Market mostly ignores Conseco shuffle; Bally's off on new guidance; Brand shrinks deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 4 - There was only muted junk market reaction Friday to Conseco Inc.'s announcement that Gary D. Wendt would give up the chief executive officer's job at the troubled Carmel, Ind.-based insurer; meantime, Bally's Total Fitness Holding Corp.'s bonds were sharply lower after the largest U.S. health and fitness club operator warned that it anticipates flabby third- and fourth-quarter earnings well below what Wall Street has been expecting.

In the primary sphere, Brand Services, Inc. came to market Friday with a 10-year note offering, although the deal was downsized to $150 million from the previously announced $165 million - although in a financial landscape cratered with falling stock prices and enervated with the risk of war the pricing, along with the announcement of a new deal from Nevada Power Co., was seen as positive news

A considerable number of eyes in the primary market watched Friday for the terms to emerge on St. Louis-based scaffolding services company Brand Service's new 10-year senior subordinated notes (B3/B-) via Credit Suisse First Boston and JP Morgan.

Throughout the week of Sept. 30 sources had told Prospect News that to a certain extent the LBO deal, coming in the wake of four pulled offerings over the preceding two weeks (and in light of the fact that Brand Services was being talked at 11¾% area), would be an indicator of investors' willingness to be involved in the present new issuance market.

The offering was downsized to $150 million from $165 million and came with a coupon of 12%, pricing at 97.189 to yield 12½%. The financing also included a $35 million mezzanine tranche, according to a syndicate source.

Prescott Crocker, portfolio manager of the Evergreen High Yield Bond Fund, told Prospect News shortly after the Brand Services terms were heard that he had taken a cursory look but ultimately took a flyer on the credit.

"I don't like LBOs of LBOs," Crocker said. "The only winner is the equity seller."

Crocker reported that the Evergreen High Yield Bond Fund is presently ranked fourth by Lipper, with a year to date total return of +30 basis points versus -7.16% which he identified as the Lipper median. In the past 12 months the fund has had a return of +6.55% versus -1.81% for the Lipper median, he added.

When asked how "open" the new issuance market appeared to him Crocker responded: "Those that have to finance in this environment, such as ClubCorp, have to finance with a fair amount of generosity to the investor group."

He was referring to ClubCorp Inc.'s planned $225 million of eight-year senior notes (B3/B), expected to price during the week of Oct. 7 via Banc of America Securities and Deutsche Bank Securities Inc.

Specifying that his fund was having a close look at ClubCorp, Crocker commented: "I think that they're going to have to give up a second mortgage lien and give it a good coupon, in which case I would say you have no risk to principle whatsoever.

"The stuff is generally worth twice the total outstanding debt," he added. "It costs eight or nine times to buy this stuff and the debt is five times."

The portfolio manager from Boston also said that he presently finds crossover credits "cheap."

"It's certainly a good time to be considering buying crossover because everybody who's been in the business of investing in investment grade has lost their job, or is terrified of losing their job. They have no ability to take risk."

Crocker, who forecast a persuasive turnaround in the flows to high-yield mutual funds when last contacted by Prospect News in mid-August (it materialized in a record-setting $1.56 billion inflow for the week ending Aug. 28) concurred with the consensus of buy- and sell-side sources who characterized it as "timer money."

Thus it follows that approximately $1.5 billion flowed out of the market over a two week period ending Oct. 2, he added: timer money, in and out.

Although Crocker may have been a shade less optimistic about high yield last Friday than he had been when he spoke with Prospect News in mid-August, he detailed a scenario that he believes will bring the market around.

"We need some stability in stocks," he said. "I think stocks are a reasonable value. I think the market needs to stabilize around the July lows. We've just got to break the terrible situation here of a total loss of confidence in the stock market.

"I think the big surprise is going to be that it's too late to go to war with Iraq," Crocker added, specifying that a reduction in the risk of war would be the best thing for the markets including high yield

"The weapons inspectors will be in there before we are and they will actually be human shields," he said. "It will be better for us to wait a year until we can prove that Saddam is really obstructing the whole process of disarmament. And by then we'll get the United Nations in there with us.

"That would substantially support a rally in the stock market," he added.

"The only thing that is keeping high yield soft and vulnerable is this sustained fear that the current numbers in the economy mean nothing, and that we're headed for a depression because the stock market doesn't stop going down.

"So all we need is stability because economic growth is satisfactory. Inventories are low, government expenditures are high, so you could have a modest economic growth.

"That would be the best thing for high yield," Crocker said, "because right now it's all very cheap and it's got a big coupon."

The high yield primary market also learned on Friday that Las Vegas-based regulated utility Nevada Power Co. would begin roadshowing $250 million of general and refunding mortgage notes series E due 2009 (Ba2/BB) via Lehman Brothers on Tuesday.

In a filing with the Securities and Exchange Commission the company listed existing debt maturities including $15 million of 7 5/8% series L first mortgage bonds due Nov. 1, 2002, a $200 million credit facility due Nov. 28, 2002 (which it intends to pay down with the proceeds of the new notes), $210 million of senior unsecured 6% notes due Sept. 15, 2003, $140 million of general and refunding mortgage notes, floating rate, series B, due Oct. 15, 2003, and $130 million of 6.20% senior unsecured notes, Series B due April 15, 2004.

In addition to the above-mentioned offering from ClubCorp, two other deals are situated on the forward calendar with the expectation that they will price during the week of Oct. 7: FMC Corp.'s $300 million of seven-year senior secured notes (Ba2/BB+) via Salomon Smith Barney and Banc of America Securities, and Amerco $275 million of seven-year senior notes (Ba2/BB+) via Credit Suisse First Boston and Merrill Lynch & Co.

Both roadshows are expected to wrap up on Tuesday.

A secondary trader noted a report about Trump Hotels & Casino Resorts Inc. in the Press of Atlantic City (N.J.) which said that "[a] major investment bank is querying investors about a possible $145 million bond deal to refinance debts backed by the company's Trump Holdings unit, according to a person a familiar with the matter." The paper further said that principal owner Donald Trump "would neither confirm nor deny the possible $145 million deal. 'Everybody wants to do our deal. We've become a hot company,' he said."

The trader scoffed that the idea that junk players are going to lend The Donald any more money at this juncture is "complete hooey." Trump scrubbed a $470 million bond sale last spring because he did not wish to pay the high interest rates demanded by investors.

Another trader, who had not seen the Press story, was also amused, noting with a snort that although Moody's Investors Service late Wednesday did upgrade the company's bonds, "what did they do, raise them to Caa1?"

That's the level to which Moody's raised Trump Atlantic City Associates' first mortgage notes from Caa3 previously; meanwhile, the parent company's paper went up a notch, from Ca - Moody's second-lowest junk rating - to Caa3.

The implication behind the rhetorical question was that even with the upgrade, the ratings remain at very weak, shaky levels and investors would likely remain wary of buying any more debt from the heavily leveraged gaming company.

Traders saw no movement in the most actively quoted Trump issue, the Trump A.C. 11¼% first mortgage bonds due 2006. "They did zero," one said, quoting the notes as having hung in at 74.5 bid/75.5 offer that they had been occupying in recent days.

Elsewhere, Gary Wendt's abrupt resignation as CEO of Conseco (although he will remain as chairman) apparently came as no huge surprise to the financial markets, with the stock trading below a dime and the bonds not much better (lower teens for the bonds which were not swapped in the company's exchange offer some months ago, lower 20s for those exchange bonds which were issued).

"We didn't really see a whole big reaction to Conseco," said a trader, "probably because people think the company is already dead [i.e. headed for bankruptcy], and so it was not that big a surprise. The reaction was 'who cares?' We didn't see a lot of trading in it."

A trader quoted the unexchanged bonds at 11 bid/12 offered and the new exchange bonds at 19 bid/21 offered, both down two points on the session. (Conseco earlier this year exchanged new bonds with longer maturities for most, but not all, of its outstanding bond debt; the new exchange bonds trade at a premium to the unexchanged old bonds, even though the latter have shorter maturities, because the exchange bonds are superior in the company's capital structure).

Although the company announcement phrased the move in terms of Wendt resigning rather than being pushed out and he called it "part of a natural evolution," other observers were less charitable and suggested that Wendt had been ousted by the company's board so that Conseco could move forward with plans to reorganize via a bankruptcy filing. Wendt, so the theory goes, was allowed to keep the chairman's post - largely a figurehead position - in return for his playing the good soldier and turning over the day-to-day reins of the company to President Bill Shea.

Wendt had come to Conseco in 2000 after the ouster by the board of company founder Stephen Hilbert, who was blamed for the acquisition of Green Tree Financial Corp. The $6 billion 1998 purchase of the mobile-home lender proved to be a disastrous mistake, producing little in the way of gains and saddling Conseco with billions of dollars of additional debt.

Wendt, recruited from General Electric Corp.'s GE Capital finance unit, was initially hailed by the investment community for his efforts to sell non-essential assets, cut debt and turn the company's fortunes around, but by earlier this year the turnaround momentum had fizzled out and Wendt came under fire from investors, analysts and the media. In August, he admitted that the turnaround strategy wasn't working, and said that a "radical change" was needed. Conseco began talks with its bondholders on a possible consensual restructuring of the company's debts, with the proviso that if Conseco is unable to come to an agreement with the debtors it could well be forced to seek relief in bankruptcy court.

Standard & Poor's cut Conseco's ratings to D (the senior debt had previously been at CC. The ratings service said that the downgrade "reflects Standard & Poor's view that Mr. Wendt's resignation is a prelude to an ultimate bankruptcy filing.")

S&P analyst Jayan U. Dhru added in his downgrade message that "[t]herefore, Standard & Poor's expects that Conseco's future payments on principal and interest will be adversely affected."

A trader said that "utilities were the name du jour," with TXU Corp.'s nominally investment-grade rated bonds "getting killed" following Moody's Investors Service revising the outlook on TXU's Baa3 bonds to negative from stable in response to deterioration in the credit profile of its TXU Europe affiliate (Baa1) and pressure on the credit profile of TXU Gas. Securities ratings for TXU Europe remain on review for potential downgrade.

The Dallas-based company reported that its third-quarter profit would likely fall to 90 cents to 95 cents a share, well down from the $1.54 that analysts had projected, and fourth-quarter profit will be 60 cents to 65 cents, versus the 99-cent consensus estimate. TXU blames the anticipated underperfomance on expected lower U.K. electricity prices and a slump in energy trading.

For the year, TXU expects to earn $3.20 to $3.25 a share, below the company's forecast, released just a month ago, of $4.35 to $4.45. Profit in 2003 was projected at $3.45 to $3.55.

TXU stock slid $5.86 (17.81%) to $27.04 in busy New York Stock Exchange dealings of 21 million shares, about 10 times the norm. On the bond side, TXU's 6 3/8% notes due 2006 dipped to 87 bid from prior levels around 90.5. Its European unit bonds are being quoted around 50 cents on the dollar.

Further erosion was seen in AES Corp. bonds, continuing a slide seen Thursday after Standard & Poor's downgraded the company's ratings in response to its plans to exchange cash and new securities for two issues of its outstanding bonds.

AES's 8¾% notes due 2002, one of the issues being exchanged, dipped to 86 bid from prior levels around 92, while the other issue, its 7 3/8% notes due 2013, which are putable in 2003, eased to 77 bid from 79. An issue not covered in the exchange, the 8% notes due 2008, were quoted three points lower at 42.

S&P lowered AES' corporate credit and senior unsecured ratings to B+ from BB- Thursday, saying the downgrade "reflects continued deterioration in AES' Latin American businesses, and anticipation that cost cutting and improved performance at other businesses will not make up for those losses to the extent that AES had projected in its guidance provided after the second quarter."

A trader said that "airlines continued to get killed" Friday although he had no firm quotes on the sector. "There were no bids on any of that paper."

Bally Total Fitness' 9 7/8% notes due 2007 were quoted as having dropped to 75.5 bid from prior levels near 90. The Chicago-based operator of fitness centers said that its third- and fourth-quarter earnings would be in the 35-to-45 cents per share range - down from the 51 cents that analysts were expecting for the third quarter and the 54-cent projection in the fourth quarter.

Bally's also said it would take a third-quarter charge of 15 cents per share, after tax, resulting from settlement of litigation arising in the early 1990s.

Bally's shares lost $1.86 (23.46%) to close at $6.07 on NYSE volume of nearly 2.2 million shares, about six times the usual turnover.

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