Chesapeake Energy, upsized Smithfield deals price; Delta slides as oil prices rise

By Paul Deckelman and Paul A. Harris

New York, July 28- Chesapeake Energy Corp. and Smithfield Foods Inc. were heard by high-yield syndicate sources to have brought quickly emerging, opportunistically priced new deals to market Wednesday - seeming to prove that whatever kind of bad karma scared Tenneco Automotive Inc. out of the new-deal market on Tuesday, when the Lake Forest, Ill.-based auto parts concern garaged its planned $500 million note offering, it is by no means all-pervasive, or even widespread.

In the secondary market, Tenneco's decision to scrub its 10-year offering - at least for now - and to concurrently abandon its pending tender offer for the company's $500 million of outstanding 11 5/8% senior subordinated notes due 2009 apparently had little impact on investors; those bonds and the company's other issues were only a bit lower, traders said.

Elsewhere, Delta Air Lines Inc. bonds were flying on just a wing and a prayer, continuing to fall as oil prices hit the highest levels seen in two decades. On the other hand, Levi Strauss & Co. notes continued to rebound from the lows they had hit a few sessions ago, possibly on short covering.

Three deals totaling $700 million and £49 million priced during the mid-week session as Smithfield Foods, Inc. doubled the size of its Wednesday drive-by deal to $400 million, which it priced at the wide end of talk.

The Smithfield, Va., processor and marketer of fresh pork and processed meats sold its seven-year senior notes at par to yield 7%, at the wide end of the 6¾%-7% price talk.

JP Morgan ran the books for the bank debt refinancing issue, which was upsized from $200 million.

Elsewhere in the market Chesapeake Energy Corp. was said to be the beneficiary news of rising energy prices - during the session crude oil reached record highs, briefly breaking through the $43 per barrel level - as it completed its $300 million sale of 10-year senior notes (Ba3/BB-), pricing it at par to yield 7%

With UBS Investment Bank in the lead, the Oklahoma City independent natural gas producer priced its acquisition financing bond deal in the middle of the 6 7/8%-7 1/8% price talk.

Finally, Debenhams Finance Holdings plc, the U.K. department store company priced a quick-to-market £49 million add-on to its 10½% senior notes due Aug. 28, 2012 (B2/B) at 103.0 on Wednesday, resulting in a 9.977% yield to worst.

Credit Suisse First Boston and Morgan Stanley ran the books for the dividend-payment deal that came at the tight end of the 102.5-103 price talk.

On May 15, Debenhams issued £160 million of the 10½% notes at par, having downsized the initial offering by £50 million.

Hence the company got an interest rate Wednesday that was more than 50 basis points tighter than the print on the original notes.

Primary session went "pretty well"

Examining Wednesday's trio of transactions well after the session came to a close, one investment banker said: "The market seemed to go okay today.

"Smithfield was upsized. They might have paid a little extra to increase the size of the deal by that much.

"And Chesapeake Energy went well, but everybody thought it would," the official added, making note of the fact that record crude oil prices were in Wednesday's headlines.

Contrary buy-side

The sell-sider also said that at present the demand for new paper among high yield accounts may not be quite as robust as one might anticipate, given that high yield mutual funds have enjoyed three successive inflows of cash.

"We think the next funds flow number that comes out might be negative," added the banker. "The market has definitely been weaker over the past day or two. Treasuries have moved against us.

"We've been hearing all year that the accounts still have money and they're looking for deals. But now we have seen the market turn against them slightly, which should be an opportunity to buy in at a cheaper price - and they're still hesitant."

Market moved away from Tenneco

In light of what sources on both the buy- and sell-sides have been characterizing as a conspicuously robust late summer new issue pipeline, Prospect News asked the sell-side source whether other prospective issuers might need to be wary of the fate suffered Tuesday by Tenneco Automotive Inc.

For the second time in nine weeks Tenneco postponed a high yield bond offering - this time $500 million, which, as with the one it pulled in May, was initiated to fund a tender for $500 million of the Lake Forest, Ill. company's 11 5/8% senior subordinated notes due 2009.

Tenneco chief financial officer Kenneth Trammell told Prospect News late Tuesday that had the company gone ahead the interest rate would still have been below the 11 5/8% on the bonds Tenneco was intending to refinance. But Trammell estimated the poor market conditions would have cost 50 basis points compared to the 8½%-8¾% price talk.

The sell-side source expressed a modicum of skepticism that Tuesday's market conditions could have hammered Tenneco that hard.

"The 10-year Treasury closed at 4.49% on Monday," the banker recounted.

"Tuesday, because of the information on consumer confidence, it closed at 4.62%. That's not the biggest move you have ever seen, but it's significant.

"So the market was moving away from them.

"But I don't think that accounts for a difference of 50 basis points."

Offering from Sino-Forest

One roadshow start was heard Wednesday.

The roadshow starts Friday in Asia for Sino-Forest Corp.'s $200 million minimum offering of seven-year guaranteed senior notes, which will be marketed to both high yield and emerging markets accounts, according to an informed source.

Morgan Stanley is the bookrunner for the Rule 144A/Regulation S offering.

The Mississauga, Ont.-based producer of logs, wood chips, and engineered wood products from a plantation area of about 232,600 hectares in East Asia will use the proceeds to fund capital expenditures.

And finally on Tuesday, the Prospect News Bank Loan desk learned that York, Pa.-based Graham Packaging Co. LP plans to issue high-yield bonds and obtain a new credit facility to help fund the acquisition of Owens-Illinois Inc.'s plastic container business for approximately $1.2 billion.

Citigroup, Deutsche Bank Securities and Goldman Sachs & Co. will lead the debt financing.

The acquisition is subject to regulatory approvals.

New deals not seen trading

Traders said that the Smithfield and Chesapeake issues appeared too late in the day for any kind of secondary activity.

They also said that the new Host Marriott Corp. 7% notes due 2012 were little moved from the 98.493 issue price at which the Bethesda, Md.-based lodging industry real estate investment trust's bonds had come on Tuesday. One quoted the new notes at 98.375 bid, 98.875 offered, while another said that after pricing "they just died." He had them checked in at 98.5 bid, 99.5 offered, "really, just an issue bid."

Tenneco notes steady

The lack of any new Tenneco bonds - after the company late Tuesday night made official what the market already knew on Tuesday afternoon, that both the deal and the tender offer it was to have funded would be shelved, for the second time in nine weeks - did not seem to have too much impact on the company's current notes.

"Eh, there was not so much going on," a trader said, quoting the 11 5/8% notes that were to have been taken out around 106.5 bid, 107.5 offered, down about three-quarters of a point to a point from their recent levels around 107.5.

"I think that people think that their numbers have been good enough," he said. "And you've got that big coupon. They probably will do something eventually with it."

At another desk, the 11 5/8s were seen still clinging to the 107 level, while the company's 10¼% notes due 2013 were actually being quoted a quarter point higher, at 113.25.

Airlines drop on oil rise

News that crude oil prices had climbed almost to the $43 a barrel mark - the highest they've been in at least 21 years - after authorities in Russia told embattled petroleum giant Yukos to halt sales while its straightens out an alleged $3.4 billion tax debt were seen having an impact on sectors of the economy that are heavily dependent on oil - which translated into bad news for the high yield airline sector in general and for struggling Delta Air Lines in particular.

The airlines were "getting smoked" as oil prices "went to the moon," a trader said during the session, although after the close he said that after the carriers "got hit, they caught a bid and began to move back up a little."

He saw Delta's 8.30% notes due 2029 having traded down to about 34 bid before coming up from that trough to end around 35.5 bid, 36 offered. On the short end of the curve, Delta's 7.70% notes due 2005 bottomed out around 59.5 bid, 61.5 offered, he said, before firming a little from that low to 60 bid, 61 offered.

"All of the airlines got hit," he said, although Delta was clearly the worst performer; he quoted Northwest Airlines Corp.'s 7 7/8% notes due 2005 at 96.5 bid, 98 offered at the close, while Continental Airlines Inc.'s 8% notes due 2005 finished around 87.5 bid, 89.5 offered.

Another trader said that the Delta bonds "got beat up," as the 8.30s, which he called "the most volatile" Delta issue, dropped to around 35 bid from Tuesday levels at 39 bid, 40 offered, and then came back up slightly to 36. He pointed out, though that "from the news last week, when the pilots offered a more than 20% cut in pay, and the notes traded up to 44, they're down nearly 10 points on the week."

Likewise, he said, the 7.70s, offered around 60-61, were down four points on the day and well down from their recent highs in a 70 bid, 72 offered context following the pilots' offer to the company of 23.5% in pay concessions.

Delta has continued to publicly jawbone its pilots' union on the need for larger pay concessions if the airline is to have a viable cost structure for the long-term - give-backs even beyond the 23.5% the line's 7,500 captains indicated last week that they'd be willing to make. The company's insistence that the Air Line Pilots Association offer was just a first step that would have to be enlarged helped knock Delta's bonds off the relatively high perch to which investors had taken them to on the initial news of the pilots' offer.

The trader also saw Delta's 7.90% notes due 2009 at 41 bid, 43 offered, down from levels in the high 40s just a few days ago, on the pilot news.

"Delta continues to get weak," yet a third trader said, "even lower in the gutter," pegging the Atlanta-based air carrier's 8.30% notes as having come down to around 35 bid, 36 offered from the 36 bid, 38 offered context in which the bonds had traded previously, so they are off a point or two.

Commenting on the pilots' offer last week of more substantial give-backs than the 13.5% the union had previously offered, he opined: "I don't care how much in concessions you get out of the employees - [if] at a certain point, oil is going to be up there for an extended period of time - [several] quarters, a year, or even higher, like $50 a barrel, there's no amount of concessions that's going to make this company be OK.

"So that's what we're seeing. [Investors] are saying 'okay, we have some good news [with the pilots being willing to compromise], but guess what? They have other expenses that are huge as well and getting higher.' So they have that to deal with."

He saw the carrier's 7.90% notes "off as well," dropping to 41 bid from prior levels around 45, while Delta's 7.70% notes, which had traded in a 63 bid, 65 offered context on Tuesday, were being offered at 61.

"Man, UGGGGGGLY," he exclaimed.

Other airlines firmer but down

The trader said that the other airlines "have hung in there a lot better," with Continental's 8% notes at 89.25 bid, 90.25 offered, "maybe half a point weaker.

"I think that paper's going to be fine in '05," he declared, "unless there's a horrible terrorist attack or something like that, Continental is going to be OK in the '05 maturity. They're hanging in there. They haven't weakened like Delta paper."

He also saw Northwest's short paper, the 7 5/8% notes due 2005, "again off, off a quarter point, half a point," at 97.5 bid, 98.5 offered.

The second trader agreed that the bonds of other airlines - particularly their shorter issues - were not doing too badly, considering.

"From what I can see, people are looking at the shorter paper," he said. "They figure for the shorter paper, [the carriers] have enough money to last a year, two years, and they're going to pay that stuff off."

The Northwest 7 5/8% 2005 notes "are the one they're really watching, trading almost at par" - he quoted the Eagan, Minn.-based carrier's notes at 97.5 bid, 98 offered, "yes, trading at a discount - but for any airline paper to be trading almost at par, well,. . ." he said, leaving the sentence unfinished.

"The thought on that one is that they're in a lot better shape than Delta. They obviously have some dough left over. People are comfortable buying [one-] year paper."

Continental's notes, even though they mature in 2005 as well, trade a few points behind Northwest, he said, at 89 bid, 90 offered, "maybe because "they've been there [Chapter 11] before, or their markets are somewhat more difficult. It's a big difference."

General selling

Back on the ground, "A lot of people are selling bonds right now," a trader said. "Despite all of the color I've heard about how we've had [high-yield mutual fund] inflows the past few weeks, it seems like people are selling bonds right now." Even "some of the go-go names - they're getting out. It's not dramatic - just like a little grind, across the board, half a point a day, for the last few days."

Among the go-gos that he saw go-going lower, Collins & Aikman Products Corp.'s 11½% notes due 2006 at 98 bid, 99 offered, down from 99.5 bid, 100.5 offered, while the Troy, Mich.-based auto components maker's 10¾% notes due 2012 "have fallen as well," to 100.5 bid, 101.5 offered versus previous levels around 103.5 bid.

Amkor down

Also lower - though not by too much - was Amkor Technology Inc.'s bonds, with the West Chester, Pa.-based semiconductor company's 7 1/8% notes due 2011 seen at 84.5 bid, 85.5 offered, down about a point. "The bids got hit" as the market digested earnings data released late Tuesday "and left them there."

Amkor boasted a second-quarter profit of $9.9 million (six cents a share), a considerable turnaround from a $51 million net loss (31 cents a share) a year ago. But the company also warned that the rest of the year would be tough, with its expansion-related costs constraining profitability and cash flow near term, while the semiconductor industry is beset by "uncertainty" and customers are "more cautious." It predicted that margins would remain "under pressure," with third-quarter revenues essentially flat sequentially, and a loss in earnings per share.

Levi up again

On the upside, Levi Strauss bonds "are turning around again, here we go," a trader said, quoting the San Francisco-based apparel maker's 12¼% notes due 2012 as having firmed to 101 bid, 102 offered from Tuesday's 99 bid, 100 offered, while its 7% notes due 2006 "have started to move," rising to 95.5 bid, looking for offers, from 94 bid, 96 offered previously.

He noted that the bonds were "still not at their peak" that they had recently hit on speculation that a sale of Levi's Dockers' casual clothing unit seemed closer; that buzz had pushed the 121/4s as high as 104, the 11 5/8% notes due 2008 to 103 and the 7s to about 98-99. The bonds had retreated from those levels after apparel giant VF Corp. said that buying Dockers was not high on its priority list.

He theorized that "there might be some short-covering "going on, because I don't know how much real news there is out on them."

He said that after the VF news last week, which caused the bonds to retreat from their highs over several sessions, those covering their shorts "saw them crap out, thought they were going to do a 10 point dive. Now that it reverses course, everybody just rushes to the gate."

Another trader also saw Levi "a little better," with the 7s as high as 96.25, up half a point, the 11 5/8s at 100.75 bid, up a point, and the 121/4s up a point-and a half to 101.25 bid, 102.25 offered.

"I think the 121/4s have a higher call price, the call premium," he said, "so they may have a little more room to go up."

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