Allison Transmission prices another new deal; GM continues rise; Trump gains, housing eases

By Paul Deckelman and Paul A. Harris

New York, Oct. 12 - For the second time in as many days, Allison Transmission Inc. tapped the high-yield market for more than half a billion dollars, hurriedly pricing a companion issue to the $550 million of new eight-year bonds which it sold on Thursday and which moved up solidly when freed. The second tranche of new bonds - PIK toggle notes rather than cash pay - were seen having moved up modestly in aftermarket trading, while the cash-pays held onto to their hefty initial gains.

Elsewhere in the new-deal arena, CDW Corp. was heard getting ready to shop a nearly $2 billion 2-part mega-deal, which could come to market at the end of this month or the beginning of next.

In the secondary market, General Motors Corp. - by the way, Allison's corporate parent ahead of the LBO - continued to firm, riding the momentum seen yesterday on the news that its unionized workers had okayed a new contract which allows the automotive giant to cut some significant costs. Bonds of its 49% owned GMAC LLC financing group were seen mixed, in active trading.

Housing bonds "were getting roughed up," a trader said, with Tousa Inc.'s notes pushed downward, giving up whatever gains the Hollywood, Fla.-based homebuilder had notched earlier in the week. But Beazer Homes USA Inc. was seen little changed on the session, unfazed by not-unexpected ratings downgrades from Standard & Poor's and Fitch Ratings.

A trader saw Trump Entertainment Resorts Inc.'s bonds better, though on "no news" and not much trading volume.

Overhang shrinks again

During the Friday primary market session underwriters continued to tackle LBO-related hung bridge loans.

One day after completing the sale of a $550 million tranche of eight-year senior cash-pay notes from Allison Transmission, underwriters returned to price a $550 million tranche of eight-year senior toggle notes (Caa1/B-) at par to yield 11¼%, 25 basis points behind the cash-pay notes.

There was no official price talk. However market sources told Prospect News on Friday that unofficial guidance was 11¼% to 11 3/8%.

Citigroup, Lehman Brothers and Merrill Lynch & Co. were joint bookrunners for the Rule 144A for life notes.

The notes were part of an overall $1.1 billion of bond financing backing the acquisition of the company by Carlyle Group and Onex Corp. from General Motors Corp.

Hence the entire bond portion of the Allison Transmission deal clears the market just one day after underwriters succeeded in taking out the remaining $217 million of Biomet, Inc.'s $2.565 billion high yield bridge loan.

Right as the Allison Transmission terms were circulating the market, late Friday afternoon, one sell-sider observed that the LBO risk overhang remains substantial, but added "It's not a bad primary market.

"The demand is there, but it's not unlimited," the sell-sider continued.

"The mistake would be for underwriters to bring too much of the hung debt at one time."

Earlier in the day, an investment banker said that the risk backlog is starting to clean itself up, and mentioned not only the Allison Transmission and Biomet deals, but also Bausch & Lomb, which is on the road with a junk bond deal, and First Data Corp. which, according to sources, could be in the market with the cash-pay notes portion of its financing before the end of the coming week.

"A month ago people were not expecting things to play out this way," the investment banker said, recalling the mid-summer freeze in the credit markets trailing a dramatic decline in the value of subprime mortgages.

"The Fed rate cut helped, but what also helps is that there are a lot of people out there with cash to put to work," the source said.

$4.27 billion week

With Friday's Allison Transmission deal clearing, the Oct. 8 week came to a close having seen $4.27 billion of proceeds raised in 10 dollar-denominated high yield tranches, making it the second biggest week since the market melted down in late June (the June 25 week saw $9.75 billion in 16 tranches).

A couple of market sources conceded that the clean-up of the Allison Transmission and Biomet bridges during the last part of the Oct. 8 week happened quicker, and perhaps more dramatically, than most observers thought possible just one month ago.

The explanations as to how these trades - which also saw investors taking out previously excoriated tranches of toggle notes - varied.

One high yield syndicate official said that junk bond portfolio managers have been seeing hung up debt price in the leveraged loan market around 95, and subsequently trade up toward par, which has succeeded in putting something of a luster on the junk market.

"Right now, without the CLO bid, the loan market is tougher than the bond market," the official added.

The official also said that the numbers currently point to an improving high yield market.

"Spreads have now tightened by 90 basis points off of their wides, and yields are 50 basis points lower," the official said.

"We're not close to the levels we saw in May, but we maybe never will get back there."

At Friday's close, year-to-date high yield issuance stood at $128.78 billion in 330 tranches, 28% ahead, on a year-over-year basis, of the $100.47 billion in 284 tranches which had priced by the Oct. 12 close in the record-setting year of 2006.

Throughout the latter half of the past week, sources said that 2007 appears poised to break the all-time issuance record of $156.63 billion in 396 tranches set last year.

The week ahead

Sources have also been telling the Prospect News high yield primary market desk that the new issue market is lately not operating in the accustomed manner in which prospective issuers take deals on the road.

In the present "bifurcated" primary market - which has lately been seeing quick-to-market "corporate" deals from well-known issuers who are principally refinancing debt, and "LBO" deals which feature underwriters attempting to offload risk related to hung LBO-related high yield bridge loans - much of the marketing is taking place in a "behind-the-scenes" fashion.

Underwriters are building up order books, securing "anchor orders" big enough to create the momentum needed to take deals over the top before they ever officially unveil the transaction, sources say.

That is part of the explanation for why there are presently so few deals on the road.

The Oct. 15 week gets underway with just three deals on investor roadshows.

All three are expected to price before the end of the week.

Underwriters are marketing the Bausch & Lomb $750 million three-part notes offering: a $400 million tranche of eight-year senior notes, a $175 million tranche of eight-year senior toggle notes, and a $175 million of 10-year senior subordinated notes.

The deal, which is being led by Banc of America Securities, is expected to price late week.

Elsewhere sources expect the US Investigations Services, Inc. (USIS) $440 million two-part offering to also price mid-to-late week.

The deal is comprised of a $250 million tranche of eight-year senior notes (Caa1/CCC+) and a $190 million tranche of 10-year senior subordinated notes (Caa2/CCC+).

Lehman Brothers and Banc of America Securities are joint bookrunners.

Finally, Indianapolis Downs, LLC, in conjunction with Indiana Downs Capital Corp., is expected to complete the roadshow on Friday for a $495 million two-part offering composed of $345 of million five-year senior secured notes and $50 million of six-year senior subordinated secured PIK notes.

Jefferies & Co. is quarterbacking that deal.

New Allisons move up a little

When the new Allison Transmission 11¼% PIK toggle notes due 2015 were freed for secondary dealings, a trader saw the bonds at 100.5 bid, 100.75 offered, up from their par issue price earlier in the session. Another trader saw them at 100.375 bid, 100.975 offered.

That stands in sharp contrast to the more than 3 point gains seen in the Allison 11% 2015 cash-pay bonds, which priced on Thursday at par and shortly thereafter shot up to trading levels around 103 bid, 103.5 offered. Those Thursday bonds were seen by traders hanging on to their gains into Friday.

GM gains continue

Among the established issues, Allison's pre-LBO parent, GM - which is in the process of selling the Speedway, Ind.-based automatic transmission manufacturer to private equity firms Carlyle Group and Onyx Corp. - continued to advance, with a trader seeing its benchmark 8 3/8% notes due 2033 up an additional ½ point at 93 bid, 93.5 offered.

The GM bonds have recently pushed back into the lower 90s after having languished at levels in the 80s, or even down in the 70s, since early in the summer. They've been given a boost back to respectability by recent improved sales figures for GM - sales up some 4% year-over-year in September - as well as the approval by members of the United Auto Workers union of a new four-year labor pact.

That accord not only ended a potentially ruinous national strike against GM almost as quickly as it began, but will end up saving GM carloads full of money in the long run by letting it cut its more than $5 billion of annual healthcare retiree costs through the establishment of a voluntary employee benefits association - VEBA, a special trust fund - which would go into effect in 2010. While GM will have to fund the trust at the outset, it will take over the company's currently unfunded retiree healthcare obligations - estimated at some $50 billion - allowing GM to clean up its balance sheet and perhaps lower its borrowing costs.

GMAC seen mixed

GM's 49% owned finance affiliate GMAC, meanwhile, was mixed. A trader saw its 8% notes due 2031 half a point better at 99 bid, par offered, while its 6 7/8% notes due 2012 were quoted by a market source up ¾ point at 95.5.

But another source told a different story, pegging the company's 7¼% notes due 2011 down ¾ point at 95, while its 6¾% notes due 2014 were down ½ point at 92.5. The source also saw its 7¾% notes due 2010 down nearly ½ point, around 99.

Housing continues to struggle

In the problem-plagued homebuilder sector, a trader saw Tousa's bonds down across the board, with its 8¼% notes due 2011 down a point at 63.5 bid, 64.5 offered, its 9% notes due 2010 down 1½ points at 64.5 bid, 65.5 offered, its 10 3/8% notes due 2012 lower by 5½ points at 16.5 bid, 17.5 offered, its 7½% notes due 2011 down by 5 points at 16 bid, 17 offered and its 7½% notes due 2015 off 4½ points at 15.5 bid, 16.5 offered.

Another trader said the homebuilders had been "roughed up," and Tousa had "given up its gains" of the past few sessions, its 10 3/8s trading as low as 17 and left at 16.5 bid.

The first trader saw Beazer Homes essentially unchanged despite ratings downgrades from S&P and Fitch.

Another said that Beazer "hung in there" at levels to which it had firmed on Thursday, after the Atlanta-based builder said that it would restate several years of financial results following an internal probe which discovered problems in its mortgage unit.

Trump gets upward bump

A trader said Trump Entertainment Resorts' 8½% notes due 2015 "caught a bid late in the day and traded up to "87 and change and were left bid a touch higher [from recent levels] on no news."

He noted that there were few trades in the issue, with the lack of liquidity magnifying the impact of the trades that did take place, declaring "$1 or $2 million bond trades can move markets." He also said that any move by Trump paper "you have to start thinking about potential takeout chatter" over the underperforming Atlantic City, N.J.-based casino operator, "increasing again."

'Quiet - even for a Friday'

Overall, a trader said, "it was another day of a sort of mixed market. It seemed we opened on the softer side, and it just kind of remained that way for most of the day."

He characterized the activity level as "pretty quiet - even for a Friday."

"If you have good, solid BB paper [out there] on the cheap, you have buyers for it. But I think a lot of people are somewhat frustrated with the way the market has moved so far so fast" in the last roughly one month, following the apparent easing of the subprime-induced credit crunch.

With bond prices having recovered some sizable part of the big losses notched in late June, July and August, "you're starting to see people dipping down into CCC" rated bonds they had previously shunned.

He said that retail names were firmer, following the release Friday morning of economic data showing an upturn in retail sales last month. "Those bonds moved higher by about a point or so."

He further said that at his shop, "we saw some bid lists and some small, cleanup-type stuff. But most people are sitting back and trying to see where the value is on the calendar."

A trader saw the widely followed CDX index of junk market performance up ½ point at 1001/2-100 5/8. The KDP High Yield Daily Index was up 0.06 at 80.57, while its yield tightened by 2 basis points to 7.69%. Advancing issues were about even with decliners.

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