Level 3 up on completed tender; Xerox easier; 2B rated Petco prices tight

By Paul Deckelman and Paul A. Harris

New York, Oct. 23 - Level 3 bonds were seen solidly higher Tuesday, as the company announced that it had bought back a sizable chunk of its bond debt at a steep discount, creating a potential short squeeze. Xerox debt was quoted at easier levels after the copier king reported a sizable third-quarter loss and its formerly split-rated bonds were cut down to full-fledged junk bond status by Standard & Poor's.

Meanwhile the successful pricing of pet food retailer Petco Animal Supplies Inc.'s new 10-year senior subordinated single-B note deal would seem to be a sign that the primary market may once again be opening up for lower-rated, less well-known credits. Elsewhere in the new-deal arena, tobacco merchant Dimon Inc.'s pending offering was heard to have been upsized, and Majestic Investor Holdings LLC was sighted getting ready to come to market with a $140 million Jefferies & Co.-led deal.

The big story in the secondary Tuesday was the jump in Level 3 Communications Inc.'s bonds, after the Broomfield, Colo.-based long-haul telecommunications operator announced the successful completion of a "modified dutch auction" tender offer under which it agreed to buy back about $1.4 billion of dollar-denominated debt and another €330 million of euro-denominated paper, for slightly more than $700 million. It agreed to buy back nearly $570 million of its $2 billion of outstanding 9 1/8% senior notes due 2008 for 45 cents on the dollar, and $358 million of its $800 million of 11% senior notes due 2008 for 48 cents on the dollar.

A trader saw the 9 1/8s - one of the junk market's biggest benchmark issues - as having firmed to around 44.5 bid/45.5 offered from levels around 38.5 bid just a session or so ago, while the 11s had risen to 48 bid/49 offered from 40 bid/41 offered previously.

"They were up considerably," he said, "pushed up by the idea that with the tender finished, there might now be a short squeeze in the bonds." Another market-watcher saw all of Level 3's debt up by around that same amount.

Another gainer, another trader said, was B/E Aerospace, Inc., despite the Wellington, Fla.-based aircraft cabin interior components maker's warning that second-half earnings are likely to come in well below previous expectations. B/E cited the impact the Sept. 11 terrorist attacks have had on the overall economy (and especially on airline-related businesses) in projecting that second-half sales would come in around $340 million, well down from the previously anticipated $450 million, while earnings per share, once expected to hit 90 cents, are likely to be about break-even, not including a $15 million cash restructuring charge and a total of about $75 million in non-cash charges related to various asset writedowns. B/E additionally said it would close five facilities, reduce its workforce by approximately 1,000 employees, and impose a cut in the management team's compensation of 35% to 50%.

Despite the prospect of lower earnings and perhaps because of the belt-tightening measures, B/E's 9½% notes firmed to 81 bid from 78 previously, while its 8 7/8% paper gained a deuce to 77 bid.

Also on the upside, the trader said, was Sea Containers Ltd., "bid up on no news, with the Hamilton, Bermuda-based transportation and lodging operator's 12½% notes up two points to 72.5 bid and its 9½% paper also up a pair to 74 bid/75 offered.

He further saw buyers in Kaiser Aluminum, which continues to bounce off recent lows; the Houston-based metals producer's 12¾% subordinated notes due 2003 were quoted at 49 bid, up from the 42-43 area last week.

A trader at another desk saw "a little bit of improvement" in WestPoint Stevens, as the West Point, Ga.-based textile maker reported a company-record $513.1 million in net sales for the third quarter, up 5% from $487.8 million a year ago, although it also posted a drop in operating earnings for the quarter to $55.7 million before charges, from $76.4 million for the same period in 2000. The trader quoted WestPoint Stevens' 7 5/8% senior notes due 2005 as moving up to 34 bid from 31-33 previously.

On the downside, the trader saw Xerox Corp.'s bellwether 5½% notes due 2003 dip to 79 bid/81 offered from 82.5 bid/83.5 offered Monday, after the troubled Stamford, Conn.-based copier and office machines giant reported a loss of $211 million, or 29 cents per share, in the third quarter. A year ago, it lost $191 million, or 30 cents a share. Revenues were off 13% in the latest period, historically the company's strongest period. Xerox cited the already weakened overall economy and impact of the Sept. 11 terrorist attack, although it also said it remains "cautiously optimistic" about returning to profitability in the next quarter - the first time in more than a year it would have shown a profit.

Not so optimistic about Xerox's prospects was Standard & Poor's, which stripped the company of its last tenuous vestage of investment-grade respectability by downgrading its bonds to BB from BBB- previously. Moody's Investors Service had already previously downgraded Xerox to junk-bond levels late last year.

Another fallen angel taking it on the chin Tuesday was Lucent Technologies Inc., which posted a yawning $8.8 billion ($2.59 per share) fiscal fourth quarter loss Tuesday, although most of that was due to an $8 billion restructuring charge. A year ago, the troubled Murray Hill, N.J.-based telecommunications equipment giant had lost $424 million, or 14 cents per share.

A trader said "sellers came out of the woodwork and into the market on their pretty crummy earnings," quoting Lucent's long-dated 2029 debentures as going from a 66 bid pre-news to offered levels around 65.25 afterward. But another observer quoted Lucent's paper as having only dipped about half a point, its 7¼% notes due 2006 ending at 83.5 bid and its 5½% notes due 2008 closing at 73.5 bid. Given Lucent's well-publicized struggles, "bond market people expected the bad results, and it was already built in."

Elsewhere on the downside, a trader said "everyone was looking for the left (bid) side" on Comstock Resources' 11¼% notes due 2003, which he saw having gone to offered levels around 97-99 from 101-103 previously, after the Texas-based independent energy company announced Monday that it had entered into a letter of intent to buy all the outstanding shares of rival DevX Energy Inc. for about $93 million, or $7.32 per share.

And a trader saw insurer Conseco Inc.'s debt clinging to the lower levels to which it has fallen over the past several sessions, fueled by investor angst over the company's prospects. Its 8½% notes due 2002 were seen around 83 bid/85 offered, he said, "down at least five or six points over the last couple of days."

Meanwhile, in the primary, talk centered on Petco Animal Supplies' $200 million of 10-year notes which priced to yield 10¾%, at the tight end of talk of 10¾% to 11%, via bookrunner Goldman, Sachs & Co..

Syndicate officials said that Petco is significant because it carries lower credit ratings than the spate of upsized deals that have come to market in the past two weeks. Moody's Investors Service rated Petco's bonds B3 while Standard & Poor's assessed them at B.

With this first lower-rated deal having shown the way, the officials said the market might now be open to many more of the "shadow deals" that were sidelined after the terrorist attacks on Sept. 11.

"The market feels better now," one syndicate source commented. "Petco is a B3/B. It's relatively interesting because of that. When you start to see the weaker B credits come to market, that tells you that the market's starting to feel a little better again, post-11.

"That's positive. We'd like to see some of those companies get good execution."

The source also commented that in light of Petco, it will be interesting to watch Advance Auto Stores' $150 million add-on, rated B3/B-, which is scheduled to price Wednesday. Whether or not Advance prices close to its price talk in the 12% area, the source said, should indicate whether the primary will truly open up to lesser credits.

An investment banker, noting Petco's tight-end-of-talk pricing at 10¾%, said: "That's pretty good, pricing it at par. They gave up 610 basis points (on a spread to Treasuries basis). But for a weak credit, that's pretty good.

"I am surprised that the weak single Bs were able to come this early, because those are the guys who need financing. And there are a lot of them on the backlog."

In addition to Advance Auto, Dimon, Inc.'s $200 million of 10-year senior notes is scheduled to price Wednesday. Demand for this Ba3/BB credit is obviously intense, one market source commented - as the deal was upsized Tuesday from its originally announced amount of $175 million.

Finally on Tuesday, talk surfaced of a deal Majestic Investor Holdings LLC. The Gary, Ind.-based gaming company is said to be planning $140 million of seven-year senior secured notes, with Jefferies & Co. as bookrunner. Although neither the company nor Jefferies would confirm the existence of this offering, numerous market sources confirmed the information. One source told Prospect News that the deal could hit the road next week.

End

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