Nash Finch languishes on SEC probe; Goodyear stabilizes after slide; Mandalay deal unseen

By Paul Deckelman and Paul A. Harris

New York, Feb. 7 - Nash Finch Co. bonds were being quoted Friday at the lower levels to which they slid during the week on news that the Securities and Exchange Commission is investigating the Minneapolis-based food distributor. Elsewhere, Great Atlantic & Pacific Tea Co. notes were seen up a few points on the news that the supermarket operator will sell some New England stores. Goodyear Tire & Rubber Co. bonds - punctured earlier in the week as the tire giant struggled to stay in compliance with its loan covenants - were seen to have stabilized and actually improved somewhat on Friday.

In the primary market, Doane Pet Care Co. was heard ready to hit the road to market its $200 million offering of eight-year notes, a deal that has been penned up for weeks on the shadow calendar.

Legrand, SA's two-piece deal priced, with some of the dollar tranche having melted off while the euro tranche snowballed. But Mandalay Resort Group's $300 million bond deal, which had been expected during Friday's session, appeared to have been a no-show.

Legrand's deal, issued through Fimep SA, emerged substantially transformed. The two-part offering of 10-year notes (B1/B+) included a dollar tranche downsized to $350 million from $400 million and priced at par to yield 10½%, wide of the 10% area price talk, and a euro tranche upsized to €277.5 million from €200 million and priced at par to yield 11%. The euro notes had been talked 50 basis points behind the dollar piece, hence they came at talk.

Credit Suisse First Boston and Lehman Brothers were joint bookrunners on the Legrand deal to partially fund the LBO by Kohlberg Kravis Roberts & Co. LP and Wendel Investissement.

The market also learned on Friday that Brentwood, Tenn.-based Doane Pet Care would begin looking for investors early in the week of Feb. 10. The private pet food company is bringing $200 million of seven-year non-call-four senior notes (B-) via Credit Suisse First Boston and JP Morgan.

The Friday snowstorm forced Mandalay Resorts, which had expected to price its drive-by deal on Friday, to drive a little slower. Its $300 million of 10-year senior notes due 2013 (expected: Ba2/BB+), which are being talked at 7½% area, will likely price Monday, according to syndicate sources.

And price talk also emerged Friday on Sydney, Australia-based baking supplies company Burns Philp Capital's $150 million of eight-year senior subordinated notes (B3/B-). Bookrunner Credit Suisse First Boston plans to take those notes out of the oven on Tuesday. Talk is 11½%-11¾%.

Despite this activity, chatter around the market on Friday continued to center on a triumvirate of mega deals - two that have priced and one still pending - which stand as bold testimony to the present health of the high yield primary, sources say.

The two completed transactions are Georgia-Pacific Corp., which priced an upsized offering of $1.5 billion on Jan. 23, and TRW Automotive, which priced an upsized four-part $1.575 billion on Feb. 6. The pending transaction is Crown Cork & Seal Co.'s upsized $2.05 billion, which, according to one source who spoke Friday to Prospect News, will possibly price on Tuesday.

"Those three deals combined will take a big chunk of liquidity out of the picture," one sell-sider reflected on Friday.

"The TRW deal was well done. All the players were there; it was a who's who of the high yield market. The book was multiple times oversubscribed which resulted in a tightening of the price talk by 15 to 25 basis points.

"The market is coming back to life," the official added, citing the $503.5 million inflow to high-yield mutual funds for the week ending Feb. 5 that was reported by AMG Data Services.

"There was also quite a lot of activity throughout the week in the investment-grade sector," this source commented. "A little bit because of the Treasury market rally, and also because of people being concerned about the war.

"Of course the high-yield market is closely linked to the equity market, which took a pretty hard hit this week," the official cautioned. "If the equity market continues to slide you can't be too optimistic about the high-yield market."

Another sell side official also told Prospect News on Friday that high-yield won't likely flourish in a continuing scenario of sliding equities.

"Equities won't continue to slide just on earnings," this source pointed out. "They will slide just because of the stuff that is going on, or on overall sentiment where people think that the economy really isn't going to have any legs to it. That will obviously have an impact on what is going on in the high yield market.

"But the high yield market still looks strong," this sell-sider insisted. "Liquidity still is strong. There is a lot of activity in the primary, and the secondary side has been a little quiet because of that. And we haven't really gotten hit with the equity fallout yet.

"Money coming back in this week was a strong indication. I think equity funds lost $3.2 billion last week."

This source sees robust activity in the primary market coming from a variety of sectors, which in and of itself is a positive sign, the official said.

"You're seeing it coming from everywhere," said the sell-side source. "The acquisition financing is strong. The American Tower deal got done, so you've seen it from all different sectors, which is the sign of a good healthy market."

Traders said the secondary market "was dead," in the words of one and "uneventful" in the words of another, as market participants kept a wary eye on stocks, which were whipsawed between good news on the labor front and bad news on the war front. An early equities advance following the government's announcement of an unexpected drop in the January jobless rate to 5.7% from December's 6%, and a surprisingly large 143,000-job increase in non-farm payrolls - analysts were only looking for a 68,000-job gain - faded around midday after Washington warned that terrorist attacks on the U.S. are more likely this month and kicked the domestic threat indicator up a notch to Code Orange - its second-highest level. Major indexes ended lower, and stocks posted their fourth straight weekly decline - the first time that's happened since early October, just before the junk market began its strong fourth-quarter rise, which has mostly continued into the new year.

That high yield surge has been fueled by ample market liquidity, and it appears the money spigot is once again open, after two consecutive weeks in which junk bond mutual fund flows - a key measure of overall market liquidity trends - had turned negative.

The $503.5 million of net inflows in the week ended Wednesday (Feb. 5) brings the cumulative inflow for the year to date up to approximately $1.727 billion from about $1.223 billion the previous week, according to a Prospect News analysis of the weekly inflow figures compiled by AMG Data Services of Arcata, Calif. and relayed to the High Yield Daily by various market sources. It reverses the two-week negative trend, during which approximately $730.3 million more flowed out of the funds than came into them, including nearly $649 million in the week ended Jan. 29 (the data includes only those funds which report on a weekly basis, and does not include distributions).

Looking at the larger picture, the latest inflow continues a trend which began in mid-October, during which inflows have been seen in 14 weeks, interrupted by a total of just three weekly outflows, here and there. In that time span, a whopping $6.592 billion more has come into the funds than has left them, according to the Prospect News analysis.

Although the mutual funds hold only a relatively small portion of the assets of the approximately $600 billion junk bond market, analysts see the data as a steady and reliable indicator of overall liquidity trends.

The surge of liquidity since mid-October represented by the junk fund inflows has gone a long way towards creating the current climate in which primary borrowers have felt comfortable bringing big deals to market - three offerings of at least $1 billion have priced since the beginning of the year, not to mention numerous other smaller, but still sizable deals. It has also pulled the secondary market out of the late-summer/early fall doldrums in which it had languished before the current binge began, with market performance indexes compiled by the major investment banks universally showing a sharp upturn since then.

In Friday's secondary dealings, traders noted that Nash Finch's 8½% notes due 2008 remained at sharply lower levels, following their tumble. A trader quoted the bonds as having careened down to around the 50 level, which he estimated was down at least ten to 15 points on the week. "They were the big loser on the week, after their downgrade," he said.

Another trader saw an even steeper slide downward to about 53 bid/58 offered from 71 bid/73 offered early in the week. It was all the more notable, he said because normally, "you don't really see it trade too much." Most investors who play in wholesale food distribution industry credits hold the bonds of Nash Finch's larger competitor, Fleming Cos. Inc., (which went on a roller-coaster ride of its own this past week, after the Dallas-based industry leading grocery distributor and its biggest customer, the bankrupt Kmart Corp., announced the termination of the multi-billion-dollar supply pact the two companies had signed in 2001).

Nash Finch was laid low after it announced on Wednesday that the SEC had begun a formal investigation of its accounting practices. It said the said an informal SEC probe had begun Oct. 9 and involved charges assessed to the company's vendors. The regulators notified Nash Finch of the formal probe on Tuesday. The company also said in its announcement Wednesday that its auditor, Deloitte & Touche LLP, resigned on Jan. 28.

On Thursday, Moody's Investors Service put all of the company's ratings under scrutiny for a possible downgrade, including the B2 rating on the $165 million of outstanding 8½% notes, citing the SEC probe, as well as "concerns regarding receipt of a bank agreement waiver or amendment if financial results are not reported before current deadlines, and revenue pressures expected to confront the entire grocery distribution and retailing industry in 2003."

Standard & Poor's followed suit on Friday with a two-notch downgrade of the company's corporate credit to B+ from BB previously, citing the SEC inquiry and the auditor's resignation.

Also on Friday, Nash Finch said that it was seeking concurrence by the SEC's Office of the Chief Accountant with its conclusion "that Count-Recount charges were properly accounted for in accordance with generally accepted accounting principles" - the matter which has been under SEC review since October. Nash Finch is also seeking a meeting with the OCA at which it hopes that its accounting for Count-Recount charges "can be discussed and confirmed."

Meantime, Fleming debt - which had fallen about eight to 10 points earlier in the week on the Kmart contract announcement, but then began to rebound off those lows - was seen little changed on Friday, with its 10 1/8% notes due 2008 around 70-71 bid - where they had been before the Kmart news. Its 9¼% notes due 2010 were pegged around 66 bid, while its subordinated 10 5/8% notes due 2007 remained at generally lower levels, below 42 bid.

Supermarket operator A&P's 9 1/8% notes were deemed "up a couple of points" by a market source, at the 75 bid/77 offered level. Montvale, N.J.-based A&P announced the planned sale of nine stores in northern New England for $80 million - part of a larger plan to divest operations in that part of New England. The company - seeking to pare expenses and cut debt - plans to close a regional office and sell additional stores.

Outside of the supermarket and grocery distribution area, Goodyear - whose bonds skidded lower around mid-week after the Akron, Ohio-based tire manufacturer announced that it was in talks with its lenders seeking covenant relief - seemed to be bouncing back, investors apparently heartened by the fact that the lenders have already given the company a waiver till March 7 on making some $500 million in pension contributions, and may give Goodyear further assistance in remaining in compliance with its credit facility covenants.

Investors may have also been relieved by Goodyear's statement that it has $600 million in cash on hand, access to $1.1 billion in the credit facilities covered by the pension waiver, and access to another $700 million in other credit facilities - meaning liquidity is probably not an issue at this time.

Goodyear "stabilized" Friday, a trader said, adding that "there was no further fall." In fact, he saw the company's 8½% notes due 2007 as having firmed three points on the session, to 70 bid/72 offered, while its 7.857% notes due 2011 were a point better, at 63 bid/65 offered.

The trader also noted that Level 3 Communications Inc.'s 9 1/8% notes due 2008 were "up a lot," pegging the Broomfield, Colo.-based telecommunications operator's benchmark issue up two points, at 67 bid/68 offered, despite a lack of fresh news out on the credit. Earlier in the week, however, Level 3 had reported a narrower fourth-quarter loss, said it had completed its acquisition of essentially all of the assets and operations of Internet services provider Genuity, and announced that it had signed an agreement to provide Internet access service to on-line auction marketplace eBay Inc.

And the trader saw the bonds of both Charter Communications LLC and Adelphia Communications Corp. lower, although on no special news; troubled St. Louis-based cable operator Charter's 8 5/8% notes due 2009 were half a point lower, at 46.25 bid/47.25 offered, while bankrupt cabler Adelphia's 10 7/8% notes due 2010 were also half a point down, at 42.5 bid/43.5 offered. At another desk, Adelphia's 9 7/8% notes due 2007 were quoted a point-and-a-half down, at 42 bid.

In the lodging sector, Host Marriott' LP's 8.45% notes due 2008 dipped to 94 bid/95 offered from prior levels around 96.5 bid/97.5 offered; a trader noted the company's announcement that chief financial officer Robert Parsons would leave the Bethesda, Md.-based hotel real estate investment trust during the second quarter "to pursue other opportunities," with chief operating officer W. Edward Walter assuming the CFO duties effective immediately. The abrupt switch was reported to have surprised many in the financial world. Parsons has been with the company since 1981 and had been CFO since 1995. Host Marriott's 7 7/8% notes due 2005 were down about a point, to 96.

Other lodging names were likewise weaker, with Meristar Hospitality Corp.'s 9 1/8% notes due 2011 quoted down four points to 76 bid, although no fresh news was seen; FelCor Lodging LP's 9½% notes due 2008 were seen off nearly three points, around 92 bid.

HealthSouth Corp's 7 5/8% notes due 2012 dipped two points, to 84.5 bid; the Birmingham, Ala.-based operator of rehabilitation clinics and outpatient surgery center - which is already under investigation by the SEC and the target of several lawsuits by disgruntled shareholders - announced that federal prosecutors have issued a subpoena for documents related to trading in the company's stock.

Back on the upside, Tesoro Petroleum Corp. - whose bonds had been firming smartly all week - was up again, its 9 5/8% notes due 2012 seen a point better at 73.5 bid. A week earlier, the San Antonio-based energy refiner's bonds had been quoted around 65 bid. The 11% notes due 2012 of another refiner, Giant Industries, were a point better Friday, at 71 bid.

Oil-market watchers noted that refiners such as Tesoro and its peers were the beneficiaries of a sharp drawdown in supplies of gasoline and other distillates such as heating oil in late January reported by the Department of Energy - a supply crunch that coincided with a blast of sub-freezing temperatures over much of the eastern U.S., which boosted demand for heating fuel sharply. A Salomon Smith Barney report issued Tuesday said that profit margins for the refiners surged to their highest levels since November, pushed up by the drawdowns.

Also on the energy front, Chesapeake Energy Corp.'s 8 1/8% notes due 2011 were up nearly a point on Friday, to a shade below 105.

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