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Published on 8/30/2005 in the Prospect News High Yield Daily.

PanAmSat bonds continue retreat on Intelsat merger plan; borrowers lining up September deals

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - PanAmSat Holding Corp.'s bonds, and those of prospective acquirer Intelsat Ltd., fell for a second straight session Tuesday as bondholders continued to give a big thumbs-down to Monday's announcement that Intelsat plans to buy its Wilton, Conn.-based rival for $3.2 billion in cash and will also assume or repay an approximately equivalent amount of PanAmSat debt. Major ratings agencies were also eyeing the deal warily, believing that the entity being created will have way too much debt.

Elsewhere, the oil price spike seen in the wake of Hurricane Katrina helped to pull bonds of the automotive component makers lower, particularly Delphi Corp., which was in trouble even before the latest crude price surge to the $70 vicinity. And the hurricane was now seen to be having some impact on bonds of gaming companies with a notable presence in Biloxi, Miss., and other nearby Gulf Coast towns, which were pretty much at the epicenter of the mammoth storm.

Overall high yield was down a quarter of a point on Tuesday, a buyside source said, adding that players spent the session keenly focused on the devastation of hurricane Katrina, and its implications for companies across a range of sectors.

In the primary arena, players continued to pretty much twiddle their thumbs and keep counting down those last few sessions ahead of the Labor Day holiday break, which essentially marks the unofficial end of summer - and clears the way for getting back to business in September. While no deals were seen to have priced, syndicate sources heard that several issuers - pricey gadgetmaker Brookstone Inc., nutritional supplement manufacturer Nature's Bounty (NBTY Inc.), and countertop producer Panolam Industries Inc. - are getting ready to bring new deals once September kicks off. These will come in addition to what is expected to be a sizable bond issue by Intelsat, to help fund its pending acquisition of PanAmSat.

That transaction was still causing the bondholders of the two companies to gnash their teeth on Tuesday, when they took those bonds down further, on top of the losses seen Monday after the initial announcement.

A trader said that PanAmSat's 9% notes due 2014 were down about two points on the session to 104.75 bid, 105.5 offered, after having fallen to around the mid-106 level on Monday, post-news, from Friday's close at 109. He also saw the company's zero-coupon notes, also due 2014, fall to 68.5 bid, 69.5 offered, down from 70.75 bid, 71.75 offered on Monday and well down from the 72-73 context in which those bonds had traded before Monday's merger announcement. And he saw Intelsat's 6½% notes due 2013 drop to 78.25 bid, 79 offered, down from 79.75 bid, 80.75 offered post-news on Monday, and well down from around 83.5 before the merger news.

At another desk, a market source saw the PanAmSat 9s down more than two points on the day to 105.5 bid, after having dropped as much as three points on Monday to 108. The source had also seen Intelsat's 8¼% notes due 2013 fall nearly 1½ points Monday to 103.625.

By way of contrast, PanAmSat's New York Stock Exchange-traded shares - which jumped 20% on Monday in reaction to the merger news - were slightly higher Tuesday, ending up six cents at $23.86. Volume of 16.9 million shares was over 14 times the norm.

From a bondholder point of view, according to one trader, it's a case of "subtraction by addition." Even though the combination of PanAmSat with Bermuda-based Intelsat will produce the world's largest communications satellite operator, and is expected to produce synergies and economies of scale that will likely enable the company to be profitable, the debtholder community is worried about the boost in leverage that will accompany the transaction.

Fitch Ratings, for instance, as part of its warning that it may cut Intelsat's ratings, projected that on a pro-forma basis, consolidated debt could rise to $11.4 billion, from a current combined debt level of $8.2 billion.

Moody's Investors' Service, while affirming PanAmSat's existing ratings, changed its outlook to "developing" from "stable" previously, and cautioned that it expects to initiate a downgrade review for its debt, or just go ahead and downgrade it, "once the timing and structure of the transaction and resolution of regulatory reviews become more certain."

Moody's declared that the developing outlook "reflects that the proposed Intelsat-PanAmSat organization is likely to have significantly higher leverage than the current PanAmSat consolidated group and that incremental debt could be raised at PAS Holdings or PAS to partially fund the equity purchase price."

The ratings agency said that debt-to-EBITDA for PanAmSat was 5.8x for the 12 months ended June 30, and was "significantly higher for Intelsat. Funding the equity purchase price with new debt would further increase the consolidated leverage profile of a combined Intelsat-PanAmSat entity," Moody's concluded.

The scrutiny for a possible downgrade by Moody's and by Fitch follows a similar move announced Monday by Standard & Poor's.

Gulf Coast gamers lower

Elsewhere, traders saw the bonds of some gaming companies having operations along the Gulf Coast between New Orleans and Biloxi, Miss., as having moved lower, now that the extent of the damage from Hurricane Katrina is being totaled up.

While the storm's most destructive phase missed New Orleans, it slammed hard into Biloxi and Gulfport, Miss., site of several large casinos. Particularly hard hit were barge-based casinos normally moored next to land. Several, such as the Grand Casino Biloxi and the Grand Casino Gulfport, both operated by Harrah's Entertainment Corp., were picked right up by the storm and put down somewhere else - in the case of the Grand Casino Biloxi, on the other side of busy U.S. 90. The Hard Rock Casino that Premier Entertainment Biloxi was hoping to open early next month was at least half destroyed.

Ironically, while investment-grade Harrah's has - or had - the heaviest exposure in that area, with a total of nine casinos scattered across southern Louisiana and Mississippi, some of which, like the two Grand Casino barges, sustained heavy damage, it is so geographically diversified that the total impact on the company should be minimal.

"Their casino in downtown New Orleans, I am told, didn't sustain a heck of a lot of damage," a trader said, "so the problem there is when people will be coming back," rather than extensive physical damage to the plant.

Also benefiting from its size and diversification, thus limiting its exposure to the storm, was MGM Mirage, whose Beau Rivage resort in Biloxi was damaged by the storm.

On the other hand, Pinnacle Entertainment Inc., which operates the Casino Magic in Biloxi and several Boomtown casinos in southern Louisiana, is estimated to get as much as upwards of 40% of its revenues from its casino operations there. The company said its Boomtown New Orleans casino in suburban Harvey, La. suffered "minor to moderate" damage, while Casino Magic's floating casino and 22-story hotel had sustained "substantial damage."

A market source saw the company's 8¼% notes due 2012 initially retreat about three points Monday, then end down about 1½ points at 104.5. On Tuesday, he said, they were down about another half point to 104.

A trader at another shop saw the Pinnacle bonds at lower levels, pegging them down "a point or two" on Tuesday to the 102-103 area, while the company's 8¾% notes were off a point to 1½ points, he said, to 104 bid, 105 offered.

The trader also said that Biloxi-based Isle of Capri Casinos Inc. "took a hit" in fairly active trading, most of it on Monday, with its 7% notes due 2014 falling as low as 98 bid, 99 offered, from prior levels at 99.75 bid, 100.75 offered; those bonds were quoted late Tuesday at 98.75 bid, 99.75 offered, around where they had finished up Monday. He also saw the 9% notes due 2012 going out at 107 bid, 109 offered, down half a point from Monday's close. He noted that unlike, say, Harrah's or MGM, Isle of Capri is "not that well diversified."

He said "you probably will see some softening up" in the sector as damage assessments continue. "You didn't see it in Harrah's, didn't see it in MGM, but you did see it in Isle." While Pinnacle's bonds were down, he said, "it was not huge - not like a 10-point drop or anything."

"People are looking to see what is going on down on the Gulf Coast," a buyside source source said. "Everybody is trying to get information on what is standing and what is not."

The buy-sider noted that Katrina completely destroyed the Hardrock Casino which was under construction in Biloxi, Miss.

Early in 2004, the source noted, Premier Entertainment Biloxi (Hardrock Hotel & Casino Biloxi) sold $160 million of 11% notes due 2012 in order to fund that construction.

"Harrah's has also come out and said that their casinos are off the moorings," the source added.

"Every half hour you're getting a little piece of information from somebody else down there, saying that something is wiped out.

"It's very unsettling," the buy-sider added. "Companies are obviously going to have to revise things down because of this."

The source also said that people are focused on energy names, adding that Valero Energy Corp. temporarily shut down refining capacity, and El Paso Corp. and Williams Cos. had partially shut down pipelines.

"You have companies like Calpine that depend on a steady stream of natural gas," the buy-sider noted.

"The effect of this thing is very wide ranging."

Auto sector weak

The other major impact of Katrina was to drive energy prices higher, as commodities traders feared disruption of production in the Gulf of Mexico from where the United States gets about a quarter of its daily energy needs by some estimates. After hitting record intra-day highs around $70.85 per barrel, light sweet crude for October delivery rose $2.61 on the NYMEX to settle at $69.81 a barrel, a record nominal close since trading began there in 1983, although it was still below the inflation-adjusted high of about $90 a barrel that was set in 1980.

Rising crude prices means rising gasoline prices not too far down the line - meaning further troubles for the U.S. automobile industry.

"Autos were still definitely underperforming" on Tuesday, "with what was going on in the energy markets," a trader said, quoting General Motors Corp.'s benchmark 8 3/8% notes due 2033 as having retreated half a point to 84.75 bid, 85.75 offered. He saw GM rival Ford Motor Co.'s flagship 7.45% notes due 2031 doing even worse, falling a point and a half to 81.25 bid, 81.75 offered.

GM was perhaps helped by optimistic noises coming out of Detroit, where company chairman and chief executive officer Rick Wagoner told analysts that the world's largest automaker's turnaround plan for its struggling North American division is on track - although he declined to give any kind of earnings guidance or discuss ongoing union negotiations.

Delphi down again

The trader meantime saw former GM unit Delphi Corp.'s recently hard-hit bonds continuing to trend lower, with the Troy, Mich.-based automotive electronics maker's 6.55% notes due 2006 dipping to 86.25 bid, 87 offered from prior levels around 87 bid, 87.5 offered, while its 7 1/8% notes due 2029 eased by a point to 71 bid, 72 offered.

Delphi - which inherited an unfavorable labor contract when it was spun off from GM several years ago - is asking its former parent and the United Auto Workers union from some help, warning that it might have to go into Chapter 11 if sufficient help is not forthcoming. The UAW has asked GM to take back some 7,000 workers from Delphi, to help the supplier company to lower its burdensome labor costs.

Another trader saw those 6.55s two points lower on the day, at 85.5 bid, 86.5 offered, and saw the 8 ¼% notes due 2010 of former Ford subsidiary Visteon Corp., also down two points, at 97 bid, 98 offered.

Sprint affiliates unchanged

Traders saw little or no movement in the bonds of Sprint Nextel Corp affiliates such as Alamosa PCS or UbiquiTel Inc., despite the news that Sprint Nextel plans to buy two small wireless affiliates and thus resolve legal issues arising from Sprint's recently completed purchase of the former Nextel Communications Inc. The affiliates complain that having Nextel operate in some of the same markets as the affiliates, either directly or through its own Nextel Partners affiliate, violates their contracts with Sprint Nextel, singed when it was still Sprint Corp.

The Number-Three U.S. wireless provider will pay $427 million for IWO Holdings, including $208 million of assumed debt, and $287.5 million for Gulf Coast Wireless, including unspecified debt.

Even though that holds out the possibility that Sprint Nextel might eventually roll all of the affiliates up - it has already bought out several, including the transaction announced Tuesday - the other affiliate bonds were unmoved, with Alamosa's 11% notes due 2010 holding steady at 112.5 bid, 113.5 offered. UbiquiTel's 9 7/8% notes due 2011 were basically unchanged at 111 bid, 112 offered, while Nextel Partners' 8 1/8% notes due 2011 were tethered to their recent 108.5 bid, 109.5 offered.

"This was no shock to the market," a trader opined.

IWO's 10¾% notes due 2015 and zero-coupon bonds due 2012 were likewise unchanged, at 70 bid and 104 bid, respectively.

$4 billion-plus bonds from Intelsat's acquisition of PanAmSat

As forecast, the primary market produced no news on Tuesday as the countdown to the Labor Day recess continued with only two full and one abbreviated session remaining until then.

What dominated the news was information filed by Intelsat Ltd. spelling out its proposed $7 billion acquisition of PanAmSat.

The bond portion of the financing figures to include a minimum of approximately $4 billion to be issued at both the holding company and operating company levels of both Intelsat and PanAmSat.

The breakdown is as follows:

* PanAmSat Operating Co. to sell $572.9 million of senior notes with the option to issue an additional $663.57 million if PanAmSat's 9% notes are refinanced;

* PanAmSat Holding Co. to sell $721.2 million of senior notes with option to issue an additional $301.9 million if PanAmSat's 10 3/8% notes are refinanced;

* Intelsat Operating Co. to sell up to $557 million of senior notes; and

* Intelsat Holding Co. to sell up to $1.4155 billion in senior notes.

The financing also includes approximately $2.88 billion of bank debt.

The financing is being provided by Deutsche Bank, Citigroup, Credit Suisse First Boston and Lehman Brothers.

The acquisition is expected to be completed sometime in 2006.

A buy-side source commented Tuesday that the size of the deal came as something of a surprise.

"You have to start to wonder how much leverage you can put on Intelsat holdco, which is going to be up past seven-times leveraged with this," the buy-sider said.

"Could Intelsat not get an IPO done? Is that why they had to do this? It seems as though if they could have gotten an IPO done they would have done one.

"The Charter [Communications] second-lien paper, with four-times leverage at 8%, is looking pretty good right now by comparison."


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