Levi bonds up on Dockers sale reports; Trump gains as bond deal may still be done

By Paul Deckelman and Paul A. Harris

New York, Sept. 24 - Bonds of Levi Strauss & Co. were seen fashionably higher Friday, as investors reacted to news reports that the San Francisco-based blue jeans maker may be near a deal to sell its Dockers casual clothing unit for about $800 million. Also on the upside, the bonds of Trump Hotels & Casino Resorts strengthened on reports that the Atlantic City, N.J.-based gaming company might be prepared to give bondholders as much as two thirds of the equity in the company in return for their support for an alternate reorganization plan.

In the primary market, a busy week came to a close with just one high-yield pricing - and that was a relatively small euro-denominated 10-year issue for ATU REI. However, new-deal players set their sights on Monday's anticipated pricing of $785 million of Calpine Corp. first-priority senior secured notes due 2014, via Merrill Lynch.

Among established issues, Levi's bonds were better as the market digested a report in the New York Post that said Levi was close to stringing a definitive deal with Vestar Capital Partners, which would buy Dockers for about $800 million. Such a price tag would be less than the $900 million that members of the controlling Haas family had been hoping for - but well above the $650 million minimum price floor set by Levi's bankers when they agreed to a Dockers sale.

A trader said that Levi's 7% notes due 2006 as having moved up to 99.5 bid, 100.5 offered from pre-news levels at about 98 bid, 99 offered.

Another trader saw the 7s half a point better at that same 99.5 plateau, while the company's 12¼% notes due 2012 were a full point up at 105 bid, 107 offered. However, he saw Levi's 11 5/8% notes due 2008, which had recently pushed above par from prior levels around 98-99, as unchanged at 102 bid, 103.

"I think they ran out of steam," he said, noting that the 7% notes were up "because they were shorter" and more likely to be paid out of the proceeds of the sale. Debt-laden Levi has said that it plans to use proceeds from any Dockers deal to pay down debt.

A brokerage house analyst pointed out in a research note Friday that both the 7% notes and the 11 5/8% notes need to be pre-funded six months prior to their scheduled maturities in 2006 and 2008 respectively in order to forestall an acceleration of the company's bank debt. He speculated that Levi will likely have to tender for the 7% bonds at a premium to face value to retire them six months early, but with the Dockers sale slated to come in at at least $150 million more than the banks' minimum requirement, assuming the Post story holds up, he said that this improves Levi's overall financial flexibility and is very favorable for the holders of the 7% notes.

Another market source quoted the 7s at 99.75 bid, up from 99, and saw the 12¼% notes jumping to 105.25 bid from 104.5. The 11 5/8s, he said, actually eased a quarter point to 102.25.

There was no immediate confirmation from either Levi or Vestar that a deal was imminent, and the newspaper - which based its report on unidentified sources familiar with the situation - noted that until it was finalized the arrangement could still fall apart.

The report of the (probably) almost-done Vestar deal follows an announcement earlier in the week by Perry Ellis International - one of the companies thought to be interested in Dockers - that it wasn't currently considering a major acquisition.

Levi announced in May that it would put Dockers, which makes a popular line of khaki casual clothing, a departure from the company's core blue jeans line, up for sale. Analysts speculated that it might go for anywhere from half a billion dollars to $1 billion, with most coming down somewhere in the middle of that range.

Trump better

Elsewhere, another newspaper report - this one in The Wall Street Journal - gave the bonds of Trump Hotels & Casino Resorts a lift Friday, a turnaround from Thursday, when the bonds had fallen sharply in intra-day dealings, on news that its planned Credit Suisse First Boston bailout deal had been spiked, but then partly recovered to end down about a point on the day.

A market source quoted the Trump Atlantic City Associates 11¼% second mortgage notes due 2006 as having firmed to 85 bid from prior levels at 82, although another trader said that the bonds had ended better than 82 on Thursday and so were only "a little bit better," in the area of 85.5 bid, 86.5 offered.

The company's over-the-counter bulletin board-traded shares - de-listed by the New York Stock Exchange several weeks ago when it said that it would restructure through a prepackaged Chapter 11 process, causing the shares to fall into penny-stock territory - were up sharply Friday, zooming 35 cents (74.47%) to 82 cents, on volume of 2.5 million shares, almost five times the norm.

The second trader attributed the gain to market sentiment that "they were far enough along [in the restructuring deal] that they can find someone else" to complete it if CSFB chooses not to come back.

The Journal reported Friday that the company's majority owner, billionaire real estate tycoon Donald J. Trump, was offering bondholders a deal that would give those debtors a roughly 65% stake in the holdings, while shareholders would receive 10% of the equity. Trump, who currently owns 56% of the stock, would have 25% under that deal - the same percentage he would have had under the CSFB deal that was scuttled - but would stay on as the company's chief executive, the paper said.

"He said in his press release that he was going to go directly to the bondholders and, I would imagine, work to negotiate a deal using the CSFB template," said Jacques Cornet, gaming analyst and head of high yield research at CIBC World Markets on Friday.

While there had been some media comment that CSFB's withdrawal from the proceedings makes it considerably less likely that a deal can be struck, Cornet said that "a resolution of this issue, given the fact that the company is over-levered, would be a good thing for everybody. So if I were the bondholders, would I be responsive to trying to figure something out? Yes."

Participants in the restructuring negotiations are playing their cards very close to the vest in terms of disclosing why the CSFB deal broke down, with some media reports suggesting balky bondholders did not like the terms, others quoted The Donald himself saying that he had scuttled the talks because he did not want to go through a second brush with bankruptcy (some Trump casino properties restructured through the courts in the early 90s.) As to the last point, CIBC's Cornet said that given the company's heavily levered state, "I think that you have to effect this through bankruptcy," one way or another.

Even though Trump's oft-criticized management style may not sit all that well with some investors - several past aborted efforts to restructure the debt died for lack of bondholder enthusiasm - it really doesn't mean all that much when it comes down to making a workable deal in this situation, the analyst said.

"If you are an investor and you own this bond, you know what his style is. Therefore you have already made the decision that you can invest in that kind of style. The people out there that don't like his style don't invest in his company."

At the end of the day, he said, "bondholders have fiduciary responsibilities to their investors, and they'll do what is right for them, so if they can cut a deal that makes sense, and puts the company on a more solid footing and puts themselves in a position where they are more likely to get paid back, they'll do it. "

Primary quiet after busy week

A sleepy Friday in the high-yield primary produced terms on a single issue - a €150 million floating-rate deal from German car parts firm Auto-Teile-Unger REI which came at the tight end of price talk.

Meanwhile there were a few details on deals expected to price in the coming week, but only one roadshow start announced: Netherlands department store company Vendex hits the road Monday with €275 million.

Soft equities not dragging down junk

Although sources often relate that the junk bond market tends to move in approximate parallel with the equity market, such does not seem to be the case at present.

Although the Dow Jones Industrial Average finished its worst week since August 2, losing 237.22 points, or 2.3%, the Bear Stearns High Yield Index rose 0.42% for the week ending Sept. 23.

"The stock market has not dragged the high yield lower," commented Bear Stearns high yield analyst Mike Taylor. "We've been more correlated with the Treasury market.

"As long as there are not major earnings weaknesses there won't be much collateral damage to high yield from the equity market," Taylor added.

ATU at tight end of talk

Friday's sole new junk issue came in the form of a euro-denominated acquisition deal.

German auto parts retailer ATU REI (Auto-Teile-Unger) sold €150 million of 10-year senior floating-rate notes (B3/B-) at par to yield three month Euribor plus 725 basis points, on the tight end of the 725-750 basis points price talk.

Morgan Stanley and HVB ran the books.

Meanwhile the only substantial pipeline news on Friday also came out of Europe.

The roadshow starts Monday for a two-part €275 million acquisition financing deal from Victoria Acquisition II BV (Vendex) via Citigroup and ING.

The company plans to price a tranche of 10-year fixed-rate senior notes that will become callable in four years at par plus the full coupon. The company also plans to price a tranche of senior floating-rate notes.

Tranche sizes remain to be determined.

With Vendex climbing aboard the forward calendar as business expected to be completed during the Sept. 27 week, Prospect News asked one high yield syndicate official whether the calendar appeared to be living up to pre-Labor Day expectations.

"The calendar is a little on the weak side right now," the investment banker said. "It's around $2.7 billion, which is not large by the average standards of 2004.

"It was up above $4 billion last week.

"There is no cause for worry, though. I think there are still plenty of deals in the pipeline."

Asked whether the Sept. 27 week's business would likely see drive-by activity the sell-sider said: "I was actually surprised we didn't see more drive-bys this week, especially after the Fed meeting.

"That's one of those things that people look out for.

"But there were no surprises." the source said. "The Fed did exactly what it was expected to do, and Treasury rates fell.

"That should make junk look even more attractive, so I'm surprised more people didn't hit it while they had the chance."

Talk on Encore Medical

Of the deals that are parked on the forward calendar as business to be completed during the Sept. 27 week, only one of the U.S. issuers had divulged price talk.

Talk of 9 5/8%-9 7/8% emerged on Encore Medical IHC Inc.'s $165 million of eight-year senior subordinated notes (Caa1/CCC+), expected to price on Tuesday morning via Banc of America Securities.

With regard to the late Sept. 20 week's big surprise, Calpine Corp.'s $785 million of 10-year senior secured notes (B+), which are expected to price Monday afternoon via Merrill Lynch, surprisingly little was heard, according to sources.

The San Jose, Calif.-based power producer held an investor conference call on Friday morning.

However late in the session a reporter's quest to hear price talk turned up surprisingly little of substance.

One market source said the Calpine deal is being whispered in the high 9% range.

Finally, one deal that is on the radar screens of high-yield and emerging markets investors, Grupo Posadas SA de CV's $150 million of seven year notes (Ba3/BB-), was talked at 8 ¾%-9%, with pricing expected early in the Sept. 27 week.

Citigroup is the bookrunner for the debt refinancing deal from the Mexico City-based hotel operator - the largest in Mexico and Latin America.

Meanwhile a trader said that Jostens IH Corp.'s new 7 5/8% senior subordinated notes due 2012, which had firmed smartly to 101.5 bid, 102 offered in initial secondary dealings Thursday after having priced at par earlier that session, "slipped a little" in Friday's dealings, to end at 100.5 bid, 101.5 offered.

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