Trump deal heard a bit delayed; power generators' bonds off on Reliant woes

By Paul Deckelman and Paul A. Harris

New York, May 13 - Trump Hotels & Casino Resorts Inc.'s closely watched $470 million two-part bond deal, which had been expected to price Monday, proved to be a no-show, although a syndicate source said the issue would likely make its debut either Tuesday or Wednesday, Meantime, Sybron Dental Specialties moved onto the forward calendar with an upcoming $150 million new deal and El Paso Energy Partners put a $200 million add-on tranche in the pipeline for pricing Tuesday.

In secondary dealings, bonds of power generating and energy trading companies softened, as the sector reeled from the troubles of investment-grade operator Reliant Resources Inc., which last week was forced to cancel a $500 million private placement a day after it had already been priced, amid questions over allegedly bogus energy trades - allegations the company confirmed Monday.

Following news of a $22 million outflow from high-yield mutual funds for the week ending May 8 - news that circulated around the market last Friday - and also given the fact that only three deals priced during the week of May 6, Prospect News inquired of a sell-side source whether the combination of the outflow and the low volume of business signaled a slowing market.

Negative, this official stated late Monday afternoon. The explanation, to a great extent, lies in hamburgers and beer.

"With 11 straight weeks of inflows - over $2 billion - that outflow is not much of a concern," the sell-sider said.

"If it were an outflow of $1 billion maybe I'd get concerned, but it's essentially a flat week and it doesn't concern me that much, especially with the volatility we've seen in the equity markets.

"Also we're a couple of weeks away from the Memorial Day holiday," the official added. "There's always a break point there. Most underwriters will tell you not to straddle the Memorial Day holiday. You want to keep the momentum going. And guys go away for the three-day weekend, eat some hamburgers and drink some beers and forget about the deals for a few days.

"There's still $2.5 billion on the road," the source assured Prospect News. "It had ballooned there for a while to close to $4 billion, but there were also some big crossover deals in that number. So $2.5 billion on the road is a pretty decent number."

Given the fate of the Wise Alloys deal that was postponed last week, and the Trump deal which is currently in the market, was restructured on May 9 and is facing challenges getting its story across to investors according to some sources, Prospect News asked this official if the market is perhaps becoming somewhat choppy.

"It's not like 1998 where everything was coming," the official said. "I think investors continue to look at businesses on an individual basis. Things like Wise Alloys are not getting done.

"I think the market is still showing some discipline around the deals. Even though it is doing some smaller, first-time issuers it's not doing everyone that comes along. Things are proceeding on a case-by-case basis.

"The market's there for good solid issuers, whether they have $500 million in EBITDA or $50 million. But the story's gotta be right."

In Monday's primary market activity a drive-by deal surfaced from Houston-based El Paso Energy Partners, a $200 million add-on to its 8½% senior subordinated notes due July 1, 2011 (B1/B-). It is expected to price Tuesday, according to a market source. Price talk is 102-102.50. Credit Suisse First Boston is the bookrunner.

Also on Monday it was learned that Sybron Dental Specialties, Inc. will attempt a simple extraction from high yield with $150 million of new 10-year senior subordinated notes via joint bookrunners Credit Suisse First Boston and Lehman Brothers.

Turning from the teeth to the eyes, official price talk of 8 ¾%-9% came out Monday on Cole National Group, Inc.'s $150 million of 10-year senior subordinated notes (B2/B). The deal is expected to price Wednesday. Lehman Brothers and CIBC World Markets are joint bookrunners.

Lehman Brother is also the sole bookrunner on John Q. Hammons Hotels' $500 million of 10-year first mortgage notes (B2/B). On Monday official price talk of 8¾%-9% emerged on that offering, which is expected to price Tuesday afternoon, according to a syndicate source.

And price guidance of a yield in the 10% area was heard Monday on JSC Tyumen's $300 million-plus offering of five-year senior unsecured loan participation notes (Ba3/B+/B+), according to a syndicate source in London who added that the deal is expected to price Tuesday or Wednesday. Credit Suisse First Boston and Salomon Smith Barney are joint bookrunners.

Finally on Wednesday a syndicate source informed Prospect News that Trump Casino Holdings, LLC/Trump Casino Funding, Inc. $470 million - a deal that was restructured into two tranches by adding second mortgage notes to the originally planned first mortgage notes and was originally expected to price late in the week of May 6 - is now expected to price Tuesday or Wednesday.

In the secondary market, WorldCom Inc., in its first full session as a full-fledged junk bond (its ratings were knocked down from investment grade by the major credit agencies at the end of last week) did not do very much.

A trader said that "not a heck of a lot was happening" in the troubled telecommunications credit. "We usually get the old bounceroo [after the way WorldCom bonds fell in advance of their downgrade to junk], but that didn't happen [Monday]."

He quoted the struggling Clinton, Miss.-based long distance operator's benchmark 7½% notes due 2011 as having eased about half a point from prior levels, to 43 bid/44 offered, though in pretty restrained dealings.

At another desk, WorldCom's 7½% notes were seen about a point-and-a-half lower, at 42.5 bid.

But after having been fixated on the telecom giant's downward spiral for much of the past two weeks, the market's focus was clearly elsewhere - specifically, on power generation and energy trading companies.

The sector had gotten walloped earlier in the year in the wake of the ignominious collapse of the once high-flying power trading industry kingpin, Enron Corp., which is now languishing in the bankruptcy courts. Then, once Enron had safely entered Chapter 11 and seemed out of sight, out of mind, some of the "guilt-by-association" that had tarred the sector began to wear off.

But it all came back to life last week with the reports that the Enron may have deepened last year's electric power supply crisis in California with deliberate trading strategies to manipulate power supplies, thus artificially boosting wholesale electricity prices to what critics called ruinous levels. Shares of other power producers and energy traders began dropping on speculation that some of those companies could be tarred with the same brush.

Then on top of that came the news that the Securities and Exchange Commission was looking into the possibility that two other industry players, Dynegy Inc. - which at one time almost emerged as a suitor and savior for Enron, only to pull back - and CMS Energy Corp., had engaged in bogus power trades which resulted in contracts being sold back and forth at the same price. It has been reported that while neither company made any money on the deals, the "wash" trades, as they are known in the energy trading industry, have the net effect of puffing up the involved companies' trading volumes, making them look busier and more active in the market than they really are, and making the whole market look more liquid than it actually is.

Reliant Resources - which had been spun off from Reliant Energy Inc. - became embroiled in the burgeoning debacle when it was forced to pull an already-priced bond deal last week amid allegations that it too may have done wash trades with CMS and other players. On Monday, management confirmed that the company had indeed engaged in "wash" trades - and lots of them, accounting for no less than 10% of its revenues over the past three years, and fully one-fifth of its electricity trading last year. Reliant Chief Executive Stan Letbetter told analysts on a conference call that the trades had been done by "misguided employees" looking to pump up the company's trading volume relative to those of its industry rivals. Reliant said it had informed the SEC and had begun its own investigation of the practice.

Moody's Investors Service put Reliant Resources' Baa3 issuer rating on watch for a possible downgrade.

Among high yield energy trading players, "there was a little softening," a trader said, with CMS's 7½% notes due 2009 dropping to 98.5 bid/99.5 offered from 100.5 bid/101.5 offered previously, "a little bit of a move, as people were looking to sell some paper" in the Dearborn, Michigan-based energy credit, which "normally doesn't trade that much as it is." At another desk, the company's 8½% notes due later this year were a point-and-a-half lower, at 98.5 bid.

The trader also saw AES Corp.'s 9½% notes due 2009 four points lower on the session at 77.5 bid/78.5 offered, as the Arlington, Va.-based independent power producer "took the biggest whacking in the group."

He quoted Calpine Corp.'s 8½% notes due 2011 little changed, also at 77.5 bid/78.5 offered, although another market source pegged the San Jose, Calif.-based independent power producer's 8 5/8% notes due 2010 were quoted around 79 bid, off about two points.

One observer noted that the bond price erosion was not confined to the junk bond side of the power and energy sector - he saw the bonds of some investment-grade operators, such as El Paso Corp or Southern Natural Gas "down huge" on Monday, even though neither company has been among those named as possible participants in the volume churning practices now under the microscope. He nonetheless saw their bonds, such as Southern's 8% notes due 2032 as having widened out about a hundred basis points Monday, as the whole sector began to look like a target.

"It's very, very bad, and the implications just get worse and worse, like dominoes falling, or a virus going right through the system," he said. " Companies now have to show [investors] that they were not a part of this. Everybody in that business is being scrutinized."

© 2015 Prospect News.
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