Junk remains quiet; Flextronics falls; TransDigm prices add-on deal

By Paul Deckelman and Paul A. Harris

New York, June 4 - High-yield market activity remained restrained Tuesday, even as equities steadied after their downward spiral Monday. One of the few names showing any kind of feature was Flextronics International, whose bonds fell along with its shares after the electronics manufacturer warned that its earnings for the next two quarters would not meet analysts' expectations.

In primary market activity, TransDigm Inc. sold a $75 million add-on to its existing 10 3/8% senior subordinated notes due 2008, while Newmark Homes Corp. announced plans to sell $350 million of new notes in a two-part deal and Buffets, Inc. will bring $260 million.

Wyndham International, which had been expected to price, went with investors back to the drawing board.

The Dallas-based upscale lodging firm was initially expected to check out of the primary market with a completed transaction for its $750 million of six-year senior secured notes (Caa1/B-) during the week of May 27. Then late that week the market heard that the deal would likely price on Tuesday. However by late in Tuesday's session it appeared Wyndham would extend its stay in the market a day or two longer.

"They're redoing the covenants at this point to satisfy some investors," a syndicate source told Prospect News late Tuesday, adding that the deal is now expected to price late Wednesday or early Thursday.

The source also said that Wyndham would conceivable undergo some structural transformation, although the source specified that in such an event it would likely only be "slightly altered."

JP Morgan and Bear Stearns & Co. are the joint bookrunners on Wyndham.

Richmond Heights, Ohio aerospace industry supplier TransDigm, on the other hand, priced a $75 million add-on to its 10 3/8% senior subordinated notes due Dec. 1, 2008 at 102.625, in the middle of the 102-103 price talk, with a 9 5/8% yield to worst. Deutsche Bank Securities Inc. and Credit Suisse First Boston were the joint bookrunners.

Meanwhile, Sugarland, Tex. homebuilder Newmark Homes built up the forward calendar Tuesday with a $350 million two-tranche Rule 144A offering that is set to start roadshowing Thursday.

The deal, via Salomon Smith Barney, will be comprised of $200 million of senior notes due 2010, non-callable for four years (Ba3/B+), and $150 million of senior subordinated notes due 2012, non-callable for five years (B2/B-).

The deal will be used to help finance Technical Olympic, Inc.'s merger of Newmark and Engle Holdings Corp., and to pay debt.

Also Buffets, Inc. was heard Tuesday to be headed the high yield market with $260 million of eight-year senior subordinateds (B), via Credit Suisse First Boston, although that institution declined to confirm it.

The Eagan, Minn.-based owner, franchisor and operator of buffet-style restaurants will use proceeds from the Rule 144A deal to help refinance $212 million of bank debt, redeem $97 million of mezzanine debt and to make a $150 million distribution to Buffets Holdings.

Price talk of 7½%-7¾% was heard on Kansas City Southern Railway Corp. $150 million seven-year senior notes (Ba2 existing/BB-) which are expected to price Wednesday afternoon via Morgan Stanley. And price talk of 12¾%-13% emerged on its sister company, Transportacion Ferroviaria Mexicana SA de CV, whose $170 million of 10-year senior notes (B1/BB-) will likely price late Wednesday or early Thursday via Salomon Smith Barney.

Also Tuesday Prospect News heard more buy-side color on the rationale for some high yield accounts holding high-grade paper, as has been reported in recent issues of this newsletter.

Portfolio manager Curt Barrows, who manages the Nationwide High Yield Bond Fund with Karen Bater, said that while his fund in "not running high grade in a big way," there are some interesting comparisons to be drawn.

"Look at some of the issues that are triple-B that are trading wider than some of the double-B credits," Barrows said.

"AT&T, for example, is trading a lot wider than double-B Pioneer Natural. If you go back six months ago before Tenet got upgraded, Tenet 10-year paper was trading through Ford Motor Credit 10-year paper. So you have to ask yourself what's going on here.

"We're always looking for opportunities in the high yield market, and we'll take it either new issue, fallen angels, or coming out of receivership. But it's still very intensive on a credit basis.

"The risk you run on fallen angels is that those deals were originally done as investment grade. So they typically don't have any covenants. So they could potentially get worse, and you don't have the leverage that would have with a high yield deal, such as debt incurrence, carve-outs, change-of-control puts. So you've got to be careful."

Generally, secondary activity was called thin by traders, as participants continued to regard investment conditions warily. Sentiment did improve somewhat from Monday, when all of the major equity indices took a nosedive; on Tuesday the Dow Jones Industrial Average eased 21.95 points (0.2%) to 9687.84 but the Nasdaq Composite Index rose 15.56 points (1%) to 1578.12. The Standard & Poor's 500 Index was little changed, up 0.01 to 1040.69.

A trader said: "The stuff that I trade is all very quiet. I don't know what to tell you. It's all Adelphia." While there was some degree of volume in the bonds of the troubled Coudersport, Pa.-based cable-TV systems operator, little or no bond price movement was seen, with Adelphia's 10 7/8% notes quoted at 73.5 bid and its 10¼% notes at 75, both off about half a point.

The trader noted that "the wireless sector continues to go lower. Rural Cellular, American Cellular - all of these wireless guys just continue to be quoted lower. It's all of these Sprint affiliates, all of these wireless guys, just being quoted lower every day. It seems like there's just no bid."

One such wireless name ending lower Tuesday was Airgate PCS Inc., whose zero-coupon notes dipped to 60 bid from 63.5. The Atlanta-based Sprint PCS affiliate's shares hit a new all-time intraday low during the Nasdaq session, before coming off that low to finish at $9.06, down $1.10 (10.83%). Analysts cited investor concerns that Airgate, which expects to add between 35,000 and 40,000 new subscribers in the fiscal third quarter ending June 30, might miss that target, due to a trend of slowing subscriber growth throughout the phone industry.

Also among the wireless names, Nextel Communications International's benchmark 9 3/8% notes due 2009 were seen down almost a point, to end at 64 bid.

Canadian telecommunications operator AT&T Canada's bonds - already careening downward on arbitrageur selling linked to investor fears that parent AT&T Corp. won't stand behind the debt when it buys out the remainder of the company it doesn't already own - were pushed lower Tuesday, in the wake of Moody's Investors Service's downgrade of its bonds to Ca from B3 on Monday. The ratings agency expressed its own concerns that without some form of support from its reluctant parent, AT&T Canada's debt will need to be restructured.

Its bonds had pushed higher on Friday and then weakened Monday; in Tuesday's trading, its 10 5/8% notes due 2008 went from 14 bid to 11 bid while its zero-coupon notes due 2008 ended at eight cents on the dollar, down three points.

Outside of the communications sphere, Flextronics' 9 7/8% notes dipped to 106.5 bid from 108 previously and its 8¾% notes lost a 1½ points to close at 100.25. Meantime, the Singapore-based contract electronics manufacturer's shares plummeted $2.43 (19.72%) to $9.89 in busy Nasdaq trading of 47 million shares, almost five times the normal turnover.

Flextronics warned late Monday after the market closed that that it would likely only see earnings of 5 cents to 8 cents a share in the fiscal first quarter ending this month, on revenue of $3 billion. That's well down from its original projections of 10 to 13 cents a share on sales of between $3 billion to $3.3 billion. Flextronics plans to also take a $150 million charge as it tries to further lower its cost structure and consolidate some of its plants.

For the fiscal second quarter, when will end in September, Flextronics cautioned that earnings would likely come in at 7 to 10 cents a share on revenue of $3.2 billion - down from analysts' expectations of 13 cents a share. The company blamed the revised guidance on a weak business environment.

Auto components manufacturer Venture Holdings Corp.'s senior bond ratings were cut to CCC- from B, while its subordinated debt was slashed to CC- from B- by Standard & Poor's, which cited the insolvency filing of its German subsidiary, Peguform GmbH. That initially sent its bonds - which had swooned sharply over the last two sessions from levels around 90 for the senior bonds and 80 for the subs - even lower on Tuesday, with its 12% subordinated notes due 2009 falling to 63 bid from 65 and its 9½% notes due 2005 and 11% notes due 2007 moved down to 71 bid from the mid-70s. But a trader said that late in the day, "Venture popped, on rumors they're going to pay the coupon," which was due on both bonds on June 1. He saw the 11% notes, which had been trading at bid levels between 70 and 72 flat (without accrued interest) during the morning, moving back up to 76 bid/79. All of Venture's debt, he said, was up four to five points.

Also on the upside, Conseco Inc.'s bonds were heard about a point or so higher, its 10¾% notes due 2009 ending at 52 bid. The Carmel, Ind.-based insurance concern was heard by market sources Tuesday to be planning to increase liquidity with a $442.5 million asset-backed securities deal backed by manufactured housing loans. It also reported further progress in retiring the debt of its Conseco Finance Corp. unit.

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