Parmalat retreats further as woes grow; Rhodia up on debt deal; primary stilled

By Paul Deckelman and Paul A. Harris

New York, Dec. 23 - Troubled Italian dairy products producer Parmalat Finanziaria SpA's bonds slipped further on Tuesday, even as the problem-plagued company said it would seek bankruptcy protection and the Italian government moved to go to its aid.

Elsewhere, bonds of Rhodia rose as the French chemical company said it had reached a long-awaited agreement with its creditor banks to refinance its debt.

Primary-side activity meantime ground to a halt on the last full trading day before the Christmas holiday break, which will see early closes (2 p.m. ET ) on Wednesday and Friday bracketing a full market shutdown on Thursday.

No issues priced in the high yield primary on Monday, according to market sources. Nor were any developments heard on pending issues.

"There's nothing," said a sell-side source contacted late in the session. "We're not expecting any news now until the new year."

Meanwhile there was a little - though not a lot - more activity on the secondary desks.

"The market did trade up, on very little volume, as they marked positions up," a trader said. But the most widely quoted name during the day's session was going anywhere but up.

Parmalat's board met Tuesday and to the surprise of exactly no one, it announced that the company planned to seek bankruptcy protection, with a filing expected Wednesday under an expedited new large-company bankruptcy mechanism approved Tuesday by the Italian government cabinet. .

Parmalat's bonds - which had slid all the way down to the mid-20s by Monday from levels around par at the beginning of the month - continued to ease on Tuesday as the company's troubles deepened.

Judicial sources confirmed news reports stating that in addition to a mystery €4 billion that may or may not exist but which is surely not in the company's bank account, the accounting hole may be another €3 billion bigger, as bonds which the company had supposedly bought back, hadn't been.

Prosecutors are probing ousted former CEO Calisto Tanzi and a number of other mostly former Parmalat executives, trying to track down the missing money - if it ever existed in the first place. Bank of America said on Friday that a document supposedly guaranteeing that a Parmalat subsidiary had the €4 billion in its account was a forgery, and the U.S. banking giant swore out a criminal complaint with Italian authorities.

Meantime, Parmalat's dollar-denominated 6 5/8% notes due 2008 were being quoted down around 21 bid, 22 offered, and its various issues of euro-denominated bonds were likewise seen as having fallen to that same 20-22 bid context.

Also among European names, Rhodia's 7 5/8% notes due 2010 firmed to 97.5 bid from prior levels at 95.5 and its 8 7/8% notes due 2011 were heard a point better, at 93.5.

The bonds were given a boost by the news that the company had finally reached the long-sought accord with its creditor banks, which maintains Rhodia's existing credit lines of €970 million and establishes a new €758 million medium-term line of credit secured by company assets.

The 8 7/8% notes had actually traded as well as 97 bid back around Dec. 11 but had fallen to 91.25 about a week afterwards, as it appeared that the banks and the company were at loggerheads on the debt accord.

However, a market source said: "They've been creeping up since then, steadily improving over the last three or four days. The news must have been anticipated."

The debt accord buys Rhodia time to restructure.

As part of the agreement with its 23 creditor banks, Rhodia said it would proceed with a €300 million capital increase in the first half of 2004.

A market source said Canadian pharmaceuticals company Biovail Corp. "has been doing better over the last week," and quoted its 7 7/8% notes due 2010 at 101.625, up from 99 last week.

Back in the States, the bonds of First Energy Corp. were heard to have widened out after Standard & Poor's cut their rating to junk amid an overall ratings downgrade for the Akron, Ohio-based electric utility company. After S&P cut First Energy's corporate credit to BBB- from BBB, and dropped its senior unsecured bond rating to BB+ from BBB- previously, its bonds were heard to have widened out by as much as 30 basis points from prior levels.

First Energy's bonds had widened out on Friday by about 15 basis points after the company announced it would miss its goal of restarting its Davis-Besse nuclear power plant by the end of the year; the company said the U.S. Nuclear Regulatory Commission told it the plant needs more work.

After briefly stabilizing on Monday, the bonds were back on the slide Tuesday following the ratings downgrade. A trader quoted the company's bonds of having widened out by as much as 20 basis points from Monday's levels, with 6.45% notes due 2011 closing at a bid level of 160 bps over Treasuries and its offered level 150 bps over, well wide of Friday's close at bid levels of 135 bps over and offered levels at 130 bps over.

S&P cited "operational and management challenges, as well as heightened regulatory uncertainty."

It said that the most recent of the challenges are additional delays in the restart of the Davis Besse nuclear plant, which has been out of service for almost two years.

S&P credit analyst Aneesh Prabhu also noted that the company "faces increased uncertainty regarding the timing and final outcome of its Ohio rate filing, the pending final report on the August 14 blackout [which a federal task force largely blamed on First Energy], the outcome of the remedial phase regarding environmental litigation relating to the Sammis fossil-fuel unit, and the pending subpoena hearing on Davis Besse."

The analyst further warned that Standard & Poor's "is concerned that the existing operational and management challenges facing the company, as well as any additional hurdles that could occur will make it difficult for the company to reach the rapid improvement in financial measures that was supporting the 'BBB' rating."

First Energy continues to hang onto investment-grade respectability through Moody's Investment Service, which rates its debt at Baa3.

Also on the ratings front, there was little market response to news that Moody's had raised its outlook for Xerox Corp. (B1) to stable from negative, "reflecting expectations that Xerox will generate stable to improving profits and operating cash flow, continue to reduce leverage, and maintain solid liquidity after meeting scheduled debt maturities."

A trader said that Xerox doesn't trade around very much because of its relatively small coupons and tight levels.

"You get asked on it but the short paper - there's just no life left in it," he declared, quoting its shortest-dated paper trading in a 100.5 bid, 101.5 offered context, while its longer dated 2027 bonds were offered at 98, "maybe up a point."

"Where's it going?" he rhetorically asked about the shorter paper. "5¼%, 5½%, 5 7/8% coupons. Where are we going? To 2%? There's no real upside."

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