Market sinks; Delphi worries erupt; Pliant, Tekni-Plex down; Sunstate prices $25 million add-on deal

By Paul A. Harris

St. Louis, Oct. 5 - Junk bonds took another dive Wednesday, trailing a steep drop in the stock market that took the Dow Jones Industrial Average down 1.2%.

One source marked the broad market off "a good half a point."

"Stuff is two to four points cheaper from where it was in mid-August," one trader remarked late in the day.

"That's not a super-surprise, but it's slowly grinding its way south.

"That's nice, because it's orderly at least."

The woes were widespread, sources said, but they cited auto parts maker Delphi Corp., pharmaceutical packaging maker Tekni-Plex, Inc. and food packaging manufacturer Pliant Corp. conspicuously lower on issues ranging from raw materials shortages to negative press.

Meanwhile in the primary market one issue priced, as Sunstate Equipment LLC and Sunstate Equipment Co., completed a $25 million add-on to their 10 ½% second priority senior secured notes due April 2013 at 101.750.

NY Times devils Delphi

One trader commented late in the Wednesday session that at present there does not appear to be "a lot of new money from the Street" being directed into junk.

The source mentioned the calendar date, Monday, Oct. 17, when new, more stringent bankruptcy laws passed by the U.S. Congress and signed into law by president George W. Bush are scheduled to take effect.

"That deadline has put a cloud over the lesser-quality credits," the source said.

However, when the subject of the bankruptcy deadline came up another trader said that when all is said and done not a lot of high yield-issuing companies are expected to file before the law changes, a week from Monday.

However there is a joker in the deck, both of these sources asserted: Delphi.

On Wednesday the New York Times published a story that reported Delphi's legal team was readying a bankruptcy that could be filed this week.

"Since they were right about Northwest [Airlines bankruptcy] they [the New York Times] now seem to have the Svengali effect," a trader quipped, spotting Delphi's bonds down three points on the day.

The trader saw the 6.55% bonds due 2006, which had opened up weak following the story in the New York Times, at 70 bid, 71 offered, and trading in that range throughout the day, after having been as high as 73 bid, 74 offered on Tuesday.

Meanwhile the Delphi 7 1/8% notes due 2009 were also down three points to 61 bid, 62 offered, from 64 bid, 65 offered on Tuesday.

"And there was nothing in that Times story that people didn't already know," the trader insisted.

Shortly after that another trader also told Prospect News that Delphi was down about three points on the day, and gave the same levels.

"There had been a lot of buying of Delphi last week, possibly on some short covering when things looked a little better," the source said.

"Now all of the sudden with today's story in the Times you're seeing a lot of selling."

Hedge fund wary of automotive sector

Meanwhile a source who manages capital at a hedge fund told Prospect News on Wednesday that the most important piece of news emerging from the automotive sector is that Ford Motor Co. has made an announcement that it will cut in half the number of suppliers that it deals with.

"GM and Chrysler are going to go the same way," the hedge fund source added.

"That is going to wreak havoc on the industry. Companies that are perceived to have great balance sheets are going to go out and lever up, and do all sorts of deals to take over the weak sisters.

"I think there are going to be some major surprises in the automotive sector," the source added, forecasting "an enormous amount of M&A activity."

However a junk bond trader, hearing this color, would not go along with it.

"The credits in the high-yield market are generally among the top three producers in their respective areas of expertise," the source said, adding that the impact would mostly be felt by a host of much smaller suppliers that don't have outstanding bonds.

"The bigger issues are energy costs, labor costs and overall production of vehicles," the trader added, asserting that of those three issues reduced production looms as the biggest threat.

A shortage of resin

Away from the auto parts suppliers raw materials concerns continued to resonate (or possibly in this case, "resinate") through the market as the bonds of packaging-makers Tekni-Plex and Pliant were seen to have come under pressure due to a shortage of the natural gas-sensitive raw material, resin, that both use in their manufacturing processes.

One trader, mentioning that Standard & Poor's had cut Tekni-Plex to CCC- from CCC+, said that the company's debt got hit.

The trader spotted the company's 12¾% bond due 2010 at 50 bid, 52 offered late in the day, down three points from Tuesday.

Adding that Pliant's bonds were also under pressure the trader said "natural gas is a big component of resin, and it has gone up significantly, and the companies can't pass the increases along.

The trader added that both would have to number among the five companies that are presently most dramatically impacted by the shortage.

Rocky road for retail

Another trader who focuses on retail names said that Wednesday proved to be a "roller-coaster ride" for some of the credits in that sector.

The source reported seeing bonds of Blockbuster Inc., which opened at 81 bid, 82 offered, trade as low as 79 bid, 81 offered, before fighting their way back late in the day to close about where they opened.

The trader added that the bonds were "down big" compared to the levels at which they traded a month ago.

"They seemed to trade in two and three point ranges all day long because people aren't quite sure which way they want to go with them," the trader added.

Remarking that there seemed to be better sellers than buyers throughout the retail sector during the session, the source also spotted drugstore chain operator Rite Aid Corp.'s secured and unsecured paper "a little softer."

The trader said that the secured 8 1/8% bond due 2010 was spotted at 101 bid, 102 offered, off about a point, while the unsecured 6 7/8% bond due 2013 was at 84 bid, 85 offered, off about a point as well.

Mixed news on recent issues

Among the recently priced bonds news was mixed on Wednesday.

Late in the day The Neiman Marcus Group Inc.'s new 9% senior notes due 2015 were trading at 99.0 bid, 99.50 offered. The 10 3/8% subordinated notes due 2015 were trading at 98.125 bid, 98.625 offered, a trader said.

Both down off about a point on the day

Meanwhile Dycom Industries par-pricing 8 1/8% notes due 2015 firmed to 101 bid, 102 offered, the source added.

A mostly quiet primary

Only one issue priced Wednesday in the primary market.

Sunstate Equipment LLC, issuing in conjunction with Sunstate Equipment Co., priced a $25 million add-on to its 10½% second priority senior secured notes due April 1, 2013 (B3/CCC+) at 101.750 on Wednesday to yield 10.075%.

Banc of America Securities ran the books for the quick-to-market debt refinancing issue.

The original $125 million issue priced at par on April 1, 2005, bringing the total issue size to $150 million.

2005 a toss-up

Finally, Prospect News quizzed a hedge fund source on a question that it has been submitting to all of its markets sources since late September.

Will the high-yield market come out in positive or negative territory at the close of the year.

"It probably will be positive, but it will be minuscule, and only because a lot of business is being pushed to the back burner," the hedge fund source replied Wednesday, noting that there will likely be a cutback in supply, "with a lot of deals being pulled and a lot of deals being shuffled around."

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