AK Steel higher on Moody's upgrade; Northwest Air bounces; Boise Cascade slates two-part deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 4 - AK Steel Corp bonds were seen trading at firmer levels Monday, after Moody's Investors Service upgraded the Middletown, Ohio-based steelmaker's speculative-grade liquidity rating. Also heading skyward was Northwest Airlines Corp. bonds, recovering after having hit turbulence Friday in response to the news that the carrier's chief executive officer would soon leave the company.

In primary market activity, Boise Cascade LLC was heard getting ready to hit the road Wednesday with a new two-part bond offering

AK Steel's bonds "felt good," said a trader, who quoted its 7 7/8% notes due 2009 up half a point to a point, at par bid, 101 offered, while its 7¾% notes due 2012 were a point better at 98.5 bid, 99 offered.

At another desk, a market source saw the 73/4s having firmed to 99 bid from 97.5 earlier, while the 7 7/8s were half a point up at 100.5. He also quoted the company's 8 7/8% notes due 2008 at that same 100.5 level, also up half a point, while AK's 9% notes due 2007 were 1½ points better at 101.5.

The AK bonds rose smartly following Moody's announcement that it has upgraded the company's speculative-grade liquidity rating to SGL-1 from SGL-2, citing "the company's continued strengthening of its liquidity position, unused credit facility availability and Moody's expectation that AK Steel will be able to finance its operating and capital costs from internal cash flow and existing cash balances over the next 12 months."

Moody's pointed out that the new rating is supported by AK Steel's cash balances of $266 million as of June 30, principally reflective of proceeds retained from asset sales, net of the company's repayment of outstanding balances under its credit facilities and its redemption of the remaining $62.5 million in senior secured notes that were to come this December.

The ratings agency also noted "strong demand in the steel industry and improved prices," which it said has enabled AK to demonstrate "improving performance, despite pressure from raw material cost increases."

Moody's said that based upon current performance, it believes that AK Steel "may generate operating cash flow of $75 million to $100 million in 2004 and that the company could be break even to modestly positive on a free cash flow basis, after capital expenditures of roughly $100 million and likely cash payments for OPEB expense in the range to $140 million."

In a research note Monday, a brokerage house analyst opined that AK Steel's recent actions "have opened a maturity window until 9/15/07, when the 9% [notes] mature. Moreover internal cashflow is expected to provide for all operating and capital needs and probably generate a bit of incremental free cash flow."

His shop, he said "can see opportunity in at least the '07 paper due to the short maturity and improved liquidity."

Moody's and the debt analyst were not the only ones high on AK Steel on Monday; the company's shares shot up $1.10 (12.79%) $9.70 on the New York Stock Exchange, on volume of 5.6 million - nearly five times the norm - J.P. Morgan raised its earnings estimates and set a target stock price for the steel maker, citing positive contract prospects.

In a research note, J.P. Morgan analyst Michael Gambardella said "unprecedented contract renegotiations in Japan between steel makers and auto makers" were expected to have "a significant positive impact on AK Steel."

He said that not only would expiring contract prices rise, but also prices in contracts not due to expire at the end of the year. AK, he said, would also shorten the tenor of its contracts.

The analyst upped his 2005 earnings estimate to $2.10 per share from $1.70, added AK Steel to the bank's Equity Focus List, and established an October 2005 stock price target of $15.

Northwest rebounds

Elsewhere, Northwest Airlines - whose bonds had fallen back on Friday on the unexpected news that the Eagan, Minn.-based air carrier's chief executive officer, Richard Anderson, will leave Northwest to take a senior position at insurer United Health Group Inc., appeared to steady and rebound Monday.

Northwest's 7 7/8% notes due 2008, which were seen down about three points Friday to the 65 area, were being quoted Monday as having regained about half of that loss to end at 66.5.

A trader saw Northwest's 8 7/8% notes due 2006 "maybe half a point better," at 85.5 bid, 86.5 offered, while its 9 7/8% notes "bounced up a bit," firming to 76.5 bid, 77.5 offered from 75 bid, 76 offered Friday.

He attributed the gain in part to overall better investor sentiment about stock and bonds, as well as slightly lower oil prices versus Friday's stratospheric levels (world crude prices backed off the more-than $50 per barrel mark seen at Friday's close of trading, with a barrel of light crude closing Monday at $49.91, down 21 cents, on the New York Mercantile Exchange).

Northwest's 8¾% notes due 2012, a trader said, were "up a couple of points" to 88.5 bid, 90.5 offered, well up from prior levels at 86 bid, 88 offered.

Yet another trader quoted the company's 7 5/8% notes due 2005 "up pretty good" at 98.5 bid, 99.5 offered, up from 97.5 bid, 98.5 offered.

Sinclair bonds ride out forecast cut

Back on terra firma, the trader said that Sinclair Broadcast Group Inc.'s 8% notes due 2012 "were not affected," even as the Baltimore-based broadcaster announced that today that it was revising its net broadcast revenue estimate for the third quarter ended Sept. 30.

While Sinclair had initially forecast third quarter net broadcast revenues to be up 4% to 5% from third quarter 2003 net broadcast revenues of $161.3 million, it warned Monday that "due to weakness primarily in auto advertising spending and cancellations resulting from the recent hurricanes, which impacted eight of the company's television stations in the Southeast," Sinclair would revise its net broadcast revenue guidance to be $163.7 million in the third quarter.

Sinclair is scheduled to release final third quarter earnings results on Nov. 4.

Charter rises

Also in the communications area, market players saw Charter Communications bonds definitely firmer - despite a lack of hard news out about the St. Louis-based cable operator, other than the fact that Charter will hold a conference call on Nov. 4 to discuss third-quarter earnings.

"No I don't know the news" that would make the company' bonds trade better, said a trader who had exclaimed "oh, yeah, they were up - though why, I don't know."

He speculated that the gains might be linked to better investor sentiment on the Nasdaq, where Charter shares trade, or perhaps a renewal of the "Paul Allen to the rescue" speculation that periodically makes the rounds, positing that the billionaire high-tech investor and Microsoft co-founder will come in and take the company private, or buy up much of Charter's approximately $18 billion of debt, or otherwise throw the company - of which he is the principal owner - a lifeline. Such rumors have proved to be unfounded in the past - but hope springs eternal.

On Monday, he saw Charter's 8 5/8% notes due 2009 "a lot better" at bid levels in the 79-80 area, about 1½ points up.

Another trader saw those bonds at 79.5 bid, 80.5 offered and its 9 5/8% notes due 2009 at 80.15 bid, 81.5 offered, "a lot better than where they had been."

A market source elsewhere pegged Charter's 11 1/8% notes due 2011 up half a point on the day, at 82.5.

No deals price

No issues priced during the opening session of the Oct. 6 week, although the spotlight went up on a pair of acquisition deals, $650 million in two parts from Boise Cascade LLC and a single $420 million tranche from Dresser Rand Co.

Meanwhile market sources took note of the quiet that pervaded most of the Monday primary market session.

One source attributed it in part to the Deutsche Bank Global High Yield Conference that is taking place this week in Scottsdale, Ariz.

Two for the road

A forward calendar that thinned considerably in the wake of the $2.460 billion and €275 million that priced last week took aboard a couple of new passengers on Monday.

Both are acquisition financings that begin their roadshows on Wednesday, and both figure to price late in the week of Oct. 11.

Boise Cascade LLC will begin marketing a two-part $650 million high-yield deal.

The Boise, Ida. paper and building products company is offering $250 million of eight-year non-call-four senior notes (expected ratings B1/B+), and $400 million of 10-year non-call-five senior subordinated notes (expected ratings (B2/B+).

JP Morgan and Lehman Brothers are joint bookrunners

And the roadshow also starts Wednesday for Dresser-Rand Co.'s $420 million offering of 10-year non-call-five senior subordinated notes (B3/B-) via Morgan Stanley, Citigroup and UBS Investment Bank.

The Olean, N.Y., supplier of infrastructure equipment to the energy industry will use the proceeds to help fund First Reserve Corp.'s acquisition of Dresser-Rand from Ingersoll-Rand Co. Ltd.

B&G Foods and the IDS backlog

Also on Monday Prospect News heard considerable speculation, a little bit of rumor and precious little information on B&G Foods' $200 million seven-year senior note offering (B2/B). The deal, coming to market via Lehman Brothers, has price talk of 8%-8¼%.

The deal is coming concurrently with, as is contingent upon, the Parsippany, N.J.-based food company's approximately $340 million IPO of Enhanced Income Securities (EIS), structured as 20.8 million securities representing shares of class A common stock and $148.6 million of 12-year senior subordinated notes. The offering price is $15.50-$17.00 per EIS.

RBC Capital Markets, Credit Suisse First Boston and Merrill Lynch & Co. are running the books for the EIS deal.

"We heard the bond deal is going well," one sell-side source said, referring to the $200 million seven-year senior notes.

"It's still scheduled to price Tuesday."

This source added that, not surprisingly, there seems to be very little color available from the principal underwriters, Lehman on the bonds and RBC on the EISs.

"This product has been dragging so long in the market that I think every underwriter is secretly hoping that B&G gets done because if it does there is still hope that you can start clearing the backlog of IDS deals a little bit."

However the most recent news from the income securities front (EISs and the more common income deposit securities, or IDSs) has been somewhat foreboding.

Last week Iowa Telecommunications Services, Inc. pulled its approximately $742.7 million IDS deal, announcing that it would come instead with an offering of common stock.

And in August American Seafoods Group LLC of Seattle postponed its $450 million IDS offering because of the weak IPO market.

"It might not be a cakewalk for B&G Foods," one investment banker not involved with the deal said Monday, adding that "the tone of the [junk bond] market has softened a little."

Rumors of Nextel Partners

Also on Monday, rumors began circulating that Nextel Partners may be headed back to the high yield reasonably soon, with sizable issuance, possibly predicated upon acquisition activity.

The Kirkland, Wash. company was last in the market in mid-May 2004 with a $25 million add-on to its 8 1/8% senior notes due July 1, 2011 which priced at 98.26 to yield 8.458%.

Another name that circulated on Monday was Hughes Supply, Inc., the Orlando, Fla.-based diversified wholesale distributor of construction, repair and maintenance-related products.

The company will bring $300 million of unsecured senior notes as part of the funding for its acquisition of privately owned electrical utility transmission and distribution companies Southwest Power, Inc. and Western States Electric, Inc.

A source close the deal said that the Hughes Supply bonds would be split-rated, and would be priced off the investment grade desk.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.