Dynegy gains on better earnings; Owens-Brockway prices upsized two-tranche deal

By Paul Deckelman and Paul A. Harris

New York, April 29 - Dynegy Inc. bonds firmed smartly on Tuesday after the Houston-based merchant energy company reported better-than-expected first-quarter earnings and raised its guidance. That also helped the debt of Dynegy's various sector peers, such as Mirant Corp. and Calpine Corp.

In the primary market, Owens-Brockway Glass Container Inc. popped the top on an upsized $900 million two-tranche deal. Thornburg Mortgage was heard by syndicate sources to have begun a roadshow for a $150 million issue of 10-year bonds, ands JLG Industries, Inc. was heard busily - and quickly - shopping a $125 million five-year bullet deal, expected to price during Wednesday's session.

Terms emerged during Tuesday's primary market session on Owens-Brockway's upsized $900 million high-yield offering in two tranches.

The indirect wholly-owned subsidiary of Owens-Illinois, Inc. priced $450 million of eight-year senior secured notes (B1/BB/BB) at par to yield 7¾%, spot on to the 7¾% area price talk. Joint bookrunners were Deutsche Bank Securities Inc., Banc of America Securities and Citigroup.

The company also priced an upsized $450 million of 10-year senior notes (B2/B+/B+) at par to yield 8 ¼%. That tranche was again spot on to the price talk that had the 10-year notes coming 50 basis points behind the senior secured notes. It was increased from $350 million. Joint bookrunners on this tranche were Deutsche Bank Securities, Banc One Capital Markets and Citigroup.

JLG Industries' drive-by sale of $125 million of five year senior bullets is talked at 8¼%-8½% and is set to price during Wednesday's session.

Credit Suisse First Boston is the bookrunner on the deal from the McConnellsburg, Pa.-based producer of mobile aerial work platforms, telehandlers and telescopic hydraulic excavators.

Meanwhile the roadshow began Tuesday for Thornburg Mortgage's $150 million of 10-year senior notes, expected to price late in the week of May 5 via Credit Suisse First Boston.

Also in the primary, more evidence surfaced Tuesday on what sources have characterized as the high yield market's presently extreme level of cash saturation.

Price talk tightened to 8 1/8% from 8 3/8%-8 5/8% on Phillips-Van Heusen Corp.'s $150 million of 10-year senior notes (B2/BB-). The deal is expected to price on Wednesday morning via joint bookrunners Credit Suisse First Boston, JP Morgan and Lehman Brothers.

Although rumors circulated the market that the deal is as much as 20-times oversubscribed, one source close to the transaction told Prospect News late Tuesday that accounts are in for at least 10 times the $150 million amount that Phillips-Van Heusen announced it intends to issue.

"It's ridiculously oversubscribed," said the source who added that a lot of orders for the paper came in "before this calendar really went through the roof."

"It's an exciting time in high yield," said the official close to the Phillips-Van Heusen transaction. "A lot of people are concerned about being able to put their money to work.

"There are a lot of small deals that are coming out that don't fit in the general lines of these guys' investments. They are coming in sectors that these guys are already swamped in. And a lot of them are coming with rates that could even be inside of 8%, with riskier credit stories. So people are doing what they can to get as much of this bond allocated as possible."

Talk of 10¾%-11% was heard Tuesday on PolyOne Corp.'s $250 million of seven-year senior notes (B2/BB-), expected to price on Wednesday via Citigroup.

And the price talk is 15% with warrants on HMP Equity Holdings Corp.' approximately $320 million of five-year non-call 1.5-year senior secured zero-coupon discount notes (B-). The affiliate of Huntsman International Holdings LLC is expected to price its notes on Wednesday or Thursday via joint bookrunners Credit Suisse First Boston and CIBC World Markets.

One source who spoke to Prospect News on Tuesday said that people who have been seeing the high yield rally "without" evidence of growth in the U.S. economy, have it slightly wrong. The massive tide of cash that has been reported to have come into the asset class "foretells" growth in the economy, according to this official.

"That cash is usually right," the source said.

"The money that propels these things is usually smarter than the people who trade it. People are going to turn around a couple of months from now and say 'Gee, I guess that's the reason spreads were moving the way they were.'"

When the new Owens-Brockway bonds were freed for secondary dealings, both the 7¾% senior secured notes and the 8¼% senior notes were heard to have moved up to closing levels around 102.75 bid/103.75 offered from their par issue price.

"They were relatively active," a trader said of the new bonds, "with most of that trades in that 102½ to 102¾ context."

Back among the existing issues, Dynegy was clearly the star performer, after the company posted its first quarterly profit in a year, and raised its earnings outlook for 2003.

Dynegy's bonds were "up a lot," a trader said, quoting its 8 1/8% notes due 2005 as having risen about two points to 96.5 bid/97.5 offered, while its 8¾% notes due 2012 were three points better on the session, at 93 bid/94 offered. At another desk, a trader said that the 8 1/8s were left bid at 96, with no offers seen - a sign the bonds' current holders are not of a mind to sell, seeing some further appreciation likely in the issue.

Dynegy's debt was empowered by the news that the company earned $147 million (17 cents per share) in the first quarter, versus a year-earlier loss of $247 million (91 cents a share). Excluding certain unusual items, Dynegy earned 13 cents a share - with analysts looking for a 16-cent loss on that basis. Revenues for the quarter rose 23.3% to $1.77 billion, well above the consensus prediction of $1.54 billion.

Dynegy attributed the results to increased operating margins across its power generation, natural gas liquids and regulated energy delivery businesses, due to higher commodity prices, as well as weather-driven increases in demand. The company also touted its efforts to boost liquidity to $1.8 billion from $1.3 billion in December, as well as its moves to strengthen its finances, including the recent renegotiation of its bank agreement.

The first-quarter results were helped by an after-tax gain of $35 million related to operating results; after-tax income of $55 million attributable to changes in its accounting methods; and a $7 million after-tax gain related to its exit from the communications business.

Dynegy had further good news for its investors, raising its 2003 earnings guidance to a range of 10 cents to 18 cents per share, up from its previous projections of per-share earnings in the 8-to-15-cent range, and up from the nickel-a-share full-year estimates of the analysts.

Dynegy shareholders were just as pleased with the earnings and guidance news as its bondholders were; the company's New York Stock Exchange-traded shares jumped 94 cents (25%) in Tuesday's dealings to $4.70, on volume of 34.9 million, about five times the norm.

Dynegy's dynamic performance also give a boost to may other names in the sector, which has recently been strong anyway as it and players such as AES Corp., El Paso Corp., and Reliant Resources have recently renegotiated their bank deals, and other players like Calpine and Mirant have been seen as likely to follow suit.

In Tuesday's dealings, Calpine's 8½% notes due 2011 were heard two points better, at 70 bid/71 offered, while Mirant's 7 5/8% notes due 2006 were "up a lot," a trader said, noting a five-point jump to 80 bid/81 offered, and four-point move up to 69 bid/70 offered for its 8.30% notes due 2011, a sector move, largely attributable to the Dynegy numbers that he described as "just crazy."

Another trader opined that the liquidity-driven market had "bailed out" the energy sector, noting the way that the energy players have recently shot up - even though just a few months ago, some of these same issuers that are riding high were being mentioned in the same breath with the dreaded "B- word," if they were unable to refinance.

And it's not just energy. Telecom has been another beneficiary.

"Look at Nextel [Communications Inc,]," he said, "a prime example" of the market dynamics which have seen literally billions of dollars of new cash (including nearly a billion more come into the junk bond mutual funds last week) chasing a limited number of new deals and thus bidding up existing paper that just a couple of months ago was languishing well below par levels.

He noted that the Reston, Va.-based wireless operator's benchmark 9 3/8% notes due 2009 were at 107.5 bid/108.5 offered, up about half a point on the session. Maybe six months ago, those bonds were trading down around 60. With its bonds above par, he said: "Now, they can do a new deal - and they're going to - that's why they filed a $5 billion shelf."

The trader quoted Time Warner Telecom's 9¾% notes due 2008 and 10 1/8% notes due 2011 as hovering around 82.5 bid/83.5 offered, even after it reported a first-quarter net loss of $33.3 million (29 cents a share), compared with a net loss of $43.1 million, (38 cents a share), a year ago, and down from the 36 cent-per-share loss Wall Street was expecting.

"In this market, anything goes up. Got a less-than-expected loss? Up five points," he quipped.

He pointed out that Level 3 Communications Inc.'s numbers released last week were "not great (the Broomfield, Colo.-based fiber-optic network operator posted first-quarter net income of $119 million (22 cents a share), versus a year-ago loss of $90 million (23 cents a share) - but that was mostly due to $396 million of one-time gains relating to a contract settlement with XO Communications and proceeds from the sale of its interest in a toll-road business). Even so, he said, its 9 1/8% notes due 2008, which were trading around 40 bid last fall, have more than doubled to 82.75 bid/83.75 offered, up another 1½ points during Tuesday's dealings.

"It's enough now just to have liquidity for the next couple of quarters," he declared. "All of these telecom companies may win by default [despite a lack of earnings for many of them, Nextel and Level 3 the major exceptions], if there's enough cash in the market" that will let even somewhat suspect credits do new deals in a paper-hungry market as they try to restructure.

He likened the feeling in the market "a little bit like 1997, '98, 99, the pre-tech crash. Hopefully the market is a little more restrained and there are not as many crap deals out there - that we don't see any issuance from that 'we don't pay a coupon club'" that seemed to dominate telecom issuance during the heady days of the '90s.

Elsewhere in the communications area, Charter Communications Holdings bonds, which had firmed Monday as an account sold two chunks of the paper, continued to push upward, its 8 5/8% notes due 2009 quoted as high as 67 bid, up a point on the session and four points on the week.

And tower operator SBA Communications Corp. 10¼% notes were quoted at 85 bid. Up more than two points, after the company announced that it had received a funding commitment of $195 million from GE Structured Finance and affiliates of Oak Hill Advisors, Inc. to refinance the existing senior credit facility of its subsidiary, SBA Telecommunications, Inc.

With the high yield market continuing to float along on its cloud of liquidity, the trader said, "It will be interesting to see what happens if and when investors decide, 'we have some earnings traction.' Is the money going to circulate out of high yield and into stocks again? Then we may see a little divergence. But right now, high yield's just been movin' north."

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