Lucent, airlines gain as investors take risks in firmer market; Bluewater prices

By Paul A. Harris

St. Louis, April 23 - The high-yield secondary market was filled with stories of tightening spreads Wednesday, as paper-hungry investors continued to forage the largely bond-dry aftermarket, "sticking their necks out a little bit," in order to put to work the sizable allotments of cash that are reported to have lately been allocated to high yield.

Firming credits, according to secondary market sources, included energy names, telecom names -one source had Lucent Technology Inc.'s 5½% notes of 2008 advancing six points - airline (yes, AIRLINE) names and recently priced paper.

Meanwhile one transaction took place Wednesday in the high yield primary market, as Bluewater Finance priced a $75 million add-on at 100.5 for a yield to worst of 10.14%.

And a triumvirate of new junk bond deals took a bow on Wednesday, as issuers continue to feel the heat of what sources have been characterizing as a "white hot" high yield market.

Two roadshows got underway Wednesday. HMP Equity Holdings started mixing with investors, hoping to interest them in its new offering of approximately $320 million five-year senior secured zero-coupon discount notes, an offering that will come with warrants for shares of common stock. And Jafra Cosmetics International, SA de CV began laying on the gloss for investors eyeing its new $175 million of eight-year senior subordinated notes.

Timing is less certain for the third offering that was heard of Wednesday. Plano, Texas durable goods rental firm Rent-A-Center, Inc. will bring $250 million of new seven-year paper to fund its tender offer. However the company would not specify timing.

Secondary market sources told Prospect News on Wednesday that advancing trading levels likely betray a buy-side in need of putting cash to work.

Take the airline names, one source advised. Sure there were headlines Wednesday - none of them particularly encouraging. AMR Corp. chief Don Carty bowed to pressure from the unions which had recently made wage and benefit concessions in order to hopefully keep it from nosediving into bankruptcy court and scrapped planned executive bonuses that were announced almost before the ink had dried on the concessions. Talk even circulated Wednesday - prompted by a Dallas Morning News article - that the AMR board might even show Carty to the aft hatch (no mention of a parachute).

Also on Wednesday AMR posted a $1.04 billion quarterly loss, which it attributed to declines in air travel caused by the war in Iraq, as well as on high fuel prices and low fares.

Hence one trader reported having kept a weather eye on AMR's paper to see if the bad news would impact upon its altitude. Remarkably, said the trader, the news seemed to have little or no impact.

"It might have been a little weaker, but not ridiculously weaker," the source said of the AMR benchmark bond, citing a trading level of 33/35.

"Honestly that's where they were yesterday," the source added. "Late Wednesday the bid pulled, but with that being said I wouldn't say they were down. They just weren't up."

The picture was not so bright at another desk but not awful either. AMR's 9% bonds due 2012 were seen bid at 29 and offered at 32, down a point from Tuesday's price of 30 bid/33 offered, itself a four-point drop from Monday.

"Continental Airlines paper was better," continued the first trader. "Delta was also better. So while the rest of the sector rallied AMR just didn't do anything."

The source saw the paper of Continental Airlines, the number five U.S. airline, strengthen even though last week it posted a quarterly loss of $221 million.

CSFB "came out with a big buy recommendation on the Continental stock, said the source. "The market is so hot that people are shifting down and taking shots when normally they wouldn't.

"Nobody would say that Continental Air is oranges when the rest of the market is apples, so I can't say why you saw some strength other than that with this buy recommendation people were kicked in the pants to do something. Continental Air stock was up about a $1.50, which is a significant move, on a percentage basis, when you're talking about an $8.00 stock.

"I just thought that away from AMR you saw strength in that stuff - particularly in Continental."

The rising tide of cash lifted energy credits on Wednesday as well, sources said.

One source had the paper of AES Corp. "up two or three points," with the 8% paper of 2008 having traded in the 85.5/86.5 context, up a couple of points. Also "up a couple of points," said the source, were bonds of Calpine and El Paso Corp.

Another source saw notes of Atlanta-based Mirant Corp., which was granted waivers by its banks on Monday, "up four or five points."

Yet another source had the Mirant 7.70% notes, which had traded around 62 during Tuesday's session, up to 65.5 on Wednesday. The same source said that Calpine Corp.'s 8½% notes of 2011, which were 66.75 Tuesday, climbed to 68.5 on Wednesday.

"The utility paper is better because the utilities have been given a little more rope to operate, or because guys are shifting their risk profiles, taking shots at stuff they wouldn't play before because now they have so much cash to put to work," commented the same trader who gave the color on the airline bonds above.

Sources also reported seeing advances in the paper of Lucent and Qwest Services.

Lucent's 5.5% notes of 2008 traded in the 83/85 range, said one source - up six points. The 6.45% of 2029 were seen trading in the low 70s, up three points.

Helping sentiment on Lucent was the company's earnings announcement. The Murray Hill, N.J. telecommunications equipment maker posted a fiscal second quarter net loss of $351 million, or 14c per share, versus a net loss of $495 million, or 16c per share, a year ago. Revenues declined to $2.4 billion from $3.52 billion.

"We continue to work toward a return to profitability in late fiscal 2003," said Lucent chief financial officer Frank D'Amelio.

"We have also continued to focus on our recapitalization efforts, which have reduced our debt and convertible securities by more than $1.6 billion to date."

The net loss was better than expectations.

In addition the company said it exchanged $842 million of its convertible securities and some other debt obligations for stock in the quarter and during April. Those exchanges cut annual interest cost by $125 million, Lucent said.

Also strong was Rite Aid Corp. One source had its 9½% notes of 2011 up half a point to 106.5 from 106. The 7 1/8% of 2007, the source added, firmed Wednesday to 95.25 from 94.5.

Meanwhile in the primary market, Wednesday, terms emerged on Bluewater Finance's $75 million add-on to its senior notes due Feb. 15, 2012 (B1/B+). The deal, via Morgan Stanley, priced at 100.5 for a yield to worst of 10.14%. The original $260 million offering priced on Feb. 14, 2002.

A roadshow got underway Wednesday for approximately $320 million of five-year senior secured zero-coupon discount notes to be sold by HMP Equity Holdings. The Huntsman International Holdings LLC-affiliate's deal, via joint bookrunners Credit Suisse First Boston and CIBC World Markets, also includes warrants for common shares, and is expected to price mid-week during the week of April 28.

A roadshow also began Wednesday for Jafra Cosmetics' $175 million of eight-year senior subordinated notes (B3/B-). The Credit Suisse First Boston-managed deal, to repay the credit facility, redeem its 11¾% senior subordinated notes due 2008, and make a distribution to equity holders, including Clayton, Dubilier & Rice Fund V, which owns approximately 84% of CDRJ Investments (Lux) SA's outstanding shares on a fully diluted basis, is expected to price late in the week of April 28.

Finally on Wednesday Rent-A-Center announced a new $250 million offering of seven-year senior subordinated notes to fund the tender for its 11% notes due 2008. Lehman Brothers will run the books, according to a market source.

The Plano, Tex. durable good rental services firm director of investor relations David E. Carpenter told Prospect News that Rent-A-Center hopes to price the new seven-year senior subordinated notes 8%-8½% range. Although he would not specify timing on the bond deal he noted that the tender offer expires on May 20.

There was no further word on any possible debt financing from Xerox Corp.

Late Tuesday talk began circulating in the leveraged markets that the Stamford, Conn. copier maker was looking at a major refinancing.

Sources at the time declined to comment further, citing the company's upcoming earnings release.

That release provided no additional news on any financing plans.

Asked about the market talk on the company's earnings conference call, chief financial officer Lawrence Zimmerman said: "There's rumors all the time about what exactly we might or might not be doing. I'm not going to comment on the rumors."

Questioned on whether the company planned to refinance or access the capital markets, he said: "I think those are always options. We are going to do it when we think it's the best for the shareholders of Xerox so we are constantly evaluating and thinking about it."

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