Secondary stronger in formless trading; Movie Gallery moves up; Hovnanian brings drive-by deal

By Paul Deckelman and Paul A. Harris

New York, Feb. 22- Secondary trading levels were generally better Wednesday - though traders said there was no specific news really moving the market. "Some stuff was inching up," one said, "but it didn't do much."

One of the few names with a specific trend attached to it was The Movie Gallery Inc., whose bonds continued to rebound strongly after having dropped to new lows last week on fears of increased competition for the Dothan, Ala.-based Number-Two U.S. video rental chain operator from a new movie delivery service being put together by The Walt Disney Co. and some partners.

Another name out of the distressed precincts that seemed to be moving up was Calpine Corp., although nobody had a real explanation for the rise in the bankrupt San Jose, Calif.-based power generating company's notes over the past several sessions.

Sources variously marked the broad market flat-to-up on Wednesday.

Meanwhile the primary market continued to pay out news in very mean amounts. The only new issue news was an upsized $300 million drive-by deal from New Jersey home builder Hovnanian Enterprises, Inc.

Hovnanian plays to good book

One source close to the Hovnanian deal reported seeing several positive signals with regard to the junk market as that transaction unfolded.

The Ba1/BB rated offering of 10-year bullets was upsized to $300 million from $200 million and priced at par to yield 7½%.

Credit Suisse, Citigroup, Wachovia Securities and UBS Investment Bank ran the books for the debt refinancing deal.

The source said that 40% of the book was comprised of investment-grade accounts, hence the deal was talked, high-grade style, at a spread of 300 basis points, and priced slightly tighter at 297 basis points. However in high-yield terms 7½% was the target, the source added.

The book was two times to three times oversubscribed at the upsized $300 million amount, the source said, depending upon how "order padding" is factored in.

The source also said that for the past three months the market has seen a "new issue discount" of approximately 10 basis points to issuers' existing bonds, although in certain cases that discount has been seen to run to as high as 1/8 to ¼ point.

The new Hovnanian 7½% bullets due 2016 priced about eight basis points wide of the company's existing paper, which is a healthy sign, the source added.

"People seem flush with cash, although selective," the source summarized.

Primary "just dead"

Apart from the Hovnanian drive-by deal the primary market produced no news on Wednesday.

Stamford, Conn., consumer goods packaging company Silgan Holdings Inc. disclosed in a company news release that it plans issuing new senior subordinated notes and/or drawing on its senior secured credit facility to fund its €230 million acquisition of Amcor Ltd.'s White Cap closures business, in a transaction that is expected to close during the second quarter.

However apart from such intimations of deals on the horizon there was no news.

"The new issue market is just dead," one sell-side official explained, adding that "year-end filers' financials have gone stale, and things will start gearing up in March.

"People will be looking to be first out of the gate when the new financials come on line," the source added.

Another sell-side official advised Prospect News to look for a possible drive-by deal on Thursday, but declined to furnish a name or sector.

Movie Gallery gains further

Back in the secondary market, a trader said the new Hovnanian notes were "the only excitement I saw here today [Wednesday].

The new 7½% senior notes due 2016 priced too late in the session for any aftermarket activity.

Among the established issues, a trader called volume "very very muted, nothing crazy."

One issue which he did see moving up was Movie Gallery's 11% notes due 2012, which he saw having moved up to 66 bid, 67 offered, up at least four points off Tuesday's levels, and up almost 10 points from the lows they hit last week.

Another trader saw the bonds push up to 66.5 bid, up several points on the day and well up from the levels in the upper 50s to which those bonds had fallen early last week.

"A lot of people think [the slide] was overdone and they got caught short."

Those bonds "got thrashed," he said, on the news that Disney and several partners were starting up a new film delivery service MovieBeam - this at a time when Movie Gallery's revenues and those of its larger rival rental chain operator, Blockbuster Inc., have been under pressure due to competition from the popular Netflix home movie delivery service, as well as pay-per view and other on-demand options offered by cable and satellite broadcasters.

However, after getting clobbered for much of last week, the bonds, and the company's bank debt, started moving back up after people took a calmer look at the situation and realized Movie Gallery's strength as a company, observers said.

Good tone

Generally the market was seen firm.

A trader said "it's the same [thing] every year around this time. Bonds are just moving stronger, as you've got some numbers coming out."

He estimated that "across the curve," most sectors, such as retailing, gaming, healthcare and energy - "except for the distressed stuff like the autos" - were "up, up a point, up half a point, up two points [on the session]. The general tone to the market was that we've probably gotten everything back from the beginning of the year. People are just buying paper."

Retail [i.e. non-institutional investors] in particular, he said, "is just buying paper. They have a love for the market right now, so it's really squeezing things tighter and tighter."

For instance, he saw Tenet Healthcare Corp.'s bonds "up at least a point across the curve," with the Dallas-based hospital operator's 6½% notes due 2012 a point better at 90 bid, 91 offered.

He saw casino paper stronger by half a point to a point, with the MGM Mirage 6% notes due 2009 up "at least a half" at 99.25 bid, 100.25 offered.

A trader said that homebuilders were showing strength, even though many of them are now so much like high-grade bonds that they're never seen in the junk markets any more.

"You've got Hovnanian coming with a deal, they were strong, and Toll Brothers was strong. The whole sector was strong."

He estimated such names were "all up ¼ to 3/8 across the board," partially because of strength in the homebuilding companies themselves, as home sales continue to hold up even in the face of higher interest rates - which translate to higher mortgage rates - and partially because "they trade off Treasuries, and the Treasuries were pretty strong."

Restaurants gain

The trader also said "the restaurants were pretty strong [Wednesday]" - adding ruefully that he wished they were not because "I'm still short some Friendly [Ice Cream Corp. bonds]."

One name from the sector he saw on the upside was Landry's Restaurants Inc. Its 7½ % notes due 2014 were up 1½ points to 96.5, in line with a nearly $2 gain in the company's shares.

He saw O'Charley's Inc.'s 9% notes due 2013 trading up to 103.25 bid.

"The whole sector was strong," he concluded.

Another trader saw Friendly's 8 3/8% notes due 2012 up a point at 93.5 bid, 94.5 offered, while Denny's Holdings Inc.'s 10% notes due 2012 were also a point better, at 104 bid, 105 offered, and the Landry's bonds were at 95.5 bid, 96.5 offered after recently posting better numbers. "O'Charley's you don't see," he declared.

Calpine up again

Elsewhere, Calpine bonds were seen having moved up for a second straight session, though "I have no idea why," a trader said.

He quoted the company's notes "up a point to 1½ points across the board. Offerings were lifted all day."

Another trader said the bonds "look like they did better," with its 4¾% convertible notes due 2023 up three points, at 33 bid, 34 offered and its 6% converts due 2014 at 26 bid, 27 offered, up two points. He quoted Calpine's 7¾% notes due 2009 at 47 bid, 49 offered and its 8½% notes due 2008 at 43 bid, 45 offered, each up a point.

Yet another trader saw Calpine's 8½% notes due 2011 two points better at 34 bid, 35 offered, while its convertibles were up three points. He attributed the rise to just market speculation about "further consolidation in the industry, and it's just giving a bid to some of the distressed stuff."

Level 3 steady

Traders saw little or no movement in Level 3 Communications Inc.'s benchmark 9 1/8% notes due 2008, which held steady around 96 bid, 97 offered, despite the news that Level 3 Technology Spectrum, a Plano, Tex.-based unit of the Broomfield, Colo.-based fiber-optic network operator, had withdrawn its planned initial public offering of common stock. The company had earlier hoped to raise as much as $115 million by selling the shares, which were to have been listed on Nasdaq. It gave no explanation for the IPO cancellation.

Westinghouse Air Brake Technologies Corp. - Wabtec - reported strong fourth-quarter and 2005 full-year income, helped by an upsurge in railroad activity that produced strong orders for the Wilmerding, Pa.-based maker of railroad equipment. Company officials also boasted on their conference call following the release of the results that Wabtec was "almost debt free" on a net basis, with a cash position almost equal to its total debt (see related story elsewhere in this issue).

A trader saw the company's 6 7/8% notes due 2013 - the company's only significant debt - at 102.5 bid, 103. He noted that a week earlier the bonds had been trading at 102.375, "so there was nothing significant going on there. They're already trading to a 6.50% yield - so they're not going to go very far."

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