Ceridian mega-deal prices, treads water; Countrywide bonds move up; Tesoro off on Kerkorian interest

By Paul Deckelman and Paul A. Harris

New York, Oct. 26 - Ceridian Corp.'s restructured billion-dollar-plus two-part deal was heard by high-yield syndicate sources to have come to market on Friday. However, after the bonds priced, they struggled just to stay around their par issue level, traders said,

Also on the new-deal front, DTE Energy was heard to be getting ready to launch a 10-year note offering somewhere around the middle of the upcoming week.

In the secondary arena, many participants were watching the gyrations of the nominally investment-grade Countrywide Financial Corp. - some of whose bonds are actually split-rated and trade at levels usually reserved for distressed junk - after the largest U.S. mortgage lender reported a larger-than-expected third-quarter loss, but then mollified the markets with bullish fourth-quarter and 2008 projections and an apparently successful conference call.

Most other mortgage names, including Thornburg Mortgage Inc., were also better.

Elsewhere, Tesoro Corp.'s bonds were down, even as its shares were up on the news that billionaire investor Kirk Kerkorian's Tracinda Corp. plans to acquire a 16% stake in the refiner via a tender offer.

A syndicate official said that the CDX High Yield 9 eased by 1/16 of a point on Friday to close at 98 7/16 bid.

Another official from a different high yield syndicate, noting that the equity markets were up on the day, said that the broad junk market was flat to slightly up from Thursday.

Ceridian prices $1.3 billion

As anticipated, only one new junk bond deal went down on Friday.

Ceridian Corp. and Merger Foundation Sub Inc. priced a restructured $1.3 billion two-part eight-year senior notes (Caa2/CCC+) transaction.

The Minneapolis-based management services provider priced an $825 million tranche of cash-pay notes at par to yield 11¼%, on the wide end of the 11% to 11¼% price talk.

Ceridian also priced a $475 million tranche of 12¼% PIK toggle notes at par. The coupon steps up by 75 basis points to 13%, should the issuer elect to make an in-kind, as opposed to cash, coupon payment on the toggle notes.

The toggle notes came on top of price talk that had them coming 100 basis points behind the cash-pay notes, with 75 a basis points PIK coupon step-up.

Deutsche Bank Securities, Credit Suisse and Banc of America Securities LLC were joint bookrunners for the LBO deal.

The amount of notes in the market was upsized to $1.3 billion from the $1 billion size that was announced on Oct. 22. However a $300 million tranche of senior subordinated notes was not included in the Monday announcement.

On Thursday an informed source said that the contemplated $300 million senior subordinated notes tranche had been withdrawn, with that amount of proceeds moved into the senior notes tranches.

Overall the bond financing initially contemplated for the Ceridian LBO has been downsized to $1.3 billion from $1.4 billion, with $100 million shifted to the bank loan market.

A source close to the deal said that it had gone well, and added that the order book had come together quickly.

Third biggest week year-to-date

With the $1.3 billion Ceridian transaction in the mix, the Oct. 22 to Oct. 26 week - which also featured a record $7.5 billion of issuance related to the TXU Corp. LBO - saw slightly more than $9.6 billion of proceeds raised in seven dollar-denominated tranches.

That total renders it the third biggest week of 2007 to date.

The biggest week thus far in 2007 was the week beginning March 12, which saw just under $9.9 billion in 15 tranches.

The second biggest week in terms of issuance came just before the massive sell-off in the international credit markets got underway: the week beginning June 25 saw just under $9.75 billion price in 16 tranches.

Thus far into 2007 no week has cleared the $10 billion issuance threshold, although the three weeks mentioned above came close.

The last week to produce more than $10 billion of issuance was the week beginning Dec. 11, 2006, which saw $12.2 billion raised in 26 tranches.

Factoring Friday's Ceridian deal into the total, 2007 year-to-date issuance is $141.8 billion in 344 tranches, as the final full week of October came to a close.

Hence on a year-over-year basis 2007 issuance remains a full 31% ahead of issuance seen in the record-setting year of 2006 which had seen $108.2 billion in 302 tranches priced by the Oct. 26 close.

The week ahead

The October-November crossover week will get underway with a purposeful amount of business in the high yield primary market.

Five issuers are expected to price $2.345 billion and €250 million before Friday's close.

They include Nuveen Investments Inc., which is expected to price $885 million (expected ratings B3/B-) on Thursday via Merrill Lynch, Deutsche Bank Securities, Wachovia Securities and Morgan Stanley.

Also on Thursday, Guitar Center, Inc. is expected to complete its $750 million two-part offering, made up of $375 million of eight-year senior cash-pay notes (Caa1/CCC) and $375 million of eight-year senior PIK notes (Caa2/CCC). The deal is coming to market via JP Morgan.

The week is also expected to produce the first new junk from a European issuer since the mid-summer sell-off in the credit markets. Melrose Resources plc, a U.K.-based oil and gas exploration and production company, is marketing a €250 million offering of eight-year senior subordinated notes (CCC+).

On Thursday the company set price talk at 10% to 10¼%.

Merrill Lynch is leading the deal, which is expected to price early in the week.

Meanwhile, a considerable number of high yield market watchers are also following a pair of Asian deals that are expected to price by the end of the week.

Singapore's United Test & Assembly Center/Global A&T Electronics Ltd. is in the market with a $475 million equivalent two-part notes offering - eight-year second-lien notes in dollar-denominated and euro-denominated tranches - via ABN Amro, JP Morgan and Merrill Lynch.

Also CII Carbon LLC and CII Carbon Corp., which are being acquired by India's Rain Calcining Ltd., are in the market with a $235 million offering of eight-year senior subordinated notes (B3//B-) via Citigroup.

Ceridian goes nowhere

When the new Ceridian bonds were freed for secondary dealings, several traders saw both the 11¼% notes due 2015 and the 12¼% notes due 2015 trading around the par to 100.125 bid level.

Later in the session, a trader pegged both tranches even a little lower, at 99.75 bid, 100.25 offered.

Countrywide tightens despite big loss

Back among the established issues, the name of the day seemed to be Countrywide, which reported a $1.2 billion loss for the third quarter - but which said that it will be black in the fourth quarter and in 2008.

A trader noted that its 6¼% subordinated notes due 2016 - split-rated at Ba2/BBB+/BBB and trading off the junk and/or crossover desks at some shops despite the company's otherwise nominally high-grade rating status, due to the pounding the issue's price levels have taken in the wake of the sub-prime mortgage lending meltdown and Countrywide's troubles since then - were up a good 4 to 5 points on the session to the 81-82 area from prior levels in the upper 70s.

The bonds opened around 80 bid, and were seen having moved up to about the 82-83 vicinity in morning trading, before reversing themselves at midday and heading back down to their previous territory at 78-79. Then, later in the afternoon, they began climbing once again, finally ending several points north of 80.

On a spread-versus-Treasuries basis, those bonds tightened to around the 490 basis points level on Friday - an astonishing 87 bps narrower than the bloated 578 bps spread at which they were quoted going home on Thursday.

Among the company's other issues, the trader said that Countrywide's 3¼% notes due 2008 were up 2 points at 95.5 bid, 97 offered and its 4¼% notes slated to come due on Dec. 15 were 1½ points up on the day at 98.75 bid, 99.75 offered.

Another market source saw Countrywide's 5.80% notes due 2012 among the most actively traded bonds on the session, and firming handsomely, up more than 3½ points on the day to a mid-88 level; on a spread basis, those bonds tightened to 481 bps versus the previous days' swollen spread in the 590 bps region.

Such eye-popping spread tightening was by no mean limited to the company's cash bonds; the cost of a credit default swaps contract bought to hedge against a possible default on the Calabasas, Calif.-based mortgage lending giant's paper came in at one point during the session by as much as 140 bps from Thursday's levels before widening back out a little later on, ending at about 360 bps over - still a pickup of more than 100 bps over the close a day earlier.

The investor confidence in Countrywide was replicated in the equity market, where its New York Stock Exchange-traded shares zoomed 32.36%, or $4.23, to end at $17.30, on volume of 123 million, triple the norm.

All of this came against the backdrop of the company reporting a third-quarter loss of $1.2 billion, or $2.12, or $2.85 including effects of new convertible preferred stock, versus its year-earlier profit of $647.6 million, or $1.03 per share. The loss came in around the middle of the wide range Wall Street was looking for, with some analysts having expected as little as $700 million of red ink, while others thought it might be twice that amount, or even more.

To reach that figure, its first quarterly loss in 25 years, Countrywide - the largest U.S. mortgage lender, writing one mortgage out of every five - took write-downs of $1 billion in loans and securities and $1.9 billion from reduced values of its securitized loans, while also upping its provision for loan losses to $934 million, more than triple the level it reported at the end of the second quarter on June 30. The company said that it was taking that step because a rising number of its customers who have home equity and "pay-option" adjustable-rate mortgages are falling behind on making those payments.

But by taking such drastic medicine now, Countrywide hopes to be able to get out of what its president, David Sambol, termed its "earnings trough" as he spoke to investors, analysts and journalists on the company's conference call following the release of the numbers. He projected that by writing down the value of questionable loans sooner rather than later and by tightening its belt - including 10,000 to 12,000 job cuts, possible because the company is writing fewer loans than it used to - Countrywide should be able to earn between 25 cents and 75 cents a share in the fourth quarter and stay profitable next year, although he gave out no profit projections for the latter time period.

Actions seen as 'proactive'

"The loss was clearly a lot bigger than the Street was anticipating, in terms of EPS," said a sell-side analyst, who spoke on the condition of anonymity, "but in our view, the company was actually pretty forthcoming in terms of trying to deal with the fact that they are going to be facing higher losses in their portfolio over the coming four to six quarters. It was more proactive, perhaps, than most of the other companies in our coverage, in trying to get their credit costs and reserves in line with what those future losses are going to be.

"While it was obviously disappointing quarter from an EPS perspective, I think that a lot of what the market was responding to, at least on the debt side, was the fact that they appeared to be coming to grips with the credit-costs issue, and at least sounding more positive than most of us expected them to sound for 2008."

The analyst said that "the comments that the company made on the conference call were pretty key, because just looking at the press release, it was hard to get a sense of exactly what their thought process was behind a number of the credit costs that they took in the quarter, and our sense was the company really was trying to be proactive in terms of reserving, both for the health of the investment portfolio, but also for their residual portfolio and other potential challenges going forward."

He said that what Countrywide is apparently trying to do is "pulling losses forward into the third quarter - their hope is that they won't have to reserve as aggressively going forward." However, he cautioned that "even they offered a pretty sobering view of their thoughts about what home-price appreciation trends would be in 2008 - but I think right now, the market is really focused on the fact that it was not as weak a quarter as many of us expected."

Even before reporting its numbers, Countrywide has been in the news lately, cast in both a positive and negative light - positive in announcing a program several days ago aimed at helping out the borrowers of some $16 billion of ARM mortgages by assisting them in refinancing those once attractive but now suddenly perilous loans into something safer, and negative with the continuing controversy that swirls around company chairman and chief executive officer Angelo Mozilo, who now faces a Securities and Exchange Commission probe into the propriety of his sale of an estimated nearly $300 million of Countrywide shares over the past two years. Mozilo - who insists that he did nothing improper and says he is cooperating with the federal probe - has said that his exercise of stock purchase options and share sales have been triggered automatically as part of his overall pension plan - but critics note the unfortunate timing, with many of those transactions taking place as the sub-prime mortgage industry crisis deepened and rising numbers of borrowers fell behind on their mortgages or were even foreclosed.

The analyst said that the first development - the $16 billion program - represents only 1% of the company's servicing portfolio, "so it's hard to see how this moves the needle in anything other than [public relations] viewpoint." As to Mozilo, he declined to opine whether the stock-sale questions suddenly make makes the veteran CEO too controversial to effectively guide his embattled company - but offered that "from a bondholders' perspective, I don't know that this is an issue bondholders spend a lot of time worrying about."

Other mortgage names mostly better

With Countrywide leading the way, other mortgage names were seen mostly higher, traders said.

Thornburg Mortgage's 8% notes due 2014 gained a point to 86 bid, 88 offered. Fremont General Corp.'s 7 7/8% notes due 2009 gained 1 point to 96 bid, 97 offered.

However, Residential Capital Corp.'s 7 7/8% notes due 2015 lost a point to 72.

Tesoro dips on Kerkorian interest

Apart from the financial names, a trader saw Tesoro's bonds about a point lower on the session - a drop he attributed to the news that Kirk Kerkorian is looking to take a 16% stake in the petroleum refining and marketing company by making a public tender offer for its shares.

He called the company's 6½% notes due 2012 off a point at 99.5 bid, 100.5 offered.

He said that while the Kerkorian stock tender announcement is obviously good news for the equity side, it's seen as possibly bad news from a debt perspective - on the theory that once Kerkorian gets his 16% holding in the company, the acquisitive tycoon "could perhaps decide to lever the company up, maybe to pursue a leverage buyout of the whole company," in order to take advantage of the profit potential in the lucrative refining industry, with crude oil north of $90 per barrel and showing no signs of coming down and U.S. refineries already running at nearly full capacity.

However, he noted that despite the slight easing, another market participant at his company sees little or no real downside in the Tesoro bonds, since "most of them have [covenant] language calling for a change-of-control offer at 101," "which would be exercised should Kerkorian or some other buyer actually take control of Tesoro.

"So we don't see a sell off," he declared. Normally, this wouldn't be so good for a credit - but in this case, it's no big deal."

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