AES bonds firm on exchange news, retreat on downgrade; funds lose $144.6 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 3 - News that AES Corp. would exchange cash and new securities for two issues of its outstanding bonds helped boost the independent power producer's debt initially Thursday, although traders said it fell back later on after a Standard & Poor's ratings downgrade for the company.

Meanwhile, the news that Conseco Inc.'s embattled chief executive officer, Gary D. Wendt, will resign that post (while keeping chairmanship of the company) came too late in the day to impact upon the company's bonds.

Secondary and primary players alike noted with some trepidation that high-yield mutual funds, a frequently watched gauge of overall junk market liquidity trends, recorded their second consecutive weekly outflow in the week ended Thursday.

A source told Prospect News that AMG Data Services of Arcata, Calif. had reported an outflow of $144.6 million from high-yield mutual funds for the week ending Oct. 3.

When Prospect News suggested that the $144.6 million might be seen as "relatively flat" the source wasted no time in pointing out that taken in conjunction with the previous week's $1.4 billion outflow it could indeed be seen as meaningful.

"That brings it to a billion and a half in two weeks," the source pointed out, insinuating that there was nothing especially flat about $1.5 billion.

"That's also reflected in the recent postponement of deals," the source added, alluding to four new offerings pulled from the market since Sept. 20: Allied Waste, Resource America, TI Automotive Ltd. and Brake Bros. plc.

Back in the secondary arena, AES bonds "were pretty firm all day long, there were buyers all day long until the end of the day," a trader said, after the company announced that it would swap cash and new senior secured notes for its 8¾% senior notes due 2002 and new notes for its 7 3/8% remarketable and redeemable securities ("ROARS") due 2013 but which are putable next year (see separate story elsewhere in this issue).

"But then the sellers came out of the woodwork" after the company's debt ratings were downgraded by S&P, the trader said. He saw the bonds ending off three or four points on the session. "The bonds that we were bidding 52 on [earlier] we bought at 49.5 at the end of the day."

He saw the 2002 bonds subject to the exchange closing at 92 bid/94 offered while the ROARS ended at 81 bid/83 offered.

Another trader agreed that "right off the blocks, the news [of the exchange] was considered by the Street to be OK." He saw the company's 9½% notes due 2009, which had closed at 52 bid/54 offered Wednesday, as having pushed as high as 55 bid57 offered. But after the downgrade news, he said. "They completely receded," and finished the day around 50 bid/52 offered. He also saw the 7 3/8% ROARS ending at 80 bid, down from 82 bid/84 offered before the news of the downgrade.

S&P lowered AES' corporate credit and senior unsecured ratings to B+ from BB-, acknowledging that "[i]f this transaction is successful, it will increase AES' flexibility by pushing off any substantial maturities for up to three years."

But S&P credit analyst Scott Taylor added that the downgrade "reflects continued deterioration in AES' Latin American businesses, and anticipation that cost cutting and improved performance at other businesses will not make up for those losses to the extent that AES had projected in its guidance provided after the second quarter."

He added that even if the tender is successful, "AES will not be paying down maturities out of operating cash flow as they come due, as had been AES' plan, but rather will be paying down debt as proceeds from asset sales are realized, which will likely result in less timely deleveraging than had been anticipated."

AES shares lost 48 cents (18.68%) to end the New York Stock Exchange session at $2.09. Volume of 4.8 million shares was not quite twice the usual turnover.

Elsewhere, there was little follow-up Thursday to the retreat seen Wednesday in Charter Communications Holdings LLC bonds after the St. Louis-based Number-Four U.S. cable operator warned that its cash flow growth would be lower than originally expected, due to erosion of its subscriber rolls.

Charter was "kinda sliding sideways," a trader noted, "up or down half a point depending on supply and demand [of a particular issue], but [Wednesday] was the day it was down.

Charter "did nothing [Thursday] a trader said, quoting its benchmark 8 5/8% notes due 2009 at 56 bid/57 offered, "right where they were Wednesday."

Overall, the trader did not see much real movement in anything. [Thursday] just stunk," he declared. "Nextel was fine [i.e., unchanged around Wednesday's 78.5 bid level on its 9 3/8% notes due 2009] and there wasn't much volatility in anything."

He noted that Conseco's announcement that Gary Wendt will relinquish his CEO post while retaining the chairmanship came after the close, too late to affect Thursday's dealings in the Carmel, Ind.-based insurer's bonds.

Wendt, who at first was greeted by Wall Street like a miracle worker when he came aboard in 2000 and began cutting debt, selling assets and turning results around, has in recent months been subjected to analyst, media and investor criticism that his ambitious turnaround plans have fallen short of expectations, while the company has allegedly sought to "spin" its less-than-overwhelming recent performances in a series of "turnaround memos" that critics have described as opaque or even deceptive.

Conseco began talks with its bondholders in August with an eye toward restructuring its more than $6 billion of debt. Those negotiations - which could lead to a prepackaged bankruptcy filing - will continue under Bill Shea, Conseco's president and chief operating officer, the company said in a statement.

The trader said that Conseco's original, unextended bonds were languishing in the 12-14 bid area while its extended exchange bonds were at 21-23 bid (Conseco earlier this year exchanged new bonds with longer maturities for most, but not all, of its outstanding bond debt).

Nortel Networks Corp. debt "was all offered" without any bids, said one trader who quoted the Canadian-based telecommunications equipment maker's 2003 bonds at 66 and its 2006 bonds at 36.

But at another desk, a trader saw them up slightly, at 66.5 bid from prior levels around 65 bid/66 offered. Nortel said it was reorganizing its business units, essentially making four units out of three previously. It also said that veteran executive Frank Plastina, who had headed one of the old units being split in two, would leave the company. Analysts doubted the change would have much immediate impact on the company's troubled finances, which have been severely affected by the downturn in capital spending by telecommunications companies that buy Nortel's equipment.

With four recent deals postponed, the eyes of the high-yield primary market Thursday were unmistakably trained upon Brand Services' offering of $165 million of 10-year senior subordinated notes (B3/B-) via Credit Suisse First Boston and JP Morgan - the only deal left on the calendar for the present week. However at the conclusion of Thursday's session no terms had been heard.

Price talk of 11¾% was confirmed by a syndicate source on Wednesday.

Proceeds from the deal will be used to fund the acquisition of the company by JPMorgan Partners from DLJ Merchant Banking, including a tender for its $130 million 10¼% senior notes due 2008.

That, according to one buy-side source, suggests that there may be interest in the deal among the company's present bondholders.

"Brand was one of those rare, off-the-run names from the late '90's that actually worked," this investor said. "May be that the buyers of this deal are the owners of the old deal getting themselves taken out. Sometimes there's a strategy there."

Elsewhere on the buy-side, another source pointed out that the company provides scaffolding services primarily to refining, chemical, petrochemical, utility and pulp and paper industries. News for such customers, the source pointed out, fails to generate much cheer during an economic downturn.

Also, this buy-sider reasoned, whatever merits new paper from an equipment rental company may be said to possess, presently there is paper in the high-yield secondary market from equipment rental companies that is considerably cheaper.

In any case as the week of Sept. 30 heads toward its conclusion there is a palpable sense that the sell-side is pulling for the best possible transaction that the current capital-markets circumstances can sustain for Brand Services.

"You have to look at the yield," one sell-side source insisted during a late-Thursday conversation about the Brand Services deal. "You offer it at a good discount and the investors will pick it up."

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