Enron debacle continues to fascinate market; Sinclair, TeeKay price drive-by offerings

By Paul Deckelman and Paul A. Harris

New York, Nov. 29 - The resounding crash of the once-mighty Enron Corp. continued to hold center stage among high yield market players Thursday, as they speculated on when the busted energy marketing company would file for Chapter 11 - and who might get stuck holding the bag. In the primary market, meanwhile, Sinclair Broadcast Group and TeeKay Shipping brought new drive-by deals to market.

Enron - whose bonds plummeted more than 30 points on Wednesday after the major ratings agencies all downgraded its formerly investment-grade debt multiple notches into junk bond territory and would-be savior Dynegy Inc. scrapped its planned $9 billion buyout of its troubled rival, continued to backpedal during Thursday's dealings, although the bulk of the damage has already been done. A trader saw the company's senior debt - which swooned to around the 25 mark Wednesday from prior levels in the 50s - going home Thursday quoted in the 20-24 area. The bonds were quoted flat, or trading without accrued interest.

Enron shares - once valued at almost $90 - meanwhile fell 25 cents on the New York Stock Exchange, or 40.98%, to end at 36 cents. Volume of 270 million shares was more than 10 times the usual daily turnover.

The bond market kept watching to see whether Enron would formally head for the bankruptcy court to straighten out its affairs, as had been widely predicted in the event the Dynegy deal were to be torpedoed, but there had been no filing by the end of the trading day. There was some speculation, reported in the media, that there might not be a filing - if Enron can successfully get enough of its creditors to agree to some kind of out-of-court restructuring. Enron has Blackstone Group presumably beating the bushes to see whether there is any interest in pursuing such a course, although this would still at this point appear to be a longshot.

Besides taking bets among themselves when a Chapter 11 filing would come down, and whether it would occur in Houston, Enron's home base, with a court highly experienced in energy industry restructurings, or in Wilmington, Del., the virtual capital of the U.S. corporate bankruptcy industry, market participants were peculating who might be on the hook and for how much as a result of Enron's spectacular fall.

"I think what the market is doing right now, is trying to figure out what companies have what exposure. I believe that this is like trying to separate the strands in a bowl of spaghetti," a trader opined. "Everybody has exposure, and the market is trying to figure out who's got what - from banks to other commodity companies, to trading partners, to pipeline companies. You've got basically every facet of the financial world involved with these guys, and everyone trying figure out on a forensic basis what's going on."

One key question is whether high yield oil and gas exploration and production companies which may have sold natural gas to Enron might be left out on a limb if the company files before paying them, including such junk energy players as Cross Timbers Oil, Chesapeake Energy, Vintage Petroleum, Key Energy or Magnum Hunter. The general consensus among several participants informally surveyed by ProspectNews would seem to be "no," that such companies either have no discernible exposure or a negligible level at worst.

"I don't think any of the E&P companies that I watch have really large exposures to Enron," one analyst said. "Some of those questions came up in conference calls for the third quarter results of those companies, and I don't think anybody has really significant exposure there. Some of the larger E&P companies that had exposure there three to six weeks ago have cut that back quite a bit since then."

"With regard to counterparty risk against Enron, it seems like there was enough lead time here that most of their major trading partners made announcements that they were scaling back - they would take delivery of certain assets from Enron but they wouldn't sell certain assets to Enron (for fear of not getting paid)," said analyst Ron Gies of Stone & Youngberg LLC in San Francisco. "So I think a lot of those things were sorted out, or at least the bulk of them had, and that was one of the things driving Enron into deeper trouble - people were unwinding those relationships. I'm not sure there was a lot of hidden counterparty risk out there. But time will tell."

If high yield oilers are not going to be the ones taking a haircut in whatever restructuring scenario which emerges - in or out of court - someone will have to pay the price and those someones are guaranteed to be mighty mad.

"It's only taken three weeks to decimate this company," one market observer noted, with mordant humor. "Can you imagine the class-action lawsuits they're going to get? The lawyers are probably already all ordering themselves new BMWs. I would if I were a lawyer."

"Wait for the indictments to be handed down," a trader declared. "Management was selling their stock in the 50s, and that was a while ago, so somebody knew something was up, obviously."

The Senate Energy Committee has already announced that it plans to hold a hearing on Enron's collapsed and its likely impact on the energy markets. And even if no angry legislative action, lawsuits or prosecutions arise from the Enron debacle, the trader added, "this will be in business school texts for years on how not to run a company."

Elsewhere, XO Communications Inc.'s 12½% notes dropped three points on the session to 10 bid, while its 10½% notes also ended at 10, down a point, after the Reston, Va.-based telecommunications operator announced that Mexican telecommunications company Telefonos de Mexico SA de CV and buyout firm Forstmann Little plan to invest $800 million in it (see related story elsewhere in this issue).

The investment and accompanying restructuring is expected to enable the voice and data services provider to get rid of $4.7 billion of its $5.7 billion in debt but it will essentially leave its current shareholders with nothing, while bondholders are expected to get about a 18% stake of the restructured company, or approximately $185 million, amounting to just pennies on the dollar for their holdings.

Also in the telecom sphere, Williams Communications Group Inc. bonds were being quoted down around three points on the session, its 10 7/8% senior notes due 2009 dipping to 47 bid, although there was no firm news seen out on the Tulsa, Okla.-based telecommunications network operator.

Nextel Communications Inc., paper was seen down about a point on the day, its 9 7/8% notes due 2009 hovering in the 82.5-84 bid region.

NTL Communications' 11½% notes due 2006 were quoted trading around 42 bid and its 11 7/8% notes due 2010 around 40, both well down from recent levels around the 48-49 bid area, after Moody's cut the British cable provider's bonds to Caa2 from B3 previously, while also lowering its convertible debt to Caa3 from Caa1. NTL's senior implied rating was brought down to B3 from B1 and its senior unsecured issuer rating fell to Caa3 from Caa1. Moody's warned that "given NTL's significantly weakened access to capital over the past year, the company has extremely limited financial flexibility and virtually no ability to absorb any shortfalls in its business plan."

Rival U.K. cabler Telewest Communications plc's bonds were also down about three to four points on sector sympathy, its 9 5/8% notes due 2006 ending at 81 bid.

Outside of the telecom and cable sphere, a trader said Kmart's bonds seemed to be drifting lower in the wake of the Troy, Mich.-based discount retailing giant's announcement earlier this week of a third-quarter loss triple that of a year ago (although less than analysts' expectations) and Standard & Poor's downgrade of its bonds to BB from BB+.

The trader saw "more selective buying in the market. Apparently, there are still tons of cash still on the sidelines that has to be put to work, but the buying is a lot more selective, and the names that are not in vogue seem to be drifting lower."

Another trader called overall activity beyond Enron and the telecoms "pretty quiet - it's month-end, year-end, all of that good stuff. Liquidity is no longer at a premium, and we've been quiet the last few days in response to all of that."

A trader noted that Houston-based chemicals maker Huntsman Corp. Announced that it has obtained a commitment from Deutsche Banc Alex. Brown, its lead lender, for up to $150 million in financing, and expects to receive approval from all its other lenders.

He projected that Huntsman would likely use the money to meet a coupon payment, due Saturday, on its Huntsman Polymer 11¾% notes, although he saw no movement in the bonds from their recent levels around 9 following the late-afternoon announcement. Meanwhile, the parent's several issues of notes, such as the 9½% notes due 2007, stayed in the 10-11 bid range, while the much more coveted 10 1/8% paper due 2009 of Huntsman ICI (the trader called the operating unit "the only part of the company which has any real value") continued to hang in at the 93-95 area.

In the new-deal sphere, the trader said the new Sinclair 10-year notes "traded pretty well" when they were freed for secondary activity, moving up to about 100.75 bid/101.25 offered from their par issue price.

Sinclair's existing 10% notes due 2005, which are to be redeemed using the proceeds of the new bond issue, moved up earlier this week to around the 103 bid level from prior levels at 101 once news of the Baltimore-based broadcaster's impending deal and its anticipated use of proceeds swept through the market. In Thursday's dealings, those existing bonds tacked on another quarter point to 103.25, just below the anticipated call price of 103.33.

Overall in the primary, a further $1 billion of new business was announced Thursday, bringing the post-Thanksgiving week's total of dollar-denominated announcements to $2.795 billion.

A Teekay Shipping Corp. $100 million add-on surfaced Thursday morning, and priced in the afternoon via bookrunner Goldman Sachs & Co. to yield 8.524%.

In addition, CSK Auto Inc. announced $225 million of notes due June 15, 2006, headed for a roadshow that starts Friday. Joint bookrunners are Credit Suisse First Boston, J.P. Morgan and UBS Warburg.

A quickly shopped offering from Houston-based Lyondell Chemical Co. was also unveiled, this one $350 million of seven-year notes (Ba3/BB) via joint bookrunners Salomon Smith Barney and J.P Morgan.

Finally, Prospect News learned that The Great Atlantic & Pacific Tea Co. Inc. will launch an off-the-shelf deal for $225 million of 10-year notes via Lehman Brothers on Dec. 7, with pricing expected Dec. 17.

Terms on Sinclair Broadcast Group, Inc.'s $310 million of senior subordinated notes due Dec. 15, 2011 (B2/B) showed it pricing at par to yield 8¾%, better than talk of 8 7/8%-9%.

One syndicate official told Prospect News that the deal, via Deutsche Banc Alex. Brown and J.P. Morgan, was highly oversubscribed.

Price talk of 12 5/8%-12 7/8% emerged Thursday on Majestic Investor Holding LLC's $145 million seven-year senior secureds, via Jefferies. The deal is scheduled to price Friday

Also on Friday, terms should emerge on the €100 million of eight-year notes from Global Auto Logistics.

End

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