Home |  Products |  Bios |  News |  Contact Us |  FAQ
  Independent Research on Corporate Bonds Since 1994 Preferences|Login

   July 2, 2009 @ 11:09 PM EDT
TODAY'S COMMENTS
3:12pm Lear Lear has announced that it will be filing bankruptcy soon, now that it's reached a restructuring agreement...
Bankruptcy by Shelly Lombard
Lear has announced that it will be filing bankruptcy soon, now that it's reached a restructuring agreement with bank debt and bondholder steering committees and obtained a $500 million DIP facility. The company did not provide public details of its restructuring plan, except to say that almost all of its trade creditors would be paid in full. In May we recommended buying Lear bonds in the low 20's and the bonds have recently rallied to the mid 30's. We can't call this a prepackaged bankruptcy since the company still needs to get approval from a majority of its lenders and bondholders. But this sounds like at least a "fast track" bankruptcy. We will provide more details when the company makes them available.
12:22pm Southern California Edison Fitch affirmed ratings and outlook of Southern California Edison and its...
Ratings Action by Philip C. Adams, CFA
Fitch affirmed ratings and outlook of Southern California Edison and its parent holdco. The action highlights their exclusion from the potential downgrades of EIX's merchant generation subsidiairies, Midwest Generation and Edison Mission Energy. The weak economy and low natural gas prices have resulted in lower wholesale electric prices, reducing the profitablity of coal-fired fleets. This does not impact SCE.
12:18pm Beazer Homes USA Beazer announced yesterday that it had reached settlements with the U.S. Attorney's office...
Legal Development by Vicki Bryan
Beazer announced yesterday that it had reached settlements with the U.S. Attorney's office and HUD related to the mortgage lending fraud investigation started in 2006. The U.S. Attorney has agreed not to prosecute Beazer as long as it satisfies the obligations under the settlement over the next 60 months. Beazer already has initiated "remedial measures" in management and oversight practices. It now must create a restitution fund to compensate the injured parties. The maximum cost of $55 million for these settlements seems small, considering that Beazer generated several billion dollars in loans during the targeted period. Under the terms of the U.S. Attorney agreement, Beazer will contribute $7.5 million into a special fund for fiscal 2009 and then build the fund with annual contributions to a maximum of $50 million by 2014. Beazer is allowed to contribute the greater of $1 billion or 4% of EBITDA in 2010 (we guess it will be $1 million), and then 4% of EBITDA each year thereafter. Beazer will make a $4 million payment to HUD immediately and then another $1 million in a year. These settlements are in addition to the $2.5 million Beazer paid in May to settle with the North Carolina Office of the Commissioner of Banks. Beazer noted that it expensed $10.5 million for potential settlements in the March quarter and it will expense another $3 million in the June quarter. Also, the CEO and COO have kicked in their 2008 bonuses to help the company cover the immediate settlement payments. The only related matter left outstanding in our view is whether Beazer will be forced to make good on mortgages that it sold which later defaulted, now that it has admitted to fraudulent lending and agreed to pay restitution.
11:58am Johnson & Johnson JNJ has devised an ingenious structure for making an investment in biotech firm Elan and...
Acquisition by Carol Levenson, CFA
JNJ has devised an ingenious structure for making an investment in biotech firm Elan and its promising Alzheimer's treatment pipeline. A JNJ affiliate will invest $1 billion in Elan for an 18.4% stake in the company. The JNJ affiliate will acquire "substantially all" the assets and rights related to Elan's Alzheimer's Immunotherapy Program, and has committed to spend up to $500 million for the development of Elan's potential Alzheimer's treatment, bapineuzumab, and other compounds. The new company will be owned roughly 50/50 by JNJ and Elan. The recent route for Big Pharma investments in biotech firms has been for the investing company eventually going after the entire biotech firm. Elan stock is up nearly 15% this morning. But JNJ can easily afford this initial investment and we believe that it could buy all of Elan eventually without any material negative impact to its credit profile.
11:15am Exelon Moody's is out with a statement on Exelon's revised proposal. The key takeaway is that if there is a...
Ratings Action by Philip C. Adams, CFA
Moody's is out with a statement on Exelon's revised proposal. The key takeaway is that if there is a transaction, Moody's believes the holdco and all subs will likely remain investment grade. Moody's says its pro forma ratios of FFO/interest (>5.0x), FFO/adjusted total debt (>30%) and retained FFO/adjusted total debt (>29%) all support investment grade ratings. S&P is also keeping EXC ratings under review for possible downgrade.
11:15am Exelon Moody's is out with a statement on Exelon's revised proposal. The key takeaway is that if there is a...
Ratings Action by Philip C. Adams, CFA
Moody's is out with a statement on Exelon's revised proposal. The key takeaway is that if there is a transaction, Moody's believes the holdco and all subs will likely remain investment grade. Moody's says its pro forma ratios of FFO/interest (>5.0x), FFO/adjusted total debt (>30%) and retained FFO/adjusted total debt (>29%) all support investment grade ratings. S&P is also keeping EXC ratings under review for possible downgrade.
9:50am Exelon Earlier this morning, Exelon announced it has increased its offer for NRG, by increasing the exchange...
Acquisition by Philip C. Adams, CFA
Earlier this morning, Exelon announced it has increased its offer for NRG, by increasing the exchange ratio from .485 shares to .545 shares of EXC for each share of NRG. This is EXC's "best and final" offer. The new offer represents $3.1 billion of value. EXC was able to justify the increase after taking a consultant-assisted, sharper pencil to how NRG can be integrated into Exelon Generation ("absorb-integrate-transform"), resulting in an approximately 30% reduction in NRG O&M expenses. Many of these savings have to do with eliminating duplicative staff in functions such as corporate/IT, trading, fossil operations, development and nuclear operations. The annual savings amount is $410-475 million, and the NPV of transaction synergies has increased to $3.5-4.0 billion. EXC says it is prepared to take out up to $4.7 billion of existing NRG senior notes, $3.1 billion of bank debt, $250 million of 3.625% preferred stock, and $908 million of other non-recourse obligations, taxes, and fees. EXC proposes to assume $700 million of 8.5% notes due 2019. EXC's financing plan includes $1.1 billion of mandatorily convertible preferred stock to preserve its investment grade ratings. EXC expects to monetize about $1.6 billion of assets -- EXC assets in Texas, NRG assets in PJM-East, International assets, and assets in Louisiana. EXC will use $1.7 billion of cash on hand, assume $379 million of certain non-recourse financing, and issue about $4.2 billion of bonds, probably at the Exelon Generation level. For its financial analysis in selling the deal to NRG shareholders, EXC is assuming an 8% cost of debt at Exelon Generation. This compares with a current yield on EXC Gen 2017s (small trades) in the low-6% range. NRG's shareholder meeting is July 21, and if EXC's board candidates win, there might still be a negotiated deal that would eliminate the bond tender portion of the transaction. We're leaving our credit score at -1 to reflect the downgrades to the lowest investment grade rating that will occur if the deal goes forward. We're not yet ready to change our outperform investment recommendation (see our report of April 17), as it is still not clear that this deal will happen, or that it will be necessary to refinance $4.7 billion of NRG bonds. An EXC win on July 21 would be positive for EXC Generation bonds, as it would increase the probability of a negotiated transaction without a put of NRG bonds.
7:45am NRG Energy Exelon today announced a 12.5% increase in its offer for NRG. The new offer raises the fixed...
Takeover Battle by Carl Blake
Exelon today announced a 12.5% increase in its offer for NRG. The new offer raises the fixed exchange ratio to 0.545 of a share of Exelon for each NRG share(up from 0.485), and boosts the total value of the offer to just over $12 billion. Exelon justified the increase citing approximately $1.5 billion of additional newly identified synergies and the added value of NRG's recent acquisition of the Reliant Energy retail business. This is pretty amazing considering the fact that NRG has yet to open its books for Exelon to conduct formal due diligence. While the increased bid is clearly a step in the right direction, this deal is far from done. NRG has repeatedly said it believes the company is worth substantially more, while Exelon says this is its best and final offer. We continue to believe that if a deal is consummated, however, it will likely be a positive event for NRG bondholders. Under the proposed structure, bondholders will have the option to put the bonds back to the company at 101. If Exelon and NRG are able to negotiate a deal, however, there is a possibility that Exelon will be able to structure a transaction that gets around the put offer. It may also offer NRG bondholders compensation to waive their put option. Almost every scenario is a win for NRG bondholders, as Exelon remains committed to maintaining an investment grade credit rating. Exelon expressed confidence in its ability to re-finance $4.7 billion of NRG's debt, including its senior notes, if necessary. Exelon will conduct a conference call with investors to discuss this announcement and presentation this morning at 8 a.m. ET.
TODAY'S REPORTS
Investment Grade
AIG  AIG is slogging forward with its restructuring plans. Yesterday, it closed the previously-announced sale of 21st Century Insurance Group (personal auto) to Farmers Group...
Tag Sales by Kathleen Shanley, CFA
Southern Company  We're updating our call on Southern Company and subsidiaries Alabama Power, Georgia Power, Mississippi Power, Gulf Power, and Southern Power. The...
Dominant Solution by Philip C. Adams, CFA
High Yield
KB Home  KB Home reported last week that revenue fell 40% in the fiscal second quarter ended in May. The best thing we can say is this was the first quarter in five that...
Weak Sister by Vicki Bryan
Constellation Brands  Constellation Brands, the world's largest wine company, experienced a sales decline in its first fiscal quarter. The company attributed the...
Sobering Trends by Kim Noland
WEDNESDAY'S COMMENTS (7/1/2009)
2:16pm Dow The company announced today restructuring plans related to achieving the Rohm and Haas acquisition synergies...
Restructuring by Carol Levenson, CFA
The company announced today restructuring plans related to achieving the Rohm and Haas acquisition synergies as well as additional facility "rightsizing" in light of continued global economic weakness. The company expects to record second quarter charges of $180-$230 million for severance, environmental remediation, and contract cancellation fees, all of which will involve cash expenditures. In addition, the closing of several basic chemicals plants (primarily ethylene derivative plants), writedowns of asset to be sold to satisfy the FTC, and closure of overlapping manufacturing facilities will result in a noncash charge of $420-$520 million. The company expects to achieve more than $100 million in annual savings from these actions, and will reduce its U.S. Gulf Coast ethylene demand by 30%. The charges seem high for such modest savings, but the announcement is evidence that Dow is not wasting any time in reacting to persistent global weakness in the demand for basic chemicals. This round of plant closures could be interpreted as an anti "green shoots" data point.
12:53pm Huntsman Corporation As expected, Huntsman announced today that it would redeem (retiring in full) $296...
Credit Profile by Carl Blake
As expected, Huntsman announced today that it would redeem (retiring in full) $296 million of its 11.625% secured notes due 2010 via the call option at a price of 102.90% of par. The company will used proceeds from its recent $1.7 billion settlement with Credit Suisse and Deutsche Bank?associated with the failed buyout attempt by Hexion?to fund the redemption. The effective date of the transaction is July 23, 2009. We also expect the company to eventually redeem the remaining $198 million outstanding of its 11.5% company guaranteed notes due 2012 that are currently callable at 102.875% of par.
9:43am CenterPoint Energy Yesterday afternoon, Moody's affirmed the ratings of all CNP entities, but changed the...
Ratings Action by Philip C. Adams, CFA
Yesterday afternoon, Moody's affirmed the ratings of all CNP entities, but changed the outlook on the ratings of Houston Electric (only) to positive. This is a more positive view than we have expressed in the recent past. The key differences between our views and those of Moody's seem to be in how much weight to give a "lower business and operating risk" profile, and whether or not weakeing financial metrics (from an advance meter program and storm cost recovery bonds) should matter. We also apparently don't see CNP-Houston Electric's regulatory relations as supportive as Moody's, as evidenced by the still-festering true-up controversy. We would say that CNP's equity dribble issuance has at least taken some pressure off of the consolidated ratings profile, which has modestly supportive implications for Houston Electric. Interestingly, this latest action has Moody's and S&P (currently one notch-equivalent higher, but outlook negative) leaning in opposite directions.
WEDNESDAY'S REPORTS (7/1/2009)
Investment Grade
AutoZone  AutoZone's new issue demonstrates its financial flexibility and should facilitate some balance sheet cleanup by replacing short-term debt. But despite its...
Cleanup Time by Carol Levenson, CFA
High Yield
Sirius XM Radio, TRW Automotive Holdings  Someone left the keys to a revved up high yield market and last week, Sirius XM Radio jumped in it and drove it like...
Road Show by Shelly Lombard
EXCO Resources  We were skeptical about the efficacy of EXCO Resources' asset sale/monetization program. Our cynicism reflected concerns we had that weak commodity prices...
Mission Accomplished  by Carl Blake
Carol Levenson was elected to the CFA Society of Chicago's Board of Directors. Read the full details in the press release!

BE Aero 6/25 
Sirius 6/19 
Univision 6/19 
Psychiatric Sol 6/10 
Domtar 6/4 
An Independent Viewpoint
Rigorous Analysis
Coverage of Key Securities
Every report is one page, and concludes with an actionable investment recommendation.
Jul 2, 2009 | Dow Jones
Kathleen Shanley on AIG "European Loans Could Be A New Source Of AIG Problems"
Jul 1, 2009 | Bloomberg
Carol Levenson on Dow Chemical "Dow Chemical to Shut Three Louisiana Ethylene Plants" Quote - "Dow is not wasting any time in reacting to persistent global weakness in the demand for basic chemicals."
Jul 1, 2009 | Forbes.com
Shelly Lombard on McClatchy Co. "McClatchy Needs Mercy" Quote - "McClatchy's fate looks increasingly out of its hands."
Jun 30, 2009 | Marketwatch
Kim Noland on Rite Aid "Rite Aid CEO back in black on long-ago stock purchase" Quote - "Estimated the financing will increase the company's cash interest expense by $70 million annually."
Jun 30, 2009 | Forbes.com
Phil Adams on Teppco "Pipe Dreams" Quote - "Sees an opportunity in Teppco's debt."
Copyright © 2009. Gimme Credit LLC. All Rights Reserved.
For Public Relations and Press Contact
Susan Assadi sassadi@gimmecredit.com or 800.922.8792