Scattered activity as junk players head home for the holidays

By Paul Deckelman

New York, Dec. 24 - The junk bond market was not quite as quiet on Tuesday as Clement C. Moore's fictional home on Christmas Eve - where "not a creature was stirring, not even a mouse." But things were still pretty restrained overall, with the U.S. debt markets closing up shop at 2 p.m. ET ahead of Wednesday's holiday and even the stock market - which normally presses on till the usual 4 p.m. ET close on most holiday eves - ringing the closing bell at 1 p.m. ET.

But those official closing times are deceptive. With visions of sugar plums dancing in their heads - okay, maybe that's stretching the Christmas reference a bit - market participants who had to be there Tuesday came in early, did their business quickly and then split, many by noon ET.

Not that there was a lot of business to do.

"There was not a thing going on," said a trader at a usually reliably busy desk. "Kmart, Charter, nothing."

Elsewhere, a trader did see some slight interest in Kmart paper - but not in the troubled discount retailer's unsecured bonds. Instead, he saw offerings wanted in Kmart's structured paper - the securities backed by store lease payments and real estate, which he saw up four or five points from recent levels, despite a lack of fresh news on the Troy, Mich.-based discounter, now nearing the first anniversary of its plunge into bankruptcy.

"I don't know if it's because they have lease payments due Jan. 1, or they've been trading flat (i.e. without accrued interest), or whatever, but there's been tremendous demand for that paper," he said.

He said prices varied on the structured paper, depending on the coupon, the maturity and most of all, the underlying collateral, but much of it had recently been in the upper 30s and now was quoted in the low to mid 40s.

For instance, Kmart's 8.54% structured notes and 8.99% structured notes were both seen having moved up from around the 37-38 level previously, to 41-42 on the 8.54s and 43-44 on the 8.99s, both looking for offerings. He meantime saw the 8.80% structured notes go from the upper 40s, lower 50s a couple of days ago to about 58 bid.

"There's a whole different type of investor that's coming into our market now," the trader theorized, "not your traditional buyer. There were a lot of these real estate investors, REITS that are coming into this market."

But there appears to be little market for Kmart's plane-Jane unsecured junk bonds; with the whole retailing industry now expecting a softer-than-hoped-for holiday shopping season and Kmart dealing with its own specific troubles some observers believe that the first round of store closings, which shuttered 248 of Kmart's over 1,400 locations were insufficient and more stores will have to be closed to cut expenses down to manageable levels. As a result the unsecured paper "is going in the opposite direction" from the structured debt, falling to around 14-16 from prior levels in the lower 20s just a few weeks ago.

Elsewhere, he said, "people were looking for offerings all day" Monday and Tuesday on the bonds of another bankrupt junker, Bethlehem Steel Corp., linking the movement to speculation that Bethlehem may soon be taken over.

"I guess there was news out on Bethlehem Steel today, because it looks like it may be a merger candidate ."

The International Steel Group Inc., controlled by financier Wilbur Ross, has been doing due diligence on Bethlehem, hoping to buy the Pennsylvania-based steelmaker out of bankruptcy.

On Monday, ISG - which has already bought the assets of bankrupt and now-defunct steelers LTV Corp. and Acme Metals Inc. - announced a labor agreement with the United Steel Workers of America. That pact is subject to ratification by the rank and file, but ISG said that it would enable the company to cut its costs, and put it in a better position to borrow the approximately $1 billion it estimates it would need to buy Bethlehem, of which $900 million would go to Bethlehem's secured creditors.

Bethlehem chairman Robert S. Miller said in a statement that the ISG pact with the union "should help advance Bethlehem's discussions with the union as a necessary component to either a combination with ISG or as a viable, stand-alone company."

The trader saw "odd pieces of Bethlehem's 10 3/8% notes - a hundred, 200 bonds - were trading as low as six or seven [cents on the dollar] flat, but there was a very sizable bid going around at 10 or 11. "

Last week, the decision by the federal government's Pension Benefit Guaranty Corp. to terminate Bethlehem's badly underfunded pension plan and take over running the plan was seen as a possible complicating factor in Bethlehem's hopes of being bought by Ross, since it was thought that some long-time employees who were in line to be offered buyouts as a way of cutting long-term costs would now balk, since they would likely receive lower pensions. Bethlehem said that development - which the company had opposed - was just one factor, and it was continuing its talks with Ross' company.

Another bankrupt junker settling its affairs with the federal pension agency is Laidlaw Inc., which announced that it had orally agreed to resolve the claims of the PBGC regarding the pension plan for Canadian-based Laidlaw's Greyhound U.S. intercity bus unit, subject to negotiation and execution of a definitive agreement.

Laidlaw said that the terms of the agreement, in essence, provide for it to contribute an aggregate amount of $150 million to such Greyhound U.S. pension plans, in excess of minimum contributions.

The trader said that since "it looks like Laidlaw gave them money for their pension liability," Greyhound bonds - which had been quoted in the 68-69 range - had moved up to the 75-6 range, although in very light trading.

"I don't know if [Greyhound] is a sale candidate, but the bonds just went up," he said. Meanwhile, Ontario-based waste and transportation operator Laidlaw's own bonds continued to languish at a deep discount to the Greyhounds, at around 46-8, while "there's a lot of scrambling around" for Greyhound bonds.

"Whether that continues when the rest of the marketplace comes back or whether this is just someone trying to push the stuff up [given the thin trading conditions], who knows?

But it seems like all of the investors had just three names they wanted to see today - Kmart structured, Greyhound and Bethlehem."

Elsewhere, little or no follow-up activity was seen in the bonds of Qwest Communications International Inc., whose Qwest Finance Corp. holding company bonds had firmed smartly on Monday upon the completion of the Denver-based telecom operator's controversial debt swap, which succeeded in taking out about $1.9 billion face amount of existing bonds.

Monday's other big mover, Charter Communications Holdings, bounced a bit Tuesday after having suffered a sell-off Monday on news of further turmoil in the St. Louis-based cable operator's executive suite, with the CFO and chief operating officer sacked amid the ongoing federal probe of the company's accounting. The bonds had also fallen as Charter warned that fourth quarter revenue growth would be at or near the low end of its prior revenue guidance of 8 to 9%, while fourth quarter operating cash flow would be less than previous guidance.

But Charter's 8 5/8% notes due 2009, which had fallen about four or five points in response to those disclosures got about a point of that loss back on Tuesday, firming modestly off its lows to end at 46 bid.

Premcor Refining Group Inc.'s 8 7/8% notes due 2007 were quoted up four points in very light dealings to 92 bid; the energy refiner had filed plans with the Securities and Exchange Commission to raise $287.5 million via a stock sale, with a portion of the proceeds slated to refinance some debt of its subsidiaries, and the bulk earmarked for financing Premcor's purchase of a Memphis refinery from The Williams Cos.

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