L-3, Yum! price new deals; Adelphia, WorldCom focus of after-hours news

By Paul Deckelman and Paul A. Harris

New York, June 25 - Defense electronics maker L-3 Communications Holdings Inc. brought its $750 million offering of 10-year notes to market Tuesday while another fairly sizable deal was served up by fast-food chain restaurateur Yum! Brands Inc., which upsized its 10-year note offering to $400 million.

The resurgent primary side - which on Monday had shown little activity - dominated the day's proceedings, with secondary action relegated to sideshow status. Rite Aid Corp. bonds were about two points higher as the nation's third-largest drugstore chain company posted better-than-expected first-quarter numbers and raised its cash-flow guidance.

But the major developments were delayed until all trading had already long since ceased - beleaguered Adelphia Communications Corp. - finally - filed for bankruptcy protection. Meanwhile, following early-evening reports of alleged massive alleged accounting irregularities, WorldCom Inc. announced that it would re-state its earnings for 2001 and this year's first quarter, and announced the firing of Chief Financial Officer Scott Sullivan and the resignation of another senior official.

In Tuesday's high-yield primary market investors apparently received loud and clear signals from military gizmo-maker L-3 Communications Holdings, Inc., which priced three-quarters of a billion dollars of notes.

Investors also laid down $150 million for junk bonds from Chumash Casino and Resort, the Calif. tribal gaming operation.

And terms emerged - a couple of days sooner than some market observers expected - on fast food franchiser Yum! Brands, Inc., which reportedly received the five-star treatment as its junk-rated notes priced off the investment-grade desks.

Meanwhile, two new offerings climbed aboard the forward calendar Tuesday. Plains Exploration & Production Co. - another E&P deal - will briefly roadshow $250 million, which it figures to price Thursday, while Oregon Steel Mills, Inc. plans to price its $300 million after the Fourth of July smoke clears.

The amount of dollar-denominated business on the forward calendar decreased dramatically on Tuesday as L-3 priced $750 million of 10-year senior subordinated notes (Ba3/BB-) at par, to yield 7 5/8%. That was in the middle of the 7½%-7¾% price talk. Joint bookrunners were Lehman Brothers and Banc of America Securities.

"I think it was a very strong execution given where the market is at this point," one syndicate source commented on the L-3 deal.

"It was a big book. There were a lot of different accounts in it.

"Things traded up and are performing very well in a very difficult market," the syndicate official added.

The New York defense communications company will use the proceeds to refinance debt it incurred to fund its acquisition of Aircraft Integration Systems from Raytheon Co. and to finance the tender and call of its $225 million of 10 3/8% senior subordinated notes.

Louisville, Ky.-based fast food restaurant-owner and franchiser Yum! Brands (formerly Tricon Global) upsized its offering to $400 million from $350 million and priced the 10-year senior notes at 99.45 to yield 7.78%. Although the three ratings on Yum!'s new notes were all speculative grade (Ba1/BB/BB+) syndicate sources told Prospect News that the deal, via joint bookrunners Salomon Smith Barney and JP Morgan, priced off the high-grade desks (see related story in this issue).

And Chumash Casino priced $150 million of eight-year senior notes (Ba3/BB-) at par to yield 9%, spot-on to the 9% area price talk, via Banc of America Securities.

Two new high-yield offerings came into view Tuesday.

Prospect News learned that the clock is already ticking for investors desiring to have a look at yet another E&P deal: Plains Exploration & Production Co.'s $250 million of 10-year senior subordinated notes (existing ratings B2/B) hit the road Monday, according to syndicate sources who added that the roadshow will wrap up Thursday, with pricing expected the same day. JP Morgan and Goldman Sachs & Co. are the joint bookrunners on Plains.

A syndicate source told Prospect News that the economic circumstances and investor sentiment that caused exploration and production credits XTO Energy and Pioneer Natural Resources to price yielding 7½% apiece during the spring, are thought to remain in play, although when pressed this source declined to predict that Plains would price quite so tightly.

And the market heard Tuesday that Oregon Steel Mills, Inc. will begin the roadshow on its $300 million of new seven-year first mortgage notes (expected ratings B1/B+) on Wednesday. That deal, via Goldman Sachs, is expected to price on July 10.

Finally, the market heard official price talk of a yield in the 10% area on CP Ships Ltd.'s $250 million of 10-year senior notes (Ba3/BB+), which are expected to price Thursday morning via joint bookrunners Salomon Smith Barney and Morgan Stanley.

And two more sell-side sources accepted invitations, Tuesday, to comment on the primary market transactions which priced between June 13 and June 21 - an interval during which 19 high-yield tranches which priced, of which 12 (or 63%) priced wide of their price talk.

One of the two sell-side officials said: "It shows that the market's backing up and investors are becoming less willing to purchase deals.

"I think that's definitely significant," the source stated. "Last year in this time-frame we had a similar scenario where there was just a ton of supply out there."

The other sell-sider, responding by email, maintained that these circumstances may best be understood on a story-by-story basis.

"It's a combination of the recent choppy high yield secondary market, due to credit developments (the Tyco downgrade, Adelphia, the wireless sector) along with the fact that some of these issues have a story-element to them," this sell-sider's message read. "Buffets is a dividend deal with the sponsor taking out in excess of their original equity investment; Herbalife had a lot of credit issues.

"Good quality deals are getting done just fine," the source said.

When the new Yum! bonds were cleared for secondary dealings, "there was a brief run-up," said a trader, who quoted the new bonds as having moved up to 100.25 bid/101 offered from their issue level earlier in the session at 99.45.

After that, though, "they traded into that 100.25 bid," and fell back to a close around 99.75 bid/100.25 offered. "There was a brief flurry, but it seemed like some flippers" bought the bonds and got out of them at the highs, "or some holders decided they wanted to lighten up, they thought it moved up much too quickly. We're in a totally different type of [environment] than we were just a few weeks ago - a different tone," he added.

Back among the already established issues, Adelphia Communications Corp. was not heard during the session to have made its long-awaited bankruptcy filing although Tuesday evening - long after the market had closed -the troubled Coudersport, Pa.-based cable television operator announced it had in fact finally filed its Chapter 11 petitions with the bankruptcy court in New York. The company has $1.5 billion in debtor-in-possession financing lined up. The filing also covers more than 200 subsidiaries.

Earlier, Adelphia's bonds were quoted lower on light activity, its 10 7/8% notes due 2010 dipping to 47.5 bid from 49 and its 10¼% notes due 2011 heard at around 47.5 bid, versus prior levels around 50. Adelphia's Arahova Communications Inc. unit's 8 7/8% notes due 2007 was quoted as having dipped to 38 bid, down more than two points.

However, a market source said Adelphia rival Charter Communications had "firmed a little," quoting Charter's 8 5/8% notes as having tacked on about two points to end the day at 77.25 bid.

Also in the communications sphere, WorldCom bonds "opened lower but then rebounded off those lows," a trader said. At another desk, WorldCom's benchmark 7½% notes due 2011 were quoted slightly higher at 41.5 bid, up half a point on the day.

Long after the market had closed Tuesday CNBC reported that the troubled Clinton, Miss.-based long-distance operator had inflated earnings by as much as $3.6 billion over the past five quarters, allegedly by reporting as capital expenditures costs that should have been treated as ordinary expenditures.

The news report - the latest in a long line of bad news for the once high-flying phone giant - caused its shares - which had fallen 8 cents during regular Nasdaq stock trading to end at 83 cents on Tuesday - to swoon as low as the mid-30s in after-hours dealings.

On Tuesday evening, sure enough, the company announced that it intends to restate its financial statements for all of 2001 and the first quarter of 2002. WorldCom said that as a result of an internal audit of the company's capital expenditure accounting, "it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles (GAAP). The amount of these transfers was $3.055 billion for 2001 and $797 million for first quarter 2002. Without these transfers, the company's reported EBITDA would be reduced to $6.339 billion for 2001 and $1.368 billion for first quarter 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002."

WorldCom further said that it had notified both its current accounting firm, KPMG LLC, and its former accountants - the troubled Arthur Andersen LLP, which had audited the company's financial statements for 2001 and reviewed such statements for first quarter 2002.

On Monday, Andersen had advised WorldCom that in light of the inappropriate transfers of line costs, Andersen's audit report on the company's financial statements for 2001 and Andersen's review of the company's financial statements for the first quarter of 2002 could not be relied upon.

WorldCom said it would issue unaudited financial statements for 2001 and for the first quarter of 2002 "as soon as practicable," and also promised that when an audit of the restated results is completed, it would provide new audited financial statements for all required periods. The troubled telecommer additionally said it was reviewing its financial guidance.

WorldCom said that it had terminated Sullivan from both of his positions, as CFO and as company secretary. It also accepted the resignation of David Myers as senior vice president and controller.

WorldCom also notified the Securities and Exchange Commission of these events.

Elsewhere, Rite Aid's 10½% notes coming due later this year pushed up to 92 bid from prior levels around 90.5, while its 6½% notes due 2013 moved up to 78 bid from 76.5, after the Camp Hill, Pa.-based drugstore chain operator reported its first quarterly profit in four years, helped by a hefty tax benefit, as well as reduced interest expense and higher prescription sales.

Rite Aid said that including the $44 million tax benefit, it enjoyed a net profit for the quarter of $2.6 million for the fiscal first quarter which ended June 1 (a loss of 1 cent per diluted share), versus a year-ago loss of $211.1 million (56 cents per share). Analysts had been looking for a loss in the 7-cent-per-share range.

Excluding the tax benefit as well as certain other items - $16.9 million of asset sale gains, non-cash charges of $12.3 million and $26.7 million of legal charges - Rite Aid lost $19.3 million (5 cents per share) for the quarter.

The company said that based on current trends, it expects same-store sales for the second quarter of the current fiscal year 2003, which ends on Aug. 31, to increase between 7% and 8% from year-ago totals. It projects fiscal second-quarter EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of a company's cash flow generation potential and ability to service debt) to be $110 million to $120 million, versus an adjusted comparable $99 million last year.

And Rite Aid is increasing its EBITDA guidance for all of the current 2003 fiscal year to a range of $545 to $595 million, from its earlier range of $530 to $580 million.

On the downside, Magellan Health Services Inc.'s 9% notes due 2008 were quoted five points lower, around 56 bid; Standard & Poor's lowered its counterparty credit rating on the Columbia, Md.'s beased healthcare operator to B from B+ previously, lowered other ratings on the company's debt issues and placed all ratings on CreditWatch with negative implications. The ratings agency cited "declining operating performance, high leverage and problematical liquidity."

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