Hollywood Entertainment notes lower despite Blockbuster bid; Affinia prices 10-year deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 12 - Bonds of Hollywood Entertainment Corp. were quoted solidly lower Friday even as the Portland, Ore.-based video-rental chain's shares pushed higher after rival video-renter Blockbuster Inc. offered to buy the company, trumping a previously announced leveraged buyout transaction.

In the new-deal market, One dollar-denominated issue priced during the final session of the Nov. 8 week, a $300 million deal from Affinia Group Inc., taking the four-day holiday-abbreviated week over the $5 billion mark, according to data gathered by Prospect News.

And with Friday's news of $2.770 billion of notes coming from two subsidiaries of Toronto's Rogers Wireless Communications, Inc., the week of Nov. 15 appears to at least have the potential to challenge that total.

A ton of cash

When Prospect News inquired of one investment banker whether the Rogers deals, which were announced mid-afternoon on Friday, would soak up a significant fraction of the buy-side's reportedly massive horde of cash that needs to be put to work, the banker simply responded: "There is a ton of cash out there.

"We saw a healthy inflow [to the high-yield mutual funds] this week," the sell-sider added, referring to the $601.6 million inflow for the week ending Nov. 10, reported by AMG Data Services.

"There are still plenty of people starving for high-yield paper."

This source also pointed to the Tuesday, Nov. 9 primary market session which saw just under $2 billion of business price in six high yield tranches - all of them drive-bys - and said that issuers may lately have developed some sense of urgency.

"Right now rates are rising," the banker said. "Right now the yield curve is flattening but also shifting - meaning the long end is catching up.

"So if you need to do something, you want to do it now because the Fed might move again in December.

"If they do it will set up a whole new interest rate environment than the one we have experienced, for the most part, in 2004."

Five Rogers tranches

The spotlight Friday belonged to Rogers Wireless Communications, Inc., which operates Canada's largest integrated wireless voice and data network. Planning to issue via two subsidiaries, the company is bringing approximately $2.770 billion of notes in five tranches, all of which are being led by Citigroup, according to market sources.

Rogers Wireless Inc. plans to price approximately $2.350 billion of notes in four tranches in the coming week.

The deal is comprised of U.S. dollar-denominated tranches of fixed-rate and floating-rate senior secured notes (Ba3/-/BB+ as well as a fixed-rate tranche of senior subordinated notes (B2/-/BB-). In addition Rogers Wireless intends to sell a Canadian dollar-denominated tranche of fixed-rate senior secured notes (Ba3//BB+).

Tranche sizes remain to be determined.

Proceeds will be used to make a C$1.750 billion distribution as a return of capital to Rogers Wireless Communications, Inc. and to repay debt incurred in connection with Rogers Wireless' acquisition of Microcell Telecommunications Inc.

Concurrently in the market and also expected to price in the coming week is a $420 million offering of senior secured second priority notes (Ba3) from Rogers Cable Inc.

For the Rogers Cable deal, a debt refinancing, Citigroup is teaming with joint bookrunner JP Morgan, according to one source.

Affinia a blowout

The only deal to price Friday came from Affinia Group Inc., the Toledo, Ohio automotive systems-maker that is being acquired by the Cypress Group for $1.1 billion from Dana Corp.

In a deal backing the acquisition, the company sold $300 million of 10-year senior subordinated notes (Caa1/B) at par on Friday to yield 9%, at the tight end of the 9¼% area price talk.

Credit Suisse First Boston, Deutsche Bank Securities, Goldman Sachs & Co. and JP Morgan ran the books for the deal.

The deal was said to have been a blowout.

Also on Friday, in Europe, German do-it-yourself retailer Hornbach-Baurmarkt-AG priced an upsized €250 million of 10-year senior notes (Ba3/BB-) at par to yield 6 1/8%.

Deutsche Bank Securities and Goldman Sachs & Co. ran the books on the deal that was upsized from €200 million

$4 billion calendar

As for the week of Nov. 15, with any significant quick-to-market action could present a challenge to the $5 billion issuance-level of the Nov. 8 week.

Including the Rogers Wireless Communications business mentioned above, at least nine issuers are in the market with deals that are expected to price by the end of Friday's session, totaling just over $4 billion of announced business.

Hollywood Entertainment drops

Back among the secondary issues, a trader quoted Hollywood Entertainment's 9 5/8% notes due 2011 at 106.5 bid, 107.25 offered - up a little from their lows at 104, but still well down from the 114-115 bid level they occupied earlier in the week.

A source at another desk meantime saw those bonds as having dipped to 108, off from 114, while another participant saw them off more than five points at 108.5.

The sharp decline was in marked contrast to the behavior of Hollywood's New York Stock Exchange-traded shares, which gained 76 cents (6.95%) to $11.69 on volume of nearly 16 million shares, about 11 times the average activity level. That rise was on top of the gain of more than 11% seen Thursday, when the bond market was officially closed for the Veterans' Daly holiday.

Dallas-based Blockbuster offered to buy the company for about $700 million, or $11.50 per share in cash, surpassing a pending offer from Los Angeles-based buyout firm Leonard Green & Partners and Hollywood chief executive officer Mark J. Wattles, who have been trying to take Hollywood private since March. They had originally offered Hollywood shareholders $14 per share, but later dropped their offer to $10.25.

Analysts said the stock rose on expectation that the Blockbuster offer could spark a bidding war, with Leonard Greene and Wattles possibly raising their bid, or even some third party coming in with its own offer.

But the bonds were lower, a trader opined, because investors apparently think "Green is a better credit. Blockbuster has a lot of leverage."

So much so that Standard & Poor's said Thursday that it might cut Blockbuster's BB corporate credit rating deeper into junk, although the ratings agency also said that it might either raise, affirm or lower Hollywood's B+ rating, depending on how the deal shakes out.

GenCorp unchanged from Thursday

Also on the mergers and acquisitions front, traders reported no further movement GenCorp Inc.'s 9½% notes due 2013, which hovered at 109.5 bid, their Thursday close, up from prior levels at 107, following the news that Steel Partners II, a GenCorp shareholder, had offered to buy all of the shares of the Rancho Cordova, Calif.-based technology company that it does not currently own for $17 per share. Steel Partners, an investment fund, said that current management of the company has made many poor decisions and wrong choices, including its current plan to raise $200 million by issuing new stock and selling new convertible debt.

CNBC reported late Friday that GenCorp's board of directors is expected to reject the Steel Partners offer, citing unidentified people close to the company as its source.

Barney's rises

Another high-yield name involved in merger activity is Barney's New York, an upscale clothing retailer being bought by Jones Apparel Group Inc. for $294.3 million in cash, plus the assumption of $106 million of Barney's debt, including its 6% notes due 2008.

A market source saw those bonds having moved up to 107 bid, from levels earlier in the week at 104.5.

Integrated Electrical plunges

Apart from names driven M&A activity, a trader saw Integrated Electrical Services Inc.'s 9 3/8% notes due 2009 at 84 bid, down from 91 on Thursday and 92.5 on Wednesday, even as the NYSE-traded shares of the Houston-based provider of electrical system design and installation services - which swooned more than 40% on Thursday - fell another 24 cents (8.11%) Friday to $2.72 on volume of some two million shares, about seven times the norm.

Integrated Electrical said on Thursday that it is facing prohibitive costs related to the surety bonding of certain projects. Surety bonds are used in construction projects as a guarantee that the contractor, such as Integrated Electrical, will perform the agreed-upon work and pay any labor and materials costs that arise. It explained in its statement that surety bond firms have lost money over the past several years - causing them to limit the amount of bonding they will write and raise their rates, which crimps the ability of a company like Integrated Electrical to pursue its business.

The company said that "as a result of the increased financial requirements from the providers of our surety bonds, we have determined that certain projects are no longer economically attractive after considering the additional capital cost associated with surety bonds."

Ainsworth lower

On the earnings front, Ainsworth Lumber Co. Ltd. reported positive results for the third quarter ended Sept. 30, including operating earnings of $87.4 million on sales of $225.2 million, well up from $59 million on sales of $155.8 million in the year-ago period. EBITDA rose to $71.8 million versus $67.3 million in the same period last year. Cash provided by operations, after changes in non-cash working capital, was $99.1 million compared to $46.7 million in the same period of 2003.

Even so, a market observer said the Canadian forest products company's 6¾% notes due 2014 dipped to 95 bid from 97.25 previously and its 7¼% notes due 2012 retreated to 101.75 from 104. Its floating-rate notes due 2010 were unchanged at 100.199.

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