Charter, Qwest bonds firmer; coveted Rexnord deal prices, trades up smartly

By Paul Deckelman and Paul A. Harris

New York, Nov. 19 - Charter Communications Holdings Inc. bonds traded up Tuesday, after the troubled cable-TV operator announced that it would restate its financial results for 2000 and 2001. Qwest Communications International Inc. was also higher, on market buzz that the telephone operator would soon announce a debt-for-debt swap to lengthen its maturities.

In the primary market, signs of improving conditions continued to appear as Rexnord Corp. priced a well-oversubscribed $225 million issue of 10-year notes at a lower yield than price talk. The issue then proceeded to move solidly higher in initial secondary action.

The Milwaukee industrial conveyor manufacturer priced its $225 million of 10-year senior subordinated notes (B3/B-) at par to yield 10 1/8%, compared to talk of 10¼%-10½%. Joint bookrunners were Credit Suisse First Boston and Deutsche Bank Securities, with co-manager Wachovia Securities, Inc.

One informed source told Prospect News in the wake of the Rexnord transaction that the book was way oversubscribed - $2 billion in orders for a $225 million deal, this source claimed.

"I understand there were well over 100 accounts on the deal," the source added. "That made for a tough allocation."

If you want to track down the last transaction that managed to come inside of talk, you can save yourself some time by turning back a handful of used calendar pages before you even bother to start reading the print.

Prior to Rexnord, the last transaction to come at a lower yield than talk, according to one sell-side source, was Asbury Automotive Group, Inc., which priced an upsized $250 million of 10-year senior subordinated notes (B3/B) at par last May 31 to yield 9%, inside the 9 1/8%-9 3/8% price talk.

Prescott Crocker, fund manager of the Evergreen High Yield Bond Fund, told Prospect News on Tuesday that with five straight weeks of inflows into high-yield mutual funds the high-yield market has, un characteristically, "unhooked" itself from equities.

"This is the sector that everybody loves to hate," he said. "It's been grabbing a sustained bid regardless of what the stock market is doing. The stock market took off around Oct. 10, and the high yield market didn't do anything for two-and-a-half weeks. And then lo and behold the stock market came up against resistance - it's probably 4% off its top - but high yield just continues to rally away.

"As long as flows keep coming in, high yield is tighter day in and day out. It just goes to show that it's a sector that is purely responsive to supply and demand."

Although Crocker did not specify that he was playing Rexnord, the level of investor interest in it could hardly have taken him by surprise.

"I think every new issue gets bid for a hundred-times over," he said.

"In this market there are two-point markets in the secondary because the Street has very little inventory. You lose your ass buying the secondary. These market spreads are absurd.

"Right now the primary market is comprised basically of companies that are alive. The problem is that if you jump into the primary you can't get enough bonds. Anything that's alive and well people will snap up.

"Basically the primary market is a seller's market. By and large if you're alive and well, and you've got some interest coverage and you have reasonable debt leverage, it doesn't matter what you do. You will do fine."

In presenting his case, Crocker drew a comparison between fall 2002's two beefy directories deals: Dex Media East LLC, which priced on Oct. 30, and R.H. Donnelley Corp., which is set to price this week.

The two-part $975 million Dex transaction saw $450 million of seven-year senior notes (B2/B) price at par to yield 9 7/8% while $525 million of 10-year senior subordinated notes (B3/B) priced at par to yield 12 1/8%.

By comparison, Crocker pointed out, Donnelley's two-part $750 million offering features a $300 million eight-year senior notes tranche (B1/B+) that is being talked at 9%-9¼% and $450 million of 10-year senior subordinated notes (B2/B+) talked at 11%-11¼%. Bookrunners are Salomon Smith Barney, Bear Stearns & Co. and Deutsche Bank Securities Inc.

Crocker, who specified that he "went after as many Dex bonds" as he could get his hands on, said that the reason the Donnelley price talk is so far inside of the Dex pricing levels is that the investment banks are using the present trading levels of Dex to set the talk on the Donnelley deal.

"I think Donnelley is priced too rich," he stated. "I don't think it should be priced off the current market value of the Dex deal. I think it should be priced off of where the Dex deal was priced."

The new Rexnord bonds proved to be as popular in the secondary arena as they had among primary investors; when the issue was freed for secondary dealings, it shot as high as 104 bid from its par issue price, a trader said, before easing slightly off that peak to close the day out at 103.75 bid/104.75 offered.

By way of contrast, demand for the new NDC Health Corp. 10½% senior subordinated notes due 2012 was restrained; those bonds, which had priced at par on Monday, had eased to 99 bid/99.5 offered by Tuesday.

Back among already established issues, traders said that Charter was the big news of the day, after the troubled St. Louis-based cable-TV operator said that it had understated by $2.6 billion the costs and tax liabilities of acquisitions in 1999 and 2000 - meaning that the company will restate its 2000 and 2001 financial results, along with the results for this year's first and second quarter.

Charter said that said it would record an additional $1.4 billion in franchise costs and $1.2 billion in deferred tax liabilities. It said that revenue and operating cash flow would not be affected by the restatements. However, the investment community was left wondering yet anew about the company's credibility, already under question after it failed to live up to earlier financial projections.

Even so, a trader said, Charter bonds "were actually up on the news - believe it or not." He quoted the company's benchmark 8 5/8% notes due 2009 as having firmed about 1½ to 2 points, to 46.5 bid/47.5 offered.

"This was pretty much old news," he said, adding that the markets knew Charter would have to restate numbers. The bonds - which "had pretty much been beaten down" - rose as the company "got it out of the way."

At another desk, a market observer quoted Charter's 9.92% notes due 2011 as having firmed a deuce, to 36.5 bid.

Equity players were less certain than bondholders that this was necessarily a good thing; Charter's Nasdaq-traded shares rose just a penny (0.85%) to $1.19, on volume of 10.7 million shares, slightly more than the usual 8.5 million-share handle.

Another mover was Qwest Communications bonds, which were better, on market speculation that the embattled Denver-based regional Bell operating company would likely offer to exchange a portion of its $26 million of debt for other debt, with the intention of lengthening the maturity of its obligations and thus avoiding a possible cash crunch that could potentially send it spiraling into bankruptcy, following in the footsteps of a number of other telecommunications companies over the past two years.

There was no official word from Qwest, which declined to comment on the market buzz. News reports quoted people familiar with the situation as saying that Qwest would be likely to formally announce such a debt exchange over the next few days, and would likely pitch it to qualified institutional buyers, as defined under Rule 144A.

Last week, Qwest - which is in the process of unloading its QwestDex telephone directory business in a $7 billion transaction, said in a regulatory filing that it could have trouble meeting its debt obligations in the next three years unless it obtained additional funding, especially if anything were to happen to impede the Dex deal or if its business were to further deteriorate. It also warned of a "substantial risk" that it would be unable to meet its debt payment obligations after 2005, even if the Dex deal were to be consummated as scheduled.

Qwest would be forced to exchange the current debt for other debt with longer maturities (presumably giving the bondholders fatter interest payments and/or more collateral in order to gain their cooperation) because it cannot currently refinance its near-maturity debt in the conventional manner - selling new bonds and retiring the existing debt with the proceeds - since it recent accounting problems have prevented it from filing audited financial reports with the Securities and Exchange Commission.

In its most recent SEC filing, Qwest - which has already had to restate some $1.2 billion of income for 2000 and 2001 - said that it had found still more accounting mistakes that will force it to erase $358 million in additional EBITDA for those two years.

The prospect that Qwest may mount an exchange for its near-term bonds, and will likely offer their investors more interest and/or collateral, helped push its bonds up Tuesday, with its benchmark 7¼% holding company notes due 2011 at 60.5 bid, up from 58 on Monday, while its operating company 7.20% notes due 2004 a point better, at 95 bid/97 offered. Its 7 5/8% notes due 2003 were also a point better, at 97.5 bid.

Qwest shares meantime were up 27 cents (7.44%) to $3.90 in New York Stock Exchange dealings. Volume of 7.9 million shares was less than the usual 11.7 million shares.

Also on the telecom front, little or no movement was seen in Level 3 Communications Inc., which was the subject of the "Heard on the Street" column in Tuesday's Wall Street Journal; the WSJ said that investors and analysts were puzzled over whether the Broomfield, Col.-based fiber optic telecommunications operator is in fact still basically a telecom company, or whether it is a software company. Level 3 has recently purchased assets of several software distribution companies, and their sales accounted for fully 72% of the $1.07 billion of revenues that Level 3 booked in the third quarter ended Sept. 30.

But bondholders apparently consider such a question to be in the same category as how many angels can dance on the head of a pin - in other words, theoretically interesting and esoteric but of little practical significance, "so long as they keep getting their coupons paid," a market participant said. Level 3's benchmark 9 1/8% senior notes due 2008 were seen unchanged at the 59 level that they've recently been tethered to.

There was likewise little or no bond price action in response to Conseco Inc.'s announcement that it had lost $1.77 billion in the third quarter and may have to file for bankruptcy protection.

"I thought they had already filed, long ago," one trader said dismissively, while another sniffed that the latest litany of troubles to come out of the beleaguered Carmel, Ind.-based insurance and financial services company was "just more old news."

Conseco's bonds stayed around the same deeply distressed 10-11 bid area at which they have been languishing for some time.

Xerox Corp. bonds were up slightly after the Stamford, Conn.-based copier and office machines giant announced that it will cut more than 2,400 jobs - 3.4% of its worldwide work force - via a combination of layoffs and voluntary departures.

Xerox chairman and chief executive officer Anne. M. Mulcahy said in a statement that "for Xerox to continue building momentum in this uncertain economy, we need to accelerate our drive to improve efficiency while delivering competitive products and services to our customers."

Xerox said the cuts will result in a pretax charge against earnings of $350 million to $400 million in the fourth quarter.

Xerox's bonds were "up half a point, net-net" following the news said a trader, who quoted its 5 7/8% notes due 2004 at 93.5 bid/94 offered, and its 5½% notes due 2003 at 96 bid/97 offered.

Xerox, he said, "was up more, then the news came out, and the bonds came in [i.e. eased in price from their highs] to end up a half point."

"After the news came out, the bids backed off," another trader said of Xerox, "but it was up a little on the day. " He saw the 51/2s ending at 95.5 bid/97 offered, while its 9¾% notes due 2009 inched up to 93.5 bid/95.

"There are just too many buyers right now in the market," he said, speaking of the junk market in general and the push-up in the Xerox notes in particular. "By that I mean there's cash coming in and there's almost indiscriminate buying because there's too much cash out there and there's a fair dearth of paper."

Elsewhere, Oakwood Homes bonds were lower after the company filed for Chapter 11 on Friday; all of the bonds were quoted bid at eight cents on the dollar, down from 15 previously.

Bowater Inc. bonds were actually quoted trading tighter after Moody's Investors Service on Monday cut the Greenville, S.C.-based forest products company's senior unsecured debt rating to junk, lowering it to Ba1.

Moody's said the downgrade "is based on Bowater's high financial leverage and weakened financial metrics, the prolonged downturn for most of Bowater's products (particularly newsprint), and Moody's concern that debt protection measurements will be weaker over the medium term than had been previously expected."

Standard & Poor's continues to give the debt a precariously investment-grade rated BBB- .

Even with the downgrade, an observer said, "the bonds got better, they tightened up." He saw Bowater's 9% notes bid at 415 basis points over the comparable Treasury issue, having firmed from 435 bps earlier.

Investment-grade credit Delhaize Group's bonds were also firmer, in the wake of the Belgian-based retailer's recent better-than-feared third-quarter results.

Delhaize's debt "really flew," the observer said, "they were up quite a bit." He saw its 7 3/8% notes due 2006 up nearly five points from recent levels, to 90 bid. Its 7.55% notes due 2007 rose to 89 bid from 84.5, while its 8 1/8% notes due 2011 pushed up to 87 bid from 82. The company's long-dated 9% notes due 2031 went from 75.5 to 78.

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