Unisys off on downgrade, Remy bonds seen higher

By Paul Deckelman and Paul A. Harris

New York, Aug. 26 - Unisys Corp. bonds were being quoted down a point by some market participants Friday, after Moody's Investors Service lowered the ratings on the Blue Bell, Pa.-based high- tech information solutions provider. Other participants, however, saw the bonds more unchanged to only slightly lower, although trading was seen as very sparse on what one trader lamented was a "typical summer Friday."

He was not alone in that assessment. Several traders reported that while the market was officially open for a full session, people began drifting away from their desks and out the door even before noon ET, the way they are expected to do next Friday, which is scheduled to be a half session ahead of the Labor Day holiday weekend.

Things were "just brutal," one trader exclaimed.

"Really," another trader said, "all of the first-string traders are still out, using up their vacation days as the summer winds down. It'll be the same through the end of next week."

Besides the downside flurry in Unisys, the bonds of automotive components supplier Remy International Inc. were seen higher, although no one saw any news out about the Anderson, Ind.-based maker of starters and alternators.

Overall a market source marked high yield unchanged on Friday, and noted that trading volumes seemed extremely thin.

Primary market activity remained almost non-existent.

A market source quoted Unisys' 6 7/8% notes due 2010 down more than a point at 96 bid following the Moody's downgrade, which cut the company's corporate family rating - the former senior implied rating - to Ba3 from Ba1, and lowered the senior unsecured rating to Ba3 from Ba1.

However, another trader saw the bonds little changed post-downgrade, quoting them at 97.25.

Moody's said that the ratings change "reflects weakened credit protection measures that result from sustained declines in the company's profitability, as [the] higher margin Technology segment revenue continues to fall and the company addresses [its] loss-generating problem outsourcing contracts." It said that low operating margins over the past several quarters "have pressured interest coverage ratios, while free cash flow generation over the past few years has been inconsistent due to varying profitability levels and increasing capital expenditures relative to revenue."

Moody's further cautioned that the rating action "also considers the continuing challenges the company faces to improve its competitive position in its services and technology segments that will create sustainable revenue growth and profitability over the intermediate term."

Remy gains

Elsewhere, Remy International's bonds were seen to have firmed, even though there was no news seen out on the company, a former unit of General Motors.

A trader said that Remy's 9 3/8% notes due 2012 opened trading around 62.25 bid, where they had closed on Thursday, and then got as good as a 64.75-65 context, before backing away from that peak area to end at 63.5 bid, 65.5 offered. The trader suggested that the bonds "might be up on a rumor of some sort," but had no concrete evidence to support that theory, and no press releases or Securities and Exchange Commission filings had been seen by the time trading wrapped for the week. The trader noted that although the company has several other bond issues extant - its 8 5/8% notes due 2007, its 11% notes due 2009 and its floating-rate notes, also due 2009, "only that one" - i.e. the 9 3/8s - was trading around.

At another desk, the 9 3/8s were seen starting off lower, around a 60 bid level, and then having firmed two points on the day to end at 62.

Tenet higher despite default notice

A source at that desk also saw Tenet Healthcare Corp.'s 6 7/8% notes due 2031 up a point, at just under 88 bid, despite the announcement that some holders of those notes have declared the Dallas-based hospital operator to be in default for having failed to submit its required financial reports to the SEC on time.

All told, holders of about $139.85 million of the $450 million of outstanding notes have sent the company that default notice, which relates to its filing of the 10-Q quarterly report for the quarter ended June 30. The deadline was Aug. 9. Tenet was also supposed to have provided the notes' trustee with a copy of the report within 15 days of the SEC filing deadline.

The declaration of the default starts the clock on a 90-day "cure period," during which Tenet can remedy the situation by filing the 10-Q report. Tenet - which had publicly warned a month ago that it expected to be delayed in its 10-Q filing - said that it expects to file the report within the 90-day period, which expires on Nov. 23.

If it fails to do so, the dissatisfied bondholders could declare the entire principal amount of the notes to be due and payable immediately, by giving written notice to the company and the notes' trustee - and that, in turn could trigger a cross-default under the indentures of the company's other outstanding bonds.

However, such dire consequences did not seem to faze investors, who pretty much held the bonds steady, other traders said, although one acknowledged that with few people around and actively trading the issue, "it's really hard to tell" whether that reflects investor confidence in the company's ability to work its way out of this mess, or just total market indifference.

He saw odd lots of the 6 7/8s offered at 87.5, but saw no bids, and said it "traded down on Trace" - but on very restrained volume. He also saw the company's 6½% notes due 2012 continuing to hover at 95.5 bid, 96.5 offered, but said he had not seen much trading in that particular issue."

Another trader said "not a whole lot of Tenet traded, just odd lots," and characterized the company's bonds up one-quarter point, such as the 7 3/8% notes due 2015, which firmed to 98.75 bid, 99.75 offered.

A trader said that the day was "extremely quiet, with trading on just three bonds, including Charter Communications Inc.'s 9.92% notes due 2011, which he saw rising to 77 bid from 75.5 previously, on the St. Louis-based cable operator's mid-week announcement of an $8.4 billion debt-for-debt exchange aimed at lengthening the maturities and cutting the outstanding principal amount of debt represented by its 2008, 2009, 2011 and 2012 bonds.

Tembec active

He also saw some activity in Tembec Industries Inc., though no news on the Canadian forest products concern. He estimated the company's 8 5/8% notes due 2009 had risen to 84.125 from prior levels at 83, while its 7¾% notes due 2012 were perhaps a quarter-point better on the day at 76.5.

A market source at another shop saw the Tembec 8½% notes due 2011 losing a point on the day, to end at 77, although another source, while seeing the bonds down by nearly a point, had started them at a higher level and consequently saw them decline only to around the 78 area.

Reports that Saks Inc. is likely to be sold off piecemeal rather than to one buyer threw the Birmingham, Ala.-based department store operator's shares for a loop, but seemed to have no negative impact on its bonds, a trader said. If anything, the company's 9 7/8% notes due 2011 were two points better, at 109 bid, 110 offered, though on "brutally" light trading, while "nobody has really seen" its 7½% notes due 2010. On Thursday, those bonds had finished around 98 bid, par offered.

Saks' New York Stock Exchange-traded shares fell $2.23 (9.27%), to $21.82. Volume of 8.8 million shares was more than four times the usual activity level.

Rival Southern-based department store owner Dillard's Inc.'s 7.13% notes due 2018 were being quoted up a point at 98.

There was little movement in recently priced issues, traders said, with MGM Mirage's new 6 5/8% notes due 2015 steady at 101.375 bid, 101.75 offered, while Station Casinos Inc.'s new 6 7/8% notes due 2016 unchanged at 102.75 bid, 103.75 offered.

Primary quiet

Meanwhile the primary market continued to practice its back float in the absence of any new issuance or active forward calendar.

With no deals pricing Friday, the week came to a close with $634 million having come to market in three dollar-denominated tranches. That compares to the previous week's slightly less than $800 million in five tranches.

At Friday's close year-to-date issuance pulled up just shy of $67 billion in 262 tranches, well behind 2004 on a year-over-year basis. By the Aug. 26, 2004 close the market had seen approximately $95 billion of issuance in 382 tranches.

Bear Stearns high yield strategist Mike Taylor told Prospect News on Friday that a big post-Labor Day forward calendar - replete with sizable LBO transactions - will not likely result in much meaningful catch-up on a year-over-year basis.

"Issuance this year continues to trail last year's at this time by about $30 billion," Taylor wrote in an email message.

"I don't think the gap will be substantially narrowed even with some of the LBOs slated to price."

Gaming deals driven by "reverse inquiry"

It is notable that the week's $634 million of issuance came in three tranches from the gaming sector - all led by Banc of America Securities.

On Thursday MGM Mirage priced an upsized $375 million - from $250 million - add-on to its 6 5/8% senior notes due July 15, 2015 (Ba2/BB) at 101.375, resulting in a yield of 6.432%.

Earlier in the week Station Casinos Inc. priced a $150 million add-on to its 6 7/8% notes due March 1, 2016 (B1/B+) at 102.50, resulting in a yield of 6.399%.

Sources continued to speculate on Friday that the deals were driven by "reverse inquiry" - that is, by accounts that had put in standing orders for bonds, should the companies elect to issue them.

"I think that's really true of the MGM deal," a trader said late Friday, adding that if you are going to bring a deal at this time of the year there had better be buyers lined up out there.

Fridson searches for value in Charter exchange

The topic du jour among market watchers on Friday remained the mammoth Charter Communications bond exchange.

In the most recent issue of Leverage World-The Weekly Publication of High Yield Strategy, publisher and junk bond guru Martin S. Fridson examined the impact of the troubled St. Louis cable operator's $8.4 billion debt exchange offer, announced last Wednesday, on the actual value of the company.

Fridson notes that on Wednesday, the day of the announcement, Charter's share price rose by 41% to $1.62 on Aug. 24 from $1.15 on Aug. 23.

"Prices of the 12 outstanding issues involved in the proposed exchange offers jumped by amounts ranging from 5/8 to 7-5/8 points," Fridson added. "Based on the price changes Charter's total market capitalization increased by $544 million."

However, Fridson asserted, a fundamental principal of financial economics holds that a company cannot increase its value by changing its capital structure.

So why did both the shares and the bonds go up in price?

Among the possible solutions to this questions that Fridson examines is one which holds that the debt exchange could possibly reduce the threat of Charter filing for bankruptcy protection.

"It is noteworthy...that scholarly research has produced an estimate of average direct costs of bankruptcy of 3% of firm assets," Fridson notes. "On June 30, 2005 Charter's total assets stood at $16.78 billion. Multiplying that figure by 3% produces a figure, $503 million, strikingly close to the amount by which the company's total value rose when it proposed its exchange offer ($544 million)."

This, he concludes, "is a provocative notion...in the absence of a better explanation for the rise in total value of Charter Communications, despite the absence of either an equity infusion or an improvement in the company's operating outlook."

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