R.H. Donnelley, Levi Strauss deals price; El Paso notes slide on downgrade to junk

By Paul Deckelman and Paul A. Harris

New York, Nov. 26 - New deals dominated the action on the last full trading day of this week Tuesday, as R.H. Donnelley Corp. and Levi Strauss & Co. Inc. priced upsized bond offerings; the new Donnelley bonds traded well when they crossed over to the secondary sphere, but the Levi bonds essentially went nowhere. Among already established issues, El Paso Corp. bonds went south after Moody's Investors Service downgraded the utility and merchant energy company's debt ratings to junk levels, citing concerns about weak cash flows and high debt levels.

With Donnelley's deal said to play to a telephone book full of accounts and investors apparently finding a good fit in Levi Strauss' new bonds, the primary market continued to roar on Tuesday after its hectic pace on Monday and Friday.

And the market heard Tuesday that Turning Stone Casino Resort Enterprises is planning to take a turn in the primary market shortly after the Thanksgiving hiatus.

One investment bank official told Prospect News that the first two sessions in the holiday-abbreviated week of Nov. 25 demonstrate that "the window is open" through which companies might gain access to the junk bond market.

"Issuers are perking up their ears," the source said, alluding to the recent run in the primary market that has seen upsized transactions pricing at par at the tight end of talk, and in some cases inside of talk.

"We are encouraging people to take advantage of this market," the source added. "This year we have seen the window open and close rather quickly."

In any case sources stated that the window was certainly open Tuesday for the two tranches of the season's second directories deal, R.H. Donnelley Corp.'s upsized $925 million offering via Salomon Smith Barney, Bear Stearns & Co. and Deutsche Bank Securities Inc. It had originally been announced at $750 million.

Word circulated the market after mid-day Monday that not only had the deal upsized but the price talk on both tranches had tightened as well: talk on the $325 million of eight-year senior notes (B1/B+) tightened to 8 7/8%-9% from 9%-9¼% while talk on the $600 million of 10-year senior subordinated notes (B2/B+) came in to 10 7/8%-11% from 11%-11¼%.

Syndicate sources wasted no time Tuesday pointing out that both Donnelley pieces, which priced at par, came at the tight ends of revised talk - the senior notes yielding 8 7/8% and the subordinated piece coming at 10 7/8%.

One syndicate source told Prospect News that the senior notes were 10-times oversubscribed, and the subordinated notes were five to six times oversubscribed.

"There were more than 200 accounts in the book," the source stated, adding that the notes hit the aftermarket trading at 103-104.

Comparing Donnelley to Dex Media East LLC's $975 million offering which priced Oct. 30, the official who spoke to Prospect News on Tuesday conceded that Donnelley may have gotten a warmer reception than Dex.

Dex's $450 million of seven-year senior notes (B2/B) priced at par to yield 9 7/8%, in the middle of the 9¾%-10% talk while its $525 million of 10-year senior subordinated notes (B3/B) priced at par to yield 12 1/8%, at the wide end of the 12% area price talk.

"If you stop to consider that Dex just priced I think you can look at [the Donnelley] transaction as an indicator of how the present market is doing," the syndicate source said.

"Between the two deals you're seeing a pick-up in investor sentiment: people have shown that they are willing to invest in companies with good business plans."

Also substantially upsized Tuesday was a rapidly shopped 10-year notes deal from Levi Strauss. With an investor conference call that took place mid-day Monday the San Francisco apparel-maker persuaded investors to loosen their belts sufficient to price $425 million of senior notes (B3/BB-) via Salomon Smith Barney and Banc of America Securities, increased from the announced size of $300 million.

The notes came with a coupon of 12¼%, pricing at 98.581 to yield 12½% - spot on to the 12½% area price talk.

Sell-side sources told Prospect News on Tuesday that the Donnelley and Levi Strauss transactions appear to have pretty much cleared out the calendar for the shortened week of Nov. 25. With only a short session Wednesday before the market breaks for Thanksgiving, sources anticipated no further transactions for the week.

However, one source specified, the two weeks following Thanksgiving promise to be active - much more so than anyone might have anticipated during the doldrums of late August and September.

In any case, one new deal did appear Tuesday. Tribal gaming firm Turning Stone Casino Resort Enterprises, which runs gaming, entertainment and lodging operations on its property in New York State, plans to start roadshowing $125 million of eight-year senior notes (ratings to be determined) on Tuesday. The first-time issuer will use the proceeds from the Rule 144A deal to fund an expansion project and refinance debt.

Banc of America Securities is the bookrunner.

"The new issues was where the action was," said one secondary trader, who quoted the new Donnelley 8 7/8% senior notes as having firmed smartly to 103 bid/103.5 offered from their par issue price, while the 10 7/8% subordinated notes did even better, pushing as high as 104.5 bid/105 offered.

But the new Levi bonds, he said, "were the only dog deal of the day," as the bonds "straddled their issue price" at 98.581 to end at 98.375 bid/98.625 offered.

Among other newly priced issues, Lyondell Chemical Co.'s new 9½% senior notes due 2008, which priced at 97.75 Monday as an add-on to the Houston-based chemical company's existing bonds, were quoted at 98 bid/98.5 offered.

Grant Prideco Inc.'s new 9% senior notes due 2009, which priced at par Monday and then moved as high as 102.5 bid/103.5 offered, improved to 103 bid/103.5 offered. As far as the other new deals which had come on Monday - TriMas Corp.'s $85 million 9 7/8% senior subordinated note add-on due 2012, Veritas Inc.'s $100 million add-on to its 10 7/8% senior notes due 2009, and MDC Holdings Inc.'s $150 million of 7% senior notes due 2012, the trader said they were unseen; as relatively smaller deals for less-popular issuers, "they were all put away quickly," he observed.

Among the already established issues, the big mover on what another trader called "just a blah day" ahead of the Thanksgiving break (the market will have abbreviated sessions on Wednesday and Friday bracketing a full close on Thursday) was El Paso Corp., whose debt fell anywhere from seven to 10 points on the day, after Moody's lowered the boom.

The ratings agency cut the Houston-based diversified energy company's senior unsecured ratings to Ba2 from Baa3 previously, with a negative outlook, meaning another downgrade is possible.

It cited El Paso's "weak cash flows and uncertain prospects for their improvement in the near term," said the company's debt levels "remain high relative to the company's cash flows, despite sizable retirements and repayments this year," and also warned of the likelihood "that capital expenditures will continue to exceed cash flow from operations and that the company will rely on asset sales to meet the shortfall and to further reduce its debt."

Moody's also cautioned that El Paso faces "execution risks related to its efforts to scale back and refocus its merchant energy activities, including exiting energy trading, consolidating the power business of its Electron affiliate, divesting its petroleum businesses, and furthering its [liquid natural gas] strategy."

El Paso shares were down $2.05 (19.19%) to $8.63, on New York Stock Exchange volume of 35.4 million shares, more than triple the norm.

Meantime, its bonds "were certainly weaker, although the dust hasn't yet settled" from the downgrade, a trader said, while a market source exclaimed "boy did they jump around," noting that the bonds - which last week had moved up anywhere from five to eight points - gave it all back and then some, dropping anywhere from seven to 10 points following the downgrade.

He quoted El Paso's 7% notes due 2011 as having fallen to 66 bid from prior levels around 75, while its 7 3/8% notes due 2012 dipped to 67 bid from 73.5 previously. He saw similar falls in El Paso's long-dated paper, like its 8.05% notes due 2030, down to 62 bid from 70, and its 7¾% notes due 2035, which finished at 68 bid, off from 73.

El Paso subsidiary Southern Natural Gas, whose bonds were cut to Ba1 from investment grade along with the debt of its parent, was three points lower, its 8% notes due 2032 closing at 87 and its 7.35% notes due 2031 quoted at 81.

While Moody's has junked El Paso, Standard & Poor's continues to rate its debt at the BBB level.

Back among purely junk bonds, Charter Communications Holdings Inc. shares jumped 21 cents (16.94%) to $1.45 after a Goldman Sachs equity analyst said in a research report that the St. Louis-based Number-Four U.S. cable operator is likely to pay down debt by selling new shares to current shareholders or to its controlling investor, Microsoft Corp. co-founder Paul Allen.

Analyst Richard Greenfield wrote that the effect of reducing its leverage and improving its balance sheet would aid Charter's stock price in the long run, despite the short-term dilution that would result from a new stock issue.

But on the bond side, the Goldman report brought no rush of buying. Charter bonds were "up a little," said a trader who quoted its benchmark 8 5/8% notes due 2009 around the 50 mark, "right around where they were yesterday. They were up a little - but no great shakes."

Likewise he said, there was little additional movement in Lucent Technologies Inc.'s recently strong bonds, despite heavy activity in the stock, probably associated with the unwinding of short positions. Lucent's 7¼% notes due 2006 continued to hover around the 69 bid level, having actually come in from earlier levels as high as 71 bid; a trader said the market "kinda crashed after 3 p.m. ET" as participants trimmed their positions ahead of the long holiday break.

"It was a bit on the quiet side," another trader said, "definitely a disappearing day."

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