MedQuest bonds jump on buyout news; Thornburg gets crushed; GE Plastics deal to be restructured

By Paul Deckelman and Paul A. Harris

New York, Aug. 13 - The junk bond market was seen having a somewhat better tone to it Monday, although with not much real activity going on, as the market took a breather from the intensity seen last week, when junk advanced, fell back amid a general market debacle and then seemed to steady.

Traders said that the big story of the day was clearly MQ Associates Inc.'s announcement that it has entered into a definitive merger agreement to be acquired by Novant Health for $45 million in cash at closing, and contingent consideration in an amount up to $35 million based on the Alpharetta, Ga.-based medical diagnostic imaging company's adjusted EBITDA during the 2008 fiscal year. That pushed MQ's own bonds and those of its MedQuest Inc. operating subsidiary sharply higher, in heavy trading.

Going the other way, meanwhile, was Thornburg Mortgage Inc., hurt by its difficulties in accessing the capital markets in the wake of the general credit tightening that has come from the subprime mortgage lending debacle - even though Thornburg itself is far from a subprime lender.

Beazer Homes USA's bonds were seen better, even though the troubled Atlanta-based homebuilder said Friday that it would delay its 10-Q report after an internal audit disclosed possible accounting irregularities.

A high yield syndicate official said that the broad market on Monday was perhaps up a little and just now seems "relatively resilient."

However, the official added, secondary market volumes are "muted," so that there is not a good sense of the present depth of the market.

The source also said that junk was up last week, and attributed the strength to possible short covering as well as to investors seeking value in securities that have may be oversold.

The official also made reference to an extremely quiet primary market, stating that the market looks a little better every day that passes with no new supply.

Sabic downsized, restructured

Indeed there was no "new supply" from the primary market on Monday.

The sole piece of news from the new issue market involved the biggest of a trio of deals believed to still be in the pre-Labor Day market.

And although the Sabic Innovative Plastics Holding BV bond deal remains the biggest, it will not be as big as the deal that was launched.

Sabic's offering of eight-year senior unsecured notes has been downsized and restructured, and is expected to clear the market comprised mostly, or perhaps totally, of dollar-denominated notes.

Meanwhile the bank loan has been upsized.

All of the debt is expected to be placed by early next week.

On Monday S&P affirmed a B+ rating on "the proposed reduced $1.5 billion senior unsecured notes due in 2015."

An informed source would neither confirm nor deny the size of the bond offering specified in the S&P release, but said that details are expected to surface on Tuesday morning.

The bond deal initially came to market as a $2.765 billion equivalent offering of eight-year notes in tranches of $1.95 billion and €590 million.

Citigroup, ABN Amro, GE Capital and HSBC are joint bookrunners.

Proceeds will be used to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic) for $11.6 billion including the assumption of liabilities.

Eyes on First Data deal

Again on Monday market sources were discussing the coming First Data Corp. $8 billion high-yield bond deal.

One sell-side source who is not among the bookrunners said that the buzz in the market is that the deal is coming during the second week of September, and added that the underwriters are "quietly telling people about the bonds."

The $8 billion junk offering is part of the financing for the LBO of the company by Kohlberg Kravis Roberts & Co.

The deal, via Citigroup, Credit Suisse, Deutsche Bank Securities, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch, with others expected, is comprised of $5.5 billion of senior unsecured notes and $2.5 billion of senior subordinated notes.

This sell-sider asserted that it is extremely unlikely that the bond deal will clear the market as it was originally contemplated, but added that First Data's $14 billion term loan is in worse shape than the bond deal because the bank loan market, with the CLO bid "drastically reduced," is in worse shape than the junk bond market.

"KKR could help," the sell-sider asserted, declining to speculate whether KKR is likely to do so.

Hearing this thesis, a source close to the deal stated that it would not go forward "until it works," and added that the underwriters are prepared to "hold the risk if necessary."

Holding the risk

Indeed, some would assert that the story of the primary market since mid-summer is the story of underwriters holding risk in the form of bridge loans that needed to be funded because bonds could not be placed and leveraged loans could not be syndicated.

In the most recent issue of Leverage World: The Weekly Publication of High Yield Strategy, Martin Fridson writes that an estimated $300 billion of financing commitments to LBOs - "with terms promised to sponsors that are nonstarters in today's market" - comprise "a major obstacle to full-blown revival" of the leveraged loan market.

"Hedge funds that have managed to remain flush are ready to buy the hung (bridge loans) at knockdown prices," Fridson asserts.

"That would clear the decks, permitting new buyouts to be negotiated at the new levels, ultimately generating fresh loan supply. The banks are cagey about their plans, though. Some may take hits on selected bridges and hold on to others for a while, betting that their present price exposure will not evolve into much more worrisome credit exposure. The drawback to this approach is that as already observed (last) week, underwriters are inclined to choke off incipient rallies by putting out large bid lists of their inventory. That behavior could push off a sustained recovery for quite a while."

Mixed performance, restrained action

Bonds were seen mixed on the day according to major performance indexes. A trader saw the widely watched CDX index "up in the morning, then down in the afternoon," finally ending off ¼ point at 94 1/8-94 3/8. However, the Banc of America High Yield Broad Market Index advanced 0.14% on the day, to a 0.53% gain on the year. The KDP High Yield Daily Index gained 0.15 on the day to end at 78.27, although it remains well below its 52-week high at 82.63.

"It was a pretty slow Monday." one trader observed, while another agreed that there was "not a ton [of stuff] going on."

MedQuest zooms on M&A news

One area where there certainly was "a ton" going on was in the bonds of MQ Associates and MedQuest, which shot up on the news that it the company agreed to be acquired by Novant Health. MQ said that the transaction will result in a change of control under the terms of the indentures for MQ Associates' 12¼% senior discount notes and MedQuest, Inc.'s 11 7/8% senior subordinated notes, both due 2012.

A trader quoted the latter bonds up 23 points on the day at 98 bid, 99 offered, versus their prior levels in the mid 70s.

"It was a huge jump," he said. "We thought you'd see it up a couple of points - but 23 points? Well."

Another trader saw the parent company's zeroes jump 60 points on the session to 82 bid, from prior levels around 22.

Another trader, noting the 23.5 point gain in the 11 7/8s, observed that purchaser Nonant is a AA rated company, and such a combination would clearly benefit MedQuest.

A market source indicated that there had been heavy trading in the 11 7/8s around the par level, moving in a range of around 97 to 101, up from a 75ish level last week, while trading in the zeros was considered active, moving in a narrow range between 81 and 86, well up from levels in the low 20s pre-news.

Thorny path for Thornburg

Traders said that Thornburg Mortgage's bonds were on the slide for a second consecutive session on Monday, with one characterizing the Santa Fe, N.M.-based residential lending company's 8% notes due 2013 as "continuing very sloppy," down a whopping 10 points on the day to 72 bid, 75 offered. That came on the heels of a 7 point drop on Friday, the trader said.

Another trader said that the bonds traded at 74 bid, well down from Friday's levels in the mid- 80s, but said "it's hard to make markets in it."

Thornburg's NYSE-traded shares plummeted $3.78 (20.93%), to finish at $14.28, a new 52-week low. Volume of 13.1 million shares was almost nine times the norm.

The ironic thing was that Thornburg was seen having been hurt by investor angst over the continued troubles of the mortgage industry, with problems of the subprime lending sector having apparently spread into other facets of the business, hurting companies like Thornburg - even though it's not even in that subprime lending business.

Bear Stearns & Co. analyst David Hochstim said in a research note that the credit crunch was having a notable negative impact on the company - "despite the fact that Thornburg has executed well on its strategy to underwrite, purchase, and hold extremely high quality assets."

He said that "it appears lenders are not differentiating" among mortgage products," - and thus "Thornburg may be getting very little credit for its careful management of credit risk."

Beazer better despite filing delay

While the fallout from the subprime lending meltdown has also hit high yield homebuilder credits such as Beazer Homes, several traders said they saw better levels in Beazer's bonds - though they added that this was before Moody's Investors service indicated that it might downgrade the troubled Atlanta-based homebuilder in the wake of its announcement Friday that possible accounting irregularities would cause it to delay the filing of its fiscal third-quarter financial reports.

A trader quoted the company's 8 5/8% notes due 2011 as having firmed to 83.5 bid, 85.5 offered, up from prior levels around 82 bid, 84 offered, while at another shop, a trader called its 8 3/8% notes due 2012 up 2½ points at 83 bid, 84 offered, and pegged its 6½% notes due 2013 up a deuce at 78 bid, 79 offered.

But at another desk, Beazer's 2011 bonds were seen having fallen as low as 78.85 late in the day, down more than 3½ points, in active trading.

Beazer's New York Stock Exchange-traded shares meantime plunged $2.85 (18.76%) to end at $12.34. Volume of 4.6 million shares was somewhat above the usual 3.8 million-share average daily handle.

After the markets had closed, Moody's said it had placed all of Beazer's ratings under review for downgrade, including its Ba2 corporate family rating, Ba2 probability of default rating and Ba2 rating on its senior notes, citing the delay in filing the third-quarter 10-Q report.

Earlier, Fitch Ratings said it downgraded Beazer's issuer default rating to BB from BB+, and cut its junior subordinated debt to B+ from BB-, while also putting its ratings on rating watch negative for a possible further downgrade.

Traders did not see much else happening in the homebuilder sector, with one noting that he had not seen "even one trade in Hovnanian [Enterprises Inc.] all day," and was equally removed from seeing anything doing in WCI Communities Inc.

However, he did see good levels on Ply Gem Industries Inc.'s bonds after the building materials maker reported positive numbers. He saw its 9% notes due 2012 up as much as 7 points on the day at 85 bid, 86 offered, although at another desk, those bonds were seen up around 4 points on the day at 83.5.

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