Sterling Refinances In Otherwise Slow Week

Sterling Chemical this week is expected to price a $295 million, high yield bond offering that takes the unusual step of refinancing lower-interest bank debt with the proceeds of higher-interest junk securities.

The company, which was recently downgraded, has had some problems with a highly leveraged balance sheet, overcapacity and decreasing demand. And while the chemical industry has been able to make recent price increases stick, the increases have not been enough to help Sterling, analysts said.

Even with the high level of debt riding on the balance sheet, bond investors were appeased by the fact that underwriters Donaldson, Lufkin & Jenrette and Credit Suisse First Boston, as well as CIT Group, went forward with a $155 million credit facility for the company last month.

The new bond, structured in senior secured notes due in 2006, carries a rating of B3/BB-. Sterling's bank debt carries the same ratings.

The company's existing debt includes a $275 million term loan, which will be taken out, and a $125 million revolver, which will be replaced with two new revolvers equaling $155 million. The two revolvers will be a fixed-asset and a working-capital instrument, respectively. And the security for the revolvers - which includes a first-priority lien on domestic assets, including the stock of subsidiaries - will remain with the new revolvers. That means more collateral will be put up to cover the larger loan amount, according to people close to the company.

The security of the bonds will be a second-priority lien on domestic assets.

A company spokesman said he could not comment on the offering since the issue was in a quiet period.

Europe Steals The Show

The rest of the new issues market was slow last week, with the same story as the past few weeks: Very little has priced but the forward calendar continues to grow. There is now about $7 billion that is said to be about to hit the market as soon as things firm up a bit, and sell-siders say there's even more down the pike that hasn't yet hit anyone's radar screen.

Conversely, the European market had a few things roadshowing last week, not the least of which was a mammoth $1.5 billion issue from cable operator UPC. It is expected to become a benchmark name in the cable sector, at least for continental Europe. The U.K., where it will not compete, is still dominated by NTL, Cable & Wireless and Telewest (see separate story on page 3).

Amsterdam-based UPC has been on an acquisition spree, whereby it bought Stockholm-based Stjaern TV for $450 million and has plans to buy Ujpest for $10 million in Budapest. The acquisitions that have already been announced by UPC total $2 billion.

The three leads on the UPC deal are Donaldson Lufkin & Jenrette, Morgan Stanley Dean Witter, and Goldman Sachs.

Other European deals that were roadshowing last week included Pannon and Rhiag. Pannon is a Dutch subsidiary of a Hungarian mobile phone company and is selling debt worth 125 million euros to refinance other debt.

Rhiag priced a 105 million euro deal that carries a coupon of 10.75%. It priced at par to yield 10.75%. It is initially callable in 2003 at 105.375, then prices fall to 103.583, 101.792 and par each year thereafter.

PSINet Deal Upsized

Other deals garnering attention last week included Internet service provider PSINet, which actually increased the size of its transaction by 50%, to $600 million from the original $400 million. The PSINet deal included a small euro tranche, but it was not increased along with the dollar tranche.

The issue was structured in 10-year notes and is expected to yield about 11%. The company also sold $743 million of common and convertible preferred stock in May.

Bayan Telecommunications priced a $200 million deal that carries a 13.5% coupon and a B3/B- rating. And ICN Pharmaceuticals priced a $125 million transaction that carries an 8.75% coupon and a rating of Ba3 from Moody's Investors Service and BB from Standard & Poor's. It priced at 96.89 to yield 354 basis points over Treasurys.

Go Outdoor Systems priced a 100 million euro deal that priced at par to yield 10.5%. It carries a B3/B- rating and was sold under Rule 144A. The deal is callable in 2004 at 105.25, then prices fall to 103.5, 101.75 and par.