AES off on Drax payment snafu; Foamex falls on loss warning; QwestDex mega-deal emerges

By Paul Deckelman and Paul Harris

New York, Oct. 16 - AES Corp. paper retreated Wednesday after its U.K. unit, AES Drax Holdings Ltd. said that TXU Corp.'s troubled European unit missed a payment to Drax, causing Standard & Poor's to cut the ratings on the latter's bonds. Out of that same embattled utility and merchant energy sector, Dynegy Inc.'s shares and bonds were lower as the company announced that it would exit the problem-plagued energy trading business and cut a "significant" number of jobs in a corporate restructuring; meanwhile, the company's president became the second key executive in recent months to offer his resignation.

Outside of that sector, Foamex International Inc.'s bonds were on the slide and its shares lost half their value on the company's warning that it expects a third-quarter loss due to higher raw materials costs, while analysts had been expecting a profit.

In the primary sector, participants saw the long-awaited billion-dollar bond deal that will help finance the leveraged buyout of Qwest Communications International's QwestDex telephone directory unit about to take to the road for a marketing pitch, perhaps as soon as Thursday.

Meanwhile the BCE directories deal was said to be standing outside the booth, tapping its foot as it awaited its turn.

And sources told Prospect News to expect Ball Corp. to shortly unscrew the lid on a fresh supply of new junk bonds.

"The Yellow Pages Wars Begin!!!" read the subject box of an early e-mail message to Prospect News Wednesday.

QwestDex's deal - to be issued jointly by Dex Media East LLC and Dex Media East Finance Co. - will be $1.05 billion in two pieces and is set to hit the road Thursday, according to a syndicate source. The Rule 144A offering comes via joint bookrunners JP Morgan, Banc of America Securities, Deutsche Bank Securities Inc., Lehman Brothers and Wachovia Securities, Inc.

The deal, to fund the first phase of the acquisition of QwestDex, Qwest Communications' yellow pages/directories business in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota by the Carlyle Group and Welsh, Carson, Anderson & Stowe, is comprised of $350 million of seven year non-call-four senior notes, and $700 million of 10-year non-call-five senior subordinated notes. The deal is expected to price Oct. 30.

A capital markets source, meanwhile, told Prospect News that sooner rather than later investors will likely be getting a call from Canada as the BCE directories financing, to fund the LBO of the directories business by Kohlberg Kravis Roberts and Teachers' Merchant Bank, a unit of the Ontario Teachers' Pension Plan, will contain approximately C$600 million of senior subordinated notes. The C$3 billion buyout also is said to include a C$1.54 billion credit facility (B1 expected) that will be led by CIBC Capital Markets, Scotia Capital and Credit Suisse First Boston. The deal, according to the source, could appear in late October.

Finally in Wednesday's primary, Prospect News learned that Ball Corp., another acquisition deal that has been positioned on the shadow calendar since high summer, could be transacted during the remainder of October.

A source said that the financing, to fund the acquisition of German container firm Schmalbach-Lubeca, contains a $200 million bridge loan to a high yield deal, with Lehman Brothers the likely lead on the junk bonds. The deal, according to this source, could come "next week or the week after."

Back in the secondary trading arena, AES' bonds were seen anywhere from two to five points lower on the session after AES Drax claimed that TXU Energy Europe had failed to make a £20 million ($31 million) payment for electricity that it had bought in September.

A trader quoted AES' 9½% notes due 2009 as having fallen as low as 36 bid;/38 offered from prior levels at 40 bid/42 offered. Another trader saw those bonds as having ended at 40, down from 42 previously, and pegged AES' 9 3/8% notes due 2010 as having pushed down to 39.5 bid from 42.25 previously. At another desk, AES' 8 3/8% notes due 2007 were quoted as having lost more than five points on the session to close at 15.

Arlington, Va.-based AES' shares fell 24 cents (20.17%) to end at 95 cents on the New York Stock Exchange, on volume of 13.2 million shares, more than four times the usual.

While AES said that TXU Europe had failed to make the scheduled payment and indicated that it had no intention of doing so, TXU took a different view, claiming in a statement that current payments were being included in negotiations it was holding with its counterparty electric suppliers.

However, the Dow Jones News Service, citing electric industry sources in Europe, reported that TXU Europe had broken off its talks with its suppliers.

Standard & Poor's cut the rating on AES Drax's £200 million and $302 million of senior secured bonds to CC from B previously and lowered the company's subordinated debt to C from CC. The ratings remained on Credit Watch with negative implications, meaning another downgrade was possible.

S&P said the "nonpayment by TXU Energy is a default under the contract and could lead to termination [of the agreement] if it is not quickly rectified. There appears to be no prospect of any payment from TXU Energy, and Standard & Poor's expects that the energy sales contract will end in the next couple of days."

S&P credit analyst Jan Willem Plantagie further cautioned that a "contract termination will leave Drax in a situation where it has to act as a merchant operator. In light of the future levels of scheduled senior debt service and the current and forecast short to medium-term U.K. wholesale power prices, it is highly unlikely that Drax will be able to generate enough cash to continue its debt service payments under the current finance structure."

S&P also cut the credit ratings of TXU Europe and its European subsidiaries to CC from B+ . The ratings remain on CreditWatch with negative implications.

The ratings service said its action "reflects the heightened potential for TXUE to be placed into administration [the U.K. equivalent of bankruptcy] in the near term. "

S&P analyst Anthony Flintoff further said that the company "is currently investigating the possibility of renegotiating contracts with its creditors, including lenders, to reduce ongoing liabilities in order to remain operational. Failing that, the break-up and sale of the business is likely."

TXU Europe is the European arm of Dallas-based utility operator TXU Corp., whose nominally investment-grade bonds have recently been beaten down to junk-like levels in the 60s and 70s on investor fears that the problems of the European subsidiary will drag the parent down. TXU Europe's own sterling and euro-denominated bonds, which were not seen trading around on Wednesday, had fallen into the 20s last week as its troubles escalated and on the possibility that its corporate parent might distance itself from its problem child.

Also on the energy front, Dynegy Inc.'s bonds were easier Wednesday after the company announced that it was throwing in the towel and exiting the troubled energy trading business, a move that would likely result in cutting up to a thousand jobs from Dynegy's 5,500-person work force.

A trader said he saw bids lower on the bonds, quoting them as having fallen to 25 bid from prior levels at 28 bid/32 offered, although he added that "I didn't see much of the right-hand side [offerings to buy bonds]." He speculated that the fall in the bid levels might just be because of "people trying to buy cheap bonds by throwing out unrealistic bids."

Dynegy shares dropped fully 25% of their value, falling 27 cents to close at 81 cents, although NYSE volume of 8.9 million shares was slightly less than normal.

The Houston-based company's move out of energy trading - a business which went sour following the collapse last year of cross-town rival trader Enron Corp. amid revelations of improper book keeping and the erosion of the wholesale energy market - will let Dynegy focus its attentions on its natural gas, electricity generation and global communications businesses.

Analysts say the move should also let the liquidity-challenged company free up as much as half a billion dollars of capital that had been pledged as collateral for its energy trading efforts, with wary counterparties having demanded security for their trades ever since the fall of Enron. Dynegy had tried without success to find a deep-pocketed partner who would back its trades.

Dynegy also announced the resignation of president and chief operating officer Steven Bergstrom, who was closely identified with the energy trading unit that is to be disbanded. His resignation marks the second sudden departure of a major executive this year, following the exit of CEO Chuck Watson back in the spring.

Staying with the ailing utility sector a bit longer, Calpine Corp.'s 8 5/8% notes due 2010 lost two points to close at 36 bid, while CMS Energy Corp.'s 7½% notes due 2009 were three points lower at 66.

Apart from the deteriorating utility credits, Foamex International's bonds "got crushed," a market source said, quoting the company's 10¾% senior notes as having tumbled to 50 bid from prior levels at 78, and its 13½% subordinated notes as having nosedived even further, down to about 16 bid from previous levels in the mid-70s.

Foamex shares meanwhile collapsed, down $1.67 (52.35%) to end at $1.52 on Nasdaq volume of 428,000 shares, four times usual.

The Linwood, Pa.-based maker of polyurethane foam rubber products warned that it expects to report a net loss for the third quarter, mostly due to previously disclosed price increases of what it called "an unprecedented magnitude" from its raw material suppliers, combined with higher than expected selling, general and administrative expenses principally related to one-time fees.

Wall Street analysts had been predicting the company would show a profit of 18 cents per share for the quarter.

Foamex also said that it expects to report EBITDA in the range of $7-$9 million for the same period, excluding any restructuring charges or credits.

In light of these results, it said, Foamex has obtained a waiver from its bank lenders of its financial covenants for the period ended Sept. 29. The waiver will be effective until Nov. 30, as Foamex negotiates with its bank lenders to amend its financial covenants. The company expects to receive the necessary covenant amendments by Nov. 30.

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