Allegheny ratings cut to junk; Argosy bonds off on earnings warning; FMC upsizes 7-years

By Paul Deckelman and Paul A. Harris

New York, Oct. 9 - Allegheny Energy Inc.'s debt ratings were cut to junk levels Wednesday by Standard & Poor's, completing the company's fall from investment-grade grace; the Hagerstown, Md.-based utility owner and merchant energy provider thus becomes the latest name from that troubled sector to run into financial troubles. Elsewhere, Argosy Gaming Co. Shares and bonds slid after the riverboat casino operator said that third-quarter earnings would likely come in well below analysts' expectations.

In the primary sphere, FMC Corp. not only managed to get its planned seven-year senior secured bond issue done - no small feat amid currently unsettled market conditions - but even upsized the offering to meet demand, although the bonds did price at a discount to par.

Meanwhile no terms were heard Wednesday on the deal that Amerco Inc. has been hauling around to investors. However, asked late Monday about reports that the deal was hitting bumps, syndicate sources were mum.

FMC upsized its seven-year senior secured notes (Ba2/BB+) to $355 million from a planned $300 million. They came, via Salomon Smith Barney and Banc of America Securities, with a coupon of 10¼%, pricing at 98.772 to yield 10½% - right on the 10½% area price talk.

Syndicate sources told Prospect News late Wednesday that investors seemed to find the Philadelphia agricultural, industrial and specialty chemical-maker's notes invigorating at 10½%.

"There was strong demand and the book was three times oversubscribed," one syndicate source commented. "A lot of people wanted to be a part of it."

During a conversation with Prospect News on Wednesday afternoon after the deal priced, FMC's director of investor relations Eric Norris said that a $100 million maturity in November among other liquidity issues caused Moody's to downgrade the company to speculative grade. However, Norris added, the new paper - FMC's first junk-rated deal - came where the company anticipated it would (see story on page one of this issue).

Some market observers were also anticipating hearing terms Wednesday on Amerco's $275 million of seven-year senior notes (Ba2/BB+/BB+) via Credit Suisse First Boston and Merrill Lynch. Price talk of 12% area was heard on Monday.

At the close of the session no terms had been heard, however. And word was circulating the market late Wednesday that the deal was meeting some resistance. Syndicate sources declined to comment.

And from the realm of emerging markets credits a deal appears to be coming from Ukrainian wireless operator Kyivstar GSM. Sources have told Prospect News that the Kiev-based company could bring up to $200 million sometime in November via Dresdner Kleinwort Wasserstein. That institution has not confirmed the information.

One source told Prospect News on Wednesday that although emerging market governments are relatively volatile at present the emerging wireless sector appears to be attractive at the moment with credits such as PTC, Eurotel Bratislava, MTS and Partner "trading above par."

This source also said that the eurobond market, while presently quiet, has the potential to spring to life.

"We're really wondering what the hell is happening to the equity markets, and waiting for the next high-yield issue to test the market," said the source. "There is certainly an immense array of opportunities with LBOs, restructurings, distressed plays, and refinancings, but the market is so volatile - in one direction! - that banks are taking extra precautions with assuming risk."

Back in the secondary market Allegheny Energy was on the receiving end of a downgrade from Standard & Poor's which dropped its senior unsecured ratings to BB from BBB previously, and put the ratings on CreditWatch with negative implications.

The downgrade came as no surprise to the market, following as it did by a day the company's announcement that its principal credit agreements and those of several subsidiaries - Allegheny Energy Supply Co. LLC, and Allegheny Generating Co.-were in technical default after it declined to post additional collateral in favor of several trading counterparties.

That announcement of technical default had sent Allegheny's bonds lower on Tuesday; Allegheny Generating's 8¼% notes due 2012, for instance, had slid to 42.5 bid from prior levels around 49. No fresh levels were seen on the bonds Wednesday after the ratings downgrade.

S&P analyst Tobias Hsieh noted in his downgrade message that Allegheny had planned to issue between $400 million and $600 million of equity and convertible debt in September to reduce financial leverage and bolster liquidity, but "did not follow through with its plans because of a sharp drop in its stock price and administrative obstacles."

Allegheny then indicated to the rating agency that, as an interim measure, it planned to have an additional $400 million bank loan in place by October to provide liquidity, but for reasons unclear to Standard & Poor's, the schedule was postponed to early December. In the meantime, said Hsieh, "Allegheny's liquidity has become increasingly constrained."

That tightened liquidity picture had pushed Moody's Investors Service to downgrade Allegheny's ratings to Ba1 from Baa2 on Oct. 1. Fitch Ratings also lowered the company's senior unsecured ratings to BB from BBB on Tuesday.

Allegheny's shares - which lost half of their value on Tuesday after announcement of the technical default (which in turn triggered the cross-default provisions under its principal bank credit agreements and other trading agreements) - initially swooned as low as $2.95 from Tuesday's close at $3.80, but later in the day, the shares recovered to actually end higher (up 25 cents - 6.58% - at $4.05 on New York Stock Exchange volume of 12.5 million shares, about five times the norm.

Also later in the session, Allegheny, seeking to turn the situation around, said that it had filed an application with the Securities and Exchange Commission seeking approval for Allegheny Energy Supply Co. to provide collateral to support additional borrowings; the application seeks authorization for the unit to borrow up to $2 billion on a secured basis.

As a part of the filing, Allegheny Energy also disclosed that it intends to cut its dividend by at least half - and maybe even more, up to and including suspending it altogether - through at least the fourth quarter of 2003, although the company said that it has not yet determined the actual future dividend level within this range.

Allegheny said the SEC filing was part of its ongoing effort to obtain the liquidity necessary to cure existing default conditions and to resume posting collateral to trading counterparties.

Allegheny's troubles were the latest manifestation of problems in the utility and merchant energy sectors, which have been hard hit over the past year - a slide which began with the revelations last fall about Enron Corp.'s fishy book keeping, and which escalated as the financial reporting of other sector players came under regulatory scrutiny, and as their profits also shrank in the face of the softer economy, both in the U.S. and abroad.

Another such company being battered last week and this week has been TXU Corp., whose nominally investment-grade debt issues have been getting pounded down to junk bond like trading levels and whose shares have also slid, mostly due to the troubles of the Dallas-based integrated utility company's European unit.

TXU said on Wednesday that it was in talks with its banks on removing a provision on an outstanding credit line that would trigger repayment of a $500 million working capital facility if the company's European unit defaults on its debt. The possibility that the U.S.-based parent might lessen or even withdraw its support have smashed TXU's euro-denominated debt issues down to about the 20 level; they had been quoted Tuesday at 35 and as recently as last week were around 80; Moody's on Wednesday dropped the rating on the European bonds to Baa3 from Baa1, while re-affirming the Baa3 rating of the parent company.

"The company is currently encumbered with a number of long-term electricity purchase contracts that are out of the money. Additionally, with the collapse in wholesale generation prices and the high margins in the competitive supply business, the company has suffered higher-than-expected erosion of its retail customer base," Moody's said in cutting the TXU Europe ratings.

The parent's dollar denominated bonds, meantime, are also trading at junk-like levels despite their nominal investment grade rating; its 6 3/8% notes due 2006 were being quoted around 69 bid, well down from recent levels in the mid-80s.

TXU shares, meantime fell $2.53 (14.73%) in Wednesday's NYSE dealings, to end at $14.65; volume of 26.8 million shares was more than ten times the average daily turnover.

"TXU is an absolute mess," one junk trader said, "but our desk has not been given it, or Allegheny - yet."

Other utility names on the downside Wednesday included AES Corp., whose 8 3/8% notes due 2007 were quoted down as much as nine points on the session to 18.5 bid, while Calpine Corp.'s 8 5/8% notes due 2010 were four points lower, at 34 bid. CMS Energy Corp.'s 7½% notes were at 63, down from prior levels in the lower 70s.

Outside of the power sector, Argosy gaming bonds were quoted lower after the Alton, Ill.-based gaming company said it expects third-quarter per-share earnings in the 63 to 65 cent range. While that's up from year-ago earnings of 58 cents per share (62 cents not including a $1.9 million charge for an abandoned Wisconsin casino project), it's well under the 73 cent per share projection of Wall Street analysts.

Argosy's shares were down $2.47 (12.47%) Wednesday to $17.34 on NYSE volume of about 3.3 million shares, 11 times the norm. Argosy's 10¾% notes due 2009 slipped two points to 105.5 bid, while its 9% notes due 2011 were also down a deuce, at 101.5 bid.

A trader said that "everything was weak. There was just more bad news, with no reason to buy."

A lot of the market's tone, he said was set by continued weakness in the bonds and shares of such investment-grade giants as Ford Motor Co. and AOL Time Warner. Ford's bonds were again in reverse Wednesday after widening out sharply on Tuesday after its stock fell in response to action by Credit Suisse First Boston cutting its investment rating on automotive sector stocks and specifically lowering its share price target on Ford to $10 from $20. CSFB had also raised the specter that the No. 2 U.S. carmaker might not be able to keep its investment-grade debt rating, although the major ratings agencies indicated that it was not in immediate downgrade danger.

Ford's 7¼% notes due 2011, which on Monday had been quoted at bid levels equivalent to 500 basis points over Treasuries, had by Tuesday jumped to yields of 560 bps over; on Wednesday, those bonds were heard to have widened out to as much as 595 bps over the government paper.

All of that - as well as the continued decline in stocks overall - threw a wet blanket over the junk bond market.

The trader quoted Qwest Communications International bonds two points weaker at 42 bid/44 offered, while Host Marriott Corp.'s 7 7/8% notes due 2008 were at 88 bid/89.5 offered, down from recent levels around 93.

He also said that while the troubled airline sector was "finally finding a bid," its was at lower levels, with Northwest Airlines' 8¾% notes due 2004 quoted at 59 bid/64 offered, down from 65 bid on Friday, and Continental Airlines' 8% notes due 2005 at 45, down from 50 earlier in the week. "That whole sector is trading like it's going to go into bankruptcy," he said.

A trader saw Fleming Cos.' 10 5/8% notes down three points, at 48 bid/52 offered, while its 10 1/8% notes were two points lower, at 73 bid/76 offered.

Nextel Communications Inc.'s 9 3/8% notes due 2009 opened two points lower, at 73.5 bid, but improved slightly to end the day's trading down a point at 74.5 bid/75.5 offered.

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