Kmart climbs as judge OKs Martha's money; Conseco eases; Foamex. Dresser bring new deals

By Paul Deckelman and Paul Harris

New York, March 20 - Kmart Corp. bonds were heard to be firmer Wednesday, after the bankruptcy court judge overseeing its reorganization approved the retailer's exclusive licensing agreements with several big-name merchandise lines Kmart says are essential to its recovery, including tasteful living titaness Martha Stewart.

In the primary sphere, although no prospective new issues sprouted on the first day of Spring 2002, a couple of offerings did come into bloom.

Addison, Tex.-based energy equipment manufacturer Dresser, Inc. upsized its drive-by deal by $50 million. The add-on to its 9 3/8% senior subordinated notes due April 15, 2011 (B2/B), now $250 million, priced at 102.50 to yield 8.888%, "in the dead middle" of the 8 7/8%-9% price talk," one syndicate source told Prospect News. Morgan Stanley ran the books on the Dresser deal.

Foamex LP and Foamex Capital Corp. also priced an upsized deal on Wednesday. Their jointly issued $300 million of seven-year senior secured notes (B3/B) priced at par to yield 10 ¾% via joint bookrunners Credit Suisse First Boston and Salomon Smith Barney.

On Wednesday, the market heard price talk on three of the four deals that are presently scheduled to price during the remainder of the week of March 18.

Official talk of 8 5/8%-8 7/8% was heard on Isle of Capri Casinos' $200 million of 10-year non-call five senior subordinated notes from joint bookrunners Dresdner Kleinwort Wasserstein, CIBC World Markets and Deutsche Banc Alex. Brown. One buy-side source commented that the Biloxi, Miss.-based gaming firm's relatively low leverage and its cash flow might will likely prove attractive.

"Isle is a second-tier locals casino operator operating in competitive markets," the source said. "While competitive conditions have been somewhat difficult in some of their markets, investors are attracted by the substantial free cash flow that the company generates on an operating basis.

"At close to two-and-a-half times coverage and a little over five times leverage the capital structure is not overly aggressive for a casino company.

"The market should be very receptive to this deal despite the tight pricing for a mid-B credit, as portfolio managers are scrambling to invest excess cash in well-known names."

A sell-side source, meanwhile, ran down a little of Isle's recent history, during a conversation with Prospect News on Wednesday. "Isle is a company that's grown substantially over the last three years," the source said. "They did a big acquisition and merged with Lady Luck Gaming in 2000.

"The company levered itself at one point over five times. And since then, they've done a great job of consolidating the properties, and getting the 'Isle' name across them all. They have also done a good job of building the cash flow to the point where leverage is below five times, and heading to the goal of four-times leverage, in a year. EBITDA was $95 million three years ago and is $233 million today," the source said.

The deal is set to price Thursday afternoon.

Price talk of 11¼%-11½% was heard Wednesday on Avaya, Inc.'s off-the-shelf sale of $300 million seven-year senior secured notes, with pricing set for Friday via Salomon Smith Barney.

And price talk of 10¾%-11% emerged Wednesday on Wolverine Tube, Inc.'s $115 million of seven-year senior notes (B1/BB-) to come to market via bookrunner Credit Suisse First Boston. That deal is also set to price Friday.

The only other deal presently situated on the new- issuance calendar for the week of March 18 is Penton Media, Inc.'s $150 million of 5.5-year (non-call for the first 3.5 years) senior secured notes (B3/B-), also via Credit Suisse First Boston. Price talk of 12% area was heard earlier in the week. Penton is expected to price Thursday.

In the secondary market, when the new Foamex bonds were freed for dealings, a trader said, they moved up from their par pricing level to close at 102.5 bid/103 offered, making the new bond "a pretty good piece of paper."

Also in the new-deal arena, Joy Global Inc.'s 8 ¾% senior subordinated notes due 2012, which priced last week at par, were hovering around 102.75 bid/103.75 offered. "Some of the new deals have come and have stayed at a premium," although not all of the new deals have fared as well. He noted that

K. Hovnanian Enterprises Inc's new 8% senior notes due 2012 "got hammered," after having priced Tuesday at 99.152; he quoted the Red Bank, N.J.-based homebuilder's new senior bonds finishing at 98 bid/99 offered.

While some of that weakness may be specific to Hovnanian itself, the trader pointed out that "you look at the Treasury market and housing conditions and that's why you saw it got beat up a little bit. Interest rates are going to be moving up again. Mortgage rates are going to be higher, housing is going to be difficult as money gets tighter."

He was of the opinion that market wariness over the future course of interest rates, following the Federal Reserve's announcement Tuesday that the Fed's policy-setting Federal Open Market Committee had decided that the economy is now in as much danger from inflation as from economic weakness, outweighed positive Commerce Department housing-starts data released Wednesday. Those numbers showed that housing starts rose in February to the highest level in more than three years, with builders starting new homes at an annual pace of 1.769 million units - well up from the 1.721 million-home rate seen in January. The housing-starts data was interpreted by some analysts as suggesting that construction of new homes could provide a strong foundation as the economy rebounds from recession.

The net effect of the positive new-homes sale numbers, balanced against the possibility that the Fed has positioned itself to start raising interest rates in the months ahead, was essentially wash, with little movement seen Wednesday in the existing debt of Hovnanian and its industry rivals. A trader remarked that most of the homebuilders "are trading so tight," at levels at or above par, that at his shop, "we don't even trade in most of them."

One issue which his desk does watch, and pretty carefully, is Kmart, whose senior bonds were being quoted at 50 bid Wednesday, up from prior levels around 48 bid/50 offered.

The troubled Troy, Mich.-based discount retailing giant's bonds "have had a nice move in the past week," he said. During that time, the bonds had pushed as high as 50 bid from around 43 on speculation Kmart might become an acquisition target for French global supermarket giant Carrefour SA. Even after the French firm said it was not interested, the notes still held most of those gains.In Wednesday's dealings, he said, Kmart was up following a ruling by the U.S. Bankruptcy Court in Chicago allowing Kmart to make payments to Martha Stewart Living Omnimedia Inc., and several other licensors with whom it has exclusive contracts to sell merchandise, including Disney Enterprises Inc. and Joe Boxer Licensing LLC, as well as companies representing actress Jaclyn Smith and model Kathy Ireland. Although the deals only represent a small portion of Kmart's total revenues - some $2.7 billion out of $37 billion in 2001 - they are high-visibility flagship lines for Kmart and their loss - particularly of Stewart, whose name graces a wide variety of housewares, soft goods and home decorating products - would have been seen as a serious setback. Stewart - a close friend of ousted Kmart boss Chuck Conway - had been rumored to be thinking of jumping ship, something her contract would allow in the event of bankruptcy filing, which occurred on Jan 22.

Kmart also got the court's OK for closing 283 of its 2,114 stores and laying off 22,000 employees - cuts which analysts say Kmart had to make if it were to have any chance at survival.

Also on the upside, a trader said, was Xerox Corp., whose bonds were seen up one or two points in the last session or so. He pegged its 5½% notes due 2003 at a "strong"94.5 bid/95.5 offered, while the copier giant's longer-dated bonds moved from the low 70s to the higher 70s.

"There's just so much cash to be put to work," he opined, "and the Xerox paper has a decent yield." Meantime, he said, "some of the new-deal stuff is not so super sexy," and with that much cash to be put to work, a name like Xerox is attractive. Another gainer he saw was Crown Cork & Seal Inc., up one point Wednesday and up five over the past week, its 7 /8% notes due 2002 at 89.5 bid/90.5 offered. "People are feeling a bit better about all of that stuff."

On the downside, Conseco Inc. bonds dropped, its 8 ¾% notes off two-and-a-half points to 54, and its 10 ¾% notes going from 50 bid to 48.5. A trader said its 9% notes due 2006 dipped to 45 bid/47 offered from prior levels around 49 bid/52 offered, in response to the Carmel, Ind. insurer's plan to seek extended maturities for some of its bonds from their holders. "It's going to be interesting to see how many of the institutional guys (the only ones receiving the offer) are going to bite at this, on the assumption that Conseco will still be here two or three years down the line," he wondered.

And a trader saw "telecoms weaker as stocks got beaten up", hearing Nextel Communications 9 3/8% notes falling to 67.5 bid/69.5 offered from 69 bid/7 offered before.

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