Kmart rebound continues, Xerox leads $1 billion of new deal announcements

By Paul A. Harris

St. Louis, Mo., Jan. 7 - It seems that for the intermediate term the retail sector's famous blue beacon will continue to beckon shoppers, according to sources in the high yield secondary market who told Prospect News Monday, that Kmart's paper was seen to have "bounced."

Meanwhile in primary market activity, a further $1 billion of new issuance was announced. Xerox Corp., as had been anticipated, unveiled $500 million, Owens Brockway Glass Containers, Inc. will bring $300 million, and Regal Cinema will use proceeds from its new $200 million deal to help fund its recapitalization as the company emerges from Chapter 11.

"Kmart bounced up anywhere three to five points, depending upon what issue," one observer commented. "I guess that Blue Light Special is kicking in, here."

This source added that Kmart's 9 7/8% notes of 2008 went to 76 from 73 in Monday trading.

A trader noted watching Kmart's outstanding bonds rise "five or six points over the past couple of days.

"The volume is a little bit on the low side, but it's certainly firmer today," the trader added.

Another trader reported watching Kmart's 9 3/8%s of 2006 go out with a 78 bid, Monday.

"The lowest I saw was a 70 to 73 picture, which was last Thursday, this source added.

"Today they started out probably around 76 bid. And going out I'd say they are probably 78 bid. So they bounced.

This source also reported hearing Kmart's 8 1/8% bonds of 2006--which, he commented, had dropped to a low in the mid-60s--"back up to 72.4.

"So those things are up about eight points."

This same source suggested that the market seems to be operating on a hair-trigger, anytime there's a whiff of bad news. And, having started to pull the trigger on Kmart, people are now perhaps reconsidering.

"I think the Street basically just looked at each other and said 'You know what - they're liquid; they're not going to go out of business in the next quarter.'

"I mean they have liquidity," the source added. "Right now, in the environment we're operating under, anytime anybody says anything negative about a credit - if they mention 'liquidity' or 'off-balance sheet'...anything like that, the same thing happens, the bonds go down. People sell, and they don't stop to ask a lot of questions."

The gains Monday continued a rebound that began on Thursday last week as the giant retailers bonds reversed previous declines in response to negative comments and a sell rating from a Prudential equity analyst.

Yet another trader examined the Kmart figures and seemed to think that although the news for Kmart has definitely improved the Blue Light may indeed still be flickering a bit.

"The short term really traded up pretty strong today. It was a pretty big range, even though there was not a lot of activity," this trader commented, adding that the 9 3/8% bonds due in 2006 opened the day at 77 bid, 79 offered, and firmed to 79 bid, 80 offered, before dropping back to 77.5 bid, 78.5 offered. The 8 1/8% bonds of 2006, meanwhile, opened the day at 70 bid, 71 offered, and firmed to 73 bid, 76 offered.

"So you had a two-, to two-and-a-half point move on the bid-side," the trader commented. "Then they kind of tumbled back down at the end of the day.

"I think everything's cheap right now," this trader added. "As long as their plan continues to move forward they will probably be okay. If you look where this paper was a month ago, or two months ago: you've got short-term paper down 15 points. So it looks very attractive, I guess, to some people."

Meanwhile traders said Conseco's debt could be heading down again when Tuesday's session begins.

Although a letter from Mark Lubbers, executive vice president of corporate affairs for Conseco, advising - among other things - that the company would not meet its 72 cents per share 2001 earnings guidance appeared too late in the session to be felt in secondary trading, sources told Prospect News that Lubbers' letter could impact Tuesday's trading.

One trader heard Conseco's 9% notes trading "somewhere between 42 and 44," Monday.

"I think that's where they went out, this source added. "But I'm sure they're going to open up a little bit weaker tomorrow, based on this headline."

But another trader said Lubber's letter might actually help the bonds. The letter, addressed to the company's investors and released to the general public, was primarily concerned with refuting negative comments on Conseco issued by Salomon Smith Barney analyst Colin Devine, may have registered a positive impact on the company's bonds.

"Conseco paper was weaker this morning, and it firmed up late in the day," this trader commented

"There was some news out where Conseco refuted the Salomon Smith Barney analyst's report: they found a half a dozen or so erroneous remarks in his report. So that paper seems to be doing a little bit better."

Secondary market sources also told Prospect News that Lucent Technologies Inc.'s outstanding bonds seemed to benefit from news that 49-year old Patricia Russo would return to the communications equipment company to take the helm.

"I see they're up three to four points, today," one observer said, noting having seen a bid on Lucent paper "around 69."

A trader affirmed this observation. "Lucent paper is certainly firmer across the board," the trader said. "And it has been each day.

"There have certainly been a lot of bids on that. You think back two or three months ago - people were nervous that the company wouldn't even be around. I think that has subsided substantially."

Among outstanding bonds of issuers poised to bring new high yield paper, Charter Communications Corp.'s 8 5/8% notes were seen to finish out Monday "a point up," at 96-bid, 96 ¾ offered.

Charter is lining up a $600 million offering in three tranches. Price talk emerged on the deal during Monday's session (see related story elsewhere in this issue).

And the outstanding bonds of Xerox, which announced a new $500 million deal in dollars and euros Monday, via bookrunner Deutsche Banc Alex. Brown, were seen "up a point or two," by one observer.

Another secondary markets source, however, saw some of Xerox's existing paper soften, but attributed it to a tendency for new issuance to thus impact existing bonds.

"Xerox, I think, is going to be pretty well received," the trader said of the new Xerox seven-year senior notes. "There's a lot of people, both in crossover land and junk-land, that are probably going to step up and buy it, as long as it's priced right," the trader added.

"Xerox paper on the whole in the secondary - they traded off a little bit. Some of the shorter paper was off maybe a half a point. The longer paper was off about a point.

"But there are certainly bids across the board on Xerox paper."

Paxson Communications priced a downsized offering of $302.1 million (proceeds), on Monday, to yield 12¼%, reduced from $310 million.

The new Paxson discount notes, which have a four-year zero-coupon, priced at $62.132, according to a syndicate source who noted seeing them trade "up a tic" in the secondary market.

Late in the session a trader noted seeing the new Paxson zeros trading off somewhat.

"The bonds came out at 62 and a steenth, and were offered at 62, and they got lower and lower and lower. I think they were last offered at 61.5," the trader said.

In addition to the Xerox deal, two other new offerings emerged on Monday's primary market: Owens Illinois subsidiary Owens Brockway Glass Container, Inc. will bring $300 million via Banc of America Securities, pricing Jan. 16, and Regal Cinema will bring $200 million of 10-year notes via Credit Suisse First Boston, to price during the week of Jan. 14.

One syndicate official told Prospect News on Monday that 2002 is starting comparatively slow with regard to new issuance.

"Usually at the start of the year the backlog is a lot larger," the official commented. "You see people coming right out of the box, ready to issue. But it seems like we're getting a little slower start this year, especially compared to last January, when you had 30-something deals."

End

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