Mirant up despite restatement; Philips-Van Heusen prices, rises in trading; AES upsizes

By Paul Deckelman and Paul A. Harris

New York, April 30 - Mirant Corp. debt rose strongly Wednesday, even as the troubled Atlanta-based merchant energy operator posted more than $2 billion in 2002 losses, re-stated earnings for several previous years downward and warned that it could be forced into bankruptcy, and other energy operators came along for the upward ride.

In the primary market, one of those other power producers - AES Corp. - was heard by syndicate sources to have increased the size of its planned junk bond offering to as much as $1.8 billion from the originally announced $1 billion. Meanwhile, apparel maker Philips-Van Heusen Corp.'s wildly oversubscribed offering of 10-year senior notes proved to be a fashionable fit for the market, which took the new bonds smartly higher when they were cleared for secondary activity. New deals also priced for PolyOne Corp. and for drive-by issuer JLG Industries Inc.

One market source told Prospect News late in Wednesday's session - as the news on the massively upsized AES deal worked its way through the market - that the heavy volume of cash now fighting for berths in high-yield may have pried open the window for other energy companies - perhaps even ones that had caused investors to break out in a rash a mere six months ago. When pressed for names, this source uttered two syllables: "CAL-pine," but also specified that others might show.

The source also said that Dex Media has been seen eyeing the present market for the second half of the two-part financing for the spin-off of the Qwest's phone directories businesses.

Evidence of the cash infestation turned up Wednesday as price talk emerged on AES Corp.'s upsized and restructured deal.

The offering is now $1.4 to $1.8 billion, increased from $1 billion, and is being sold in two tranches as opposed to the previously announced single tranche.

Pricing is expected Thursday afternoon.

Talk is for a yield in the 8¾% area on the $1 to $1.2 billion 10-year notes and 9% area on $400 to $600 million of 12-year paper.

Also drawing huge demand was Phillips-Van Heusen's 10-year deal that was reported Tuesday to have been at least 10-times oversubscribed by high-yield accounts.

Doubtless some investors went away empty-handed because the company priced the amount it had announced, $150 million, bringing it at par to yield 8 1/8%.

When downwardly revised price talk had emerged Tuesday on Phillips-Van Heusen's deal, and word circulated the market that the deal was "ridiculously oversubscribed," a source told Prospect News that it did not necessarily portend another huge inflow of cash into the market - that orders had come in early on the deal. The source attributed the massive buy-side play in Phillips-Van Heusen to the extreme load of cash that junk investors have to put to work, and the appeal of the credit.

When news of the AES upsizing and restructuring circulated on Wednesday afternoon, however, one source said that the issuer's move possibly does anticipate that investors have still more cash to set to work since the $955 million inflow - the ninth consecutive positive flow for high-yield mutual funds - was reported for the week ending April 23.

Phillips-Van Heusen sold $150 million of 10-year senior notes (B2/BB-) at par to yield 8 1/8%. The deal, via Credit Suisse First Boston, JP Morgan and Lehman Brothers, priced spot on to the downwardly revised 8 1/8% price talk. Earlier talk was 8 3/8%-8 5/8%.

Soon after the apparel-maker's deal priced the notes were quoted as trading at 103.25 bid/103.75 offered in the secondary market - another sign of the demand, said a source.

Terms also emerged Wednesday on PolyOne Corp.'s upsized $300 million of seven-year senior notes (B2/BB-), which priced at par to yield 10 5/8%, inside of the 10¾%-11% price talk, via Citigroup. The deal was announced at $250 million.

JLG Industries, Inc. also priced a deal Wednesday. The McConnellsburg, Pa. construction equipment-manufacturer sold $125 million of five-year senior notes (B1/BB-) at par to yield 8¼%, at the low end of the 8¼%-8½% talk, via Credit Suisse First Boston.

And Huntsman International LLC affiliate HMP Equity Holdings priced an upsized offering of $415.06 million proceeds of units on Wednesday, increased from $320 million. The units were comprised of one note and one warrant for 2.809 common shares of HMP Equity Holdings, or 12% of the pro forma equity of the company. They priced at 47.435 to yield 15.433%.

Price talk was 15% with warrants. The deal that was run by Credit Suisse First Boston and CIBC World Markets.

On Wednesday four deals showed up to occupy the forward calendar slips vacated by the day's four transactions.

A quick-to-market offering from Amkor Technology, Inc. of $425 million senior notes due 2013 (B1/B) is expected to price on Thursday afternoon via Citigroup. The company will use the money it raises to redeem its 9¼% notes due in 2006.

Meanwhile, the roadshow is set to begin late in the present week for Interline Brands' $200 million of eight-year senior subordinated notes (Caa1/B-). The Moorestown, N.J.-based distributor of repair and maintenance products is expected to price its deal during the week of May 5, via Credit Suisse First Boston and JP Morgan.

The roadshow gets underway Thursday for Titan Corp.'s $200 million of eight-year senior subordinated notes. The San Diego-based firm expects to price its offering on May 9.

And Moscow-based dairy and juice manufacturer Wimm-Bill-Dann Foods OJSC was heard to be in the high-yield market with $150 million of five-year senior notes (B3/B+). The roadshow is set to start on May 2, with UBS Warburg doing the bookrunning.

In addition to the upwards move in Philips-Van Heusen's new notes, while PolyOne's new 10 5/8% senior notes due 2010, which priced at par, were quoted by a trader as having risen to 102 bid/103 offered. JLG Industries' new 8¼% senior notes due 2008, were heard to have firmed only slightly from their par issue price, to 100.25 bid/100.75 offered.

Back among the already established issues, Mirant "moved up quite a bit," one market source said, quoting its 7 5/8% notes due 2006 as having powered up to 85.5 bid from prior levels around 80, while its 7.20% notes due 2008 and 8.30% notes due 2011 were seen having gotten as good as a 74 bid from 69.

At another desk, a trader agreed that Mirant's paper was "up sharply," quoting its 7.40% notes due 2004 as having gone as high as 87.5 bid/88.5 offered from Tuesday's levels at 78.5, and described the issue as having "traded heavily."

At first glance, it would be hard to figure out why. Mirant announced that for 2002, it had a net loss of $2.4 billion ($6.06 per share), mostly due to large restructuring charges, substantial non-cash write downs, and a valuation allowance against the company's net deferred tax asset balance. The 2002 loss represented a sharp turnaround from 2001, when the company had income of $409 million ($1.19 per share).

That 2001 net income was restated, down $159 million from the company's originally reported figures, while the 2000 income was likewise restated down $29 million to $330 million; last year, Mirant asked its independent auditor, KPMG, to perform the re-audit after it discovered an accounting error that led to the overstatement of net income by $41 million from 1999 to 2002.

Mirant had delayed its 2002 report pending completion of the re-audit and which said it expected to shortly file quarterly breakdowns for the 2001 and 2002 figures, as well as its first-quarter 2003 results with the Securities and Exchange Commission; it said the re-audit had found no indications of fraud, and attributed the mis-stated earnings instead to errors.

In its statement, Mirant indicated that completion of the re-audit essentially closed the book on what company president and chief executive officer Marce Fuller termed "a period that has been very frustrating for our stakeholders, employees and management. This is a critical step in restoring confidence in Mirant.." With the re-audit out of the way - and with investment community concerns about possible accounting fraud apparently now put to rest - Fuller said that the company could now "turn our full attention to completing a successful refinancing of major debt maturities and returning Mirant to profitability and growth."

The Mirant statement also noted that the company - which has about $8.6 billion of total debt, including $1.125 billion coming due in mid-July - is in discussions with its lenders regarding the refinancing of a substantial portion of the debt, and recently confirmed that it has received temporary waivers from its banks.

It warned in its filing with the SEC that should the refinancing efforts not pan out and if its lenders or debt holders elect to accelerate Mirant's indebtedness, "the company would likely be required to seek bankruptcy or other protection." It further said that due to the uncertainty associated with its refinancing efforts, the KPMG report includes a warning questioning whether Mirant would be able to continue as a "going concern" in that event, - although Mirant added that it "anticipates that this paragraph should be removed if it successfully completes its proposed refinancing."

But Mirant also said that under the current refinancing plan it expects to pay all obligations in full, with interest (see story elsewhere in this issue).

While bondholders were apparently sufficiently reassured that the lenders likely will not force Mirant into Chapter 11 and took the bonds higher, shareholders were not as sanguine; its New York Stock Exchange-traded shares, which had soared by as much as 14% in intraday trading after release of the 2002 report and accompanying company statements, fell back later in the session to end down 15 cents (4.34%) at $3.31, on volume of 37.5 million, slightly more than six times the normal turnover.

The strength in Mirant was enough to help pull other merchant energy sector players higher. Dynegy Inc.'s bonds - which had firmed smartly on Tuesday after the Houston-based merchant energy company reported better-than-expected first-quarter earnings, raised its guidance and announced its intention of cutting its $7.7 billion debt load in half - were again up on Wednesday, with its 8¾% notes due 2012 moving up to 95 bid/96 offered from prior levels around the 94-94.5 area.

A trader meanwhile noted that Calpine Corp. "was up off Mirant," quoting the San Jose, Calif.-based independent power producer's 8½% notes due 2011 as having firmed to 73 bid from prior levels around 70; at another desk, Calpine's 8 5/8% notes due 2010 were nearly three points better, at 72.25. Calpine, like Mirant, is seen by market players to be likely to announce refinancing news sometime in the near future; if and when that happens, Calpine will join a list of other utility/merchant energy operators who've recently announced refinancing deals, including such names as Dynegy, AES, El Paso Corp. and Reliant Resources Inc. "All the news out on the sector [of late ] has been positive," a market source declared in noting the continued rise of the formerly beleaguered energy-producer constellation.

Elsewhere, Tyco International Group SA's bonds were seen little changed despite revelations of fresh accounting problems at the Bermuda-based industrial conglomerate.

Its 6 3/8% notes due 2011 were quoted at 98 bid, around the same levels they held on Tuesday, although a trader opined that 4.95% notes "may have been a point better" at bid levels around 100.125-100.25. At any rate, "we didn't see too much activity in the bonds," he said, although he noted that the stock was another story, up 23 cents (1.50%) to $15.60 in NYSE dealings on what the trader described as "huge" volume of 54.8 million shares, about four times the norm.

"Everyone's trying to figure out why," he added, in view of the fact that all of the news coming out the company Wednesday was bad.

Tyco said Wednesday that it had a net loss of $468 million (23 cents a share) from continuing operations in the fiscal second quarter that ended March 31, including some $1.4 billion of charges (55 cents per share). Management attributed about half of the charges to its estimations of reserves, accruals and valuation of investments - but the rest of the charges were attributable to inappropriate capitalization of expenses and other accounting adjustments. Wednesday's Wall Street Journal reported on the latest burst of accounting problems at Tyco, whose previous accounting irregularities led to the ouster last year and the eventual indictment of its high-living bon vivant former CEO, Dennis Kozlowski, as well as the sacking of various other top executives.

Kozlowski's replacement, Edward Breen, said in a conference call late Wednesday following the release of the results that he planned to fire an undisclosed number of staff, presumably in order to get to the bottom of the continuing accounting problems. While Breen declared that Tyco had now uncovered nearly all the accounting problems inherited from the previous management, skeptics noted that he had made a similar claim in December.

News of the big loss surprised Wall Street, where analysts had expected earnings for the quarter of about 32 cents per share.

However, the loss was still smaller than the year-ago deficit of $6.37 billion ($3.20 a share), which included a substantial charge related to the sale of Tyco's financial services unit, CIT Group Inc.

Investors were also apparently cheered by Tyco's report that free cash flow rose to a better-than-expected $833 million in the second quarter, or 47% above the $568 million in the same period in 2002, using a new definition of free cash flow; it also rose using the previous standard, to $1.3 billion, from $1 billion a year ago. Tyco had previously estimated that free cash flow would come in anywhere from $450 million to $750 million.

A trader said that AK Steel Corp. bonds were trading down Wednesday "being manipulated by one dealer." He said that volume was "not heavy - but was still down nonetheless," with the Youngstown, Ohio-based steel producer's 7 7/8% notes easing to 89 bid and its 7¾% notes at 88 bid, both down about two to three points on the session.

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