OM Group continues slide; Tyumen deal prices; market sees third straight inflow

By Paul Deckelman and Paul A. Harris

New York, Oct. 31 - For a third straight session, the battered bonds and shares of OM Group Inc. were being further beaten down Thursday - but those of another chemical name, Lyondell Chemical Co., were on the upside, propelled by favorable earnings data.

In the primary, Tyumen Oil came to market with a $400 million issue of five year notes, while Owens Brockway - a unit of packaging maker Owens Illinois - stood ready to pop the top on a new offering.

And primary and secondary players got some more evidence that the worst might be behind them as market sources said that high yield mutual funds took in a whopping $683.76 million more than they paid out in the week ended Wednesday.

That was the third straight week in which AMG Data Services reported a positive funds flow number. Last week, net inflows totaled $425.2 million. In the past three weeks, inflows have totaled approximately $1.316 billion, according to a Prospect News analysis of the AMG figures, offsetting most of the approximately $1.7 billion which had hemorrhaged from the funds over the prior three weeks.

Many junk market players watch the weekly fund flow numbers as a way of gauging overall market liquidity trends. The figures take into account only those funds which report weekly (some funds report solely on a monthly basis) and do not include distributions.

The ups and downs of the fund flow numbers have more or less coincided with positive and negative performance cycles of junk bond market indices put out by most of the major brokerage houses.

In the 44 weeks since the beginning of the year, inflows have been seen in 25 of those weeks. The total cumulative inflow figure, according to Prospect News' analysis of the AMG figures, is approximately $4.68 billion.

In the primary, one syndicate official lamented having a "Dex hangover" in an early email message to Prospect News on Thursday, making reference to the reportedly twice-oversubscribed Dex Media East two-part $975 million junk bond deal that priced Wednesday.

Perhaps this official took solace as not long afterwards Owens-Brockway Glass Container Inc. broke the seal on $300 million of new 10-year senior secured notes which figure to price Tuesday.

One buy-side official admitted to not taking part in Wednesday's Dex festivities during a conversation with Prospect News on Thursday.

"It's good for the market because it was a huge deal," the investor allowed, agreeing to speak on background.

"It's liquid and everybody was in it so the underwriters have made money. People have a new name to add to their portfolios, which they haven't had in a large issue for months and months."

So will Dex clear the way for more new issuance? Prospect News inquired of the portfolio manager.

"Since the market has traded up it looks like people have money," the source said. "But you just need to see yield spreads narrow. I think it's awfully hard for a lot of companies to come at these yield spreads.

"I think it's going to become self-fulfilling: when the economy looks better yield spreads will start to get narrower and then you can bring a calendar. And you'll have a much better market.

"Right now everybody's traded what's out there. There is no reason to have any kind of turnover because you've got through earnings season and the good names are good, the bad names are bad, and not much goes on in the way of trading."

Nonetheless Owens-Brockway has lined up a drive-by deal. The Toledo, Ohio glass and plastic packaging company, a wholly-owned subsidiary of Owens-Illinois Inc., is looking to price $300 million of 10-year senior secured notes (B2/BB) on Tuesday, with an investor conference call scheduled for Friday and a one-day roadshow on Monday.

Salomon Smith Barney, Banc of America Securities and Deutsche Bank Securities are the joint bookrunners.

Earlier this year Owens-Brockway priced 2002's biggest tranche of bonds so far and the second biggest junk sale after the year behind Charter Communications' $1.1 billion. Owens-Brockway's $1 billion of seven-year senior secured notes came at a yield of 8 7/8% after being dramatically upsized from the originally planned $300 million. Banc of America Securities and Goldman Sachs & Co. were bookrunners on that offering.

Also on Thursday Prospect News heard terms on an emerging markets corporate deal from Russian oil company Tyumen Oil. The company priced $400 million of five-year loan participation notes (Ba3/B+/B+) at par to yield 11%, via Credit Suisse First Boston and Salomon Smith Barney. The Rule 144A/RegS notes are guaranteed by TNK International Ltd.

Tyumen Oil's previously priced $500 million of 10% five-year senior unsecured loan participation notes via joint bookrunners Credit Suisse First Boston and JP Morgan priced on May 15, 2002 but cancelled the offering prior to settlement. According to sources, Price Waterhouse Coopers declined to give an unqualified opinion on Tyumen Oil's financial statements, stating that certain assets should not have been booked at acquisition rather than at historical costs. The financial statements from 2000 and 2001 have since been restated, and on June 5, 2002 the company received an unqualified opinion from Price Waterhouse Coopers.

Finally on Thursday timing was heard on the only deal aside from Owens-Brockway presently on the calendar to price during the week of Nov. 4: Constar International Inc.'s offering of $200 million of 10-year senior subordinated notes (B3/B) via Salomon Smith Barney and Deutsche Bank Securities. The deal to help fund spin-off of Constar from Crown Cork & Seal, and repay debt to Crown Cork & Seal is set to price on Nov. 7.

The new Dex East Media bonds which had priced at par on Wednesday and then firmed smartly to above the 102 level for each tranche of the deal, continued to hold steady around those lofty levels Thursday, with a trader quoting them essentially unchanged, the 9 7/8% senior notes due 2009 at 102.625 bid/103.375 offered, and the 12 1/8% senior subordinated notes due 2012 at 102.25 bid/102.75 offered.

Back among existing issues OM Group debt continued to take it on the chin from investors for a third consecutive session, its 9¼% notes due 2011 falling as low as 37 bid from Wednesday's closing levels around 43. The bonds were heard to have bounced back up to their opening levels, but then headed south once again to close out trading below 40 bid.

Those bonds had been trading around 90 bid earlier in the week, but swooned down to around 50 on Tuesday after the Cleveland-based specialty chemicals maker that it had posted a sizable third-quarter loss and that things would not get any better during the final quarter of the year. On Wednesday, the bonds had dropped as low as the upper 30s, before bouncing partially off those lows to closing levels in the lower 40s. But they were unable to hold those levels Thursday, and retreated to the lower 30s.

The bonds were knocked back down at least partially due to Standard & Poor's downgrading the company's ratings and putting them on CreditWatch with negative implications, meaning a further downgrade is possible. S&P lowered the company's corporate credit to BB- from BB previously, saying the downgrade "is the result of the company's liquidity coming under stress because of probable financial covenant violations, unexpected dismal earnings performance, and the likelihood for a continuation of a weak economy well into 2003."

S&P credit analyst Wesley E. Chinn further noted that while OM Group has $170 million of availability under its credit agreement, "there is the potential for noncompliance with debt covenants at Dec. 31, 2002, because of expected further deterioration of operating results in the fourth quarter. Moreover, the price of cobalt is expected to remain low through 2003, reflecting the tough market environment and the lack of any foreseeable improvement in the demand for super alloys."

S&P added that the CreditWatch listing "reflects considerable uncertainties regarding the company's near-to intermediate-term liquidity and the strength of its cash flow generation and business activity."

While the debt ratings were being downgraded and the bonds were in retreat, things were just as bad on the equity side of the ledger, where the shares had swooned some $22, or more than 70% on Tuesday, and had gone down another $1.46 (16.31%) on Wednesday. In Thursday's New York Stock Exchange dealings, the shares lost an additional $1 (13.35%) to close at $6.49, on volume of 15 million shares - more than 15 times the usual turnover. News that chairman and chief executive officer James P. Mooney had disclosed in a Securities and Exchange Commission filing that he had sold all 710,000 of his company shares in order to meet margin calls and currently holds no stock, only options which he cannot exercise, were seen as a factor in the continuing erosion of the shares.

But while OM Group's bonds and shares continued their slide, investors figured that another chemical maker - Lyondell - had found the right formula, taking its bonds and shares higher after the Houston-based chemicals producer reported favorable third-quarter earnings.

Lyondell's 9 5/8% notes due 2007 pushed up to 95 bid/96 offered from prior levels around 93.25 bid/94.25 offered, while its 10 7/8% notes due 2009 were at 85.5 bid/86.5 offered, up from Wednesday's 80 bid/82 offered.

"Their numbers were out today," a trader said, "and people liked them." Lyondell shares were up 4 cents (0.32%) to $12.50.

Lyondell reported that in the third quarter, it lost $2 million, or 2 cents per share, a level it called "near break-even" coming against a background of escalating energy and raw materials costs late in the quarter. That relatively small loss compares with the year-ago loss of $67 million (57 cents per share), although it should be noted that $51 million of that loss was due to a special charge taken for the shut down of one of Lyondell's underperforming businesses.

Absent that shut-down charge, the company had lost $16 million (13 cents a share) on operations in the year-ago quarter; in this year's third quarter, Lyondell had actually shown a profit of $5 million (4 cents per share) from operations, before a $7 million charge related to debt refinancing.

Of more interest to the bondholders, the company posted EBITDA of $241 million for the quarter (including its proportionate share related to several joint ventures), versus $217 million in the second quarter and $193 million a year ago.

Elsewhere, Lucent Technologies Inc. debt - which has recently been firming solidly - was seen little changed Thursday on a USA Today news report that the SEC plans to send the Murray Hill, N.J.-based telecommunications equipment maker a "Wells Notice," which the agency sends to companies against whom it plans to file civil charges. Lucent said that it had not yet received any such notice from the regulatory agency. The paper reported that the agency plans to send the company the notice within days. Lucent said it had already voluntarily disclosed the accounting practices said to be under investigation a year ago.

A trader said that he had seen no reaction in either Lucent bonds or shares to the news that it might face charges, with the company's benchmark 7¼% notes due 2006 hanging in around the low 50s. "The investigation is meaningless," he declared. "They're investigating after the horse has already been stolen, sold, cut up and eaten."

Another trader agreed, somewhat less colorfully, that the market was apparently not much concerned about the prospect of an SEC probe, pegging the 71/4s at 52 bid/53 offered, actually up a point on the day, in line with the bonds' recent firming trends.

The Lucent bonds have been going up recently on a combination of factors, including news of a big equipment contract coming from China, indications that giant regional Bell operating company and key Lucent customer SBC Communications Corp. would leave its capital spending levels for the fourth-quarter untouched from prior guidance (analysts had expected a reduction) and Lucent's own numbers for the latest quarter, which seemed positive.

Lucent shares were just as unmoved as the bonds on the SEC news; they were up 3 cents (2.50%) to $1.23 on volume of 75 million shares, versus the usual 42 million-share daily handle.

Lucent - whose shares and bonds had previously been beaten down to severely distressed levels as the telecommunications industry which it depends upon to buy its equipment continued to implode - is not the only troubled telecom credit which seems to be doing somewhat better these days.

A trader said that WorldCom Inc.'s bonds "keep moving up," quoting the bankrupt Clinton, Miss.-based long-distance and Internet service giant's paper 17.5 bid, up from levels below 12 just several weeks ago.

There have been some suggestions that investors were heartened by recent financial figures for July and August that the company submitted to the bankruptcy judge overseeing its reorganization; while WorldCom continued to show hefty net losses for both of those months, it also showed impressive EBITDA figures, leading some in the market to extrapolate that it might be able to show as much as $5 billion of cash flow on an annual basis once it has restructured.

The trader said "even if people weren't that impressed by the cash flow and the other numbers, once they come out with something reasonable, they're saying to themselves that the worst is over" - that everything that was going to come out has already come out, and things could improve from here.

He also saw the same phenomenon at play with Qwest Communications International Inc. debt, which has also been rising of late, with Qwest's holding company bonds up two to three points Wednesday, depending on the issue, and its operating company debt - which still trades at a considerable premium to the holding company bonds - at least hanging in around previous levels, even with the news, released earlier in the week, that the company expects to take a $24 billion goodwill impairment charge against earnings and could end up taking as much as $40 billion in various charges before its all over.

S&P said Thursday that the announcement would have no impact on the company's B- corporate credit rating or its developing outlook.

Bond investors remained just as little fazed as the ratings agency. "Qwest's numbers (released Wednesday) weren't great," the trader said, "but they were in line [with analysts' expectations] and people are beginning to feel 'okay, the worst is over, we've heard all of the bad news now.'"

However, he added: "Who knows? Wait till the next door opens," possibly revealing further bad news about Qwest or other high yield issuers who have been battered by questions about accounting issues and/or liquidity.

At another desk, Qwest Capital Funding's 7¾% notes due 2006 were being quoted up two points on the session at 61, while its operating company 8 7/8% notes due 2012 were a point better at 90.

Also on the telecom front, Nextel Communications' benchmark 9 3/8% notes due 2009 "were up again, like a broken record," a trader said, quoting them half a point better, at 86 bid.

In the technology sphere, Amkor Technologies Inc, bonds have been on the upside over the past few sessions, helped by a narrower third-quarter loss for the Chandler, Ariz.-based semiconductor assembly and test services provider.

Its 9¼% notes due 2006 rose seven points on Wednesday to just under 80 bid, and tacked on another two points Thursday to close at 82.

Amkor had a net loss of $59 million (36 cents per share) in the latest quarter, including $11 million in after-tax charges associated with factory consolidation and operating efficiency initiatives. Excluding the charges, Amkor said its net loss was $48 million (29 cents per share). That compares with a year-ago loss of $128.7 million (80 cents a share).

A trader said that not only was Amkor firmer over the last few sessions; he saw better trading in other tech-sector names such as Solectron, Fairchild Semiconductor, Avaya Inc. and the latter's former corporate parent, Lucent. "The techs," he said, "are all coming back."

Tenet Healthcare, a former high yield name which was upgraded to investment-grade some months ago, ran into a buzz-saw of trouble Thursday, as FBI agents raided one of its California centers and prosecutors said two doctors there had falsely billed for and had performed unnecessary heart procedures. Tenet pledged cooperation with the federal probe, although it said it had "no reason" to believe the charges were true.

Tenet's 6 3/8% notes due 2011 were quoted as having lost 4 cents, to close at 101.75, its yield having widened out by more than 50 basis points.

Tenet shares meantime plunged $10.22 (26.23%) in NYSE dealings to end at $28.75. Volume was 512 million shares, 17 times the usual.

Among high yield healthcare names, Magellan Healthcare bonds fell as low as 59 bid during the session, down from Wednesday's close at 63, but bounced back later in the session to end the day unchanged.

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