Tesoro, KB Homes up on debt paydowns; housing better; two more deals shelved

By Paul Deckelman and Paul A. Harris

New York, Aug. 7- Tesoro Petroleum Corp.'s bonds firmed smartly on Tuesday, traders said, after the San Antonio, Tex.-based energy refiner announced better second-quarter numbers and told investors on its conference call that it had repaid the outstanding balance on its revolving credit agreement.

Another credit in that same fortunate situation was KB Home, which announced that it had recently used asset-sale proceeds to complete the redemption of one series of its bonds and to repay a term loan four years ahead of schedule

Meanwhile, the recently hard-hit bonds of some of KB's sector peers, such as Hovnanian Enterprises Inc. and WCI Communities Inc., were seen at better levels on Tuesday, after having gotten hammered in Monday's dealings. However, another company which got pounded on Monday, Standard Pacific Corp., continued to retreat on Tuesday.

In the gaming sector, Wynn Las Vegas LLC's bonds were better, after the Las Vegas-based hotel and casino operator reported a solid rise in second-quarter profits.

Primary market activity remained muted, but for the news that Alliant Holdings I, Inc. has postponed its planned $290 million junk deal, while East Valley Tourist Development Authority has withdrawn its planned $275 million offering of senior secured notes. However, Altra Nebraska LLC plans to issue $130 million of new bonds.

Tesoro tops estimates, bonds up

A market source saw Tesoro's 6¼% notes due 2012 trading just above 99, well up from Monday's levels around 96.5, although its 6 5/8% notes due 2015 were seen holding to that same 96.5 level at which they've been for a few days.

At another shop, however, the latter bond was pegged at 99.75, and said to be up nearly 3 points on the session.

Tesoro said that its second-quarter profits jumped 36% from year-earlier levels to a company record $443 million ($3.17 a share), from $326 million ($2.33 a share) previously. The per-share earnings were a bit better than the $3.14 which analysts, on average, had been expecting. The increased earnings came on a 14% climb in revenues for the quarter to $5.6 billion.

The company said the key to its better performance was a 22% increase in refining margins - the difference between the price of a barrel of crude oil and the price at which the refiner can sell the distilled products from that same barrel, such as gasoline, heating fuel, jet fuel and kerosene.

During its conference call with investors and analysts, Tesoro further announced that its better-than-expected cash generation during the quarter allowed it to repay all outstanding debt on its revolving line of credit, including $500 million which it borrowed to help fund the purchase of a Los Angeles refinery from Shell Oil and USA Petroleum in May.

The debt repayment brought the company's debt to capital ratio to 37% at June 30, exceeding Tesoro's goal of achieving a 40% ratio by the end of the year (see related story elsewhere in this issue).

KB Home better on repayment news

Another company doing some big-time debt paydown - presumably well appreciated by its bondholders - is Los Angeles-based homebuilder KB Homes, which said Tuesday it had whisked some $650 million off its balance sheet.

A trader said that KB's 5¾% notes due 2014 moved up 1½ points to 83 bid, 85 offered. The company's other outstanding bonds were also up around the same amount, with its 5 7/8% notes due 2015 at 84 bid, 86 offered, and its 7¼% notes due 2018 rising to 86 bid, 88 offered. The company's 6 3/8% notes due 2011 finished at 90 bid, 92 offered.

The company said that it repaid $250 million in 9½% subordinated notes and $400 million in an unsecured loan due 2011 using cash on hand. KB said that it has lowered its debt by about one-third, or $1.1 billion, in the past year.

The company believes that with less debt on the balance sheet, it will be in a better position to take advantage of the eventual rebound in the housing market.

Housing better, but for Standard Pacific

That hard-hit housing sector was generally better pretty much across the board Tuesday, except for the bonds and shares of Standard Pacific, which had been one of Monday's big losers in the sector on market rumors that the Irvine, Calif.-based homebuilder might not be able to support its debt.

Standard Pacific's bonds were seen continuing the easing trend - though on much reduced volume from the levels seen on Monday. Some traders in fact said that they saw very little in the way of Standard Pacific paper traded - one said he "didn't see any action in those," while quoting the company's 6½% notes due 2008 at 89 bid, 90 offered, down from previous levels in the 90s.

Another trader thought the bonds might be "a little better" in line with the generalized snapback in the sector, but added that "without any liquidity, it's difficult to say."

Another market source quoted the bonds generally lower, but on light volume, with its 6½% notes due 2010 seen down about 2½ points at 85.375, and its 6½% notes due 2008 down as much as 4 points to around the 92 region. Its 9¼% notes due 2012 were seen actually a little higher, up 1 3/8 points at 81.375 bid, again on restrained trading.

Standard Pacific's New York Stock Exchange-traded shares - which at one point plunged nearly 19% intra-day on Monday, touching seven-year lows, before cutting their losses but still ending lower, were actually higher on Tuesday, up 34 cents (3.23%) to $10.86, on volume of 6.6 million, 2½ times the usual turnover.

While investors still either sold Standard Pacific bonds on Tuesday or stayed away from them completely, other housing names that have recently taken their lumps were better on Tuesday, notably Hovnanian Enterprises, some of whose issues were quoted down as much as 5 or 6 points on the session Monday.

It was a different story Tuesday, a trader said, as he quoted the Red Bank, N.J.-based builder's bonds "all up a little," its 8 7/8% notes due 2012 and 8 5/8% notes due 2017 both at 80 bid, 82 offered and its 6½% notes due 2014 at 79 bid, 81 offered. He saw its 6¼% notes due 2015 also "actually higher today" at 76 bid, 77.5 offered.

"In general, houses were a little firmer," he said, because overall, "the market was generally firmer and [the builder names] followed suit."

Another market source saw Hovnanian's 10½% notes slated to come due on Oct. 1 up 2½ points on the day from Monday's levels at 99.5 bid, while its 6¼% notes due 2016 were 3 point winners at 78. Its 8 5/8% notes due 2017 were 5/8 point better at 82.65.

But Hovnanian's rebound was by no means universal - the market source also saw the company's widely traded 8 7/8% notes due 2012 get as good as 83.5 - but still called that a 2 point loss on the day.

WCI, Technical Olympic gain

Meantime, a trader saw WCI Communities "a little better - though with not a lot of action." He pegged the Bonita Springs, Fla.-based builder's 9 1/8% notes due 2012 at 75.5 bid, 76.5 offered, saw its 7 7/8% notes due 2013 71 bid, 72.5 offered, while its 6 5/8% notes due 2015 were at 69 bid, 71 offered.

Another source called the latter bonds up 2 points at 71 bid, saw the 7 7/8s up nearly 1 point on the day at 70.875, and pronounced the 9 1/8s unchanged at 75.

Another trader said recently hard-hit Technical Olympic USA Inc.'s bonds were "retracing their losses" as they headed back upward, and were improving.

He saw the Hollywood, Fla.-based builder's 10 3/8% subordinated notes due 2012 and its 9% senior notes due 2010 both up 5 points on the day at 48 bid, 50 offered and 77 bid, 79 offered.

Spectrum Brands better on asset-sale plans

Also out of the distressed-debt sphere, Spectrum Brands Inc.'s bonds were up after executives of the Atlanta-based maker of such familiar consumer products as Remington electric shavers and Rayovac batteries said that it intends to sell a strategic asset by year's end - and insisted that even without such sale, its liquidity is adequate.

A trader said its 7 3/8% notes due 2015 were 6 point gainers on the session to 74 bid, 75 offered, while a market source at another desk said the company's 11¼% notes due 2013 were up more than 5 points at nearly 84 bid.

However, another trader said the bonds had already gone home around those respective levels on Monday, and were up an additional ½ point at most on Tuesday.

Yet another trader contradicted that, however, seeing the 7 3/8s up nearly 7 points and the 111/4s actually up by 7 on Tuesday.

Wynn a winner

Back among the non-distressed issues, Wynn Las Vegas was seen 1¼ point higher, according to a market source, who had those bonds going out at 96.25.

Another market source saw the Nevada-based gaming company's bonds up nearly 2 points on the day at 95.75.

Wynn's bonds rose after the company reported that its second-quarter profit more than doubled, to 82 cents per share, aided by the revenues generated by its new casino in Macau. Wall Street had been looking for just 53 cents a share for earnings.

Fed not a factor for junk mart

A trader said that the Federal Reserve Board's announcement that - as had been widely expected - it will leave the key overnight U.S. lending rate at 5.25% and will continue to watch out for inflation, "basically had not effect" on the junk market, although he did see stocks "all over the place, down 150 [points], then up 150.

"It's unbelievable."

The market's performance, as measured by indexes, was to the upside. A trader saw the widely followed CDX junk bond index up ¾ point at 94-94 3/8. The Banc of America Securities High Yield Broad Market Index was up 0.21% on the day, with a flat 0.00% return for the year to date. The KDP High Yield Daily Index closed at 77.76, up 0.31 on the day.

A senior high yield syndicate official said that trading volume was so thin on Tuesday - as it has been for the past four or five sessions - that were was no dramatic move in the market one way or another.

Another sell-side source said that junk continued to seem firm on Tuesday, but concurred that trading volume seems light.

The primary market continued to produce negative news, as the market learned that Alliant Holdings I, Inc. and East Valley Tourist Development Authority each pulled notes offerings.

Alliant pulls $290 million

Alliant Holdings I, Inc. has postponed its $290 million offering of 7.5-year senior notes (Caa1/CCC) due to market conditions.

Proceeds from the deal, which was being led by JP Morgan and UBS Investment Bank, were to have been used to help fund the acquisition of company by the Blackstone Group.

East Valley abandons deal

Meanwhile East Valley Tourist Development Authority has withdrawn its downsized, restructured $275 million offering of seven-year senior secured notes (B+).

The Merrill Lynch-led deal fell victim to market conditions as well as to a dispute between the tribal gaming concern and the IRS regarding the tax-exempt status of municipal bonds issued in 2003 to fund the construction of a casino (see related story in this issue).

Secondary first

During the Tuesday session, sources continued to tell Prospect News that accounts are discreetly browsing the high-yield bond aisles for badly beaten up bonds, many trading in the low 90s or mid-to-upper 80s.

One source said that there is a belief that the sell off is overdone, and there are bargains out there.

This source mentioned hearing that a European shop canceled its traders' customary August leave-taking, although the source allowed that the cancellation may have to do with a flurry of activity sparked by an oversold market or, by contrast, it may have to do with a market that continues to be developing somewhat dangerously.

There is a buzz in the market about pending mammoth issues, as well as the recently postponed mammoth issues now sitting on the books of the big investment banks.

Sources are contending that these bonds are going to have to be sold at significant discounts in order to draw investor focus away from the bargain shopping now said to be taking place in the secondary market.

However one sell-sider told Prospect News that even if new issues begin to be offered at discounts - even at signficant discounts - it won't be enough.

Buyers are going to be focused on those bonds that are trading in the 80s, the source asserted.

"They'll be looking for the bounce."

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