Allegheny Energy bonds up as debt pact reported near

By Paul Deckelman and Paul A. Harris

New York, Jan. 10. - Allegheny Energy Inc. bonds were quoted higher in otherwise generally featureless trading Friday, on news reports that the troubled utility and merchant energy company was close to a deal with creditors on a restructuring plan that would allow the company to avoid a bankruptcy filing.

Allegheny's 8¼% notes due 2012 were being quoted Friday at 82 bid, up seven points. On the equity side, its New York Stock Exchange-traded shares jumped $1.58 (18.57%) to $10.09, on volume of 8.7 million shares, nearly four times the usual, helped by an upgrade to "outperform" from the previous "in-line" on Friday by Goldman Sachs & Co.

Goldman's research note cited a likely near-term announcement of a refinancing package, as well as the potential for improvement in the company's financials this year and next.

Allegheny, a Hagerstown, Md.-based power producer, was reported by The Wall Street Journal on Friday to have recently reached agreement with important creditor groups on the framework for a deal under which existing lenders and bondholders would inject about $470 million into the company.

The report anonymously quoted people involved in the negotiations as saying the agreement would solve Allegheny's liquidity problems. In exchange for the new financing, creditors would receive collateral on about $1.7 billion of existing credit, which is currently unsecured.

But as of Friday, no formal agreement had yet been firmly reached, leaving open the possibility that Allegheny, which operates three regulated utilities that provide power in the Middle Atlantic states as well as an unregulated merchant energy subsidiary, might still have to seek Chapter 11 protection from the holders of its approximately $5 billion of debt.

On Friday evening, the Dow Jones News Service was reporting that two regional banks, part of a 20-bank syndicate led by Citigroup Inc. and J.P. Morgan Chase & Co. , were holding up completion of a deal. It said those lenders "just want to exit the credit instead of participating in a restructured facility."

But the report also noted that according to sources close to the negotiations, the two balky banks aren't among the Allegheny's larger creditors, and other bankers were expressing optimism that some type of resolution could be found, possibly as soon as the upcoming week.

Allegheny, whose credit ratings were dropped to junk levels in early October, is one of a number of former high-grade utility/merchant energy credits struggling with debt and liquidity concerns in the wake of the collapse of Enron in late 2001 and the parallel collapse of the wholesale electric power market. Another name in that sector, Dynegy Inc., was sharply higher this past week, many of its issues jumping to bid levels near 60 from the upper 30s previously, as the Houston-based company released optimistic earnings projections, and said it was continuing to pare down debt.

But another big player, Mirant Corp., cast a pall over the sector Friday as it warned that it faces "many challenges" in the coming year. Mirant said on a conference call with analysts that while it has about $1.4 billion of liquidity, it plans to shore up its position by selling at least $300 million of assets this year, cutting capital spending and operating costs and decreasing its collateral requirements. For instance, Mirant said that it will cut gas sales by half and pay $270 million to cancel orders for power-plant turbines to conserve cash.

Mirant expects to exit markets in a number of foreign countries, although it will continue operations in the Philippines and the Caribbean; at home, Atlanta-based Mirant plans to cut operations in the Southeast and in Texas in favor of the Northeast, the mid-Atlantic states and the Midwest, noting its significant presence in those regions, along with growing power needs there.

Mirant shares lost 35 cents (12.77%) Friday, dropping to $2.39 on NYSE volume of 28.3 million shares, over five times the norm.

But while such sector players as AES Corp. and CMS Energy Corp. were easier Friday - AES's 9 3/8% notes due 2010 and CMS's 9 7/8% notes due 2007 each down half a point to 65.5 bid and 98, respectively - Calpine Corp. continues to firm, its 8½% notes due 2008 quoted a 1½ points better at 54 bid. At another desk, a trader saw both the 2008 notes and the company's 2011 bonds "pretty much status quo" in the 52-54 range.

Calpine "continues to be strong," another trader said, quoting the San Jose, Calif.-based independent energy producer's 2005 notes bid around 60, after having started the week quoted at 52 bid/55 offered.

Outside of the energy sphere, the junk market, a trader said "was hangin' in there," although apart from specific situations, such as Allegheny, he did not see much in the way of price changes.

"We've slowed down a little at the end of the week," despite the news of a huge $1.025 billion net inflow into junk bonds mutual funds in the week ended Wednesday, continuing the recent trend of plentiful liquidity in the junk market.

But while he saw little response Friday, he noted that during the week, when that money was actually coming into the market, "that [liquidity] surely doesn't hurt - it definitely added to the fire this week. Stuff is up two, three, four, five, six, seven, ten points, depending on what you are looking at.

"Everything pretty much tightened up across the board, whether it was telecom or retail, although some sectors had some softness," meaning areas such as the tech names and gaming which had already run up considerably even before this past week.

"Today [Friday] itself was a decent day - but not much price action."

He saw Nortel Networks Corp.'s 2003 paper essentially unchanged at 96 bid/98 offered, while rival telecommunications equipment provider Lucent Technologies Inc.'s 2006 notes up perhaps a point on the session but almost 10 points on the week, to 69.5 bid/70.5 offered.

In the retailing sector, he saw bonds of The Gap - which had firmed solidly on Thursday as the San Francisco-based closing retailer reported better-than-expected sales figures for December - as having fallen back slightly after that run up.

He said Gap's benchmark 6.90% notes due 2007 eased a bit after having gotten as good as 100.325 bid/101.125 offered Thursday on the 5% rise in December same-store sales from a year ago. He saw those bonds going home Friday at about 99.25 bid/par offered.

"They made their run Thursday, and people looked at the levels - the 6.90s above par - and kind of backed off a little."

He attributed the recent firmness in the market to what happens when "you get a lot of shorts, and people are chasing them, so it kind of just builds on itself. Until people start buying for short covering, you're going to still going to see some tightening. That's what we saw this week."

Another trader called the situation "weird. Here you have a backdrop of complete turmoil - North Korea is threatening us, we're calling up the reservists, thinking about [reinstating] the draft and sending people to the Middle East." Meantime, junk prices just seem to keep on appreciating.

"I don't know," he mused. "God bless this rally - while it lasts. I'm not convinced" of its staying power.

Still, he acknowledged, "we're still buying."

For instance, he saw Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009, which have steadily firmed smartly into the 90s over the past several months from levels in the 60s, continuing to rise; they ended at 96.75 bid/97.5 offered, from Thursday's levels 95.5 bid/95.75 offered.

Levi Strauss' 11 5/8% notes were also "better again," moving up to about 105 bid Friday from 103 bid/105 offered on Thursday; the San Francisco-based blue jeans maker's bonds had started the week around 97 bid/98 offered.

The trader also saw Gap's bonds essentially unchanged at the higher levels to which they had moved on Thursday, with its 2003 bonds at par bid/101 offered - these "can't go any higher" he observed - and the 6.90s at 99.5 bid/100.5 offered.

"There's so much cash in the market that a lot of [the advance] is because there's a technical wind behind it, and I think you're going to see the new-issue calendar totally heat up in the coming weeks" - and maybe even sooner.

"I think you're going to start seeing drive-bys, the people who need to re-finance, and the people who can pull stuff off the shelf [registrations] and do add-ons and things like that, you'll see that [this coming] week," he predicted, and you'll start to hear announcements of other, bigger deals. Who knows? Maybe Donald Trump [who scrubbed a $470 million bond deal last spring] may even get his deal done."

While the overall market was firm, the trader saw National Steel Corp.'s 9 7/8% first mortgage notes due 2009 as having given back some of the big gains they notched on Thursday, when it was announced that United States Steel Corp. would buy the assets of the bankrupt National for $950 million. That news boosted those bond as much as 20 points, into the mid-60s, but the trader saw then having fallen back to offered levels around 59 on Friday, after having apparently gone too fast, too far.

A market source saw the bonds of supermarket operator A&P lower after the Montrose, N.J.-based grocery chain reported that it had lost $29.7 million (77 cents a share), in the fiscal third quarter ended Nov. 30. While that was an improvement from the year-earlier loss of $89.6 million ($2.34 a share), the latest net loss figure included a gain of 29 cents a share related to asset sales; excluding that one-time item, its operating loss would be $1.06 a share.

A&P reported a 2.3% drop in total sales year-over year to $2.47 billion, while comparable-store sales were 0.1% better.

The company cautioned in a statement that "we do not anticipate any abatement of present margin and cost pressures in the near future."

Standard & Poor's responded to the company's data by cutting its corporate credit a notch to B+ from BB- previously. The ratings agency declared that A&P's "weak" earnings "are only partially mitigated by A&P's satisfactory market shares in its major operating areas. Most of A&P's markets are experiencing increased promotional activity from both traditional supermarkets and nontraditional channels of distribution, as operators fight for market share in a soft consumer spending climate."

S&P analyst Mary Lou Burde further cautioned in her downgrade message that "trading down to lower-margin products by consumers and deflation in certain product categories are compounding the challenges in the sector. Moreover, A&P has had difficulties in executing its store format effectively, and is burdened by a high cost structure."

A&P's 9 1/8% notes were quoted Friday as having slid to 63 bid, down from levels earlier in the week in the upper 60s. Its shares surrendered 85 cents (11.72%) to end at $6.40 on volume of 983,000 shares, about four times the usual turnover.

One sell-side source in the U.S. high-yield market labeled Friday's session in the primary market a "breather."

But towards the end of the day news surfaced that Premcor Refining Group, Inc. would bring $400 million to fund a transaction set to close sometime in the first quarter.

Other than that the primary market seemed to be masticating what is reported by Bear Stearns & Co. to be the ninth largest inflow ever to high-yield mutual funds: $1.025 billion for the week ending Jan. 8.

"American and Remington are on the road," one source told Prospect News very late in Friday's quiet session. And there was that Fisher drive-by. I know the TRW deal is supposedly moving along. They're trying to get drafting done and get to market.

"Other than that the new issuance market seems surprisingly quiet."

The two roadshowing deals to which this official referred are Remington Arms Co. Inc. which hit the road Wednesday with $175 million eight-year senior notes (B2) via Credit Suisse First Boston, with pricing expected Jan. 17, and American Media Inc., which started roadshowing $150 million of eight-year senior subordinated notes (B2/B-) via JP Morgan last Thursday, figuring to price the Rule 144A deal on Jan. 16.

The other deal the source mentioned, TRW Automotive, is also thought to be first quarter business, according to the source, who added that the deal appears to be coming with $1.4 billion in senior and senior subordinated tranches.

The syndicate for the deal that will help finance $4.725 billion acquisition of the company by the Blackstone Group reportedly includes JP Morgan, Lehman Brothers and Deutsche Bank Securities Inc.

The source also mentioned Cascades Inc.'s $325 million of notes (BB+), which is due to begin roadshowing following the close of its exchange offer on Jan. 21. Salomon Smith Barney is leading the Quebec paper packaging firm's exchange.

Outside of those offerings, the sell-side official commented, there is not much concrete news to be heard coming out of the U.S. market.

"A number of companies that had planned to come in January hit the fast forward button," the official explained. "So some of the supply has already gone to market, and that's why we had such robust levels in November-December.

"That's maybe why we're getting the breather space right now."

Outside the U.S. sources advised Prospect News on Friday that, like in the States, the European high-yield market is sitting relatively still licking its chops as it eyes a buy-side that it believes has pockets full of cash.

"Nothing has come to the market yet but a couple of things are rumored to be out there. It will be interesting to see what comes and see what the reception is.

"Generally speaking it sounds like investors are sitting on a lot of cash and when the deals come I think people are pretty optimistic that they are going to get done, and get done pretty well."

In Europe one deal is presently "in" the market, a source said: Eco-Bat Technology Ltd.'s €185 million of 10-year notes via Credit Suisse First Boston and Salomon Smith Barney. The deal to finance the purchase of two recycling plants, said one source, is expected to begin its roadshow on Wednesday and possibly price during the week of Jan. 20.

Another source stationed in Europe told Prospect News Friday: "There's stuff in the pipeline," and named the Italian eye-care firm Safilo Group and the Norwegian pharmaceutical firm Nycomed Pharma AS, in addition to TRW Automotive, Legrand, and Brake Bros.

"It's a quieter start to the year than one would normally have expected but we're very optimistic given current leads," the source commented.

Finally, in a filing with the Securities and Exchange Commission that appeared late on Friday Premcor Refining of Old Greenwich, Conn., announced that it will bring $400 million of senior notes due 2010 and 2013, via Morgan Stanley, Credit Suisse First Boston, Deutsche Bank Securities and Goldman Sachs.

Proceeds from the Rule 144A deal will be used to help finance the company's purchase of a refinery in Memphis, Tenn. owned by the Williams Companies, Inc., for approximately $415 million. The deal is set to close during the first quarter of 2003.

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