Snow throws wet blanket over trading, though airlines gain; new Tesoro deal downsized

By Paul Deckelman and Paul A. Harris

New York, April 7 - A thick blanket of snow falling over New York and other Northeastern business centers Monday threw a wet blanker over junk bond trading, market participants said. Most issues held within a narrow range not much changed from where they had gone home on Friday, although the airline industry was noticeably better, presumably cheered by the prospect that the Iraq war may indeed soon be over.

Two deals priced in a high-yield market described as "smokin'" on Monday, while no new offerings were announced.

Investors came into the Tesoro Petroleum Corp. deal knowing that there would not be a sufficient amount of paper from the San Antonio refiner to satisfy the accounts' gnawing bond-hunger - the result of the massive tide of cash that has lately flowed into high yield. Unfortunately for some cash-heavy investors, Tesoro actually trimmed its bond deal on Monday, downsizing its offering of five-year notes to $375 million from $400 million, while upsizing its term loan which is structured to be repaid more rapidly. Tesoro's notes came inside of talk, yielding 8¼%.

And in the "tight-pricing deals" category, the new, upsized add-on from iStar Financial Inc. appears to have a firm grip on second place among junk-land's lowest-yielding issues. The New York City-based finance company priced an upsized $35 million add-on to its 7% notes of 2008 at 102.75, to yield 6.339% - making it a distant second to recent junk from Korea First Bank which achieved 5.783% but firmly ahead of Peabody Energy at 6.875%, both of which priced last month.

Although it was reported to be significantly oversubscribed, Tesoro Petroleum trimmed $25 million from the junk bond deal it had taken on the road last week. On Monday the San Antonio refiner priced $375 million of 8% five-year senior secured notes (Ba3/BB) at 98.994 to yield 8¼%, inside the 8 ½%-8 ¾% price talk. The deal had been planned at $400 million. Goldman Sachs & Co. ran the books on the Rule 144A deal. Banc One Capital Markets was co-manager.

"The bonds went down and the term loan went up so we could pay off the debt quicker," a Tesoro spokesman told Prospect News shortly after Monday's transaction priced.

"The senior secured note has a call feature that is longer than a term loan, so if you think that cash flows are going to be stronger you would want to give yourself flexibility to pay off more debt quicker," the source added.

"The senior secured note was well oversubscribed," the company official further commented. "We were going to be on the roadshow for five days, but ended up being on the road only two days.

"We had a book that was four-times filled. We had $2 billion of demand chasing $550 million.

"The market," noted the Tesoro source, "is definitely smokin'!"

In addition to Tesoro, terms also circulated Monday's market on an upsized iStar Financial's upsized $35 million add-on to the senior notes due March 15, 2008 (existing ratings Ba1/BB+/BBB-). The deal, increased from $25 million, priced at 102.75 to yield 6.339% via Deutsche Bank Securities.

According to data developed by Prospect News, that 6.339% yield sandwiches iStar's add-on between the extremely-tight pricing new 10-year notes from Korea First Bank which priced March 5 to yield 5.783%, via Lehman Brothers and UBS Warburg, and the latest deal from Peabody Energy, which priced $650 million of 10-year notes on March 14 to yield 6.875%, via Lehman Brothers and Morgan Stanley.

Tesoro was one of three deals parked on the forward calendar of new issuance to price during the week of April 7, at the start of Monday's session. With its terms now in the books the two remaining offerings that are expected to be transacted before Friday's close are Town Sports International's $250 million of eight-year senior notes (B2/B-), on the road through Thursday via Deutsche Bank Securities, and Brake Bros.' £175 million of eight-year senior notes, in sterling and euro tranches, (B3/B-), via joint bookrunners Credit Suisse First Boston and JP Morgan.

Meanwhile in last Friday's edition of Bond Market Roundup, Larry Adler and other members of the U.S. fixed income research team at Salomon Smith Barney (SSB) commented upon the supply and demand travails which, according to numerous sources who have recently spoken to Prospect News, currently beset the buy-side.

"High yield mutual fund flows are typically coming in at over $1 billion per week, an astounding number compared with previous years," the SSB researchers noted. "Equally extreme stories are being heard among emerging market investors. And fuel is being added to the fire by little need for new money by corporate issuers. Not only is this evident in the high-grade market, but CP balances and commercial and industrial loans also are near low levels. This mismatch between supply and demand is not improving."

When the new Tesoro bonds were freed for secondary dealings, they moved up to about 100.75 bid/101.25 offered from their issue price at 98.94, "a nice move," a trader said.

He also quoted Frontier Oil's new bonds, which debuted on Friday at 99.15 and then promptly moved up, as having stayed essentially changed at those higher levels Monday. The bonds were seen late in the session at 102 bid/102.5 offered.

At another desk, a trader quoted Allied Waste Industries Inc.'s new 7 5/8% notes due 2013, which priced at par on Friday, as hanging in at 100.75 bid/101.5 offered, not much changed from where they went in initial secondary dealings Friday after they were priced. He saw the waste disposal company's existing 10% notes due 2009 unchanged at 104 bid/105 offered.

The trader said that Monday was "a weird day. Everyone got excited about the war news, and stocks raced up and then died, and basically closed only up slightly on the day. And a lot of cash [in the junk market] probably got put to work last week," between a slew of new deals and bidding existing bonds up. And there were economic concerns as well.

But he said probably the most important factor in stilling the market Monday was the snow, which dumped more than half a foot of snow on the Eastern seaboard, and more in some places.

"Nothing really gave back a lot, but nothing moved up a lot" Monday, he said. "We've come so far, so fast, and with the back drop of the economy," it would be natural to expect a pause, maybe some consolidation. The stock market and the junk market as well, have meanwhile rallied on the war news he said, since he said "the war seems to be somewhat controllable at this turn."

Away from that, he reiterated, "you've got the backdrop of the economy, and it's dumping snow - not a lot of people around, and people going home early. So nothing really moved today."

He saw the recently robust merchant energy sector just standing pat, with Calpine Corp. - a big mover last week on speculation that it might soon cinch a financing deal the way a number of other sector players recently have - having "kind of fizzled out." He saw the San Jose, Calif.-based power producer's 8½% notes due 2011 having pushed as high at 67.25 bid/68 offered from opening levels at 66.5 bid/67.5 offered, but by the end of the day, they had backed off, to close at 66 bid/67.

Likewise, he said, AES Corp.'s 9½% notes due 2009 were unchanged at 90.5 bid/ 91.5 offered. AES had firmed on Friday on news that the Arlington, Va.-based power producer would bring a $1 billion junk bond issue and use the proceeds to take out $525 million of existing paper and $475 million of bank debt.

Another trader said that AES "did absolutely nothing" on Monday. "People were digesting the tender information. The bonds did nothing to speak of."

He also saw Calpine's 81/2s dipping half a point to 66 bid/67 offered. Calpine had been "very active lately, but not much today."

What little movement there was in the merchant energy sector came from Mirant Corp., whose 7 5/8% notes due 2006 moved to 67.5 bid/68.5 offered from 66 bid/67 offered on Friday, and Dynegy Inc., whose 6 7/8% notes due 2011 were "up a little," the trader said, to 71.5 bid.72.5 offered from 69 bid/70 offered. Houston-based merchant energy operator Dynegy announced a refinancing deal last week, while investors speculated whether crosstown rival Mirant might soon do so as well.

The trader also saw some activity in the airline sector, apparently cheered by the news that the war seems to be almost over, with no terrorist attacks against the industry and the possibility that fuel prices will slide (oil prices have softened as it has become evident that Iraq's oil fields will likely be back in operation in a few weeks with minimal damage).

Northwest Airline's 8 3/8% notes due 2004 gained three points from Friday's levels, to 75 bid/76 offered. Also up about three points were Delta Airlines' 6.65% notes due 2004, to 80 bid/81 offered. Delta's longer dated 7.90% notes due 2009 were even better, at 56.5 bid/57.5 offered, a gain of more than five points. AMR Corp.'s 9% notes due 2012 - which jumped last week on hopes the beleaguered industry-leading carrier could wring sufficient concessions from its unions to keep out of bankruptcy - firmed from 33 bid/34 offered Friday to Monday's 35.5 bid/36.5 offered.

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