Williams drops on bankruptcy talk; Level 3 firm; Computer Associates lower again

By Paul Deckelman and Paul Harris

New York, Feb. 25 - Williams Communications Group Inc.'s debt and stock tumbled Monday, after the troubled telecommunications company said that a possible Chapter 11 filing was among the debt restructuring options it might consider. But fellow long-haul telecommer Level 3 Communications was seen hanging in there after some benign guidance and the announcement of a planned big acquisition. Computer Associates' nominally investment-grade debt continued to retreat amid allegations of accounting irregularities.

In the primary market, details emerged on three separate deals, although the timing on two of them remains something of a mystery.

Back in secondary activity, Williams "was the big news, although on not a lot of trading" during a generally muted session, a trader said, noting that its 10 7/8% notes were down by his count about eight or nine points.

At another desk, the benchmark issue had dropped down to at least the 13 bid/14 offered level from Friday's finish above 20, and were "trading flat as a pancake" (i.e., without accrued interest), a trader said.

The Tulsa, Okla.-based long distance network operator - which was supposed to have come up with a restructuring plan by this date - instead issued a morning statement saying it was continuing discussions with its bank group to develop such a restructuring plan.

While repeating its previous assertions that the company has "sufficient cash - over $1 billion as of December 31, 2001 - to fund our business plan through 2003," and is current in all of its obligations," Williams added it had expanded the options it was considering, and that "as part of evaluating the expanded options, the company is considering the potential benefits of a negotiated Chapter 11 reorganization process, which would support uninterrupted continuation of the business and minimize any impact to customer and vendor relationships." Williams said it expanded the options being considered after it concluded on Feb. 22 that "certain institutions other than the banks are not likely to participate in the restructuring process on terms that are beneficial to all stakeholders of the company.

The company further said that it had authorized its legal and financial advisers to discuss restructuring options with the holders of certain of its notes, who were not specified, cautioned that the expanded options now being considered "could potentially result in substantial shareholder dilution," and said any restructuring the company undertakes would include plans to cut controllable costs by one quarter, which would include workforce reductions.

The announcement that bankruptcy might be considered as a means of allowing for "a more orderly process that maximizes enterprise value" is an abrupt reversal of Williams' recent declaration that it was not considering a bankruptcy filing or a massive dilution of shareholder equity as possible means out of its current dilemma of too much debt and not enough revenues (don't even think about profits) to cover all of those obligations.

"I just love it how three weeks ago (Feb. 4) they said 'we don't have any liquidity issues and we're funded to (the point where we're) cash-flow break even, we're going to be EBITDA-positive,' yadda, yadda, yadda," a trader said sarcastically. "They said all they had to do was iron out this little problem they had with their banks, that they blew up a covenant. Three weeks later, they're considering Chapter 11. It's the same thing (in this industry), over and over again. It's simply amazing."

Standard & Poor's also found the latest development amazing; in dropping the rating on Williams corporate credit to CC from CCC+ previously - with a further downgrade to D possible - the ratings agency noted that "the active consideration of a bankruptcy filing or a debt restructuring runs contrary to William Communications' recent publicly announced intentions." Fitch Ratings cut Williams to CC from CCC- previously. Moody's Investors Service currently rates the Williams bonds at Caa3.

Equity investors were just as stunned and dismayed; Williams Communications shares fell 26 cents, or 56.86%, to 22 cents, in New York Stock Exchange dealings. Volume of 60.5 million shares was nearly ten times the usual turnover.

But if Williams was slip-sliding toward oblivion Monday, the trader felt that long-distance rival Level 3 Communications Inc. was holding its own, after the Broomfield, Colo.-based telecom operator said it expects its first-quarter results to meet or exceed its forecasts - especially now that it anticipates boosting its sales by acquiring Corporate Software Inc., a Norwood, Mass.-based distributor and reseller of business software.

"That was very smart," the trader said. "They spend $89 million in cash and take on a little debt and solve a bank covenant problem - a pretty smooth move."

Level 3 had warned it might be in danger of violating a requirement in its credit agreement that it maintain a certain level of revenues. With a soft telecom industry, there was no assurance the company would be able to do so - but by buying Corporate Software - which last year racked up about $1.1 billion revenues, compared with Level 3's own $1.5 billion, they fulfill the revenue covenant requirement "and they don't have to talk to the banks again until the second half of 2003. Very smart."

Level 3 also said it expected to meet or beat estimates it released on Jan. 29, when it projected that it would likely post a first-quarter net loss of $1.10 a share, while communications revenues would come in at about the same level as fourth-quarter totals.

Level 3's benchmark 9 1/8% senior notes due 2008 were seen hanging in around the same 38-39 bid area they've recently occupied. On the equity side of the ledger, the company's shares gained 56 cents (22.86%) in Nasdaq trading to close at $3.01. Volume of 16.3 million shares was more than triple the average activity level.

Elsewhere on the telecom front, Nextel Communications Inc. was heard down about half a point, at 56.5 bid, by a market source who saw "not much else doing" beyond Williams Communications' fall. There was no change seen in SBA Communications Corp.'s debt, with its 10¼% bonds remaining at 65 and its zero-coupon notes at 61; the Boca Raton, Fla.-based telecommunications antenna operator issued a statement affirming that it had has complied with the terms of its $300 million senior credit facility during the 2001 fourth quarter. The statement dismissed as "unfounded" market rumors to the contrary. Equity players refused to be appeased, however; SBA shares plummeted $1.08 (35.29%) to $1.98 on the Nasdaq; volume of 8.8 million shares was a more than tenfold increase in the usual daily handle.

There was little reaction to Standard & Poor's decision late Friday to cut AT&T Canada's ratings to BB from BBB previously, citing "heightened concerns about (U.S.-based corporate parent) AT&T Corp.'s economic incentive to provide support to AT&T Canada debtholders in the long term should regulatory changes and continuation of challenging market conditions not support a competitive Canadian telecommunications market."

AT&T has until June 30, 2003 to decide whether it wants to buy up that portion of the Canadian company it doesn't already own; Ma Bell has already indicated that she feels no legal obligation to absorb AT&T Canada's debt in the event of such a takeover.

A market watcher surmised that the latter's 7 5/8% notes due 2005 and 7.65% notes due 2006 - both in the mid-to-upper 30s last month before dipping into the 20s this month - would be a few points lower on news of the downgrade to junk status.

Outside the telecom sphere, AES Corp., whose bonds had descended rapidly last week on investor worries over the Arlington, Va.-based power producer's Latin American exposure and the feasibility of its plan to raise $1.5 billion via expected asset sales, remained stuck around 60 bid.

Rival independent power generator Calpine Corp.'s notes were down two points across the board to around the 67 bid area, after S&P first issued a warning that it might downgrade Calpine Corp.'s BB ratings - and then withdrew the threat, calling the whole thing an editors' error.

When the ratings agency originally issued the warning, it indicated that San Jose, Calif.-based Calpine's bankers had agreed to arrange a $1.6 billion loan package for the company after the cash-challenged utility agreed to put up hefty amounts of collateral, effectively subordinating the company's bonds behind the new debt. Later in the day, S&P said that transaction had never happened, and that the advisory had been issued in error - although news reports raised the possibility that the mistaken release might be an indicator that such a deal might in fact really be in the works, just waiting for all of the "I"s to be dotted and the "T"s to be crossed before being announced.

For a fourth straight session, Computer Associates International's bonds were heading south in the midst of allegations - denied by the Islandia, N.Y.-based software company - of the market's current bugaboo, accounting irregularities. The company on Monday confirmed that the Securities & Exchange Commission is investigating, but denied any improprieties. Even so, its 6¼% notes due 2003 had fallen to 91 bid from 92.5 bid Friday (and before that, from prior levels around 96.25); its 6 3/8% notes due 2005 dipped to 83 bid from Friday's 85 and Thursday's 88.25; and its relatively inactive 6½% notes due 2008 continued to languish at Friday's 76 bid, down from 78.5. Those nominally investment-grade bonds were now being quoted around in dollar terms rather than on a spread basis, like investment grade credits normally are.

Meantime, the company's stock - which fell sharply last week on the allegations - were essentially unchanged in Monday's dealings, although NYSE volume was several times the normal level.

In the primary, although the forward calendar continues to build slowly, one syndicate source who spoke Monday with Prospect News on Monday reported sighting approximately $800 million of new business headed for the primary in the coming days.

"Some of my competitors are in the same situation," this source said. "We were in famine-stage for a couple of months, and now it's time for us to feast.

"I think we are going to see an up-tick in the calendar here in the next one to three weeks, in terms of a lot more paper coming in - a lot more quality paper.

"For the last two months we've have been pushing all the accounts to come. And as usual they're all going to end up coming at once."

Pressed to make some quick calculations, this official said that it is entirely conceivable that the calendar could "quickly build" to between $3 billion and $4 billion, and that March could possibly see new issuance of between $5 billion and $6 billion.

Commenting on the recent dearth of new issuance in the high yield, this official told Prospect News that the Dynegy Inc. high-grade $500 million deal that priced Friday, Feb. 15 no doubt had high-yield players in the primary - as syndicate sources told Prospect News at the time - and the secondary.

"That's an awful attractive yield for a six-B credit," the source said. "It came 388 (basis points) off. It's a nice liquid piece of paper: $500 million, easy to get into, and easy to get out of. And even if you're buying it today in the 8.50s, I still think that's an attractive piece of paper for a Baa3/BBB+.

"Even if it gets downgraded, is S&P going to take them all the way down to high yield land? I don't know. It might be BBB-. Maybe Moody's gets a little bit closer to knocking them down into our world. But even then you're still talking about a five-B credit with an 8¾% coupon on it, the way it was priced. And by today, 8.55% to 8.60%. "I'm buying that piece of paper."

As with others who told Prospect News of the high yield accounts' interest in Dynegy, this sell-sider said that a low volume of quality new issuance undoubtedly sparked that interest.

"We haven't had a whole hell of a lot of product in our market that's been worth buying," the official said. "What product there has been has been upsized, has come through talk, has come at the tight end of talk, and has not really been having a whole hell of a lot of problems getting done.

"There are more dollars out there that need to be put to work than there are good places to put it. The must-own names in the secondary market are over-bought. A lot of people don't want to chase those names any higher because they think those levels are not sustainable. So they're looking for other places to put their otherwise-idle cash to use.

"Dynegy is an investment grade credit that's kind of on-the-cusp. It's got some nice coupon to it, and it's in a good sector. If I'm the portfolio manager, and I have a basket of dollars to put to work - and I can move up the credit spectrum, in terms of rating - why wouldn't I do that?"

This official said that it was likely that high-grade accounts anticipated interest among the junk-bond crowd and acted accordingly.

"The reason that the high yield guys had to buy it in the secondary is because it was a blowout in the primary for the investment-grade guys," the source said. "They typically don't buy the $5 million and $10 million pieces that high yield buyers buy. They buy the $25 millions and $50 millions. If you make a point and a quarter on $50 million in a week, that's a nice little return."

"I'm sure some of the players that did buy it knew that it was an oversubscribed situation and knew there were going to be follow-on buyers in their market and in other markets. And so why not?"

Meanwhile back in the high-yield asset class Monday, the market heard details of Toledo, Ohio-based aftermarket auto parts company Dana Corp.'s $250 million senior notes due 2010 (Ba3/BB), which will hit the road Wednesday, via Salomon Smith Barney.

Last Friday Moody's downgraded Dana's notes and industrial revenue bonds to Ba3 from Ba1, citing "continuing weak end markets" that Moody's believes will delay meaningful improvement to the company's earnings, cash flow and debt holder protection measures.

The roadshow on Dana's new notes wraps up March 5, with pricing expected the following day.

Pricing would appear to be imminent for a euro deal that has been rumored for the past several weeks.

Market sources told Prospect News Monday that price talk of 11% area emerged on Agrokor DD's €150 million senior guaranteed notes due 2007 (B1/B+) via Credit Suisse First Boston. The notes are guaranteed by at least 90% of the Zagreb, Croatia-based food company's operating subsidiaries, according to the sources.

Also on Monday, most but not all the details were heard around the primary market on B&G Foods, Inc.'s $100 million add-on to its 9 5/8% senior subs due Aug. 1, 2007 (existing ratings B3/B-). Lehman Brothers is the bookrunner. Among several sources Prospect News spoke with on the sell-side of the primary, Monday, none had heard timing on B&G.

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