Williams, other energy names fall back; Manitowoc sells $175 million 10-year deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 2 - They say that what goes up must come down, and the recently rebounding merchant energy sector of power generators and energy traders is no exception. After several days on the rise, mostly due to Williams Cos. successfully lining up some $2 billion of financing and another $1.8 billion of asset sales, the sector, including Williams, was in retreat on Friday after high-yield sector player Calpine Corp. reported negative quarterly earnings results, as did another debt-issuing utility, California's PG&E Corp.

In the primary market, Wisconsin crane-maker The Manitowoc Co. Inc. scooped $175 million from investors in a deal that priced within talk.

As the Manitowoc deal took to the road on July 24, one sell-side source not on the syndicate said it would be closely watched as an indicator of whether or not the high yield new issuance market is actually open to a decent credit doing an acquisition deal.

Manitowoc's $175 million of 10-year senior subordinated notes (B2/B+) priced at par to yield 10½%, at the wide end of the 10¼%-10½% price talk. Bookrunners were Deutsche Bank Securities Inc. and Credit Suisse First Boston.

While expressing an appreciation for the difficulties of the current high-yield new issue market, Carl Laurino, Manitowoc's acting chief financial officer, told Prospect News late Friday that money from the capital markets these days does not come cheap.

"Quite frankly we certainly expected to do better before we launched," Laurino said. "Obviously we understood that we were dealing with a difficult and pretty skeptical market. We certainly liked the Manitowoc story. And we would have liked to have seen pricing even below the coupon on the deal that we did last year (10 3/8% in a eurobond offering)."

Asked what brought the company into the present junk bond market Laurino said: "It's really acquisition-driven. We needed to get through the regulatory issues on that acquisition we're making, which is Grove Worldwide. As soon as we had visibility that we were going to get the clearance that we needed from a regulatory perspective we wanted to complete the transaction as quickly as possible."

Ultimately, the Manitowoc acting CFO said, the company is grateful that it could get its deal done under the circumstances.

"Investors are obviously a little skittish as relates to high yield opportunities. But they did invest in Manitowoc. I think just the fact that we got the deal done says a lot for our company."

Much of the talk from the sell-side Friday - although no one demonstrated a pronounced appetite for talking about it at length - had to do with the eighth straight weekly outflow from high yield mutual funds. Arcata, Calif.-based financial information firm AMG Data Services, according to those sources, reported an outflow of $313 million for the week ending July 31.

"It sucks," one official from an investment bank offered.

"Right now we're thinking that only two deals are truly in the market, although we're hearing that the shadow calendar has begun to build.

"But things are very quiet in this market and I think they will continue to be quiet for a while now."

One of the two deals to which this official referred is the offering from Alpharetta, Ga.-based diagnostic imaging services operator MedQuest Inc., which is looking to price $180 million of 10-year senior subordinated notes (B3/B-) on Thursday via JP Morgan. Like Manitowoc, MedQuest is an acquisition deal.

The other deal to which the sell-sider referred - also an acquisition financing - is the offering from San Francisco engineering and design services provider URS Corp., which is scheduled to start its roadshow Monday on $250 million of seven-year senior notes (B1/B) via Credit Suisse First Boston.

In addition to the combined $430 million from MedQuest and URS, the Prospect News High Yield Daily forward calendar contains a further $220 million in two deals reported to likely be headed for August pricings: Ferrellgas Partners, LP's $170 million of 10-year senior notes (B1) via Credit Suisse First Boston and Banc of America Securities, and a $50 million add-on from NCI Building Systems, from joint bookrunners Wachovia Securities, Inc. and Banc of America Securities.

That being the case the total amount of business on the calendar at the close of the week of July 29 is $650 million.

Finally on Friday, although rumors circulated that what is reportedly the second largest beef recall in history had canned Swift & Co.'s $400 million of seven-year senior notes (B1/B+) via Salomon Smith Barney and JP Morgan, a syndicate source advised Prospect News that Swift should stay on the forward calendar, although no precise timing was given.

The roadshow was delayed on July 22 after ConAgra announced that the US Department of Agriculture had ordered it to recall 18.6 million pounds of beef.

The Swift & Co. deal is slated to fund the acquisition of ConAgra's US and Australian beef, pork and lamb operations by Hicks, Muse, Tate & Furst.

When the new Manitowoc bonds were freed for secondary dealings, they firmed to a level of about 101.5 bid/102.5 offered from its par issue price earlier in the session, although a trader said that "they didn't really trade actively. " However, he noted that the issue "priced at the cheaper end of the [pre-deal market price talk] range, and I guess it did better than most people thought it was going to do."

Back among the already established issues, "the utility names were lower," a trader said, citing the earnings reports from Calpine and from PG& E. "The whole sector was weaker on that," he declared.

Calpine reported second-quarter earnings of $72.5 million (19 cents a share), on revenues of $1.94 billion. The net profit figure was a 41% slide from year-ago earnings of $107.7 million (32 cents a share), on revenues of $1.61 billion. The San Jose, Calif.-based power generating company said the slowdown which had hurt the industry would likely continue, and it lowered its earnings guidance for the year to between 80 cents and $1 per share - well down from previous analyst estimates that had ranged as high as $1.50, and even below its own previous projection of $1.25 a share in a "worst-case" scenario.

Calpine's shares tumbled 50 cents (11.90%) in New York Stock Exchange trading on Friday to end at $3.70. Volume of 20 million shares was nearly triple the normal handle.

On the bond side of the ledger, the trader saw Calpine' 8½% notes due 2011 move down to 47 bid/50 offered from prior levels at 54 bid/55 offered. At another desk, the company's 8½% notes due 2008 were quoted five points lower, at 48 bid.

In addition to Calpine, PG&E Corp. reported late Thursday that its second-quarter net income fell to $218 million (59 cents a share) from $750 million ($2.07 a share) a year earlier, even though its operating revenue actually rose to $5.75 billion from $5.01 billion in 2001, a 15% gain.

A market source said that he had seen the 10 3/8% notes due 2011 issued by PG&E's unregulated power generation and energy trading subsidiary PG&E National Energy Group quoted around a wide 53 bid/58 offered - well down from Thursday's level around 65 bid, which in turn was well down from its levels earlier in the week around 85. On Wednesday, Standard & Poor's dropped the unit's senior unsecured debt rating into junk bond territory, lowering it two notches to BB+. That downgrade set off rating ratings triggers on $1.6 billion in NEG obligations, company officials said, although they couldn't say just how much cash they might have to put up.

As of Friday afternoon, PG&E National was still clinging to a shred of investment-grade respectability, with Moody's Investors Service continuing to rate its debt at Baa2 - but the San Francisco-based power generating company acknowledged that if Moody's were to follow S&P's lead and downgrade the bonds to junk, $1 billion in holding company debt could be declared due and payable by lenders.

The company's downgrade is the latest in a series of setbacks from the merchant energy industry - power generating companies and energy traders that sell power to local utilities that have gotten out of that phase of the business.

Another sector name is Williams Cos., the Tulsa, Okla.-based energy trader and pipeline operator which just Thursday was flying high on the news that it had lined up $2 billion on secured financing from legendary market investment whiz Warren Buffett and its banks, and had inked contracts for another $1.8 billion in asset sales, with the proceeds expected to be used by the company to pay off its debt obligations and keep it afloat while it seeks a buyer or partner for its energy trading business. That news sent Williams' stock up sharply, and boosted its bonds by 15 to 20 points in some cases.

But traders said that while Williams tried to extend that powerful run on Friday, it came down from its highs and actually finished lower on the session, dragged down by a combination of factors, including probable profit-taking off of its big advance, the retreat of the whole energy sector in the wake of the Calpine and PG&E earnings news, and the general heaviness of the market, based on the stock market's continued retreat. "The sector was already weak," a trader said, and the equity market downturn "just added more fuel to the fire."

Williams bonds "went kablooie," one source said. "They went up, and then they came back down in the afternoon."

He quoted Williams' 6½% and 6¼% notes due 2006 both around 60 bid, down from Thursday's level at 66. Williams' 7 1/8% notes due 2011 were being quoted at 58 bid, down from 62 on Thursday, while its longer-dated 7½% bonds due 2031 and 8¾% bonds due 2032 both fell to around 51 bid from 53 bid, after having firmed up to 54 during the day, "just bouncing around back and forth."

A trader agreed that Williams "was stronger and then got weaker later on," seeing the 7 1/8% notes due 2011 dip to 57 bid/59 offered, after having firmed nearly 20 points on Thursday into the 60s on the financing news.

Undoubtedly, some investors may have been taking the advice offered by analysts such as Carol Levenson of the Gimme Credit market advisory service. "Bondholders should take advantage of the Omaha rally [so-called because of the participation in the financing of Warren Buffett, nicknamed the "Oracle of Omaha" for his savvy stock picks] to exit this name, since we fear the company's situation remains precarious," Levenson wrote in a research note on Friday.

The analyst noted that despite the new financing, Williams still has only a limited cash cushion, achieved only a modest extension of its debt maturities and it had to pledge many of its assets as security for the $2 billion of new credit.

Bond players weren't the only ones backing away from Williams on Friday - on the equity side its shares were down 40 cents (10.53%) in NYSE dealings to close at $3.40. Volume of 17 million shares was almost triple the usual.

Power generator AES Corp.'s 9½% notes due 2009 lost a point to end at 40, while its 9 3/8% notes due 2010 were three points lower on the day, at 43.

Outside of the volatile merchant energy sector, traders didn't see much going on Friday.

"There wasn't much going on in sectors" outside of the energy names, one said. "It was just portfolio adjustment kind of trading going on, with accounts that might have been losing cash versus some that are putting it to work. Where names are fully valued, there was some trading by people that need to raise cash, with other people adding to stable credits."

He also noted that it was the typical "slow Friday afternoon in the summer. Couple that with what's been going on in the equity markets [down again across the board Friday] and the economic numbers [disappointing July job-growth statistics] and a pretty light [primary] calendar to boot."

Another trader said that the current market conditions have led some players to pull funds out of the market - a trend seen with the weekly release of high yield mutual fund flow statistics by AMG Data. In the latest week, some $313 million more left the funds than came into them - the eighth straight week in which there has been a net outflow. Over that time, more than $2 billion has leached from the funds, which are seen by some as a reliable indicator of overall market liquidity trends.

"Most of these guys have cash on hand," he said. It's a matter of not wanting to put it to work" in the current market environment.

"Cash is not the problem," he continued, "it's confidence in the market, some of the companies, accounting issues and things of that sort. We're just not seeing any aggressive buyers."

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