Isle of Capri jumps on partial tender offer; Neiman Marcus off on PIK interest decision; Nortel baffles investors

By Paul Deckelman and Paul A. Harris

New York, Jan. 13 - Isle of Capri Casinos Inc.'s bonds were seen solidly higher in an otherwise fairly lackluster session on Tuesday after the St. Louis-based gaming company announced plans to tender for a portion of the outstanding paper.

Elan Corp. plc - whose bonds soared late last week on takeover speculation, and then held those gains Monday even though the company dismissed the notion that it was in talks with anyone - was again firming, although more modestly, as the Irish drugmaker acknowledged that it had hired Citigroup to help it evaluate strategic options, possibly including the sale of the company.

On the downside, Neiman Marcus Group Inc.'s bonds were off by several points in active trading after the Dallas-based operator of upscale department stores said it would exercise its option to make the upcoming interest payment on one of its several series of bonds by issuing additional bonds to the holders, rather than paying in cash.

Nortel Networks Corp.'s bonds continued to retreat amid uncertainty about whether the Canadian telecommunications equipment maker will make a scheduled interest payment of over $100 million due this week.

Market indicators head south

The widely followed CDX High Yield 11 index of junk bond performance, which had plunged 2¼ points on Monday, was off 3/8 point on Tuesday, a trader said, quoting it at 76¾ bid, 77¼ offered. The KDP High Yield Daily Index fell by 18 basis points to 55.68, while its yield widened by 11 bps to 13.62%.

In the broader market, advancing issues trailed decliners by around a seven-to-six margin. Overall market activity, reflected in dollar volumes, rose 39% from the pace seen in Monday's session.

The increased volume level notwithstanding, a trader said that from where he sat, "it was a pretty quiet day, really. A lot of new issues came," although not in the junk market per se but in high grade, monopolizing the attention of shops and players that are active in both asset classes, as is fairly common.

"It was a kind of a weird day," a second trader said. "There's little pockets of action, but I would not say broadly that there was a lot of action."

At another desk, a market source said that it was "somewhat busy early on, but then it quieted down in the afternoon."

Active issues mostly lower

Tuesday's session, yet another trader agreed, "was similar to [Monday] - a little bit of a flurry of activity in the morning, and then things just totally died. And there was still a negative sentiment, I would say."

He said that a majority of the most active issues were lower, including widely perceived market bellwether Community Health Systems Inc.'s 8 7/8% notes due 2015; the Franklin, Tenn.-based hospital operator's issue inched down to 93.375 from 93.5 Monday, on $8 million traded.

The most active issue of the day, he said, was Freeport McMoRan Copper & Gold Inc.'s 8¼% notes due 2015, last seen trading on a round-lot basis at 82 bid, well down from prior levels at 85.5, on volume of $26 million. The Phoenix-based metals mining company's floating-rate notes due 2015, which fell to 72 bid from 75.5 last week, with $15 million changing hands.

"Clearly, Freeport McMoRan got whacked," he said, also seeing its 8 3/8% notes due 2017 fall to 80.5 bid from 85 previously, on volume of $9 million.

Another trader said that the 81/4s lost 2 points to 80.5 bid, 82 .5 offered, and opined that "with copper prices down, they were getting hurt."

Isle takes off on tender

One of the major generators of what little excitement there was in the junk market Tuesday was Isle of Capri, whose 7% notes due 2014 firmed smartly after the company announced plans to tender for a portion of those bonds.

A market source saw the bonds open about 8 points higher Tuesday than the mid-40s level at which they had finished trading on Monday. The bonds traded for most of the day in a 53-54 context, with a number of big-block trades taking place.

A trader said of the 7% notes that he "didn't see a lot of trading in them," perhaps about $10 million. He saw the bonds at 51.5 bid, 53.5 offered.

Another trader said the bonds had pushed as high as 54 bid from 46.5 on Monday, before going home at 52.875 bid, with $11 million changing hands.

Isle of Capri - which operates casinos in Mississippi, Louisiana, Colorado, Iowa, Missouri and abroad - said that it would buy up to $140 million principal amount of the $500 million of outstanding 7% notes, offering 58 cents on the dollar to holders who tender their notes by the early tender deadline on Jan. 27, and 55 cents on the dollar otherwise. If the offer is oversubscribed, Isle will buy the tendered bonds on a pro-rata basis. The tender offer expires on Feb. 11, with both deadlines subject to possible extension.

Elan evaluates options

Also on the upside, traders said, was Elan Corp., which announced that its board of directors had engaged Citigroup Global Markets to help the Dublin, Ireland-based drugmaker evaluate strategic options that could include the outright sale of the company.

Its bonds, particularly the 7¾% notes due 2011, had screamed sharply higher on Thursday and Friday as Junkbondland - and the equity market as well - buzzed with speculation that pharmaceutical giant Pfizer might make an offer to acquire Elan, to enhance its own drug pipeline. Those 73/4s had jumped from the low 60s to eventual levels just under 80 bid. Even a statement from the company's chief executive officer that it was not in talks with Pfizer or anyone else, failed to push the bonds back downward.

On Tuesday, the bonds resumed their climb, apparently helped by the Citigroup news and the prospect that Elan could be sold - although there was some commentary in the financial media that an outright sale was unlikely, given Elan's $1 billion debt load, and the fact that such a sale might cause the unwinding of some of the joint venture projects Elan is involved in, including its development and marketing of multiple sclerosis drug Tysabri with Biogen Idec Inc., and its experimental Alzheimer's therapy, bapineuzumab, which it is jointly developing with major drugmaker Wyeth.

A trader saw its floating-rate notes due 2011 push up to 73.5 bid from 72 on Monday, though on only $2 million of bonds traded. Its 8 7/8% notes due 2013 were ½ point better at 68, although the 73/4s were unchanged at 79 bid.

Biomet boost from quarterly numbers

In that same healthcare sphere, trader saw strength in Biomet Inc.'s bonds - proving, he said that "it was not a complete down market today."

He saw its LVB Acquisition 10% notes due 2017 move up to par from 98.25 on Monday, with $18 million traded, while its 11 5/8% notes due 2017 firmed to 91.75 bid from 90.125 earlier, on volume of $9 million.

He noted that the Warsaw, Ind.-based maker of artificial joints, dental implants and other reconstructive products, had announced results on Monday for the fiscal second quarter ended Nov. 30. Although he had not seen the actual results, he said "I'm guessing that they were better-than-expected, based on the movement of the bonds."

Biomet said that in the most recent quarter, operating income was $80 million on a reported basis, versus a year-earlier operating loss of $251 million; excluding special charges in both periods, adjusted operating income increased 17% to $211.4 million, versus $180 million a year ago. Adjusted EBITDA in the latest period increased 17% to $247.1 million, or 38.4% of sales, compared with adjusted EBITDA of $210.8 million, or 34.7% of sales, in the prior-year period.

Advanced Medial Optics rise over

Advanced Medical Optics Inc. - whose bonds had doubled in price on Monday on news that the company will be acquired, moving above the par level from prior levels in the low 50s - was seen unchanged to a little easier on Tuesday, its explosive upside move apparently over.

A trader said that he "didn't see a whole lot go on" Tuesday with its 7½% notes due 2017. Those bonds had shot as high as 104 on Monday from prior levels around 51-52, on the news that pharmaceuticals major Abbott Laboratories will acquire the Santa Ana, Calif.-based maker of eyecare products and developer of laser surgery technology for $2.8 billion, including debt assumption. On Tuesday, the trader saw just "a couple of trades" at 103.5 bid, 104 offered, and agreed with the proposition that any upside for those bonds had come during Monday's dramatic session, and that they likely would rise no further.

Neiman Marcus knocked down on PIK election

On the downside, Neiman Marcus' bonds moved lower after the upscale department store operator said that it was exercising its rights to make an interest payment on one of them in kind rather than in cash.

The company said in a filing with the Securities and Exchange Commission that it will pay the quarterly interest due on its $700 million of 9% senior PIK notes due 2015 in additional notes for the Jan. 15- April 14 period. Exercise of the PIK option will cause the coupon rate on the bonds to step up to 9¾%. Rather than paying $15.75 million in cash, the company will issue $17.06 million of additional notes.

A market source saw the 9s fall as low as 47 bid in morning trading, versus the levels around 53 at which they had ended on Monday. The bonds bounced back only part of the way, to around 49, by the afternoon.

A trader said those 9s "were pretty active." He saw "a lot trading" in a 50-52 context, but pegged the bonds going home at 49 bid, 50 offered.

He also saw the company's 10 3/8% notes due 2015 several points lower on the day at 49 bid, 51 offered.

Another trader saw the 9s ending at 49 bid from 52.75 on Monday, with $16 million traded, and saw the 10 3/8s also down, by 1½ points, at 50.5, with $123 million changing hands.

The company's $500 million of 10 3/8% senior subordinated notes - which also have a $25.93 million semi-annual interest payment coming due on Thursday, but which do not carry a PIK option - were meantime also seen off a little, dipping about 2 points to the 50 bid level, on slightly less-active dealings than the 9s.

The 9s, which were issued in the summer of 2006, carry a provision allowing the company to pay the interest in kind for any quarterly payment period through Oct. 15, 2010. Neiman Marcus said in its filing that it negotiated for the right to include the cash-conserving PIK feature in the notes' terms because it believed that "this feature could be a useful tool to enhance liquidity under appropriate circumstances. Given the dislocation in the financial markets and the uncertainty as to when reasonable conditions will return, NMG believes that conditions are appropriate to utilize this feature" - although it pointed out that it is not experiencing any kind of liquidity pressures, with $576.3 million of unused borrowing capacity currently available under its $600 million revolving credit facility.

Neiman Marcus also said that going forward it will mull over on a quarter-by-quarter basis whether to pay future interest payments on those notes in kind rather than in cash, depending on market conditions "and other relevant factors at that time."

Nortel keeps investors guessing

A trader saw Nortel Networks' floating-rate notes due 2011 "down around 22," with its 7 5/8% notes due 2026 around 20 bid and its 10 1/8% notes due 2013 at 21 bid, 23 offered" amid continued lack of clear information on whether Nortel will pay coupon interest due on Thursday.

"We didn't see a whole lot of action in them," he said. "They're all down in the lower 20s - that's where they've been" recently.

At another desk, the 10 1/8s were quoted at 22.5 bid, down 3 points on the day.

The problem-plagued Canadian telecom equipment manufacturer is scheduled to pay approximately $102 million in coupon interest on Thursday - about $45 million on the floaters, $28 million on the 10 1/8s and $29 million on the 103/4s - but it has not given any indication whether or not it will make the payment. In fact, a company spokesman specifically declined any comment, citing a corporate policy against commenting on "our creditor obligations other than what we disclose in our public filings."

Chemical names mostly get crushed

Among the troubled chemical makers, Nova Chemical's 6½% notes due 2012 lost 2 points to 40.5. Some $6 million traded.

A trader said that Tronox Inc.'s 9½% notes due 2012 were unchanged around the 15.5 bid, 16.5 offered level to which they had risen following Monday's Chapter 11 filing.

Meantime, Lyondell Chemical Co.'s 9.80% notes due 2020, which had risen steadily since that company's Chapter 11 filing last week, were down 3 points on Tuesday to 24 bid, 26 offered.

WaMu bounces back

A trader saw Washington Mutual Inc.'s 4% bonds scheduled to come due on Thursday at 73 bid, 75 offered, and said that could be a "generic price" for all of the senior holding company notes.

He meantime saw WaMu's subordinated bonds generically at 33 bid, 35 offered.

He said that the bankrupt Seattle-based thrift giant's paper "was down last week, but they've rallied back."

Autos spin their wheels

A trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 down ½ point at 17.5 bid, 19.5 offered, and saw GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 a point lower at 26 bid, 28 offered.

Another trader saw the GM benchmarks at 18.5 bid, versus 20 on Monday, with $11 million traded, and saw GM's 7.20% notes due 2011 fall 3 points to 27 bid from 30.

He also saw the Ford long bonds fall to 27.25 from 30 on Monday. "The trend [in the sector] is clearly lower," declared. Some $5 million traded.

Among the automotive finance companies, a trader saw GM's 49%-owned GMAC LLC's 8% bonds due 2031 ease to 52.75 from 54.125 last Friday. He said the most active GMAC was its 5 5/8% notes coming due on May 15, which gained ¼ point, with $20 million traded, to end at 95.5 bid.

Another trader said that GMAC's 6¾% notes due 2016 were up ½ point at 63 bid, 645 offered.

A trader saw Ford Motor Credit Co.'s 7 3/8% notes due 2011 ease to 76.25 from 77.5 on Monday, with $15 million traded. Its 9¾% notes due 2010 were unchanged at 83 bid on $15 million of activity.

New issue market

A high-yield mutual fund manager said junk felt a little softer on Tuesday.

"There is still an underlying bid to the market," the investor contended.

"Some of it is the crossover buyers. Some of it is traditional high-yield guys looking for good ideas.

"Until we get some new issuance to soak up that demand the secondary market is going to remain well bid."

New issuance that might soak up the buy-side's demand for paper is probably on the way, according to the investor, who has put in for dollar-denominated bonds in the only deal now in the primary market: Fresenius US Finance II Inc.'s $650 million equivalent two-part offer of six-year senior bullet notes (Ba1/BB).

The order book for the bridge refinancing deal is expected to close Wednesday, with the bonds scheduled to price on Thursday.

The deal is being offered in dollar-denominated and euro-denominated tranches, with tranche sizes remaining to be determined.

The investor expects the Fresenius dollar-denominated tranche to be well-subscribed.

"I listened to the conference call today, and the roadshow," the buy-sider said.

"They tell a pretty good story."

The bonds are being discussed in the context of the 10½% area, the investor said.

"That's likely to get a lot of people interested, particularly since the existing paper trades at 8½%.

"It's a pretty big concession considering that it's double-B, 4.5-times leveraged and somewhat of a defensive business."

JPMorgan is leading the dollar-denominated tranche, whereas Deutsche Bank Securities is on the left for the euro-denominated notes.

The euro market

Speculation ran rife on both sides of the Atlantic Tuesday regarding what kind of demand, if any, is surfacing for the proposed euro-denominated Fresenius notes.

Coming into the new year sources had varying expectations regarding the re-emergence of the long-dormant European high-yield market, with some expecting 2009 issuance of $5 billion to as much as $10 billion in Europe, while others expected the euro market to remain dormant well into the year.

Fresenius would represent the first broadly marketed, euro-denominated high-yield issuance from a Europe- or U.S.-based company since July 26, 2007, when Intergen NV, priced €150 million of 8½% notes at 99.174 to yield 8 5/8%, part of an overall $1.875 billion equivalent three-tranche 10-year senior secured notes (Ba3/BB-) deal led by Merrill Lynch, Barclays Capital, Deutsche Bank and Lehman Brothers.

In the interim FCE Bank, plc, a United Kingdom-based wholly owned subsidiary of Ford Motor Credit Co., priced €400 million of 7 1/8% notes due Jan. 16, 2012 (B1/B+) at 82.00. However a senior high-yield syndicate official in Europe told Prospect News on Tuesday the FCE deal was more in the nature of a private placement, and certainly not broadly marketed.

Given the length of time the European market has been shut down, and the expectation on the part of some observers that it will be slow to regenerate, sources who spoke to Prospect News on Tuesday were anticipating that Fresenius will be done predominantly in dollars.

"It wouldn't surprise me if it came in all dollars given the differences in the two markets," one New York-based investment banker said, adding that there just does not appear to be any euro market at present.

However given the warm reception the Fresenius dollar-denominated tranche appears to be receiving, the high-yield mutual fund manager wonders whether the European buy-side might eventually arrive at the party anyway.

Reverse inquiry

The Fresenius deal was apparently not driven by reverse inquiry, according to the buy-sider who added that that makes it something of an exception to the rule in the present primary market.

This source expects HCA, Inc. to show up sooner than later with a deal driven by reverse inquiry. JPMorgan is also likely to be involved, the investor added)

"You're not going to get any bonds unless you agree to run the deal," the investor explained.

"For example, in a $1 billion deal you have to be willing to say that you will take $100 million. They line up five guys who say they'll take $100 million each. So half the deal is already done before they even go to market with it. For the other $500 million they'll get $2 billion of orders."

Size: a problem

Getting size right now in the high-yield secondary market is a problem, the investor said, pointing to the considerable build-up of cash that is reflected by the $2.4 billion of inflows that have been reported over the past three weeks by AMG Data Services, the biggest burst of cash so reported during a three-week period since Spring 2003.

"We continue to get cash," the fund manager said, adding that in addition to traditional high-yield players there are equity-crossover buyers who are presently keen to get into the market.

"They can try to come but they are not going to get any size," the investor remarked.

"They'll want to buy $10 million to $50 million of something but the Street will come back and offer to sell $1 million or $2 million."

One solution has been the triple-B portion of the high-grade market, the source added.

Two high-grade deals, Weatherford International Ltd.'s 9 5/8% notes due 2019 (Baa1/BBB+/) which priced in a $1 billion tranche at a 723 basis points spread to Treasuries on Jan. 6, and Staples, Inc.'s 9¾% notes due in 2014 (Baa2/BBB/BBB), which priced at an 828.9 bps spread on Monday in a $1.5 billion deal, received considerable high-yield attention, market sources say.

The high-yield mutual fund manager, for instance, got into Monday's Staples deal, and watched the par-pricing high-grade notes trade to 103½ bid.

Somewhere in that rally the determination was made that the fund could live without those Staples high-grade notes in the portfolio, whereupon they were sold, the investor conceded.

"Volatility is the name of the game, right now," the high-yield buy-sider counseled.

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