CSK Auto, CVRD price upsized deals; A&P jumps on smaller-than-expected loss

By Paul Deckelman and Paul A. Harris

New York, Jan. 9 - CSK Auto Corp. and Brazilian mining company Companhia Vale do Rio Doce SA (CVRD) were heard by high yield syndicate sources to have priced upsized deals on Friday, while South American steelmaker CSN Islands VIII Corp. also priced, bringing the first full trading week of 2004 to a busy close, with over $2 billion of new bonds brought to market.

In secondary dealings, the bonds of Great Atlantic & Pacific Tea Co. Inc. were seen sharply higher after the operator of the venerable A&P supermarket chain reported sharply lower-than-expected losses in the most recent quarter.

Sources saw continued strong demand among investors during Friday's primary session as CSK Auto priced the day's only U.S. deal, an upsized $225 million issue, inside of price talk.

The Phoenix-based automotive aftermarket retailer, which increased the size of its offering from $200 million, sold its new 10-year notes at par to yield 7%, inside of the 7¼% area price talk.

Credit Suisse First Boston, Lehman Brothers and JP Morgan were joint bookrunners on the refinancing deal.

One source pointed to CSK Auto, and to Thursday's transaction from Elizabeth Arden, Inc. - an upsized $225 million of 10-year senior subordinated notes (B3/B-), which priced at 7¾%, well inside the 8%-8¼% talk - and suggested that such executions are likely the product of strong demand among investors for new issues.

Further evidence, the sell-side official added, was also heard on Thursday when AMG Data Services reported an inflow of $506 million to the high yield mutual funds for the week ending Jan. 7.

That was the 15th positive flow out of the last 16, dating back to the week that ended Sept. 24, 2003.

"The consensus seems to be that people are cautiously optimistic through the first quarter, at this point," the official said. "But that seems to be as far as anyone is willing to make a best guess."

This source, as is the case with just about all of the primary market observers who have been interviewed by Prospect News during the run-up to the holidays and since, holds that a key factor that will determine how far the present rally in high yield has left to run is interest rates.

Alluding to the U.S. Labor Department's Friday report that non-farm payrolls expanded by only 1,000 jobs in December, drastically short of the 150,000 new jobs many economists had projected, the official said "Given today's jobs report, it does not appear that anything is going to happen anytime soon, with regard to interest rates.

"But everyone is expecting interest rates to go up at some point," the source added.

"How will that impact the market? That's what everyone is trying to figure out."

Concordia Bus joins euro calendar

Only one new offering came aboard the high yield forward calendar during Friday's session.

The roadshow started Friday for Concordia Bus Nordic AB €125 million of 5.5-year senior secured notes (expected ratings B2/B-), which are expected to price late in the Jan. 12 week.

Goldman Sachs & Co. and JP Morgan are joint bookrunners on the offering from the Stockholm, Sweden-based bus company that operates throughout Scandinavia.

Prospect News also heard Friday that Celanese AG is expected to bring an offering of high yield notes as part of the financing for a €3.1 billion leveraged buyout of the company by Blackstone Capital Partners.

A market source told Prospect News that Morgan Stanley Dean Witter and Deutsche Bank Securities have been mandated to run the books on the offering from the Frankfurt, Germany industrial chemical company.

CVRD leads busy emerging markets session

The emerging markets corporates new issue market bristled with news during the final session of 2004's first full week of business.

The big story was the massively upsized issue from Companhia Vale do Rio Doce SA.

The Rio de Janeiro-based iron ore miner priced $500 million of 8¼% notes due Jan. 17, 2034 (Ba2) at 98.904 to yield 8.35%. The deal was increased from $300 million.

The 30-year maturity of the notes is the longest ever for a Brazilian company in the international capital markets, according to a company press release issued on Friday.

Merrill Lynch & Co. ran the books for the off-the-shelf issue.

Also pricing Friday was an add-on from CSN Islands VIII Corp., a subsidiary of Companhia Siderurgica National.

The Brazilian steel producer priced an upsized $200 million add-on to its 9¾% senior notes due Dec. 15, 2013 at 104.875, on Friday, to yield 8.996%, via Citigroup. The deal was increased from $150 million.

The original $350 million issue priced at par on Dec. 16, so CSN came away from the Friday transaction with a substantially lower interest rate.

Meanwhile the market heard that Braskem SA will begin a roadshow during the Jan. 12 week for $150 million of senior notes due 2014 (B+).

Credit Suisse First Boston and UBS Investment Bank are joint bookrunners on the offering from the Sao Paolo, Brazil-based petrochemical company.

Late last November Braskem priced a $75 million add-on to its 12½% senior notes due Nov. 5, 2008 (B+) at 101.5 to yield 12.083%.

Credit Suisse First Boston was also the bookrunner on that deal.

Finally, price talk of 8 7/8% to 9 1/8% emerged Friday on a joint offering from Telemig Celular SA and Amazonia Celular SA of $100 million of bonds due 2009 (B2/B+).

The Brasilia-based telephone company's deal is expected to price Tuesday morning via Bear Stearns & Co.

New deals trade up

When the new CSK Auto 7% senior subordinated notes due 2014 were freed for secondary dealings, they broke at 101.25 bid, 101.75 offered, well up from their par issue price earlier in the session.

A trader said that since the deal got done fairly late in the day, "a lot of people were absent. I didn't see much trading in it."

Elizabeth Arden Inc.'s new 7¾% senior subordinated notes due 2014, which priced late Thursday at par, "really blasted off," a trader said, quoting the cosmetics company's new issue as having zoomed to 103.75.

Nova Chemicals Corp.'s new 6½% senior notes due 2012, which priced at par earlier Thursday and then firmed to 102 bid, 102.50 offered going home Thursday, "continued to move up" Friday, the trader said, quoting the new bonds at 102.375 bid, 102.875 offered.

At another desk, a trader said of the new Novas that his shop "was pretty active in it" Thursday in a 102.25 bid, 102.75 offered range. "It seemed to have more buyers [Friday] morning, but I think we ran out of sellers, so it got stuck in that 102.25-102.75 context, without a lot of trading going on."

Back among the established issues, "it looked like there were a couple of more sellers around in the morning. Then with the employment number out and the subsequent strength in the government market, bids fell back in and nobody was looking to sell really," the trader said, "or looking to hit bids, anyway."

The Labor Department reported that non-farm payrolls - a key economic indicator - grew by only 1,000 jobs in December, just a fraction of the 148,000 jobs analysts had been expecting. On top of that, downward revisions sliced a total of 51,000 jobs off the healthy payroll figures seen in October and November. The anemic job-growth number stands in stark contrast to recent government data suggesting a healthy rebound was underway, and threw a wet blanket over the strong stock market surge that had been seen all week.

Among bond investors, "some people read the [payrolls] number as a bullish sign," a trader said, explaining that it seemed to indicate that "there's no inflation and interest rates are going to stay low for a while."

Others he said "read it that stocks are going to get killed, so high yield is going to take a little profit. So its effect was mixed."

Overall, he said, the junk market on Friday "was a little bit weaker, but not as dramatic as stocks."

A&P zooms

One issue which was anything but weaker was A&P, which surprised analysts and investors Friday by posting a smaller-than-expected loss in the fiscal third quarter ended Nov. 29.

Market fears that the numbers would be negative had driven its 7¾% notes due 2007 down to bid levels around 90-91 from 93-94 over the previous two sessions, but on Friday, powered by the numbers, A&P's bonds "took off like a bat out of hell," a trader said, "especially after Bear Stearns put out a report knocking them down in anticipation of bad earnings."

He quoted the 7¾% notes as having zoomed back up to 95 bid, 96 offered from bid levels around 90-91 on Thursday, and saw its 9 1/8% notes due 2011 jump to 94 bid from 88 previously.

On the stock side, the company's shares jumped more than 23% on the New York Stock Exchange, closing up $1.74 at $9.28. Volume was over two million shares, nearly six times the average daily turnover in the name.

The Montvale, N.J.-based supermarket chain operator lost $25.1 million (65 cents per share) in the latest quarter, down from the $30 million (77 cents per share) that it lost a year earlier and well down from Wall Street projections that it would lose as much as $1.35 per share. A&P was helped by a $75 million gain from the sale of its Eight O'Clock coffee brand and by positive results from its Canadian stores.

On a continuing operations basis, A&P earned $41 million (32 cents per share), versus a year-ago continuing operations loss of $41 million ($1.12 per share), and versus analysts' consensus estimates of a roughly $1.21 per share loss from continuing operations. However, on its conference call with investors and analysts following release of the figures, A&P acknowledged that its figure included items such as a $32 million (89 cents per share) tax benefit not included in most analysts' calculations. The continuing operations figure also excluded a one-time $60 million charge related to the restructuring of the company's Farmer Jack Food Market store chain in the Midwest. A&P said it expects to take additional charges of not more than $75 million in the next two quarters related to the Farmer Jack turnaround efforts.

Toys "R" Us holds steady

Also in the retailing area, even though Toys "R" Us Inc.'s ratings were cut to junk bond levels by Standard & Poor's on Thursday after the company reported negative sales numbers and lowered earnings guidance - and Moody's Investors Service on Friday threatened to do likewise - there was no real erosion in the bonds of the Wayne, N.J.-based specialty retailer, one of the largest sellers of toys and other baby- and child- related apparel and merchandise in the world.

A trader said its 7 3/8% notes due 2018 "widened out after the news" Thursday to bid levels around 315 basis points over comparable Treasuries and offered levels 305 bps over, but said that in Friday's dealings, the spread declined to 310 bps over on the bid side, 302 bps on the offered side, "so they tightened up."

Another trader said that while the company "came out with bad numbers, the same-store number was off and they got downgraded," Toys "R" Us' shorter-dated bonds, which have recently traded at spreads over comparable Treasuries of about 195 basis points, "were about 10 [bps] wider on the bid side, but it seemed to be more a case of better buyers than wider levels. People were kind of anticipating a downgrade."

He said that he had been told by a specialist in such crossover issues that "these things are basically cheap to where fellow retailer Saks Inc. and some of the other guys [in the sector] are trading" - making the bonds still attractive, even with the bearish numbers and the downgrade.

On Thursday, Toys "R" Us announced that while total sales for the nine-week holiday-shopping period increased slightly (up 0.9% to $4.42 billion) versus the year-earlier $4.38 billion figure, sales actually fell 2.7% excluding the impact of currency translation. It said that comparable U.S. toy store sales for the nine-week period - i.e. sales at stores open at least a year, the most reliable measure of retail activity - declined by 4.9% versus last year, and are down 3.4% year-to-date.

The company also lowered its earnings guidance for the second time in recent weeks, projecting earnings of 90 cents to 95 cents a share for the fiscal year ending Jan. 31, excluding an accounting change and store-closure charges. Previously, Toys "R" Us had anticipated earning $1.15 per share, but had lowered those expectations in November to a range between $1.05 and $1.15 a share.

S&P on Thursday cut the company's long-term rating a notch to BB+ from BBB- previously and lowered the short-term corporate credit rating to B from A-3. The ratings were also put on CreditWatch with negative implications.

On Friday, Moody's chimed in, putting its Baa3 long-term rating and P-3 short-term rating under review for a possible downgrade, citing what the ratings agency called "continuing soft performance of the U.S. Toy division, heightened by a disappointing holiday 2003 selling season and the continued deterioration of TRU's competitive position as discounters continue to gain share."

Nortel gains, Lucent off

Elsewhere, Nortel Networks Corp. paper continued to "look strong" Friday, a trader said, quoting the Ontario-based telecommunications equipment maker's 6 1/8% notes due 2006 as having improved to 104.75 bid, 105.375 offered, up from 104.25 bid, 104.75 offered.

Nortel is expected to be one of the prime beneficiaries of what is expected to be a giant spending spree by telecom operators looking to build wireless and wireline infrastructure, among them Verizon Communications, which on Thursday announced plans to spend some $3 billion improving its infrastructure.

Even though Lucent Technologies Inc. is expected to be another big winner when Verizon and rivals such as SBC Communications and BellSouth Corp. hand out procurement contracts, its 7¼% notes due 2006 were seen off about a quarter point on the day, to 104.125 bid, 104.75 offered.

Also on the telecom front, Level 3 Communications Inc.'s bonds were seen up half a point, its 9 1/8% notes due 2008 at 97 bid, 98 offered. Qwest Communications International Inc.'s bonds "hung in there," a trader said, its 7¼% notes due 2011 at "a decent level" of 100.5 bid, also up half a point.

Traders noted the sharp rise in Collins & Aikman Products Corp. bonds, which were seen having risen about three to four points on Thursday and holding most of those gains Friday.

"The stuff that's been cheaper has caught up to the market, like the Collins and Aikman paper [which] traded up quite a bit this past week," a trader said.

He quoted the Troy, Mich.-based auto components manufacturer's 10¾% senior notes due 2011 at 104 bid 105 offered and the 11½% subordinated notes due 2006 at 99 bid, par offered. "You know, just a few weeks ago, that paper [the 111/2s] was down in the 70s."

C&A "continues to stay strong," another trader opined, quoting the bonds as having "settled in" around those same levels.

Another auto-linked name that's "much stronger" of late, he said, is Titan International Inc., which manufactures off-highway wheels and tires for agricultural, earthmoving, construction and consumer equipment.

He saw its 8¾% notes having inflated to 83 bid from prior levels at 75. "I don't know if it's because of the improving economy, or what's going on in the marketplace in general, but the bonds traded up."

And he saw a "sharp rebound" in Goodyear Tire & Rubber Co. bonds, with the Akron, Ohio-based tire and rubber producer's 7 7/8% notes due 2011 firming to 93.5 bid from 91, while its 6 3/8% notes due 2008 were a point or two better at 95 bid.

He suggested that at least some of the movement in junk bonds right now was simply due to the fact that "investors have to put money to work," citing the latest inflow into the junk bond mutual funds of $506 million, reported Thursday.

IMC continues ascent

One major mover Thursday seen continuing to rise Friday was IMC Global Inc., whose 10 7/8% notes due 2008 - up more than six points Thursday - rose to 117.5 bid Friday from 116 previously. Its 11¼% notes due 2011 were likewise a point better at 117, while its 7 3/8% notes due 2018 fattened by five points, to 93.

The big fertilizer company is the object of market speculation that it might mere with Cargill Inc., although neither company is commenting on those rumors.

A trader said that while some individual names are strong and the market generally is more positive, activity remains limited.

"You talk to accounts and a lot of them are at the roadshows [for the upcoming new deals] and lunches, and the secondary market is kind of not that active," he said.

He noted: "There's a lot of buying outside of the traditional high yield investor. Money's just coming in - from pension funds, insurance companies, whatever, allocating money to the marketplace - and it's a pretty diverse account base right now, creating a kind of one-way market, as far as secondary trading goes. I think some of that gets alleviated when the calendar finally starts coming, as it is now, but in the meantime, it will probably stay that way for a while."

The trader said that on Thursday, "some of the homebulder paper backed off in the afternoon," after Ryland Group Inc. reported that fourth-quarter net new orders would show an 8.9% decline from year-ago levels, even though the Calabasas, Calif.-based homebuilder also issued fairly optimistic earnings guidance. "But that stuff came right back again [Friday], so it was unchanged to a tad better."

He saw Hovnanian Enterprises Inc.'s 6½% notes, which had been 100.25 bid, 101 offered before dropping to 99.5 bid, 100.5 offered following the Ryland announcement, moving back up Friday to 100.25 bid, 101.25 offered, while D.R. Horton Inc.'s 5% notes, which on Thursday had fallen to 99.5 bid, 100.5 offered, saw "par bids around all day" on Friday.

However, another source was quoting Ryland's bonds a little easier, with its 9¼% notes due 2011 heard a point down at 113, while its 8% notes due 2006 dipped half a point to 108.5 bid.

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