Levi tumbles after forecast cut; Mandalay sells eight-year notes; funds see $258 million inflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 13- Levi Strauss & Co.'s bonds were sharply lower Thursday after the San Francisco-based blue jeans maker warned of a larger decline in sales for the full year than its previous projections. That in turn led Standard & Poor's to put the company's ratings on CreditWatch with negative implications, while Moody's Investors Service downgraded its senior secured debt - the notes are already as low as they can go at Ca - and Fitch Ratings downgraded its unsecured debt to B- from B and cut its other ratings as well.

Thursday's primary market saw only one transaction price as Mandalay Resort Group greeted the dawn with a drive-by $250 million.

But whether or not Mandalay caused the dawn to come up like thunder, one sell side source gave a distinct clap just after sunset as word spread that AMG Data Services had reported a $258 million inflow to high-yield mutual funds for the week ending Nov. 12.

"That pushes us over the magic $25 billion mark for the year," the official stated.

"But including all of the revisions, and the funds that report monthly I now get a total of a little over $25 billion," the official said.

Market participants familiar with the weekly fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday $258 million more came into the funds than left them, calculating the flows into only those funds which report on a weekly basis and excluding distributions.

The fund flow numbers are considered to be a reliable gauge of overall junk market liquidity trends.

It was the second consecutive sizable inflow to the funds, following the previous week's infusion of $440.5 million, and the seventh inflow in the past eight weeks, according to a Prospect News analysis of the AMG figures. For the year to date, inflows have been recorded in 29 weeks of the 45 since the start of the year, for a total cumulative net inflow of $18.22 billion, the peak level for the year.

In new-issue activity, Mandalay Bay hauled in a quarter-billion portion of it on Thursday as the Las Vegas gaming firm priced a quick-to-market $250 million offering of 6 3/8% eight-year notes (Ba2/BB+/BB+) at 99.221 to yield 6½%.

Banc of America Securities, Citigroup, Deutsche Bank Securities, Credit Suisse First Boston and JP Morgan ran books on the deal that came at the wide end of the 6¼%-6½% price talk.

One U.S. company announced intentions of tapping the cash-laden junk bond market, Thursday. A one-week roadshow starts Friday for OMI Corp.'s $150 million of 10-year senior notes due 2013 (B1/B+). Goldman Sachs & Co. will run the books on the deal from the Stamford, Conn.-based owner and operator of crude oil tankers and product carriers.

Meanwhile news was heard on two deals that have been taking shape in the euro market.

The roadshow begins Monday for ABB Ltd.'s €650 million of eight-year senior notes, which are expected to price later in the Nov. 17 week.

Deutsche Bank Securities, Barclays Capital and HVB will do the bookrunning for the Zurich, Switzerland-based provider of power and automation technologies.

And the roadshow starts Tuesday for Vendex KBB NV's €200 million of seven-year senior subordinated notes, expected to price during the week of Nov. 24.

The European nonfood retailer, based in Amsterdam, will have ING and BNP Paribas as bookrunners on the deal.

The new Mandalay Gaming 6 3/8% senior notes due 2011 priced too late in the session for secondary trading, market participants said.

A trader said the new Tekni-Plex Inc. 8¾% senior secured notes due 2013, which priced at par on Tuesday, had firmed to 101.5 bid, 102 offered.

Back among the established issues Levi was "the big thing," a trader said, quoting the company's 7% notes due 2006 as falling as far as 69 bid from Wednesday's levels at 77 bid, 79 offered, before then firming off the lows late in the day to close at 71 bid, 72 offered.

He saw its 11 5/8% notes due 2008 falling to 73 bid, 75 offered from 86.5 bid, 88.5 offered previously, before ending at 74 bid, 76 offered.

And its 12¼% notes due 2012 dropped to 68 bid, 71 offered from 81.5 bid., 82.5 offered, before coming off the lows to close at 71.5 bid.73.5 offered.

Another trader saw the bonds around the same level and observed with some understatement that they were "down pretty good."

Earlier in the day, Levi updated its guidance, cautioning that full-year net sales would likely be down between 6% and 7% from year-earlier levels when adjusted for fluctuations in the value of the dollar; previously Levi said that sales for the full year would likely be essentially flat, plus or minus 2%. Even with stable exchange rates, it said that sales would be down at least 2% to 3% from last year's levels.

Levi cited citing tighter retail inventories and a worldwide trend toward lower prices for jeans and casual pants.

The company also said that full-year gross margin, excluding restructuring-related expenses, would likely be around 39% of sales, versus the 40% to 42% it had projected previously. Levi anticipates operating margin excluding restructuring charges and restructuring-related expenses to be 7% to 8% of sales, rather than the 8% to 10% previously indicated.

And the company said that net debt at year-end is projected to be between $2.1 billion and $2.2 billion, higher than the previous guidance of approximately $2.1 billion.

The lowered guidance led S&P to put Levi's ratings, including its B long-term corporate rating on CreditWatch with negative implications

Although Levis' announcement "is not expected to adversely affect the company's liquidity position relative to its bank facility," S&P said, the ratings agency "finds the timing of this latest announcement especially troublesome, given the series of controversial events with the company in recent months," notably allegations from two former employees of improper tax-driven transactions. "This development represents another in a series of challenges for the company as it seeks to execute a turnaround," S&P added.

Moody's Investors Service downgraded Levi's $500 million senior secured term loan facility due 2009 to Caa2 from Caa1 and confirmed the approximately $1.6 billion of senior unsecured notes maturing through 2012 at Ca. Furthermore, the rating outlook was changed to negative from stable.

"The downgrade was triggered by the company's announcement today of a downward revision in estimated year-end performance particularly in the areas of sales, and cash generation, which would cause inventory and debt to be higher than Moody's expectations," the rating agency explained.

The Ca rating on the senior notes continues to reflect the effective subordination of the notes to about $1.25 billion of secured debt and structural subordination to $400 million of third-party liabilities of the subsidiaries. The rating implies limited recovery in a distressed scenario, Moody's said.

Fitch, meantime, downgraded Levi's $1.7 billion of unsecured debt to B- from B, and in addition, lowered the rating on the company's $650 million asset-based loan to BB- from BB and cut its $500 million term loan B+ from BB-. The rating outlook remains negative, "reflecting the continued challenges Levi faces in stimulating top-line sales growth."

Fitch said that "weaker sales, coupled with persistent cost pressures, are expected to result in operating profit that is down dramatically from prior expectations. Though debt levels at year-end are forecasted to remain unchanged, credit measures will weaken significantly due to poorer operating performance."

Elsewhere, another big loser on the session was Pliant Corp., whose 13% notes due 2010 were quoted at 89 bid, down around 10 points on the session, while its 11 1/8% notes due 2009 lost about four points to 105.5.

Pliant reported that operating income decreased by $3.9 million, or 42.0%, to $5.4 million for the three months ended Sept. 30, 2003 from $9.3 million for the three months ended Sept. 30, 2002. It attributed the decline to a 2.2% drop in sales volume and poor performance of its Pliant Solutions unit due to weak demand and reduced sale of high margin products.

On the upside, Six Flags Inc. bonds firmed after the New York-based theme park operator reported better third- quarter numbers. Its 8 7/8% notes due 2010 firmed to 97 bid from 95 5/8% previously, while its 9¾% notes due 2013 were a point better, at 99.

Six Flags said that net income for the quarter rose to $140.2 million ($1.32 a share), in line with analysts' expectations and higher than $139.7 million ($1.31 a share) in the year-ago quarter.

A trader said that Collins & Aikman Products Co.'s bonds were solidly higher, with a trader attributing the rise to "decent and earnings and a positive conference call."

The Troy, Mich.-based automotive components supplier posted a loss of $32.1 million (38 cents a share), compared with a loss of $45.2 million (54 cents a share) a year ago. EBITDA almost doubled to $41.9 million from $21.8 million a year. It meantime reaffirmed its August forecast for a loss of 40 cents to 50 cents a share before items for all of 2003.

Collins & Aikman's 11½% notes due 2006 were seen having firmed to 78.5 bid, well up from prior levels at 74 bid, 75 offered, while its 10 ¾% notes due 2011 jumped to 88.5 bid from 85 previously.

A trader said that "everyone was scrambling to buy Lucent paper," after the Murray Hill, N.J.-based telecommunications equipment maker was heard to have reached a settlement in a securities fraud case; he quoted Lucent's 6.45% bonds due 2029 bid at 76.5 late in the session, up from prior levels around 76 offered. Its benchmark 7 ¼% senior notes traded up to 101.5 bid, up about half a point.

The trader saw strength in Greyhound Bus Lines' 11½% notes, which he pegged at 80.5 bid, up from 76.5 bid, 77 offered, "possibly in anticipation of earnings, or maybe they feel the new management has gotten its act together, or maybe it's the coupon, because people are scrambling for income."

Traders saw little or no movement in Level 3 bonds, even in the wake of news reports that multi-billionaire investor Warren Buffett's Berkshire Hathaway had trimmed its equity holdings in the Broomfield, Colo.-based telecommunication fiber optic network operator to 1.6 million shares from 19.9 million previously. The 9 1/8% notes due 2008 were heard to have traded into a 90 bid and were left offered around that level. A trader said "There's going to be the real test tomorrow."

From emerging markets, terms were heard Thursday on a small corporate deal.

Brazilian telecommunications firm Telemar priced a $50 million offering of 5 5/8% two-year notes (B+) to yield 5¾%, via Banco Itau.

Meanwhile an emerging markets source told Prospect News that Vneshtorg Bank's $500 million five-year eurobond is set to begin roadshowing during the week of Nov. 17 in Europe.

Deutsche Bank Securities and UBS Investment Bank are the underwriters for the offer from the government-owned Russian bank.

And Chile-based energy company is Enersis SA will start the roadshow Friday for $300 million of 10-year notes (Ba3/BB+).

Deutsche Bank Securities is heard to be leading the Rule 144A deal, with others including Latin American investment banks to be involved.

One emerging markets brought to the attention of Prospect News a report published Thursday by Santander Central Hispano Investment Securities Inc., which cited combined sovereign and corporate Latin American emerging markets issuance month-to-date at $1.4 billion.

The report, which gave October's figure as $6.3 billion of new Latin American issuance, went on to state "...look for the total to continue to rise in coming days as issuers look to take advantage of the current window of low interest rates and relatively constructive demand-side technicals."

The report went on to state that market sources anticipate a €5 billion sovereign offering from Brazil as well as a $500 million deal from Petrobras, and new bonds from Embratel.

"In any event," the report stated, "[there are] no signs yet of market indigestion from the latest increase in supply, although speculation about new issuance from Brazil and Peru has seemed to weigh a bit on the credits."

Emerging markets sources have been telling Prospect News that the market's focus was especially drawn to Wednesday's $1 billion deal from Telefonos de Mexico (A3/BBB-), that came with a 4½% coupon via JP Morgan.

One source said that 95% of the new Telmex paper went to "pure high grade accounts," with a "small smattering" absorbed by emerging markets names.

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