Pathmark bonds dive on lowered guidance; Grant Prideco hits road with seven-year deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 13 – Pathmark Stores bonds and shares were sharply lower on Wednesday as the supermarket chain cut its third-quarter earnings outlook, citing weaker-than-expected economic conditions.

In the primary market, the purposeful pace continued as Grant Prideco, Inc. was heard by syndicate sources to be ready to take to the road to market its upcoming $175 million issue of seven-year notes. And price talk was heard on a pair of upcoming deals.

After being positioned for several days on the shadowy fringe of the forward calendar, Grant Prideco announced a Thursday start for the roadshow to market its $175 million of seven-year senior notes (Ba3/BB) via Deutsche Bank Securities Inc. The Houston-based provider of oil and gas equipment and services expects to price its Rule 144A deal on Nov. 25, according to a syndicate source.

Columbus, Ind. truck engine maker Cummins Inc. talked its first-ever junk bonds – $200 million of eight-year senior notes (Ba2/BB+/BB-) – at 9½%-9¾%, with pricing set for Friday afternoon via Salomon Smith Barney and JP Morgan.

Meanwhile Waco, Tex. waterworks company National Waterworks Inc. issued price talk of 10½%-10¾% on its $200 million of 10-year senior subordinated notes (B3/B). Goldman Sachs & Co. and JP Morgan are joint bookrunners and UBS Warburg is co-manager on the deal, proceeds of which will be used to fund the LBO of the assets of U.S. Filter Distribution Group Inc. from U.S. Filter Corp. (a subsidiary of Vivendi) by JP Morgan Partners and Thomas H. Lee.

One buy-side source who communicated with Prospect News on background Wednesday forecast fair weather for Cummins as well as National Waterworks.

“Both will get done because there’s a lot of cash around,” the source commented. “Cummins seems OK for what it is. That is, it has decent ratings and will follow the economy.

“National Waterworks will get done because there’ll be a good coupon and on its face it is a decent little business.

“But it’s little,” the investor added. “So there’s going to be a liquidity premium” (Prospect News wondered, late Wednesday, whether the pun was intended and suspected that it was).

At the close of Wednesday’s session one sell-side official assayed primary market activity thus far in November and characterized it as “moderate” as opposed to “frothy,” but added that the current pace –given the apparent stability that lately seems to have settled over the equity markets – might be sustainable through the end of 2002.

“We expect the calendar to be pretty busy,” the official said. “There is about $2 billion on the calendar right now, $750 million of that being the Donnelley deal which is next week’s business.

“There are about four weeks left for the year if you throw out the Thanksgiving week. From what we’re hearing on the Street the present pace could hold up right through that period.”

Generally in conversations with Prospect News Wednesday sources on both the buy and sell sides sounded optimistic notes. Citing factors that range from a strong high yield secondary market and the apparent stabilization of equities to last week’s Fed rate cut and the return of business-friendly Republican lawmakers to Capitol Hill, sources reported that issuers are definitely getting a better deal now than they would have gotten just a few weeks ago.

As evidence of the improved tone, two sell-siders told Prospect News that Allied Waste, which had been consigned to the dumpster of fixed-rate debt securities in September, was speedily spiffed up by investment bankers as the week of Nov. 11 got underway so that investors found it quite presentable.

“The market is doing extremely well,” one sell-side source told Prospect News on Wednesday, pointing to recent upsized, par-pricing, tight-end-of-talk transactions from Owens-Brockway Glass Container Inc. (Nov. 5) and AmerisourceBergen Corp. (Nov. 12).

“The issuers actually have a little bit of leverage given how well the secondary market has been performing,” the sell-side source said.

However, the official added, nowhere has the market’s health seemed more evident than in Tuesday’s pricing of Allied Waste North America, Inc. $300 million of 10-year senior notes (Ba3/BB-) at par to yield 9¼%, via Credit Suisse First Boston and Deutsche Bank Securities.

“Their senior debt was trading at 9% in the secondary market when the deal priced Tuesday and they tried to bring the new deal right on top of that,” the sell-side official said, adding that it became necessary to widen somewhat to bring in enough investors. But in comparison with transactions that happened (and some that did not happen) in the run-up to Halloween, an additional 25 basis points pales.

And both of the sell-side officials who mentioned Allied Waste during Wednesday conversations with Prospect News were quick to point out that less than two months ago, on Sept. 20, Allied Waste –stating its yearning for more stable conditions in the high-yield market – withdrew an offering of $250 million of 10-year senior notes (Ba3/BB-/BB-), then being talked at 9%-9¼%.

“They tried to come in September and didn’t get the deal done, but Tuesday they got $300 million done,” one official commented. “The market is definitely in better shape now than it was then.”

The new AmerisourceBergen Corp. 7 ¼% senior notes due 2012, which priced at par on Tuesday continued to hang in at the high levels to which they had moved later that session when they were cleared for secondary dealings, and went home Wednesday quoted at 101.25 bid/101.75 offered.

Meantime, Allied Waste’s new 9¼% senior notes due 2012, which also came to market at par on Tuesday, were quoted at 100.625 bid on Wednesday.

Back among already existing issues, Pathmark’ 8¾% notes due 2012 were “down significantly, even while the rest of the supermarket sector stayed firm,” a trader said, citing the Carteret, N.J.-based supermarket operator’s earnings warning. He saw the bonds, which had gone home on Tuesday trading at 88 bid/90 offered, as having fallen to 81 bid/83 offered by the end of the day on Wednesday.

“That was a disaster,” he declared.

It was also a debacle on the equity side of the ledger, with Pathmark’s shares swooning 98 cents, or 23.28%, to $3.23 in Nasdaq dealings, on volume of 1.6 million shares, more than four times the usual turnover.

The bonds and shares headed south after Pathmark said that it expected to post per-share results somewhere between a three-cent loss and a one-cent gain during the fiscal third quarter that ended on Nov. 2. That’s well below the company’s previous projections in the 9 to 17 cent per share range. Analysts have generally been looking for earnings of around 12 cents a share of the quarter. For the fiscal year ending this coming February, Pathmark lowered its forecast to a profit of between 42 and 52 cents a share, while Wall Street has been expecting 68 cents a share of earnings.

Of more interest to bondholders, Pathmark also lowered its EBITDA projections for the third quarter to between $37 million and $39 million, less than its previous guidance of $43 million to $47 million. Fort the full fiscal year, the supermarket chain likewise lowered its cash-flow expectations to $175 million to $180 million.

Pathmark CEO Eileen Scott said in a statement that “declining consumer confidence and weak economic conditions impacted consumer spending which affected our third quarter sales performance. These same conditions resulted in continued promotional activity within our marketplace.”

Scott projected that total sales for the quarter would be down 1%, and same-store sales at those outlets open at least a year would fall by 2.6%. For the fiscal year, total sales are expected to be off 1%, and same-stores down 1.5%.

“Their third-quarter numbers are down, their outlook is poor, and everything is poor,” said the trader, in speculating whether Pathmark – which only emerged from a Chapter 11 reorganization last year – might conceivably be in danger of a return trip, the way fellow New Jersey-based supermarket chain Grand Union became a “Chapter 22” reorganization repeater.

Certainly, even though the Pathmark bonds have heretofore held at fairly respectable levels, stock investors have already essentially given up on Pathmark, whose share price has fallen to its current low levels from above $26 just a year ago.

Also among the supermarket names, no activity was seen in the bonds of Fleming Cos., which announced that it had sold 28 of its Food4Less retail food stores in California to Save-Mart Supermarkets, for as much as $165 million. The sale is part of the Dallas-based wholesale grocery supplier’s previously announced plans to unload 112 underperforming retail supermarkets, allowing the company to use the proceeds to cut debt, while it concentrates on its core wholesale business.

Separately, Fleming announced after the market had closed that it has been informed that the Securities and Exchange Commission plans to conduct an informal inquiry into a number of matters related to Fleming, including previous media speculation regarding Fleming’s vendor trade practices, the presentation of second quarter 2001 adjusted earnings per share data in Fleming’s second quarter 2001 and 2002 earnings press releases, the company’s accounting for drop-ship sales transactions with an unaffiliated vendor in Fleming’s discontinued retail operations, and the company’s calculation of comparable store sales in its discontinued retail operations. Fleming said it would cooperate with the probe.

Elsewhere, junk market activity was limited, traders said.

“It was surprisingly quiet,” one opined, “a very quiet day. Yesterday [Tuesday] was very active, more active than I probably would have expected, and today was quieter. “

Most issues he said “feel better, “ citing such names as Williams Cos., El Paso Corp., Qwest Communications International Inc., Calpine Corp. and AES Corp, WorldCom, MCI .”You go through a lot of the big names, and they’re probably unchanged to up a point or so on some of the stuff, and you’d think on that kind of a day you’d have some activity but it was very, very quiet today.”

He marveled that “it wasn’t just here” at his own desk, joking that he wondered whether his phone wasn’t ringing because of something he had done – only to find when he called other shops that they also told him “‘we’re not getting called by anybody.’ It doesn’t seem like there’s a lot of things to do.”

He said that “one thing you’re seeing less and less of” with the junk bond market recently enjoying ample liquidity and showing some strength “is that you’re not getting a lot of activity guided by sellers. Most of the investment-grade accounts that wanted to puke the [fallen angel] stuff out have already done it. You just don’t have as much impetus from the sell side kicking paper out. Without those guys stirring it up it becomes a patience game.”

He saw WorldCom – which on Tuesday had jumped four or five points on speculation that Michael D. Capellas, newly resigned as Hewlett-Packard Co.’s president, was a likely candidate to assume the reins of power at the troubled Clinton, Miss.-based telecom operator – hanging around at the same 23 bid level it had grabbed Tuesday, “on a lot less volume.”

WorldCom “went up [Tuesday] and then just hit a wall,” said another trader who saw those bonds trading in the same 23-23.5 context. He saw the bonds of WorldCom’s MCI long distance unit bid around 46-47, up a point on the day.

Another troubled communications company’s bonds also were up Wednesday on market buzz that the company might be able to lure a high-powered executive from a giant investment-grade firm to come in and take command as it reorganizes.

Adelphia Communications Corp., like WorldCom, is currently mired in Chapter 11, driven there by revelations of massive corporate accounting fraud. It was said to be trying to lure not one, but two departing AT&T Broadband executives to Coudersport, Pa., to take over the shambles left after the ouster this spring of Chairman John Rigas and several of his family members from positions of power at the once high-flying cable operator. Rigas, two of his sons, and several other long-time Adelphia executives were later indicted on charges of having systematically looted the company of hundreds of millions of dollars, charges which they have so far all denied.

Adelphia was reported to have made offers to William Schleyer, chief executive of AT&T Broadband, and to Ron Cooper, its chief operating officer. Both men are scheduled to leave that company in the wake of its impending acquisition by Comcast Corp., a transaction which was formally approved Wednesday by the Federal Communications Commission.

News reports said that Schleyer has been offered the chief executive officer’s post at Adelphia and Cooper has been offered the post of chief operating officer. Adelphia declined comment on the story.

Adelphia’s 10¼% notes due 2011, which on Tuesday had pushed up to 34 bid/35 offered, got as high as 37 bid/38 offered during Wednesday’s session ,before dropping back a bit to end at 36.5 bid/37.5 offered.

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