline, recovered two points of that loss to end Friday at 93, although a trader noted that it was still "five points down on the whole week."

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