A&P bonds up on results; Wise Metals, TUI AG price deals

By Paul Deckelman and Paul A. Harris

New York, April 30 - For the first time in three days no well-known high yield issuer reported an abrupt executive change in response to accounting problems - and so the junk market appeared to get back to normal, after having been roiled on Wednesday and Thursday by bombshell announcements by Nortel Networks Corp. and Bally Total Fitness Holding Corp., respectively. Instead, traders looked at the names straggling in with their quarterly results - and liked what they saw in Great Atlantic & Pacific Tea Co. Inc. Even though the Montvale, N.J.-based supermarket operator's loss widened significantly from year-earlier levels, it was still much less than the red ink that Wall Street had been looking for.

In the primary market, Wise Metals Group LLC was heard by syndicate sources to have priced an issue of eight-year notes.

But European names dominated the news in the junk bond primary market during the final session of April 2004.

Hanover, Germany travel industry company TUI AG priced a massively upsized €625 million seven-year deal, while British steel maker Corus Group announced a roadshow start for €500 million and British department store firm Debenhams said it would start marketing £325 million.

Meanwhile, with the calendar pages of April dealt down to the bottom of the deck, one high yield sell-side official wondered on Friday how long "the party" in high yield - in which companies continue to refinance debt and/or fund acquisitions by selling bonds at attractive rates - can last.

"Right now there are companies riding high on first quarter earnings, that are going to want to capitalize on that by going to the market with a bond deal," said the source.

"And who knows, maybe that can last for two or three more months, or maybe even six months.

"But people are talking about rising interest rates and some people are talking about possible inflation. And you have the sell-off in Treasuries [late in the session a source spotted the 10-year Treasury at 4.52%].

"And you also have an environment where cash is flowing out of high yield," added the official, making reference to Thursday's news from AMG Data Services that high yield mutual funds underwent a $245.5 million outflow for the week that ended April 28. It was the third consecutive outflow and the sixth negative flow recorded over the past seven weeks.

"Everybody still seems to be having a good time," said the sell-sider. "But you know the party just can't go on forever."

As with numerous other sources from both the buy- and sell-sides, this official conjectured that the apparent present liquidity of the high yield asset class is related to the activities of hedge funds.

TUI massively upsizes

Friday's biggest deal came from TUI AG, which priced a massively upsized €625 million issue of non-rated seven-year senior notes at par to yield 6 5/8%.

The debt-refinancing deal, via The Royal Bank of Scotland, Commerz and WestLB, came at the tight end of the 6 5/8%-6 7/8% price talk.

The only other issuer on Friday was Linthicum, Md. beverage can stock producer Wise Metals Group LLC, which, in conjunction with Wise Alloys Finance Corp., sold $150 million of eight-year senior secured notes (B2/B) at par to yield 10¼%.

The deal, which was underwritten by Deutsche Bank Securities and Wachovia Securities, came well wide of the 9¾% area price talk.

Two British firm plan sizable deals

Two of three deals that were added to the new issue pipeline Friday came from English companies.

Corus Group plc will start a roadshow Tuesday for an approximately €500 million offering of seven-year senior notes.

The London-based steel company's debt refinancing deal is expected to price late in the week of May 10, with Credit Suisse First Boston running the books.

Meanwhile the roadshow starts Wednesday for Debenhams Finance Holdings' £325 million of eight-year senior notes in sterling and euro tranches, with pricing also expected to take place late in the week of May 10.

Credit Suisse First Boston and Morgan Stanley are joint bookrunners on the deal. Proceeds will be used to repay the bridge loan put in place for the LBO that was completed in December 2003 by TPG, CVC Capital Partners and MLPE.

The only U.S. company to show up Friday with a new offering was Gundle.

The roadshow starts Tuesday for Gundle/SLT Environmental Inc.'s $150 million of eight-year senior notes (B-), an acquisition financing which also is expected to price late in the week of May 10.

UBS Investment Bank will run the books for the deal from the Houston manufacturer and marketer of geosynthetic lining solutions, products and services.

Outflows set stage for "intercapital arbitrage," says Fridson

In the April 30 edition of Leverage World, the weekly high yield strategy organ, editor and publisher Martin Fridson, the noted guru of the junk bond market, examined the present environment in which money has been flowing out of high yield mutual funds.

Fridson asserts that such an environment sets the stage for bond trades that selectively exploit the declining equity prices of companies with complex capital structures by "whacking" the company's bonds.

"If capital were flooding into the high yield sector," Fridson reasons, "final investors with cash to put to work would constitute a barrier against sell-offs.

"They would buy any bond that ticked down but did not appear to be in serious trouble. It would matter little to them that financial economists insist that the stock and the bond of a given company must move in tandem because they derive their value from the same set of expected cash flows. In the short run, contrasting capital flows in the stock and bond markets can in fact cause a company's implied valuation to rise in one market while falling in the other.

"Evidently, it is short-run divergences of that sort that make intercapital arbitrage possible. The more complex a company's capital structure (that is, the more spread out over the common, preferred, straight, and convertible sectors), the better the chance that hedge funds can put on a trade premised on one instrument being rich relative to another.

"Not surprisingly, the recent whacking of bonds has been concentrated in companies with complex capital structures, such as Amkor, Level 3 and Nextel. In cases where speculators were short the common stock or convertible, sudden drops in the companies' equity values have induced the speculators to lift the bond leg, thereby creating selling pressure."

Triad edges higher in trading

In secondary dealings in new bonds, Triad Hospitals Inc.'s new 7% senior notes due 2012 were seen up a quarter point from their Thursday issue price at par, while Seneca Gaming Corp.'s 7¼% senior notes due 2012 were at 101.25 bid, about the level they went out at late Thursday, but well above their par issue price.

A trader saw the new Sea Containers Ltd. 10½% senior notes due 2012 - which had priced Wednesday at 97.369 bid and then pushed up more than a point Thursday - continuing to firm on Friday, floating up to par bid, 100.5 offered.

He said that "actually, they priced this deal much too low" on Wednesday. "The truth is they could have done a better deal."

He also saw the Hamilton, Bermuda-based transportation and lodging concern's existing bonds firming up, with its 7 7/8% notes, "where there's a short [squeeze] on," at 96.75 bid, 97 .75 offered, although "some odd lots were trading lower."

Sea Containers' 10¾% notes due 2006 moved up to 104.25 bid from 103.5 on Wednesday.

A&P gains strongly

A big mover that he saw was A&P, whose 7¾% notes firmed to 94 bid, 95 offered from prior levels around 91.5, while its 9 1/8% notes due 2011 was up some four points on the day 88 bid, 88.5 offered.

At another desk, a trader saw the 73/4s jump to quoted levels around 95.5 after the company issued its earnings statement, but "with no one trading them there." Then he saw them ease back to 93 bid, 95 offered - still "up three points on the day but down two points from the highs", as the earlier, higher bid "just kind of melted away."

A&P reported that its fiscal fourth quarter loss widened to $57.1 million ($1.48 per share) from its year-earlier loss of $21 million (54 cents per share).

The company took a large charge in connection with its restructuring of its underperforming Farmer Jack store chain operation; excluding the charge, the loss was 55 cents per share - well below analysts' loss estimates in the 96 cent-per share area, with some bears having predicted that the company would show as much as $1.27 per share of red ink.

A&P's quarterly sales rose to $2.7 billion from $2.4 billion a year earlier, while same-store sales, at stores open at least a year - were up 1.5%.

Winn-Dixie little changed despite break-even

Another supermarket chain that did better than anticipated was Winn-Dixie Stores Inc., which reported net earnings of $600,000, or break-even on a per-share basis, well down from $50.6 million (36 cents per share) in the year-ago quarter. But Wall Street was expecting a loss in the area of nine-cents per share from the embattled Jacksonville, Fla.-based store chain operator, so the market, he said was "initially shocked" when Winn-Dixie did better than expected.

Even so, he said, "the strange thing was that the bonds initially went down," with company's 8 7/8% notes due 2008 trading down to levels below 90 bid, and then edging back up to end little changed at 91 bid, 92 offered.

"People didn't think they would break even," he said, "but then they just shrugged [the fact that it did] right off."

Another trader saw "nothing" in Winn-Dixie, quoting them at 90 bid, 92 offered. "It was no big deal at all, no great shakes."

MCI off, Nextel steady

The trader saw MCI's new 10-year bonds down a point, at 94.5 bid, 95.5 offered, and said all of the bonds of the telecom giant, which recently emerged from a long stay in Chapter 11, were "a little softer."

Also in the telecom sphere, he saw no activity in Nextel Communications Inc.'s bonds, despite news that a wireless industry group to which Nextel belong was ganging up on the Reston, Va.-based wireless telecom company in making a recommendation to the Federal Communications Commission. The Cellular Telecommunications & Internet Association said that Nextel should be made to put up at least $3 billion to fund the move of public safety communications to new wireless airwaves, and then should be granted access to airwaves in a new band only on a market-by-market basis, and only after it had first paid to relocate the public safety communications.

Nextel expressed its objections to the group's plan, which is being submitted to the FCC. The commission is looking at the problem of wireless communications causing interference with police calls, fire dispatch and other public-safety radio traffic.

Despite the potentially large liability should the commission decide to go with the association's plan, Nextel's bonds "did nothing," he said, its 5.95% notes at 94 bid, 95 offered, unchanged on the day.

Mark IV higher

A trader said that Mark IV Industries' 7½% notes moved up, even though Standard & Poor's revised the auto components maker's outlook to negative from stable, citing its anticipated increased debt burden after its upcoming recapitalization. He saw the bonds having moved up to the 94.25-94.5 bid range, despite the ratings action because the bank debt the company arranged matures after the bonds, "so they stretched out their bank debt and the bonds mature before the bank debt." Besides that, he noted auto-sector bonds in general - both junk and investment grade - remain strong, "so everyone is scrambling for it."

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