Secondary rally stalls out, though Dynegy gains on NRG talk; Chesapeake brings $600 million drive-by

By Paul Deckelman

New York, June 6 - Last week's automotive-driven high-yield secondary market rally appeared to have hit a pothole on Monday, with the auto supplier sector markedly lower, leading the rest of the market down.

However, bonds of Dynegy Inc. were seen doing better on renewed market speculation that the Houston-based power generating company and sector peer NRG Energy Inc. might decide to merge.

In the primary market, Chesapeake Energy Corp. was heard to have successfully priced a quickly shopped $600 million issue of 121/2-year senior notes.

High yield primary market sources said that the Rule 144A deal, done via sole underwriter Wachovia Securities, priced at 98.923, to yield 6 3/8%, at the wide end of pre-deal market price talk envisioning a yield of 6¼% to 6 3/8%.

The Oklahoma City-based independent oil and gas exploration and production company plans to use the proceeds of the deal to fund tender offers for its $245.4 million principal amount of outstanding 8 1/8% senior notes due 2011 and its $300 million principal amount of outstanding 9% senior notes due 2012. The company said it expects to launch those tender offers this week.

A primary market source characterized the deal as having "gone well."

Another source noted that Wachovia had managed beat out several other banks - whom he did not name - who had worked with Chesapeake in the past. "It was a jump ball between them and several former underwriters," he noted.

The new deal priced way too late to move over into secondary market trading.

Chesapeake's existing bonds "were down half a point across the board" on the news, announced at mid-afternoon, that the new deal was coming, a trader said.

Another trader saw an even bigger drop-off, pegging the company's existing 6 7/8% notes due 2016 as having retreated to 104 bid, 105 offered, from pre-news levels at 105.5 bid, 106.5 offered, while its 7% notes due 2014, he said, dipped to 105 bid, 106 offered from 106.5 bid, 107.5 offered pre-news.

A market source meantime said that the two issues of bonds slated to be taken out with the proceeds of the new deal, the 8 1/8% notes and the 9% notes, "really didn't change." He characterized them as "trading 50 basis points off Treasuries," with the 8 1/8s around an assumed takeout level 107.375, and the 9s at 114.125.

Dynegy climbs on NRG rumor

Also in the energy and power sphere, one of the traders said, Dynegy's bonds were "up a little," which he attributed to market speculation that its recently revealed talks with Princeton, N.J.-based NRG might lead to a merger.

He quoted Dynegy's 8¾% notes due 2012 at 107 bid, 108 offered, up from prior levels at 105.5 bid, 106.5 offered, while its 6 7/8% notes due 20122 were a point better at 97.5 bid, 98.5 offered, and its 10 1/8% secured notes due 2013 were unchanged, continuing to hover around 111.5 bid, 112.5 offered. NRG's 8% notes due 2013 were seen maybe a quarter-point improved at 107 bid.

At another desk, a market source saw the 83/4s at 106.75, up nearly two points on the day.

An industry trade publication, Power Finance & Risk, recently posted a story on its website highlighting that Dynegy and NRG are holding merger discussions, although neither company has said anything about such negotiations.

In a research note Monday, Merrill Lynch & Co. power and energy lead debt analyst David Silvestein opined that the talks between the two companies "make sense" - and could yield substantial benefits to the two companies, including "a significant reduction in combined overhead," and the future development of NRG and Dynegy's joint ownership in West Coast Power, which he said would be facilitated by a merger.

Silverstein noted that NRG "has been in a holding pattern for some time with a strong balance sheet," and its substantial liquidity could be applied to clawback of 35% of Dynegy's second-priority secured bonds.

On top of that, the Merrill analyst noted, Dynegy is now a more attractive potential merger candidate, following its recent announcement of plans to sell its Midstream business, which caused the company's bonds to firm smartly.

He said that "one impediment to a possible merger that we see at this time is NRG's somewhat risk-averse management team. Nonetheless, we think the synergies that could be created warrant consideration of a merger of the two companies."

Merrill Lynch, he continued, has recommended that investors overweight the bonds of both companies, although "we would recommend NRG bondholders to lighten positions in the near term to reflect likely higher leverage should a merger be announced."

Silverstein estimates the pro forma for a sale of its midstream business Dynegy's leverage at its holding company level would be about 7.9 times EBITDA, while NRG's leverage is currently 4.1 times.

Texas Genco higher on IPO

Elsewhere in that same energy sector, a trader saw Texas Genco's 6 7/8% notes due 2014 having moved up a point from Friday's levels to 105.5 bid, 106.5 offered, on the news that the company will issue $600 million of new stock in an initial public offering. He called the up-move "surprising," given that none of the anticipated proceeds from the IPO are slated to go to reduction of the company's $2.275 billion of debt, but rather, "the companies [that own Genco] are pocketing it," according to the IPO filing.

Blackstone Group LP, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. and Texas Pacific Group purchased Texas Genco last year for about $2.8 billion in cash, and each holds slightly under a one-quarter stake, with Genco management owning the remaining 0.8%.

Junk mostly down in quiet market

Apart from those specific upsiders though, it was pretty much a down day on the market, although trading activity was extremely limited.

"People liked the first three-day holiday [of the summer season] last week and wanted another," one trader quipped, in asking whether things were quiet all over "or was it just here," at his shop?

"Things seemed decidedly on the quiet side today." he continued. "It felt as though the CCCs that we had seen rally so much over the last couple of weeks gave a point back across the board - but it was tough to tell because not a lot of trading was going on."

Auto sector declines

One area of particular retreat was the recently robust automotive suppler sector, pushed up by such names as Delphi Corp. and Visteon Corp.

On Monday, the trader said, both were notably weaker, with Visteon's 7% notes due 2014 retreating to 82.25 bid, 83.25 offered from 85.5 bid, 86.5 offered on Friday, while the Van Buren Township, Mich.-based automotive electronics company's 8¼% notes due 2010 dropped to 92 bid, 93 offered from 95 bid, 96 offered - even as the company announced that members of the United Auto Workers union had approved the recently announced $1 billion bailout deal for Visteon under which its former corporate parent, Ford Motor Co., will take over 24 unprofitable Visteon plants in the United States and Mexico, with some 17,400 highly paid employees. With the UAW endorsement in hand, Ford will now be able to buy out about 5,000 union members, to reduce costs at the plants and make them easier to sell.

The trader also saw Delphi's bonds weaker, particularly on the long end of the curve, with the Troy, Mich.-based former General Motors unit's 6½% notes due 2013 dipping to 74 bid, 75 offered from 75.5 bid, 76.5 offered on Friday, and its 7 1/8% notes due 2029 at a "kinda wide" 68 bid, 70 offered, down from 70.5 bid, 72.5 offered Friday. However, he said, its shorter bonds actually showed a little strength, with the 6.55% notes due 2006 a quarter point better, at 96.75 bid, 97.75 offered.

Amkor slips

A trader said that outside the auto sphere, Amkor Technology, recently on a tear, "gave back a little of its gains," with the West Chester, Pa.-based high-tech manufacturer's 7¼% notes due 2013 down two points at 84 bid, 85 offered.

Overall, the trader said, "it was pretty quiet, with the market waiting for [Federal Reserve Chairman Alan ] Greenspan to either corroborate or deny" a statement last week by another Fed official to the effect that the central bank was in the "eighth inning" of its interest-raising campaign - meaning that only one or two more rate hikes were likely this year. "He'll probably say nothing" the trader said, "but we'll see."

Tekni-Plex, Interamericana now Tuesday

Back in the primary market, two deals which were seen as possibilities for pricing Monday were heard to have been floated off till Tuesday - packaging maker Tekni-Plex Inc.'s $150 million of senior secured notes due 2012 via joint bookrunning managers Citigroup and Lehman Brothers, and Mexican live events promoter Corporacion Interamericana Entretenimeinto SA de CV's $200 million of 10-year notes, also coming via Citigroup. Price talk emerged late Monday on the latter issue, with market participants expecting a yield of around 9%.

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