Texas Genco mega-deal leads busy primary; MCI bonds climb after S&P rates issues

By Paul Deckelman and Paul A. Harris

New York, Dec. 8 - Texas Genco LLC's billion-dollar-plus issue of 10-year notes set the pace for a busy session Wednesday in the primary market; drive-by deals from D.R. Horton Inc., Duane Reade, VWR and Stone Energy kept the pot bubbling, as they priced alongside scheduled calendar deals from Texas Genco, Ryerson Tull Inc. and The Pep Boys - Manny, Moe and Jack.

In secondary dealings, MCI Inc.'s bonds were seen higher, after Standard & Poor's assigned a B+ rating to the Ashburn, Va.-based telecommunications company, which had crashed and burned in its former incarnation as WorldCom Inc. earlier in the decade amid lurid accusations of corporate mismanagement that led to criminal indictments. But the company emerged from Chapter 11 at the end of April with a new name and the issuance of some $5.7 billion of new bonds.

The primary market saw $2.43 billion price during the busy mid-week session, with three of the day's seven deals upsizing, and six of the seven coming either at the price talk or at the tight end of talk.

The day's biggest issuer was Texas Genco LLC with $1.125 billion. The lowest yield was D.R. Horton's 5.734%, while the highest, 9¾%, was printed on the discount notes issued by CDRV Investors Inc., the holding company for VWR International.

2003 volume in the cross hairs

Meanwhile, as the high-yield new issue tumblers rolled on during the Wednesday session, the 2003 issuance total of $138.5 billion seemed within reach.

By the end of the Wednesday session $132.98 billion had priced in the U.S. market, with at least $8.25 billion parked on the forward calendar as business expected to be priced by the end of the year.

Currently 2003 stands as the second busiest year ever in junk bonds behind 1998's total.

The number of deals so far this year has already beaten last year, with 532 tranches so far compared to 506 for all of 2003.

A cautionary note

With the investment banks rolling out the junk bonds on Wednesday, one investment banker sounded a cautionary note, asserting that the long-enduring strong market technicals - too much cash chasing too few bonds - have quite possibly overheated the market.

"Our trader said today that there should be a new par," the source said. "Instead of 100 it should be 105.

"In the name of chasing yield people are buying into some distressed situations perhaps without paying due heed to some of the credit issues that some of these companies have."

As evidence that the market could be headed into choppy water, the source cited a report issued Monday by Moody's Investor Services that projected the junk default rate would bottom out near 1.9% around March or April of 2005, and then begin to trend higher.

Texas Genco does $1.125 billion

Wednesday's biggest issuer by far was Houston wholesale electric power generator Texas Genco LLC.

The company priced $1.125 billion of 10-year senior notes (B1/B) at par to yield 6 7/8%, tight to the 6 7/8% to 7 1/8% price talk.

Goldman Sachs & Co. ran the books for the acquisition financing.

Big day at the drive-thru

Four of Wednesday's news issues came from companies that marketed bonds via conference calls, as opposed to traveling roadshows.

D.R. Horton, Inc. priced an upsized, quick-to-market $300 million of 5 5/8% 11-year senior notes (Ba1/BB+) at 99.107 on Wednesday to yield 5.734%, the day's low print.

The Citigroup-led deal priced right on top of the Treasuries plus 160 basis points price talk.

Also pricing a quick-to-market issue Wednesday was CDRV Investors, which sold $481 million of 10-year senior discount notes (Caa2/B-) at 61.58 on Wednesday to yield 9¾%, on the wide end of the 9½% to 9¾% price talk.

The note sale generated $296.2 million of proceeds.

Deutsche Bank Securities, Citigroup and Banc of America Securities were joint bookrunners for the dividend deal from the West Chester, Pa.-based distributor of laboratory supplies.

Elsewhere Stone Energy Corp. priced an upsized $200 million of 10-year senior subordinated notes (B2/B+) at par to yield 6¾%, tight to the 6¾% to 7% price talk. The deal was increased from $150 million.

Banc of America Securities ran the books for the debt refinancing deal from the Lafayette, La., independent oil and gas company,.

Finally Duane Reade Inc., the New York drugstore chain, priced $160 million of six-year senior secured floating-rate notes (B2/B-) at par, in a quick-to-market Wednesday transaction, to yield three-month Libor plus 450 basis points, right on top of price talk.

Banc of America Securities and Credit Suisse First Boston ran the books debt refinancing issues.

Pep Boys, Ryerson Tull, via the road

Wednesday's remaining two issuers marketed their deals via conventional junk bond roadshows.

The Pep Boys - Manny, Moe & Jack priced an upsized $200 million of 10-year senior subordinated notes (B3/B) at par to yield 7½%, tight to the 7½% to 7¾% price talk. The deal was increased from $150 million.

Goldman Sachs & Co. ran the books for the debt refinancing deal from the Philadelphia-based automotive maintenance, repair and parts business.

And Chicago-based metals processor Ryerson Tull Inc. sold $150 million of seven-year senior notes (B2/B) at par to yield 8¼%, on top of the 8¼% area talk.

JP Morgan and UBS Investment Bank were joint bookrunners for the acquisition/debt refinancing issue.

$2.2 billion on tap for Thursday/Friday

Sell-side sources who spoke to Prospect News on Wednesday said that the new issue market could see an additional $2.2 billion of issuance price before Friday's close.

Some details emerged during the session on deals poised to price.

Price talk of 6½% to 6¾% emerged on Community Health Systems Inc.'s $250 million of eight-year senior subordinated notes (/B/B+), expected to price on Thursday via JP Morgan.

Meanwhile price talk of 10½% to 10¾% was heard on InterDent Service Corp.'s $80 million of seven-year non-call-four senior secured second-lien notes (B3/B), expected on Friday via Jefferies & Co.

And in Europe, Waste Recycling Group Ltd. circulated price talk Wednesday on its £500 million two-part offering, which is expected to price on Thursday morning.

Price talk is Libor plus 350-375 basis points on WRG Acquisitions plc (parent of Waste Recycling Group Ltd.)'s £250 million of seven-year second-lien floating-rate notes (B1/B+).

Meanwhile talk is 8 ¾%-9% on WRG Finance plc (newly formed parent of WRG Acquisitions plc)'s £250 million 10-year fixed-rate senior notes (B3/B).

Deutsche Bank Securities, Merrill Lynch & Co. and Barclays Capital are joint bookrunners.

Spheris to start roadshow

One roadshow start was heard during the session.

The roadshow starts Thursday for Spheris, Inc.'s $125 million offering of eight-year non-call-four senior subordinated notes, which are expected to price Friday, Dec. 17.

JP Morgan and UBS Investment Bank are underwriters for the debt refinancing deal from the Franklin, Tenn.-based medical transcription company.

Texas Genco zooms in trading

When the new Texas Genco 6 5/8% notes due 2014 were freed for dealings, they shot up as high as 103 bid, 103.5 offered, a trader said. Another trader quoted the bonds up a little more moderately, at 102.375 bid, 102.875 offered, bust still handsomely above their par issue price.

He had heard earlier that demand for the new issue might be lackluster, but opined that "between [Wednesday] morning and the time that these deals came, things changed as far as the investment public is concerned. So much for a lukewarm response."

Everything, he added, "was well received."

A trader saw the new D.R. Horton 5 5/8% 11-year notes at 99.75 bid, 100 offered, up from their 99.107 issue price earlier on. Pep Boys' new 7½% notes due 2014 and Ryerson Tull's new 8¼% notes due 2011, each of which had priced at par, were each seen going home at 101.75 bid, 102.75 offered, "trading well," he said, while the new KB Homes 5 7/8% notes due 2015 were seen "straddling" Tuesday's 98.134 issue price, at 98.125 bid, 98.375 offered.

MCI higher on S&P ratings

Back among the secondary issues, the big mover of the day seemed to be MCI, following the assignment of its B+ rating by S&P.

The move was not unexpected.

Over the past several sessions, traders had mentioned that the MCI paper had been tightening, in apparent anticipation of assignment of a rating.

MCI's 5.908% senior notes due 2007, and its 6.688% senior notes due 2009, which had both recently been seen around 101.625 bid, 101.875 offered, were being quoted Wednesday morning post-news at 102 bid, 102.5 offered, and 103 bid, 104 offered, respectively. Its 7.735% senior notes due 2014, which had risen to around the 104-104.25 area, were seen after the ratings news at 106 bid, 107 offered.

The bonds held those gains through the afternoon.

The bonds rose on possibility that the coupons of the respective issues might be reset higher, based on the initial ratings for the bonds from S&P and from Moody's Investors Service.

S&P assigned a B+ to both the bonds and to the company's corporate credit. Moody's has yet to weigh in.

"They're likely to step up 100 basis points," a trader said in noting the bonds' rise.

S&P pointed out that under the terms of the three note series' indentures, the coupon for each is subject to a one-time reset based on the initial ratings from the two services. Based on S&P's B+ rating, it said that the additional interest margin on the three debt issues would be either 0%, 1%, or 2%, depending on Moody's ratings outcome.

S&P said that this range of interest rate outcomes "is already encompassed" in the ratings it assigned to the bonds. The ratings agency further noted that its debt issue ratings also take into account MCI's ability under the notes' covenants to incur up to $1 billion of secured debt.

MCI said that any reset would become effective the day after Moody's issues its rating.

Besides pegging the bonds at B+, S&P assigned a negative outlook to the notes.

"Ratings on MCI reflect intense industry competition and declining pricing for commodity voice and data services because of overcapacity, exacerbated by technological and regulatory shifts," S&P analyst Eric Geil wrote in assigning the ratings.

"Weak profitability and negative free cash flow may continue for the foreseeable future because of low double-digit percentage revenue declines largely resulting from MCI's reduced emphasis on the consumer segment, continuing pricing pressure on business customer revenue, and higher costs compared with those of peers. Commitment to a substantial dividend could undermine the company's currently good financial cushion," he added.

On the upside, the S&P analyst noted among MCI's strengths the fact that it is the second-largest U.S. provider of long-distance services and one of the largest internet backbone network operators. Geil further noted that MCI has "a substantial, relatively stable base of large enterprise customers and good near-term liquidity from a cash balance currently approximating debt obligations."

Bally Total Fitness gains

Elsewhere, Bally Total Fitness Corp.'s bonds were higher after the Chicago-based fitness club operator announced that it had received and accepted consents from the holders of a majority of its 10½% senior notes due 2011 and 9 7/8% senior subordinated notes due 2007 to a limited waiver that keeps the company from being declared in default for not filing financial results with the Securities and Exchange Commission and not furnishing such information to the noteholders and the notes' trustee.

A market source saw the company's 9 7/8% notes due 2007 jump to 83 bid, a gain of 2½ points, while its 10½% notes due 2011 were up a more restrained quarter-point at 96.5.

Levi gains

Levi Strauss & Co. bonds were up on the news that the San Francisco-based apparel company had repaid the remaining $57 million balance outstanding on its 1999 credit facility. The figure represents both principal and interest.

The credit facility, which formally expired Tuesday, was secured by most of the equipment located at Levi's customer service centers in Kentucky, Mississippi and Nevada.

Levi's 7% notes due 2006, which had recently been moving up smartly on all kinds of speculation - that Levi might call the bonds, or might revive its deal to sell its key asset, the Docker's clothing operation, again gained on Wednesday's news, moving up a point to 103 bid, a market source said.

He saw the company's 11 5/8% notes due 2008 up perhaps a quarter point at 105.5, but saw real strength in the 12¼% notes due 2012, up 1¼ points at 109.75.

Dynegy down on earnings warning

On the downside, Dynegy Holdings Inc. bonds were quoted easier, after the Houston-based utility company trimmed its 2004 earnings outlook and predicted it would lose money next year. Dynegy's 10¼% notes due 2013 were off 1½ points to 114.75.

Little bond market response was seen Wednesday to the news that Sprint PCS affiliates Alamosa Holdings and AirGate PCS have agreed to merge in a $680 million transaction that will see Lubbock, Tex.-based Alamosa absorb Atlanta-based AirGate and assume $238 million of net debt.

AirGate's 7 3/8% notes due 2009 and 13% notes due 2009 were each seen unchanged at 109.5 bid and 106.75 bid, respectively. Alamosa's 8½% notes due 2012 were likewise unchanged at 107.

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