Levi bonds retreat as Dockers sale scrubbed; Star Gas swoons on earnings warning; deal calendar grows

By Paul Deckelman and Paul A. Harris

New York, Oct. 18 - Levi Strauss & Co. bonds headed downward, bounced off their lows but still finished several points lower on the day Monday after the San Francisco-based apparel company said that it had changed its mind about selling off its valuable Dockers unit for a reported $800 million, preferring to keep the unit and allow it to continue to generate revenues for Levi.

Also, Star Gas Partners LP's shares and bonds plunged sharply after the Stamford, Conn.-based energy company warned that it expects to report substantially lower income for the just-ended 2004 fiscal year, warned that the earnings slide would likely restrict its access to its credit line and could ultimately push the company into bankruptcy if it cannot obtain assistance from its bank lenders.

In primary market activity, no new deals were seen to have priced during the session, but the forward calendar continued to fatten up, with Arch Coal and CBD Media seen likely to price quickly emerging deals on Tuesday, Reddy Ice seen bringing a new deal to market some time in the week and roadshows starting up this week for offerings from SuperPages Canada, Ready Mixed Concrete and Levitz Home Furnishings.

Levi Strauss issued a noontime ET announcement to the effect that the venerable blue jeans maker has decided to keep Dockers, rather than selling it, reportedly to Vestar Capital Partners for $800 million.

"After exploring the possible sale of the Dockers business," the company said in its news release, Levi "has determined that there is more value in continuing to build the brand than to sell it, especially in light of the company's improved year-to-date business performance."

Speculation that Levi would sell Dockers had been driving its bonds upward for months, and when that speculation crystallized into news about the Vestar sale (even though Levi never officially confirmed or denied the widely reported news that a letter of intent had been signed, coyly saying only that the sale process "was continuing"), pushed the bonds up to the recent levels they held, its 7% notes due 2006 firming to around par bid, the 11 5/8% notes due 2008 around 105 and the 12¼% notes due 2012 to levels around 108, traders said.

Of late, the bonds had softened a little from those peaks, with the 7s going home Friday quoted around 99 bid, the 11 5/8s around 103ish and the 121/4s around 107.

On Monday morning, the New York Post - which had first reported the Vestar deal - now reported that the talks had ended, with the two sides unable to close the deal. That caused Levi's bonds to backtrack from Friday's close, particularly the 121/4s, which were seen having eased to about 104. After the company announcement confirming that there would be no Dockers sale, the 7% notes fell to 96.5 bid, 97.5 offered, the 11 5/8s eased to 100.5 bid, 101.5 offered, and the 12¼% notes dipped to 101.5 bid, 102.5 offered.

However, the bonds did not stay at those lowest levels for very long and by day's end had recovered some - but not all - of their lost ground.

A trader quoted the 7s at 97 bid, 98 offered, down two points on the session, while the 11 5/8s at 101 bid, 101.75 offered, also down about two points, and the 121/4s closing at 103.25 bid, 103.75 offered, about a four point loss.

At another desk, the 11 5/8s were seen down about 1½ points, to 101.5 bid.

Sale "a strategic choice"

Levi chief executive Phil Marineau noted in the company's statement that Levi has said all along that "this was a strategic choice for us and that we would only sell if we received what we believe is an appropriate offer, given the value and worldwide stature of the brand."

Some analysts suggested that Dockers might fetch Levi as much as $1 billion - although others saw it going for no more than $600 million tops. All of the money was expected to go to pay down debt. The controlling Haas family was said to have been looking for $900 million but reportedly settled for the $800 million figure widely bandied about in news reports several weeks ago.

Marineau said that Dockers had attracted "a high level of interest" from prospective buyers. But "[a]fter carefully considering the numerous sales offers and terms we received, and reflecting upon our improved financial performance this year, we have chosen to keep the Dockers business. We believe that we will create more value for [Levi] and the Dockers brand by retaining the business and driving its continued development ourselves."

On Oct. 12, Levi filed its third-quarter 10-Q report, which saw the company report improved results for the third consecutive quarter.

"The company's improving financial position, particularly our stronger cash flow and bottom line results, contributed to our strategic decision to retain the Dockers brand, " Levi's chief financial officer, Jim Fogarty, said in the company statement. "During the first nine months of this fiscal year, we've generated $50 million in net income, managed a healthy 43.8% gross margin and reduced our net debt $100 million. We have a healthier base of business and a stronger balance sheet."

Although the proceeds from the Dockers sale would have been used by Levi to help pay down a sizable chunk of its roughly $2 billion of debt, primarily its bonds, Fogarty added that the company was not in any kind of situation where a sale was an absolute necessity.

"As we reported last week, we continue to believe that we have sufficient liquidity and will be in compliance with all of our debt covenants.

"In August we renegotiated our bank agreements and secured an amendment to our term loan that greatly improves our covenant flexibility," the CFO concluded.

Levi had anticipated being able to cut its debt load by at least 30% using the proceeds from the sale. Without a Dockers sale, its credit facility covenants require that it have on hand the money to redeem its $448.2 million of the 7% notes, $376.7 million of dollar-denominated 11 5/8% notes and $110 million of 11 5/8% euro-denominated notes six months before their respective maturity dates of Nov. 1, 2006 for the 7s and Jan. 15, 2008 for the two series of 11 5/8s, or face the prospect of acceleration of its term loan.

Star Gas plunges

Elsewhere, Star Gas "dropped like a stone," a market source said, quoting the company's 10¼% notes due 2013 as having nosedived to 85 bid from Friday's close at 109.75.

A trader who saw those bonds going out at 86 bid, 87 offered, agreed that "Star got killed," and noted that its stock was equally "down big," with its New York Stock Exchange-traded shares collapsing $17.28 (80%) to finish at $4.32, on volume of 12.3 million shares - more than 117 times the usual activity level of about 105,000 shares.

A trader said that the company's announcement had clearly caught the financial markets by surprise, causing the massive carnage in both the shares and the bonds.

Star Gas, a diversified distributor and services provider specializing in heating oil and propane, said that it had recently advised the bank lenders to its Petro heating oil division of "a substantial expected decline in earnings for this division for the fiscal year that ended on Sept. 30, 2004, and a further projected decline in earnings for the fiscal year ending Sept. 30, 2005, which will not permit Petro to meet the borrowing conditions under its working capital line."

Star said that it is in talks with the lenders "to modify conditions and other terms necessary to assure that Petro will have sufficient liquidity to operate through the winter." Star also said that while it believes that with the support of its existing lenders "it can manage the extraordinary challenges arising from current energy prices and other factors" - it acknowledged that this "cannot yet be assured," and warned that should such lender support not be forthcoming, the company "may be forced to seek interim financing on extremely disadvantageous terms or even to seek to restructure its debts under the protection of the bankruptcy courts."

The stock fell as equity holders reacted to the company's declaration that due to the requirements of Star's current and potential lenders it will not be permitted to make any distributions on its common units.

Star blamed the sudden downturn in its fortunes on a combination of its inability to pass on the full impact of record heating oil prices to its customers, as well as the effects of unusually high customer attrition, "principally related to its operational restructuring undertaken in the past 18 months."

Star said the Petro unit "is continuing to submit borrowing requests under its working capital line."

ICON holds at lower levels

In other names, ICON Health and Fitness Inc.'s 11½% notes due 2012, which by Friday had cascaded down to about 90 bid, a loss of some 17 points over the previous several sessions after the Logan, Utah-based maker of home exercise equipment reported sharply lower fiscal first-quarter sales, were seen holding steady at those same lower levels on Monday.

Ditto for Muzak LLC, whose 13% notes due 2010 dipped three points Friday to 65 bid while its 9 7/8% notes due 2009 lost five points to close at 68. There still was no negative news seen Monday on the Fort Mill, S.C.-based provider of canned music programming to elevators and other public and private venues.

A trader saw Toys "R" Us bonds pushed down about half a point to ¾ point, in response to "poor earnings" from major toymakers Hasbro and Mattell, causing the Wayne, N.J.-based toy retailer's 7 7/8% notes due 2013 to ease to 101 bid, 102 offered in sector sympathy.

The trader said that MCI Inc.'s announcement that it would record non-cash impairment charges of some $3.5 billion in the third quarter, mostly for property, plant and equipment, came way too late in the day to affect trading in the Ashburn, Va.-based long distance operator's bonds, although he indicated that it might have some impact Tuesday. MCI's 10-year bonds were quoted Monday at 96 bid, 96.5 offered; its five-year notes were at 98 bid, 98.375 offered, and its three-year notes finished at 99.25 bid, 99.75 offered.

No pricings but primary busy

Although no new issues priced during Monday's primary market session, the investment bankers obviously did not sit on their hands.

It's no secret that there is significant cash to put to work on the buy-side, sources say, while adding that up to now the new issue calendar has not been up to the task. Hence issues have been bid up in the secondary market.

On Monday, however, the investment bankers rolled up their sleeves as an assortment of issuers began roadshows or announced pending roadshow starts, while others got into the drive-by market with deals expected to be completed before the end of the week.

Everybody needs yield

One sell-sider told Prospect News that given the present intense demand for high yielding paper on the part of high-yield mutual funds, hedge funds, insurance funds and pension funds, a build-up in the forward calendar is inevitable.

"The 10-year has been hovering around 4%," the sell-sider observed. "Investors are under pressure to find yield, and some of them are being forced to migrate down the curve.

"Meanwhile investment-grade credits are as tight as ever," the source said. "And there has been a lack of supply in the investment-grade market. The new issue volume is substantially lagging behind 2003.

"Right now there are a lot of people shopping in the high yield."

The calendar builds

None of the deals that were heard to have come into the market on Monday was especially big.

The largest, a debt refinancing deal, came from St. Louis-based Arch Coal, Inc.'s subsidiary Arch Western Finance, LLC which plans to price a $250 million add-on to its 6¾% senior notes due July 1, 2013 on Tuesday. Bookrunners are Citigroup, JP Morgan and Morgan Stanley, the same banks that ran the original $700 million deal (Ba2/BB+) that priced at par on June 19, 2003.

Elsewhere an Oct. 20-28 roadshow was announced for Advertising Directory Solutions Holdings Inc. (SuperPages Canada)'s $210 million of eight-year fixed-rate senior notes, which are expected on Oct. 28.

JP Morgan, Banc of America Securities, Deutsche Bank Securities and Merrill Lynch & Co. will be joint bookrunners for the acquisition financing from the Burnaby, B.C.-based directories publisher.

SuperPages is one of two directories publishers with deals pending. The other is CBD Media LLC.

Meanwhile the roadshow starts Wednesday for Ready Mix Concrete's $150 million offering of eight-year non-call-four senior subordinated notes, expected to take place on Oct. 28 via JP Morgan.

Proceeds will be used to fund the LBO of the Escondido, Calif.-based ready-mixed concrete producer, by the Audax Group.

Levitz Home Furnishings Inc. began a roadshow Monday for $130 million of seven-year non-call-four senior secured notes (B3/B-), also expected to price on Oct. 28.

Jefferies & Co. will run the books for the debt refinancing deal from the Woodbury, N.Y.-based home furnishings company.

CBD details

Also during the session, details surfaced on the deal from Cincinnati-based directories publisher CBD Media LLC.

The company is expected to hold a conference call on Tuesday for its $100 million offering of eight-year senior notes, with pricing to follow on Wednesday or Thursday.

Lehman Brothers, Banc of America Securities and Goldman Sachs & Co. are the bookrunners for the dividend funding deal.

Finally Dallas-based Reddy Ice Holdings, Inc. announced plans to price $100 million proceeds of eight-year senior discount notes (Caa1/B-) late in the present week, via Credit Suisse First Boston.

The company, formerly known as Packaged Ice, will use the proceeds to redeem stock and fund dividend payments.

And further off in the distance Prospect News heard Monday that K&F Industries will bring $750-$800 million of bond and bank financing, as well as $300-$350 million of equity from Aurora Capital Group, to fund acquisition of K&F Industries by an affiliate of Aurora for $1.06 billion.

The deal is expected to close in November.

Talk widens on IT Holdings deal

The forward calendar having fattened substantially on Monday, news also emerged on deals that have been in the market.

Milan, Italy fashion brands holding company IT Holding Finance SA let its price talk belt out a few notches.

Price talk on its €185 million of eight-year non-call-four senior notes (B3/B+) was revised to 10% area from 9¼%-9½% on Monday.

The deal, via Merrill Lynch & Co., is expected to price on Tuesday.

Elsewhere, price talk of 7%-7¼% emerged MarkWest Energy Partners LP/Finance Corp.'s $200 million of 10-year non-call-five senior notes (B1/B+), expected on Wednesday via JP Morgan and RBC Capital Markets.

Finally, a delay in the publication of its red herring prompted Rockwood Specialties Group Inc. to push back its roadshow for $625 million equivalent of 10-year non-call-five senior subordinated notes (B3/B-) by one week.

The roadshow for the two-part dollar/euro deal is now set to start Monday, Oct. 25 in London and will move to the U.S. on Monday, Nov. 1.

Credit Suisse First Boston, Goldman Sachs & Co. and UBS Investment Bank will be joint bookrunners.

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