Collins & Aikman climbs after other shoe falls; Yellow Roadway plans split-rated deal

By Paul Deckelman and Paul A. Harris

New York, May 17 - Collins & Aikman Products Co. bonds were quoted solidly higher Tuesday - though now trading without their accrued interest - after the troubled Troy, Mich.-based automotive components maker finally threw in the towel and sought protection from its junk bond holders and other creditors via a Chapter 11 filing. The escape under the bankruptcy court protective umbrella had been widely expected by market participants for some time, and speculation that things were headed in that direction intensified last week after Collins & Aikman announced its dire liquidity situation and revealed that it had sought help from its bankers.

In the primary market, no pricings had been seen by the time trading wrapped up for the day, and only one new deal had been announced - and that was an offering from split-rated (Ba1/BBB-) Yellow Roadway Corp., which was expected to draw some interest from high-yield accounts looking for safety.

The high-yield market was poised for a strong opening Tuesday after the strength seen Monday in the equity market, a market source told Prospect News.

But in the end it wasn't in the cards.

In fact, sources had the market marked down half a point to as much as a point before a late rally, again following the stock market, left high yield down slightly more than a quarter of a point on the day.

One junk investor, speaking on background Tuesday, cited the market's present volatility and defensiveness and said: "Welcome to the high yield."

Back to historical pattern

"The high yield market is now behaving like it often does, instead of the way it behaved for the past two years when we saw low volatility and the trade only going in one direction," the investor commented.

"Now we're seeing volatility pick up, and people are getting more defensive after two straight years of insatiable risk appetite.

"Looking at Merrill Lynch's index, spreads from the top have widened from 270-ish to around 450. So they are 180 wider than where they were.

"Just about anybody would tell you that the market was trading way too tight. And we had a ways to go to really reflect the risk out there.

"The fact that the Fed is tightening and the yield curve is flattening doesn't tend to be a good harbinger for high yield."

Collins & Aikman jumps

Collins & Aikman was both the big name in the secondary market, for a fourth consecutive session, as well as the major mover.

After the by no means unexpected news began percolating through the market around mid-morning, Collins & Aikman's two issues of bonds - its 10¾% senior notes due 2011 and its 12 7/8% subordinated notes due 2012 - moved up in price, at least in nominal terms, although traders said they began trading flat, or without their accrued interest - effectively, about a four-point decline in the bonds' value, partly offsetting some of the price rise.

But those bonds - which had rocketed crazily downward since Collins & Aikman announced its liquidity and covenant problems last week, as well as the resignation of chief executive officer David A. Stockman - did began to push back upward.

A trader who had seen the senior bonds going home Monday at 33 bid, 34 offered, trading with interest, saw them opening Tuesday around 35.5 bid, then pushing up to a high of around 45.5 after the bankruptcy news, before coming off that peak to go home at 41 bid, 43 offered, trading flat.

"They filed, the bonds went up about 10 points [from their opening levels] and now are up about six or seven points," he said.

He saw the subordinated bonds go to 7 bid, 9 offered and trading flat, from prior levels of 4 bid, 6 offered, trading with the interest.

Another trader facetiously quipped that the juniors "were on an unstoppable monster rally," nearly doubling in price to 7.75 bid, 8.5 offered at his shop, up from about 4+ the previous evening. He saw the 103/4s go out at 41 bid, 44 offered, with both issues trading flat.

At another desk, the subordinated bonds were seen as high as 8 bid at the end, a gain of three to four points.

Other auto names lower

Apart from Collins & Aikman's widely expected insolvency, other automotive issues were seen somewhat lower in general sector sympathy, with Visteon Corp.'s 8¼% notes due 2010, for instance, quoted by a trader down two points at 67 bid, 69 offered.

However, Dura Operating Corp.'s 9% notes due 2009 were observed to have actually firmed half a point at 58.5 bid.

Exide plunges after loss warning

But the biggest loser in the sector was the Lawrenceville, N.J.-based battery maker Exide Technologies, whose 10½% notes due 2013 were seen bouncing around at sharply lower levels, in the wake of the company's announcement late Monday of a wider-than-expected quarterly loss - and a likely violation of its debt covenants.

A trader - who had seen those bonds as high as 83 on Monday, before they traded into an 80 bid later on as the company released its bad news - saw the bonds open Tuesday at a wide 63 bid, 68 offered. After that, he said, "they started to trade up," and got as good as 75 bid, 77 offered, before retreating back to around 73 bid, 75 offered.

He attributed the rise off the lows to probable short-covering.

Another trader saw the Exide bonds open at around 70, well down from 84.25 bid, 85.25 offered Monday, before trading back up to go home at 74 bid, 75 offered.

He noted that the company restructured through the bankruptcy courts in late 2003 and early 2004 before emerging about a year ago, and theorized that some market players may feel that "it has a relatively clean balance sheet" as a result of having undergone restructuring and having killed off most of its old debt only so recently, and so "is not incredibly highly levered," meaning its prospects for avoiding a return trip to Wilmington are, for the moment, pretty good.

Exide warned on Monday that for the fiscal year ended March 31 it expects to be in violation of the minimum earnings and leverage ratio covenants in its $365 million senior credit facility.

It also reported Monday that its net loss widened to $70.7 million in the quarter from $50.4 million a year earlier.

Exide's Nasdaq-traded shares nosedived $4.27 (38.30%) to $6.88 on very heavy volume of 18.1 million shares - more than 67 times the usual turnover.

J.C. Penney climbs

On the upside, J.C. Penney Co. Inc.'s bonds were about half a point to a point better, after the Plano, Tex.-based department store operator reported that its fiscal first-quarter profit soared to $172 million (63 cents a share) from $41 million (13 cents a share) in the year-earlier period. Penney beat analysts' average estimate by two cents a share.

On a conference call following the release of the company's quarterly results, Penney executives also noted that it was continuing with the ambitious capital structure repositioning program announced last summer, including the open-market buyback of some $250 million face amount of its bonds this year (see related story elsewhere in this issue).

Penney's 7.60% notes due 2007 were seen firming to 103.75 bid, 104.75 offered from 103.25 bid, 104.25 offered on Monday. Its 7 3/8% notes due 2008 rose to 105 bid, 106 offered, from 104.25 bid, 105.25 offered, while its 8% notes due 2010 improved to 107.25 bid, 108.25 offered from 106.75 bid, 107.75 offered.

Saks off on earnings, accounting troubles

But while Penney was sizzling, rival retailer Saks Inc. was fizzling, after having reported lower-than-expected quarterly numbers, and also having acknowledged that it still has not gotten to the bottom of some previously reported accounting problems.

Saks' 8¼% notes due 2008 were ¾ point down at 104 bid, 105 offered, and its 7½% notes due 2010 and 9 7/8% notes due 2011 were each a point lower, at 94 bid, 96 offered, and 102 bid, 104 offered, respectively.

Saks earned $17.1 million (12 cents a share), in the fiscal first quarter ended April 30, less than the 16 cents Wall Street had been expecting. It was unable to provide year-ago figures for a comparison because its year-ago results are still being restated. The company admitted that it still had not concluded its probe into a vendor allowance scandal that led to the firing of three top executives, and was trying to confirm the amount of improperly collected vendor allowances.

A&P edges higher

In the supermarket sector, Great Atlantic & Pacific Tea Company Inc.'s bonds were seen unchanged to up slightly, after Moody's Investors Service revised the outlook on the Montvale, N.J.-based foodstore operator's debt to developing from negative, citing A&P's recently announced plans to restructure by seeking a sale or other strategic transaction for its profitable Canadian unit and looking also to divest its underperforming Midwest store assets.

A&P's 7¾% notes due 2007 were seen at 102.5 bid, 103.5 offered, while its 9 1/8% notes due 2011 were at 104 bid, 105 offered

Primary market - the waiting game

Meanwhile the Tuesday primary market session came and went with barely a breath of news.

Seneca Gaming Corp. talked a $200 add-on to its 7¼% senior notes due May 1, 2012 (B1/BB-) at 96.50 to 97.50, with pricing expected on Wednesday via Merrill Lynch & Co. and Banc of America Securities.

One sell-side source commented that even though Seneca inhabits the gaming sector, which is perceived to be a defensive one, the add-on is coming at a significant discount to the original notes.

The company's original $300 million issue priced at par on April 29, 2004.

Split-rated Yellow Roadway deal

The only other news during the Tuesday session came from crossover-land.

Overland Park, Kan., transportation services company Yellow Roadway Corp. is marketing a split-rated $250 million offering of six-year senior floating-rate notes (Ba1/BBB-) via Credit Suisse First Boston.

Pricing was expected to take place Tuesday, however no terms had emerged as Prospect News went to press Tuesday evening.

Proceeds will be used to fund a portion of the $1.37 billion acquisition of Chicago-based regional trucking firm, USF Corp.

Sources on both the buy- and sell-sides expressed the opinion that some high-yield accounts would take a close look at Yellow Roadway.

"Everybody is looking for high-quality stuff right now," a sell-side official observed.

Positive factors still in place

Finally on Tuesday one sell-side source told Prospect News that factors which created the amazing strength in the high-yield market during the 18 to 24 month period leading up to late March - namely a strong U.S. economy, low default rates and low Treasury levels - are still very much in evidence.

"It's hard to know where things really are right now," the sell-sider said. "Everyone is short the market.

"At some point if things run up it's going to come back really quickly."

The official went on to say that the evidence indicates that the present sell-off was completely sparked by the auto sector.

"If that turns out to be an isolated event, and we don't see any credit problems in the rest of our market, there is no reason why it can't bounce back strongly," the sell-sider reasoned.

"But if you start to see credit problems in other sectors we could be in for a more prolonged downturn."

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