Fox Acquisition prices; GM off as Merrill talks bankruptcy; Blockbuster up after dropping Circuit City idea

By Paul Deckelman and Paul A. Harris

New York, July 2 - Fox Acquisition Sub LLC priced a downsized offering of eight-year notes on Wednesday - and those bonds firmed solidly from the discounted pricing level when they were freed for secondary dealings.

High yield syndicate sources also heard that Horsepower Holdings Inc. was getting ready to hit the road on Tuesday to market a new issue of 10-year senior notes.

In the secondary market, General Motors Corp.'s bonds - which had hung in there, little changed, on Tuesday, despite the carmarker's report of yet another big slide in monthly vehicle sales from year-earlier levels - finally cracked on Wednesday, tumbling several points, after analysts gave pessimistic assessments of the auto giant's near-term prospects and Merrill Lynch & Co. even speculated that it could be forced into a bankruptcy filing. Amid a generally soggy autosphere, ArvinMeritor Inc.'s bonds were better after the Troy, Mich.-based components maker issued positive guidance.

But the guidance coming out of Avis Budget Group Inc. was negative, reflecting the impact the deadly combination of a troubled economy and high gas prices have ad on the car-rental business. That pushed Avis' bonds and shares lower, and sector peer Hertz Global Holdings Inc.'s paper came along for the downside ride.

Back on the upside, Blockbuster Inc.'s bonds rose after the Dallas-based video rental company finally abandoned what many observers considered to be an ill-advised, even quixotic effort to acquire electronics retailer Circuit City Stores. And Chesapeake Energy Corp.'s notes firmed on the announcement of a joint venture with Plains Exploration & Production Co. to develop a Chesapeake shale property.

A high-yield syndicate official said that Wednesday was a quiet day in market, but added that bad news on the automotive and employment fronts, and continuing erosion of stock prices, took their toll.

Fox prices $200 million notes

The primary market generated news during the midweek session.

Fox Acquisition Sub LLC priced a downsized $200 million issue of 13 3/8% eight-year senior notes (Caa1/CCC+) at 98.803 to yield 13 5/8%.

The yield was printed 37.5 basis points beyond the wide end of the 13% to 13¼% price talk.

The issue was downsized from $230 million, with $30 million of proceeds shifted to the company's bank loan.

Deutsche Bank Securities, UBS Investment Bank and Banc of America Securities were joint bookrunners for the acquisition deal.

A syndicate source commented that both the bond deal and the loan went very well.

The company upsized its term loan to $515 million, moving the $30 million of proceeds out of the bonds in order to save money on interest expense.

The Libor plus 425 basis points term loan, in which there was "an exuberant amount of interest," was priced at 97, and traded to the mid-98s on the break, the source said.

Bond and bank interest in Newsday

Also on Wednesday Newsday LLC priced its $650 million five-year term loan (B1/BB+), which was marketed by both the high-yield and leveraged loan sales forces.

The deal came in two tranches: a $525 million fixed-rate tranche and a $125 million floating-rate tranche.

The fixed-rate piece priced at 9¾% and was sold at 99.035, while the floating-rate piece is priced at Libor plus 550 basis points and was sold at an original issue discount of 99.

The fixed-rate tranche had been talked at 9% to 9¼%.

Originally the whole loan was expected to be fixed-rate but the floating-rate tranche was carved out during syndication based upon investor demand.

Bank of America, Merrill Lynch and Citigroup are the joint bookrunners, with Bank of America and Merrill the joint lead arrangers for the acquisition financing deal.

Horsepower launches $275 million

On Tuesday a high-yield syndicate official said that the post-Independence Day week could be busy, and professed visibility on three deals which should launch regardless of the market conditions.

On Wednesday a different investment banker, who works on a different syndicate desk, conceded visibility on a deal, but added that market conditions would factor into the unnamed issuer's decision to launch.

"Things have slipped a little, to say the least," this official remarked, adding that the issuer in question did not need to brave capital market tumult, but rather could wait to raise the cash.

One junk deal did launch on Wednesday.

Horsepower Holdings, Inc. will begin a roadshow on Tuesday for a $275 million offering of 10-year senior notes, a merger financing deal via left lead UBS Investment Bank and joint bookrunner Goldman Sachs.

The proceeds were shifted to the proposed bonds following the company's decision to eliminate its $275 million term loan B, according to a market source.

Proceeds will be used to help fund the proposed mergers of Basic Energy Services, Inc. and Grey Wolf, Inc. into Horsepower Holdings, after which Horsepower will be renamed Grey Wolf, Inc. Some proceeds will also be used to refinance Basic's revolver.

Day-to-day calendar

Sources seemed to concur that Wednesday would be the last session of the pre-holiday week to see any action in the new issue market, with the forces expected to be substantially depleted on Thursday.

Three deals that have been on the calendar for the past several days as possible pre-Independence Day business have now been pushed into the post-holiday week.

These include AEI's $250 million 10-year senior bullet notes (B2/B), which were talked Monday at the 10¼% area. AEI is being simultaneously marketed to high-yield and emerging markets accounts.

AEI is being led by Credit Suisse, as is Ferro Corp.'s $200 million offering of eight-year senior notes (B2) which was talked at 8¾% to 9%, and has also been pushed into next week.

Likewise, Ferrellgas, LP and Ferrellgas Finance Corp.'s $250 million offering of notes mirroring the company's existing 6¾% senior notes due May 1, 2014 (Ba3/B+) via Banc of America Securities LLC and JP Morgan. No price talk has surfaced on the Ferrellgas deal.

New Fox bonds move up

When the new Fox Acquisition Sub 13 3/8% notes due 2016 were freed for secondary dealings, a trader saw them having moved up to 99.5 bid, 100.5 offered, up from the discounted 98.803 level at which the $200 million of new bonds had priced.

Another trader saw the new issue doing even better, pegging the bonds at par bid, 101 offered.

Market indicators keep heading south

Back among the established issues, a trader said that the widely followed CDX junk bond performance index was down another ¼ point Wednesday, seeing it around the 93¼ bid, 94 offered level. The KDP High Yield Daily Index was again pointing lower, down 8 bps to 71.91, while its yield widened by 2 bps to 10.35%.

In the broader market, advancing issues trailed decliners for yet another day, by an almost five-to-three margin. Activity, represented by dollar volume, fell almost 23% from Tuesday's levels, as market activity wound down on the last full trading session of this abbreviated pre-holiday week. U.S. fixed-income markets are slated to officially close at 2 p.m. ET on Thursday - although, realistically, many participants will already be long gone by then - and the domestic financial markets will close completely on Friday, July 4.

GM skids lower

Among specific issues, a trader saw General Motors' 8 3/8% bonds due 2033 down 2 points at 55 bid, while the Detroit giant's 49%-owned GMAC LLC finance unit's 8% bonds due 2031 were also down a deuce at 60 bid, 62 offered.

At another desk, the GM benchmarks were seen down 2½ points on the day at 56 bid, 57 offered, although its 7 1/8% notes due 2013 were actually up slightly at 64 bid. A market source saw the GM benchmarks plunge 3 full points to 56 bid in heavy trading with a number of big-block transactions recorded. The source also saw GMAC's 7¼% notes due 2011 down 1½ points, also in active trading, at 69.5 bid.

Yet another trader saw the 8 3/8% bonds swoon to 55.5 bid, 56.5 offered, after having held steady on Tuesday at 58 bid, 59 offered even in the face of news that the Number-One U.S. vehicle manufacturer's June sales were off 18.2% from year-earlier levels, the latest in a long string of monthly declines, although the numbers were not quite as bad as the plunge with many on Wall Street had been expecting.

But after having played it cool on Tuesday, bond investors had second thoughts on Wednesday, as analysts weighed in with their assessments of the sales numbers - and these were not pretty. GM dropped $1.77, or 15%, to $9.98 at the close of New York Stock Exchange composite trading. That was the lowest since Sept. 2, 1954.

For instance, Deutsche Bank Securities analyst Rod Lache - noting that GM's June sales were temporarily helped by some buyer incentives that the carmaker announced around mid-month - warned that it could face "payback" not too far down the line when sales in later months fall off once the incentives are through, "if history is any guide." He forecast that GM's share of the domestic market, which nudged upward to 22.1% in June, helped by the incentives and the inability of competitors like Number-Two Toyota and Number-Three Ford Motor Co. to fully meet customer demand for their popular fuel-efficient cars, could drop back to around a 19% to 20% range in the next few months.

At Citigroup, analyst Itay Michaeli cut his price target on GM stock to $14 from $21, and cautioned in a research note that while GM has a big enough bankroll to stave off an immediate cash crunch, "the urgency to shore up liquidity to navigate through a difficult 2008-09 has risen significantly in recent months."

But the headline story about GM Wednesday came out of Merrill Lynch, where analyst John Murphy suggested what at one time would have been unthinkable - that the once-mighty GM could find itself having to seek the protection of the courts from its creditors.

"Bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised," he declared in a research note. Murphy said that GM might have to raise as much as $15 billion to cope with the eroding conditions in the auto market.

He slashed his price target on the stock by 75%, to $7 from $28 previously, saying the industry-wide decline in auto sales seen so far has been sharper than expected and was likely to continue through next year.

ArvinMeritor holds its own

Even with GM generally leading the auto sector lower Wednesday, a trader noted that ArvinMeritor's 8 1/8% notes due 2015 rose by 1 point to 79 bid, 80 offered, which he called "pretty good for an auto parts name," after the company said that it expects stronger global demand to boost fiscal its third-quarter sales by 20% from its year-earlier level, to around $2 billion; analysts generally are predicting sales in a $1.85 to $1.9 billion range.

And ArvinMeritor also said that its per-share earnings for the fiscal year that ends in September will likely come in at the upper end of its previously announced guidance of $1.40 to $1.60, before special items; there too, Wall Street is more conservative and the company, anticipating about $1.35 of full-year per-share earnings before special items.

Avis falls on bearish guidance

But earnings guidance can be a double-edged sword for the junk market; bad guidance can send a credit lower just the way good guidance can give it a boost, as seen by investor response to Avis Budget Group's wary predictions for the upcoming months. A trader saw its Avis Budget Car Rental LLC 7 5/8% notes due 2014 down 2 points on the day to 76.5 bid, 77.5 offered. Another market source saw the bonds at least a point lower at 77.25. Its NYSE-traded shares meantime plunged by $1.60, or $21.95, to $5.69.

The Parsippany, N.J.-based vehicle-rental company - second in the U.S. market only to Hertz - said that it expects its second-quarter earnings, and full-year results as well, to fall below year-ago figures due to rising fuel costs and slowing U.S. commercial air travel - since airport rentals account for more than 80% of its business.

Avis expects to release its earnings on Aug. 6. In the 2007 second quarter, it posted a profit of $24 million, or 23 cents per share, and suffered a fiscal 2007 loss of $916 million, or $8.88 per share, although that was principally due to a special $1.1 billion charge. For the full 2008 year, the company expects pre-tax earnings, before any special gains or charges, of about $140 million. EBITDA will fall to $350 million from $409 million last year.

Hurt by the same industry dynamics that are crimping Avis' earnings, bonds of its larger rival Hertz were also seen on the downside.

A market source saw its Hertz Corp. 8 7/8% notes due 2014 among the day's most active bonds, down more than ½ point to about the 89.5 level. The Park Ridge, N.J.-based care rental operator's 10½% notes due 2016 were also busily traded, down 1¼ points, around the 87 area. At another shop, the 8 7/8s were seen off more than 2 points at 89 bid. Yet another trader pegged those bonds at 88.5 bid, 89.5 offered, and called that a 2 point loss.

Blockbuster up as Circuit City adventure ends

A trader saw Blockbuster's 9% notes due 2012 at 84 bid, 85 offered, up several points, as the company abandoned its efforts to buy Circuit City Stores for more than $1 billion. Another trader called the bonds up 2 points on the session at that same 84 bid, 85 offered level.

At another desk, a market source saw the bonds having risen to 84.5 from a prior 81-82 context.

Blockbuster had surprised many observers earlier this year when it said it wanted to buy Circuit City for around $1 billion. While Blockbuster said that purchasing the electronics retailer was a well-planned strategic move that would allow it to have a hand in providing both video content and the hardware that such movies, TV programming and other entertainment fare would be played on, giving it a marketplace advantage, some analysts considered it at best a long-shot wild goose chase. They noted that in the current tighter credit market environment, Blockbuster would have a hard time raising the $1 billion it would need to swing the deal, and said the acquisition wouldn't really help it regain market share lost in recent years to upstart alternative content providers like Netflix Inc. They also pointed out Circuit City's own substantial problems, such as its own loss of market share in recent years to rival retailers like the larger Best Buy electronics chain, and to Wal-Mart Stores.

Chesapeake gains on joint venture deal

A trader saw Chesapeake Energy's 6 7/8% notes due 2016 up a point at 96 bid, 97 offered, following the Oklahoma City-based independent oil and gas exploration and production company's announcement that it will jointly develop its Haynesville shale natural gas field, which stretches from eastern Oklahoma and Texas and into northwest Louisiana, with Plains Exploration & Development.

At another desk, a market source saw Chesapeake's 7¼% notes due 2018 up a point at 98.25.

Plains Exploration's bonds, meantime, were easier, given the amount of money that the Houston-based operator will be laying out over the next few years. Its 7 5/8% notes due 2018 were down ½ point to 98.5 bid, 99.5 offered, while its 7% notes due 2017 eased to 95.75.

Under the terms of the deal, Chesapeake will sell a 20% stake in the shale field leasehold to Plains for $1.65 billion in cash. Plains will also finance half of Chesapeake's share of the drilling and completion costs for future wells in the area over a period of several years, until another $1.65 billion has been paid.

James River hangs in despite coal collapse

Elsewhere in the energy patch, coal-company shares slid badly on Wednesday as coal prices - swollen by a months-long run up - underwent a correction, with the fuel's price falling about 20% on European and U.S. markets to under $200 a ton. Despite that debacle, a trader saw James River Coal Co.'s 9 3/8% notes due 2012 at 99.5 bid, 100.5 offered, saying they "held up pretty good - I would have thought they would get crushed" amid the general downturn in coal-mining stocks on Wednesday.

However, another market source saw those bonds at 97 bid, down a point or two from recent levels.

Separately, a trader saw Massey Energy Co.'s 6 7/8% notes due 2013 down 1 point to 96.5 bid, 97.5 offered. Another saw the bonds at 97, off slightly more than a point. Besides the pullback in coal prices, the first trader noted big legal problems facing the Richmond, Va.-based coal operator, which is the defendant party in several large pollution-related lawsuits - including one in which its insurance carriers say they are not liable for any damages the company incurs, claiming that the policy language specifically excludes such cases from coverage.

Massey might have to pay $125 million in compensatory damages - more than half its estimated 2008 net income - should it lose the case arising out alleged groundwater contamination at a company mine in Rawl, W.Va. - and it might also face punitive damages in the case of as much as $1 billion.

Massey's NYSE-traded shares plunged by $17.47, or 18.92% Wednesday to $74.87. Volume of 11.9 million shares was almost three times the norm.

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