Enron bounces despite downgrade; Adelphia up on ABIZ plans; ResCare sells $150 mln

By Paul Deckelman and Paul A. Harris

New York, Nov. 8 - Moody's Investors Service downgraded the embattled Enron Corp. Friday, but the Houston-based energy marketer's bonds headed back up as it appeared to move closer to clinching an investment/takeover deal with rival Dynegy Inc. Adelphia Communications Corp. rose despite a wider third-quarter loss, as it outlined plans to spin off its unprofitable Adelphia Business Solutions telecommunications unit and disclosed that it had raised nearly $1 billion via stock and convertible offerings.

In primary market activity, ResCare Inc. met with a good reception for its offering of $150 million of seven-year senior notes (B2/B).

The debt, via joint bookrunners Lehman Brothers and UBS Warbug, priced at par to yield 10 5/8%, compared to talk of 10 5/8%-107/8%.

"This deal priced at the tight end of talk and the book was significantly over-subscribed," one syndicate source commented.

Another primary market source told Prospect News that the Louisville, Ky.-based provider of services to special needs individuals was a challenge to investors because it involves a "story" that is not all that easy to tell.

"What sector do you relate this one to?" the source asked rhetorically.

"If a credit like ResCare gets done, it is a sign that the high yield market is healthy and that investors are starting to become open to different stories - even if those stories involve single-B credits."

Terms emerged Friday morning on the Sonic Automotive, Inc. $75 million add-on to its 11% senior subordinate notes due Aug. 1, 2008. According to market sources it priced late Thursday at 100.5, at the tight end of talk.

Sonic was the third drive-by deal to scoot across the primary market finish line during the week of Nov. 5: two chemical credits - ISP Chemco and Resolution Performance Products - each priced $75 million add-ons to existing paper.

Numerous sources commented that the high yield primary is presently well-primed for such rapidly developing issuance to hit the block: marketing costs are low and demand for the specified credit is an established fact well before the deal materializes, the sell-siders told Prospect News.

"We're trying to get some issuers to do some add-ons," one investment banker said Friday. "We're trying to get them to hit the market while it's hot.

"Accounts have so much cash," the source continued, "a lot of the recent issues are trading at levels of 107 and 108. We figure if we could bring add-ons to deals like that maybe we could have some success."

The week ahead, abbreviated by the Monday celebration of Veterans Day, may see some more of these drive-by deals, sources say.

In addition, issuance that is scheduled to price during the week of Nov. 12 includes Chesapeake Corp.'s £90 million of 10-year notes (B2/B+), via Credit Suisse First Boston, scheduled to price Tuesday. Price talk of 10%-area emerged Friday.

And Compass Minerals Group $200 million of 10-year notes via joint leads Credit Suisse First Boston and J.P. Morgan, which is still on the road, is scheduled to price on Friday.

Also there are rumors that deals from Majestic Investor Holdings LLC ($140 million) and Global Auto Logistiques S.A. (€100 million) could finally emerge during the week of Nov. 12.

And players on all sides of the table advise Prospect News to stand by for surprises.

In the secondary Enron, which has been bouncing around all week, continued to hold the attention of high yield traders, despite its still-nominally investment grade status.

That status appeared shakier Friday as Moody's downgraded the company's bonds from Baa2 to Baa3 - the last step before officially becoming a junk bond - and said its ratings remain under review for a possible future downgrade.

Friday's market action repeated a pattern seen Thursday, when Enron's bonds had gyrated wildly, as the company first confirmed that it was in talks with Dynegy, which could lead to a big equity infusion or even a bailout, but then announced that it would restate its earnings for the past four years and for most of this year at lower levels, adding that several heads had rolled in the executive suite. After having traded as high as about 87 bid, they closed around the 80 area Thursday.

The volatile activity in the credit continued Friday; a trader said, for instance, that Enron's 7 7/8% notes due 2003 had traded as low as 68 bid/70 offered before jumping back up to around the 80-85 level, an intraday swing of at least 15 points.

"Everyone's just watching Enron move around," a distressed-debt trader noted. "It's a real roller coaster." He said his shop had "seen a guy offering the bonds at 72, and we tried to buy them with a 75 top - and the next thing we knew they were 85-87."

Yet another trader saw the 7 7/8% notes having pushed up to around 84 bid/87 offered, while Enron's 9 1/8% notes due 2003 were around 85 bid/86 offered just before the junk market closed up shop in an abbreviated session ahead of the Veterans Day holiday (The Bond Market Association recommended a 2 p.m. ET close on Friday and a full closure of the debt markets Monday, although stocks will be in session).

The language in the Moody's downgrade was ominous, as the ratings agency cited the company's "reduced financial flexibility," a "substantial loss of investor confidence," "significant debt maturities over the near term" and "increased risk for debtholders". But the trader said the bonds actually rose on news of the downgrade - because it wasn't more severe.

"There were rumors that if Moody's downgraded them to junk, Dynegy was pulling out of the deal. Moody's left them one notch above, and it looks like the deal's probably going to get done. Chevron (oil major Chevron Texaco Corp., which owns 27% of Dynegy) is included, which adds more credibility to the deal. When Moody's left (Enron) investment grade, the bonds spiked up."

Beyond confirming that they are in talks, Dynegy and Enron declined to disclose any information about what shape a deal might take until early evening Friday when a merger was officially announced. Under the deal, each Enron will be exchanged for 0.2685 Dynegy shares. (Dynegy stock closed at $38.76 and Enron's at $8.63 so at those levels Enron holders will receive $10.41 worth of Dynegy stock) Dynegy will provide an immediate $1.5 billion asset-backed equity infusion and Chevron invest a further $2.5 billion in Dynegy. Dynegy's current shareholders will own 64% of the combined company and Enron's shareholders 36%.

Enron, once a high-flying energy marketer, was brought down to earth by falling energy prices and allegations of possibly improper dealings which caused the Securities and Exchange Commission to recently begin a full-scale investigation and which led to the recent ouster of the company's former chief financial officer. On Thursday, as it announced the restatement of its earnings going all the way back to 1997, the company announced the firing of its treasurer and its general counsel. The company's troubles have caused its shares to plunge from 52-week high levels near $85 per share early in the year to current levels around $9; its bonds, formerly trading near par and quoted on a spread-vs.-Treasuries basis, as investment-grade issues normally are, currently are well below par and are quoted in dollar prices, like junk bonds. High yield desks are now actively quoting the bonds and there have been predictions they would go to the junk players if either Moody's or Standard & Poor's (which currently rates Enron bonds at BBB) were to drop them any further.

Elsewhere, Adelphia Communications bonds were up, even as the Coudersport, Pa.-based cable and telecommunications operator reported that its third-quarter net loss widened to $267.2 million ($1.54 per share) from $145.4 million ($1.06 per share) a year earlier.

But everything else seemed to be coming up roses for Adelphia, which has built itself into the fifth-largest U.S. cable operator over the past three years via a series of acquisitions. Revenues for the latest period rose to $898.6 million from $727.9 million a year earlier, while, more importantly from a bond-market standpoint, EBITDA rose to $357.1 million from $280.3 million (earnings before interest, taxes, depreciation and amortization is considered a key bond market measure of a company's cash-flow generation capacity and ability to service debt).

A trader saw the 10¼% notes due 2004 going from Thursday's 97.5 bid/98.5 offered to 100.5 bid/101.5 offered Friday, while another desk had the recently issued 10¼% senior notes due 2006 at par, up 2¼ points. The trader said what had really given that paper its boost was the announcement that Adelphia's board had authorized the spin-off to its stockholders of its 79% stake in Adelphia Business Solutions Inc. by March 31. The unit, formerly Hyperion Telecommunications, has never turned a profit and will now by forced to sink or swim on its own in a perilous environment for start-up telecom companies, although Adelphia said it may provide a going-away gift of as much as $100 million of further support for the company.

Adelphia Communications' own 12% bonds, meanwhile, "were sucking wind," the trader said, languishing down around a penny on the dollar.

Adelphia also announced Friday that it had raised between $900 million and $1 billion, selling 30 million shares of common stock to the public at $21.50 per share, while selling an additional $300 million of convertible preferred stock, $50 million of it to the controlling Rigas family. Total net proceeds of some $907 million will be used to repay bank debt.

The two-session rebound in American Tower Corp. bonds (which had fallen sharply earlier in the week when the company reported a wider-than-expected third-quarter loss and projected more of the same for the fourth quarter) came to an abrupt end on Friday, after Standard & Poor's cut its senior unsecured debt rating to B- from B previously.

S&P said it downgraded the Boston-based telecommunications antenna tower company's ratings because its network services and Verestar business units "remain weaker than previously expected" on reduced cash flow.

American Tower's 9 3/8% notes due 2009, which had bounced back up over the previous two sessions to around the 80 level from Tuesday's post-earnings lows of 72, were heard quoted Friday afternoon around 78.5 bid/79.5 offered.

On the upside, a trader said he heard retailers' paper, particularly Kmart Corp., was better, as were airline issues, particularly troubled carrier giant United Airlines and Northwest Airlines, but he offered no quotes.

Overall, market activity was quiet ahead of the three-day bond market holiday. There was little perceived response to the news that $188 million more came into high yield mutual funds than left them during the week ended Wednesday, according to market participants who track the weekly fund-flow statistics released by AMG Data Services. The numbers are considered a reliable barometer of overall market liquidity trends. It was the fourth straight weekly inflow figure, as the market recovered liquidity throughout most of October and early November, after having suffered massive bleeding totaling more than $1 billion in the several weeks immediately following the Sept. 11 terrorist attacks. In the week ended Oct. 31, inflows had totaled $37.8 million.

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