New s Issues Dry For the Week

The primary market only saw two deals price before press time last week, with a number of others on the verge of finding investors. Overall, though, market players said that the new issues were not generating a lot of enthusiasm, much like the secondary market.

There were a couple of interesting deals in the market, though, investors said. One was from Hangar Orthopedic Group, which was looking for buyers on a $150 million offering structured in senior notes via BT Alex. Brown. The issuer is the largest prosthetic limb company in the country, and plans to use the proceeds to finance the acquisition of the second-largest NovaCare.

The $450 million acquisition, announced in April, was just one step on NovaCare's overall plan to restructure

Most of the talk last week, however, still centered on the controversial deal backed by one of America's hottest and most crisis-prone industries: privately run prisons. The deal from Prison Realty Trust Inc. came at last to the high-yield market following weeks of postponements and stock collapses for the issuer.

Lehman Brothers was the sole lead manager of the $300 million offering from Prison Realty Trust, which owns more than 90% of the private prisons in America. While the deal intrigued plenty on the buy-side, investors soon began demanding concessions in maturity and yield in order to take on what they considered to be a bevy of potential risks.

The deal was originally scheduled for the week of May 24 but was pulled when a flood of issuance caused spreads to widen on many junk deals, even high-regarded telecom offerings. While Prison Realty started out with a proposed yield in the 9% range, final pricing was in the area of 10.25%, one trader said. Further, the bonds' maturity was reduced to seven years, rather than the 10-year lifespan initially proposed, he said.

Why the cold feet? The consensus is that investors believed taking on such bonds meant entering a universe of new, unfamiliar risks, and having to worry about such events as breakouts, inmate murders and protests against prisons from local populations: not your typical buy-side concerns.

"I grew more cool to the deal as I did more research," said one high-yield investor who declined to buy the deal. "The key was looking at the equity research. Most of the equity analysts that follow the company are not terribly happy with it. I think the biggest concern is that there have been too many surprises from the management."

Corrections Corp. of America began in the early 1980s and has grown to become the dominant force in the privatized prison market. Last year, the company spun off a real estate investment trust, Prison Realty, which in turn purchased CCA early this year. The combined companies now own 50 prisons and have contracts to run 81 more.

But Nashville, Tenn.-based Prison Realty has not had an easy time in the past year. The most recent crisis was its announcement last month that it had signed a new agreement with CCA, in which Prison Realty reportedly plans to increase fees to the CCA subsidiary by a dividend of $1.89 per share to cover the costs of operations and marketing, among other needs.

The equity market reacted negatively to this news. Prison Realty's stock price has plummeted in the month following the announcement, falling from $21.25 per share in early May to last Thursday's close of $12.81 per share.

The stock cratering enraged many shareholders in Prison Realty, and the last few weeks have seen lawsuits brought against the company. The suits claim that Prison Realty waited until after releasing its first quarter results before announcing the fee increases. The plaintiffs contend that the merger of CCA and Prison Realty, approved last January, would not have happened had shareholders been aware of the additional costs to be incurred. Neither Prison Realty nor Lehman returned calls for comment.

The Lehman-led deal did seem to be finding some investors by press time, though it was unclear how successful the deal's reception was. One junk investor noted that prison corporate bonds, as a concept, could be a great fit for many portfolios.

Other deals in the pipeline include a $1.3 billion dollar transaction from Williams Communications, structured in senior notes maturing in 2009; a $200 million issue from Express Scripts via Credit Suisse First Boston; and a $130 million deal from Majestic Star structured in senior notes.

In addition to Prison Realty, two other deals that priced last week as of press time, both underwritten by Jefferies & Co., were from Archibald Candy Corp., which found buyers on its $40 million offering, and Riviera Black Hawk, which finalized a $45 million issue. - Christopher O'Leary and Lee Conrad