Sanitec prices deal; Hollywood Entertainment shelved; WorldCom slides as CEO quits

By Paul Deckelman and Paul A. Harris

New York, April 30 - Sanitec International, SA sold a well-received €260 million bond issue, while Compton Petroleum Corp. and hotelier John Q Hammons Hotels lodged prospective new deals on the forward calendar; meantime, Hollywood Entertainment Corp. was heard to have postponed its planned $275 million note offering.

Junk market secondary participants' attention was once again largely diverted over to the investment-grade side of the fence, as WorldCom Inc., still nominally a high-grader - at least for the moment - stumbled badly as the telecommunications company's disarray deepened with the resignation of its chief executive officer, Bernard Ebbers.

After pulling up stakes with an offering of $150 million of 10-year senior subordinated notes (B1/B-) last January, Calgary, Alberta oil and gas exploration and production company Compton Petroleum told Prospect News on Tuesday that it would drill once more into market, this time with seven-year senior notes (B2 expected/B).

"Compton's timing the last time around was not the best," a syndicate official told Prospect News on Tuesday, adding that the longer maturity, the subordinated structure of Compton's notes, the softness in natural gas prices (72% of Compton's production) and the absence of hedging all contributed to Compton's winter travails.

The syndicate source pointed to another exploration and production company, Comstock Resources, Inc., that was in the market early in 2002 with a $75 million add-on (B2/B) which yielded 11.537%

"Compton got killed," the official said. "Compton's deal got pulled."

In the interim, the syndicate official continued, Compton has done some significant hedging.

Indeed the company's CFO Norm Knecht told Prospect News Tuesday that whereas the company had no hedges in place in January currently its production is 20% hedged. Also, Knecht said, natural gas prices, which represent 72% of Compton's production, are up by about a buck. (See related story on page one)

BMO Nesbitt Burns, Lehman Brothers, Scotia Capital and TD Securities are joint bookrunners on Compton's new offering. The deal, now on the road, is expected to price Friday.

Springfield, Mo.-based hotelier John Q. Hammons Hotels announced Tuesday that it would bring $500 million of new 10-year first mortgage notes (B2/B), with the roadshow starting Friday.

The independent company owns 47 hotels in 20 states, operating primarily under the Holiday Inn and Embassy Suites trade names.

Lehman Brothers will run the books on the John Q. Hammons deal, which will conclude its roadshow on May 14, according to a syndicate source.

Early in Tuesday's session terms were heard on Sanitec's €260 million of 10-year seniors (B2/B) which priced at par to yield 9%, in the middle of the 9% area talk, according to a syndicate source.

Goldman Sachs & Co., Merrill Lynch & Co. and HypoVereinsbank were joint bookrunners on the deal.

An official from the Sanitec syndicate said that aftermarket trading levels on Sanitec and on JohnsonDiversey, which priced an approximately $500 million dollar and euro deal on Monday, poignantly represent current high yield market conditions on the eastern side of the Atlantic.

"You can judge how hot the market is from JohnsonDiversey trading up to 105 from the break," the official commented before the markets opened Tuesday in New York.

"And Sanitec is trading at 103," the official added. "That's how buoyant the market is.

"Particularly in European high yield, there is very high demand," the sell-side source continued. "There's not that much of a forward calendar at the moment. But you can bet your bottom dollar that everyone is going to be working to get those high yield mandates because the market is there and it's ready and waiting."

One of this official's counterparts at another investment bank in London told Prospect News within the past 10 days that the comparatively low volume in European high yield at present is a function of that market's lack of maturity - with less variety in the use of proceeds compared to the US. The official from the Sanitec syndicate, however, expressed the opinion that the comparatively low volume is attributable not to the European market's maturity, but to its size.

"I think there is a greater variety of use of proceeds in the States," the Sanitec syndicate official conceded. "I mean, refinancing is a very large proportion of high yield volume in the States. Over here it's not so much because your commercial banks are still willing to give relatively off-market loans.

"So the refinancing business isn't a large part of our market over here. It's primarily LBOs. And it was telecoms.

"However people here are open to a variety of high yield bonds, but it's just more prevalent over there because it's a much larger market. People over here are just as open, I think."

Tuesday's events in the high yield primary also included the postponement of Hollywood Entertainment Corp.'s offering of $275 million senior subordinated notes due 2010 (Caa1/B-), via UBS Warburg and Bear Stearns. (see related story in this issue) The company said it could not achieve the necessary interest rates to justify going ahead with the offering.

Sell-side sources who communicated Tuesday with Prospect News noted that Hollywood Entertainment is hardly the first "triple-hook" deal to disappear from the forward calendar in recent weeks.

"As we've seen with PCA and Panavision, even when you get the triple hooks on one side that's enough to knock your deal out of the water," one official said.

"Sometimes it's like that PCA deal, where it's not going to get done at any price," the source added. "You slap warrants on there and it's still not going to get done. Sometimes it's management that looks at the price they're offered and says 'No way.'

This sell-side source went on to comment that as far as Hollywood Entertainment is concerned that it's good news/bad news these days for the video rental businesses.

"That's been a very good sector," this official said. "Blockbuster's been performing really well, relative to the dog everyone used to think of it as back when everyone thought Viacom had egg on their face for not getting rid of it, and losing so much money.

"But now with the DVDs the life has come back into that company."

However, this source conceded, no successor to the DVD appears to be waiting in the wings. And as available bandwidth and CPU clock speed ramp up sooner or later (and this source says it will be later than sooner) the internet will grab significant amounts of the retail video rental business.

Another sell-side source seemed to espouse this belief as well. "With video via the internet, what are the long-term growth prospects for a business like Hollywood Entertainment?" the source asked.

"This is an industry that is going the way of the Telex machine."

As one triple-hook credit exited the high yield Tuesday another proffered price talk: 12½%-12¾% emerged Tuesday on ON Semiconductor Corp./Semiconductor Components Industries, LLC's $300 million of six-year senior secured notes (B3/CCC+) via joint bookrunners Credit Suisse First Boston and Morgan Stanley. That deal is scheduled to price Wednesday, according to a syndicate source.

Thus the month of April 2002 came to a close with the high yield primary market having seen $7.38 billion of new issuance price.

One sell-side source who spoke with Prospect News on Tuesday, as the hands on the clock were closing in on high noon, noted that at the time the Dow Jones Industrial Average was up just about an even 1% (it closed the day at 9946.22, up 126.35 points, or 1.29%). This official characterized the present equity market as "jittery" and said that as such it was not necessarily a bad thing for high yield.

"I think it's good because it keeps us in the sweet spot for a while," the source explained. "On one hand you've got the data which is showing that growth is returning. And on the other hand you've got factors that are keeping the Treasuries low: low inflation and rising unemployment, which tells you that the Fed isn't going to raise rates any earlier than it has to.

"It's positive for our market. It keeps the rates low and keeps the issuers looking.

"When the equity market's really strong people think 'Oh, maybe it's time for me to actually sell some equity,' as opposed to now, when they're saying 'I don't think these are fair levels for my equity. Instead I want some high yield, as a kind of 'cheap equity.'"

"That's how people look at it," this sell-sider said. "It's long-term capital, no amortization. It allows you to reinvest in your business in a unlimited fashion."

In the secondary market, Johnson Diversey's new dollar-denominated 9 5/8% senior subordinated notes due 2012 were being quoted at 103.5 bid/104.5 offered - essentially unchanged on the session, a trader said, after the bonds had firmed smartly in Monday's late dealings after having priced earlier that day at par.

The trader also saw "some interest" in Silgan Holdings Inc.'s new add-on 9% senior subordinated notes due 2009. At 103.75 bid/104.5 offered, they had firmed a bit from their 103 issue price last week.

Among the already established issues, WorldCom debt swooned amid the uncertainty surrounding the company's future in the wake of Bernie Ebbers' resignation as president and CEO of the Clinton, Miss.-based telecom company, parent of No. 2 U.S. long-distance operator MCI. Ebbers had been under pressure stemming from the telecom indtruy slowdown, the company's falling share prices, investor concerns about its heavy debt burden and a Securities and Exchange Commission investigation, as well as the disclosure that the company had lent him $366 million - believed to be the largest such personal loan extended to an executive by a public company in recent memory.

WorldCom was "clearly the big name of the day," one trader said, while another characterized the level of trading activity in its bonds as "extreme."

WorldCom debt - which had been sliding well down into junk bond territory in recent weeks despite its nominal high-grade rating - fell as much as 10 points during trading Monday, with many issues trading down to the upper 40s. On Tuesday, the trader said, the debt initially dropped sharply on the latest bad news, although it firmed about halfway off its lows. WorldCom held a mid-day conference call with investors and analysts at which management sought to put the best possible face on things, denying that WorldCom's immediate concern is not so much liquidity as perceived worst-case liquidity issues.

But after that initial bounceback from its lows, the rebound stalled, and WorldCom bonds ended down about three or four points on the session from Monday's finish. The trader quoted WorldCom's benchmark 7½% notes due 2011 as having opened as high as 51 bid, around Monday's close, before sliding down to 41 as the market was roiled by Ebbers' resignation, and then bouncing back to close at 46.5 bid/47.5 offered. He saw WorldCom's 7½% notes due 2004 dipping initially to 53 bid, before coming partway back to 56.5 bid/57.5 offered, still down from Monday's closing levels in the 59-60 area. Its 8¾% long-term bonds due 2031 ended at 43 bid/44 offered, down from 47 bid/48 offered Monday. After having fallen even lower earlier in the session.

Another trader - noting that at his company, at least, WorldCom was still, for the moment, being traded by the high-grade guys (although he added that "we are watching it in anticipation of the handoff"), quoted the WorldCom bonds down as much as five to 10 points at various times during the day, seeing its shortest-dated paper, which matures later this year, trading in a 75-76 context.

Standard & Poor's late Tuesday put WorldCom's A-3 short-term debt rating on review for a possible downgrade, citing the continued loss of investor confidence in the company, as demonstrated by the recent sell-off in its stock and bonds; S&P already has WorldCom's BBB corporate credit under scrutiny for a possible downgrade to, or at least toward, junk bond status.

While bondholders and credit analysts apparently remain wary of management claims that liquidity should not be a problem and other efforts at spin, equity players seemed to be breathing a sigh of relief; WorldCom shares gained 12.9 cents (5.49%) in heavy Nasdaq trading, to end at $2.479. Volume of 295 million shares was almost six times the daily average.

Back in the bond world, the trader said that WorldCom's problems continued to be a drag on the junk telecom sector, as bellwether Level 3 Communications Inc. "got beaten up a bit" in the wake of larger long-distance player WorldCom's slide. Level 3's 9 1/8% senior notes due 2008 dipped to 45 bid/47 offered, from 46.5 bid/48.5 offered on Monday.

Elsewhere in telecom, bankrupt Williams Communications Group's 7 7/8% notes were seen unchanged at 13 bid.

Outside of the telecom sphere, the trader saw Allied Waste bonds "in a little bit" at 100.25 bid/101.25 offered, down from prior levels around 101.5 bid/102.5 offered, even as the No. 2 U.S. trash hauler reported a $51.1 million (17 cents per share) profit in the first quarter, versus a year-ago loss of $18.5 million (19 cents a share). But revenue was down 2.8% from $1.35 billion to $1.32 billion, and EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of a company's cash-flow generation potential and ability to service debt) dropped to $404.1 million, a 14% decline from $471.3 million a year ago, as the softer economy hurt sales.

He also saw Hollywood Entertainment's 10 5/8% notes due 2004 drop back two points to 102 bid/103 offered, after the Oregon-based video-rental store chain scrubbed its planned $275 million junk bond issue, the proceeds of which would have gone to take out the $250 million of 10 5/8% notes.

Back over on the (barely) investment-grade side of the fence, Tyco International Ltd.'s paper was quoted up two points, as the troubled conglomerate said on a conference call that it isn't facing a cash crunch, and added that proceeds from the planned sale of its CIT finance unit would be used to repay debt.

Tyco's 6¾% notes due 2011 firmed to 80.5 bid from Monday's closing level at 78.

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