Hovnanian dives on debt-exchange plan; Pilgrim's Pride plucked on plan to skip coupon; better tone seen

By Paul Deckelman and Paul A. Harris

New York, Oct. 27 - Wall Street had another topsy-turvy day, ending in a loss, but traders said the overall tone in Junkbondland seemed to have improved and managed to hold up even despite the late slide in stocks.

But while there were buyers out for a number of issues, some notable names struggled.

Hovnanian Enterprises Inc. bonds plunged as the Red Bank, N.J.-based homebuilder announced plans to exchange new debt for a portion of those bonds - but at a steep discount to their face value.

Pilgrim's Pride Corp. had some good news on the financing front - its banks agreed to extend the covenant default waiver they had issued to the Pittsburg, Tex.-based top chicken producer. But the company also announced plans to not make the scheduled Nov. 3 interest payment on two series of its bonds and to instead invoke the standard 30-day grace period. That overshadowed the good waiver news and caused the bonds to fall.

Gaming names continued to be hard hit, particularly MGM Mirage. But Wynn Las Vegas LLC was seen holding its own.

In the primary sphere, BCE Inc. reiterated that it still expects its $34 billion buyout deal to close, as scheduled in December, and there was talk among new-deal denizens over when and how the big Canadian telecommunications company might start pulling the financing for the mega-deal together, particularly with the currently troubled state of the credit markets.

Market indicators mixed

The widely followed CDX High Yield 11 index of junk bond performance, which had fallen by 1½ points on Friday, was up by ¼ point on Monday, a trader said, quoting it at 78 7/8 bid, 79 3/8 offered. The KDP High Yield Daily Index was meantime little changed at 52.93 - down 1 basis point on the day - as its yield also pretty much held steady, tightening by 1 bp to 16.41%.

In the broader market, advancing issues trailed decliners by about a nine-to-seven edge. Activity, measured by dollar volume was off about 7% from Friday's pace.

A trader said that the junk market on Monday was "a little bit of a roller-coaster ride - although I didn't see as many participants on the downside as I did on the upside. I think that our market seemed to have stabilized a little bit."

That was all the more notable in view of what went on over on the equities side of the fence. It was yet another volatile session on Wall Street, which saw stocks start off stronger but eventually give in to persistent investor angst late in the session, leaving the bellwether Dow Jones Industrial Average - up by as much as 220 points earlier in the day - finishing down 203.18 points, or 2.42%, to end at 8,175.77. During the volatile session, the Dow zig-zagged between positive and negative territory some 60 times. Broader market indexes were also thrown for a loss, with the Standard & Poor's 500 index ending down 27.85 points, or 3.18%, to finish at 848.92, while the Nasdaq composite index slid by 46.13 points, or 2.97%, down to 1,505.90.

"Had the Dow finished on the upside, we [in junk] would have seen a little bit more of an upward price movement, but with the turnaround in stocks, I would pretty much categorize us as unchanged."

As an example of the stabilizing trend, he noted that the usually actively traded and volatile Community Health Systems Inc. 8 5/8% notes due 2015 - which usually get pushed downward when there's any kind of pressure on the market - ended the day unchanged at 80.75 bid, although volume of $15 million was lighter than usual for this market benchmark issue.

He also noted "a little rebound" in the recently beleaguered bonds of mining operator Freeport McMoRan Copper & Gold Inc., whose 8¼% notes due 2015 - the most active issue as of late afternoon, with over $31 million traded - was up a point at 79, while its 8 3/8% notes due 2017 were up 1¼ points to 77.5 bid.

'Enough is enough'

Another trader opined that the "the market actually had a little strength today. Believe it or not, there seems to be a little cautious optimism on buying. Some of the names that have gotten beaten up" seem to be doing better.

He said that Graphic Packaging was one such issue. "There seems to be demand building up there, earnings are expected out, and with the lowering of costs, people think that's heading up a little bit. The bonds were at 91 a few weeks ago, and then got beaten down into the upper 60s, but now, he said "there's starting to be some nibbling," that's brought them back up to around the 72 area.

Another such issue was ArvinMeritor Inc. He said the automotive parts company's "stock got beaten up - but there seems to finally be a bit to it [i.e. its bonds]. People were looking for paper, because it seems like the company is doing the right thing. "He said its 8 1/8% subordinated bonds had been pushed down into the mid 50s during the recent junk slide, but "people are saying 'wait a minute - enough is enough'."

The trader said that he wasn't sure if you could call it bottom-fishing per se "but some of the numbers [i.e. price levels] look pretty good."

One possible factor, from what he had heard, was that some companies are doing what he termed "quiet debt for equity swaps" - a company will issue some stock at a discount, and then use the proceeds "to quietly retire debt at these tremendous prices," without making a big announcement about it.

"When you look at some of these yields, and you don't think that Graphic Packaging is going bankrupt, or ArvinMeritor," he said, it's a clear inducement to step in and do some buying. "I'm just citing those two names - but I'm sure there another fifty like them."

The bottom line, he said was "I was definitely seeing more buying than selling."

Hovnanian hammered by debt exchange

But not in Hovnanian Enterprises' debt.

A trader saw Hovnanian's bonds down about 10 points on the session to around the 30 mark, noting that "they offered to do some sort of exchange - and the bondholders didn't like it."

Another trader saw the company's bonds down even further, in the 20s, which he said that was down about 20 points on a round-lot basis from the prior round-lot trades - all of which had taken place a week or more ago. "There's no question people were bailing on the news," he opined.

He saw Hovnanian's 6½% notes due 2014 at 24, its 6¼% notes due 2015 at 21 bid and, what he called its most active issue, the 6¼% notes due 2016, at 27. The latter bond, he said, was down some 25 points from 52, notched back around mid-month, with no large-block trades in the name seen since then.

Hovnanian announced a private offer to exchange up to $250 million of new 18% senior secured notes due 2017 for a portion of its $1.515 billion principal amount of currently outstanding senior notes slated to come due between 2012 and 2017. It is offering holders of the current notes anywhere from 41 to 47 cents on the dollar's worth of the new bonds for their outstanding notes, depending on the issue, and has ranked the seven tranches of outstanding notes in a descending order of priority, with the shortest-dated issues, the 2012s, at the top and hence, most likely to be accepted in the exchange offer, and the longest-dated paper, the existing 2017s, at the bottom and hence the least likely to be accepted for exchange.

Pilgrim's pride not so proud

Pilgrim's Pride's debt dropped at least 5 points on the day after the company said it was opting to miss its upcoming coupon payment.

A trader said the chicken producer's bonds had begun trading flat with due bills, its 8 3/8% notes due 2017 at 17.5 bid, 19 offered and its 7 5/8% notes due 2015 at 39.5 bid, 40.5 offered. Another trader placed the 8 3/8% notes at 18 bid, 20 offered and the 7 5/8% notes at 39.5 bid, 41.5 offered.

The Pittsburg, Texas-based company's decision to enter the 30-day grace period came as it received an extension on a temporary waiver from its lenders. The waiver allows the company to access its credit facilities through the end of November.

"Lenders have been constructive and supportive throughout this challenging period and we believe that like us, they are encouraged by recent industry egg set data and the continued decline in grain and other feed ingredient prices," the company said.

Pilgrim's bottom line has been affected by the rising prices of grains, which are used to feed its livestock. The company has tried to offset some of those costs by increasing its prices for consumers, as well as decreasing output. The company also tried to hedge some of the costs of grain, but ended up losing money. The latter was blamed for the company's expected losses in the fourth quarter.

But as the current efforts to ensure viability have not yet produced results, the credit facilities lenders are requiring Pilgrim's to hire a restructuring officer. Pilgrim's has been working with Lazard and Bain & Co. on its restructuring efforts thus far. However, lenders have told the company they have 10 days to fill the new position, once a list of possible candidates has been submitted.

On the news, Moody's Investors Service slashed its rating on the company, cutting the 7 5/8% senior notes to Caa3 from Caa1, the senior subordinated notes due 2017 and $5.1 million senior subordinated notes due 2013 to Caa3 from Caa1.

Gaming still a bad bet

A trader said it "looked like MGM Mirage got clocked." He also described the Las Vegas-based casino giant's bonds as "active and lower," with its 6% notes maturing next Oct. 1 last trading at 80 on a round-lot basis, up from its low of 78, though well down from 84.5 bid on Thursday. "They're off from Thursday, but did rebound of their lows," he further elaborated.

He saw the MGM 6 5/8% notes due 2015 at 59.75 bid versus 62.125 on Friday, while its 5 7/8% notes due 2014 lost 3 points to close at 63.

The trader saw Harrah's Entertainment Inc.'s bonds mixed, despite a Wall Street Journal story warning that the company's owners, TPG and Apollo Management LP, will likely have to mark down their investments in Harrah's due to the company's heavy debt load and industrywide problems caused by the staggering economy. He quoted Harrah's 7 7/8% notes due 2010 up ½ point at 59 bid, and its 6½% notes due 2016 up ½ point at 19, but saw its 5 7/8% notes due 2015 down a point at 17 bid.

The trader also saw Wynn Las Vegas 6 5/8% notes due 2014 "getting hit," going out at 70.75, versus 72 on Friday, with an active $18 million of the bonds traded.

Another trader saw the Wynn '14s "still in the low 70s. They're down significantly from where they had been, but they're still hanging in better" than other big gaming names like Harrah's and MGM.

Autos all over the lot

A trader said General Motors Corp.'s 8 3/8% benchmark bonds due 2033 were 2 points better at 27 bid, while its 49% owned GMAC LLC's 8% bonds due 2031 improved by as much as 4 points to 39 bid.

But another trader saw the GM benchmark's down 1½ points at 25 bid, 27 offered, while Ford Motor Co.'s 7.45% bonds due 2031 were a point better at 27 bid, 29 offered.

At another desk, a trader saw the GM '33s up ½ point at 26, with Ford down ½ point at 28.

Little change for names in the news

A trader saw little or no change in CenturyTel Inc.'s bonds despite the announcement that CenturyTel and Embarq Corp. plan to merge in an all-stock deal totaling over $11 billion, including assumption of $5.8 billion of Embarq debt. While CenturyTel holders thought the Monroe, La.-based rural telecommunications provider's planned deal is a wrong number, since their holdings will be diluted and holders of the considerably larger Embarq will be dominant in the combined company, and took its shares down 13% in busy New York Stock Exchange trading, in the junk market, the trader said, CenturyTel's 6% notes due 2017 were unchanged at 76.875.

There was also no activity seen in Dillard's Inc.'s bonds - even though the Little Rock, Ark.-based department store operator's shares shot up more than 35% as two large investors called for company CEO William Dillard II and other family members occupying high executive positions at the underperforming company to walk the plank in the face of continued sales declines and losses which they charged have eroded the retailer's market value by 95% since he took over the top spot 10 years ago.

"We didn't even see a bid or offer, which is weird," a trader said, "given the news out and what the stock is doing. I guess we'll see something [Tuesday]."

Still on the road

Although there was no primary market news, junk-watchers remain closely focused on the only deal in the market, Brocade Communications Systems Inc., as well as on the BCE Inc. mega-deal, thought to be on the near horizon.

The Brocade $400 million bond offer, to help fund the acquisition of Foundry Networks, Inc., remains on the road, according to a source close to the deal who declined to furnish any color.

Last Friday a special meeting of Foundry shareholders, convened for the purpose of voting on Brocade's $19.25 per share cash offer, was adjourned and rescheduled for Wednesday.

Foundry's press release cited "recent developments related to the transaction," which left some market watchers wondering how the bond deal was going.

To fund the unsecured portion of the deal, Brocade is marketing a $400 million offering of six-year senior unsecured notes (B2/BB-), via Banc of America Securities and Morgan Stanley.

The roadshow began one week ago.

In a Monday note to its clients Lazard Capital Markets stated that its checks indicate that investor interest during Brocade's roadshow last week was tepid and that the book was likely short of getting filled.

Lazard went on to say that although details are few, it is possible that Foundry's shareholder meeting was delayed to allow the management teams to reevaluate the terms of the deal following that tepid response.

"We believe it is in [Brocade's] interest to renegotiate a lower price for Foundry, given the dramatic change in market conditions since the deal was announced and the subsequent difficulties in raising the remaining financing," Lazard stated, adding that Brocade currently owns 14 million Foundry shares, valued at $250 million, and could lose 40% if the deal fell through.

"On the other hand, we don't believe it is in [Foundry's] interest to walk away from the deal even at a lower price, given the potential $85 million termination penalty and the prospect of seeing the shares return to the $10 to $11 range.

Trailing Friday's 25.6% drop following the "adjournment" news, Foundry's shares (Nasdaq: FDRY) fell 2.2% on Monday to close at $12.39.

BCE: Day by day

Elsewhere on Monday BCE reiterated in a press release that the acquisition of the company by Teachers Private Capital, Providence Equity Partners and Madison Dearborn Partners, is scheduled to close by Dec, 11.

That reiteration came in a statement in which the Montreal-based telecom stated that the litigation brought on behalf of common shareholders seeking, among other things, the payment of second and third quarter common dividends, damages and an injunction to halt the going-private transaction until the dividends are paid, is completely without merit and will be vigorously defended in court.

Late last Friday news reports began circulating that the debt financing for the C$51.7 billion LBO, including $11.3 billion equivalent of bonds and C$23.05 billion of bank debt, could begin this week.

That's not likely, sources close to the deal told Prospect News on Monday.

"It's a big deal that is going to take a lot of preparation," a banker said.

"The markets are up and down so it's difficult to prepare for anything.

"We're waiting for the markets to get better, and so far they haven't."

This source conceded that the dealers remain in conversations with investors, including hedge funds.

However, the banker added, it is premature to say that the deal is going to launch next week or the week after.

"It's day-by-day," the banker said.

"If and when the market gets better we'll do the deal."

Eying high grade

News that 3M Co. priced $800 million of double-A rated 4½% three-year notes at 275 basis points over Treasuries turned out to be of interest to a couple of sell-side sources who spoke to Prospect News late Monday.

One of these sell-siders expects that with a modicum of stability in the capital markets there could be more activity in the high-grade primary before the week is over.

Neither of these sources was willing to carry any celebration over investment grade 3M's deal very far, however.

"It's double-A rated short-term paper," one commented, noting that such a transaction has limited implications for the high-yield primary market.

Ran its course

Forced selling on the part of hedge funds, in the name of paring leverage, appears as though it has pretty much run its course, according to a hedge fund manager who spoke to Prospect News on Monday.

"They have gotten [the deleveraging] to the point where they are not going to have to hit the ridiculous bids that they've been having to hit," the source added, noting that a couple of double-A CLO deals, "by really high-class managers," were trading in the low-50s.

"That's unheard of," the manager asserted, adding that the bulk of the hedge funds' blood-letting lately has taken place in CLOs and leveraged loans.

"There hasn't been any real liquidity in the cash market for months," the manager added.

-Stephanie N. Rotondo contributed to this report

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