Conseco off on downgrade, Adelphia lower on disclosures; four deals join slate

By Paul Deckelman and Paul A. Harris

New York, May 28 - It was back to work for the high-yield market Tuesday following the Memorial Day break and while participants described things as somewhat restrained there was activity in specific issues in response to news developments, notably Conseco Inc., whose intermediate- and longer-term bonds were heard lower after Moody's Investors Service cut its ratings by two notches. Adelphia Communications Corp. eased after the embattled cable company revealed the extent of its close dealings - critics would say too close - with its founding Rigas family.

In primary activity, four new deals took their places on the forward calendar.

The Fleming Cos., Inc. will use the $200 million it hopes to raise in order to help fund an acquisition, a syndicate source said Tuesday. And Mexican railroader Transportacion Ferroviaria Mexicana will use proceeds from the sale of $170 million of junk bonds to by back its government's equity stake in the company.

And although a few of the details were missing at the close of Tuesday's session, news was also heard of L-3 Communications, which is bringing $500 million of new bonds. And Graham Packaging will come with $100 million.

Fleming will kick off the roadshow Tuesday, June 4 for its new off-the-shelf four-B deal. Deutsche Bank Securities is the bookrunner on the $200 million of eight-year senior notes (Ba3/BB-), which are expected to price June 12.

The Dallas-based food wholesaler, which is also undertaking a $200 million common stock offering and taking out a new $950 million credit facility, plans to use the money to fund its acquisition of Core-Mark and to repay bank debt.

High yield observers have speculated recently on the seriousness of the blow dealt to Fleming when its customer Kmart, the second largest discount retailer in the US, filed for Chapter 11 bankruptcy protection on Jan. 22.

In a recent filing with the Securities and Exchange Commission the company stated that net sales for its distribution segment increased by 22% for the first quarter of 2002. "The net growth in 2002 was mainly a result of increased activity with Kmart, our largest customer," the release stated. "Kmart accounted for 23% and 10% of our total net sales during the first quarter of 2002 and 2001, respectively."

Also on Tuesday Mexican railroader Transportacion Ferroviaria Mexicana SA de CV announced that it will start highballing down the high yield line Wednesday with $170 million of new 10-year senior notes (B1/BB-), via Salomon Smith Barney.

The Rule 144A 10-non-call-five deal, proceeds from which are slated to finance the acquisition of the Mexican government's 24.6% equity stake in the company, comes with a proviso, according to a syndicate source: if the company is not able to raise at least $150 million via the bond deal its previously-obtained consents will be revoked. Pricing is expected to take place June 6.

News of $500 million of new senior subordinated issuance from L-3 Communications circulated the market on Tuesday.

The company is also undertaking an approximately $750 million equity offering via Lehman Brothers.

Proceeds will be used to help refinance debt taken out to fund the acquisition of Aircraft Integration Systems from Raytheon.

The market also heard Tuesday that York, Pa.-based Graham Packaging Co., Inc. will bring $100 million of six-year senior subordinated notes via Deutsche Bank Securities.

The bond deal is a component of a recapitalization plan that includes a new $700 million senior credit facility. The plan also calls for an IPO of up to $287.5 million.

Activity in the secondary market was pretty quiet, a trader said. "It's the holiday blahs," he asserted. Following the three-day holiday weekend (which saw the market close up shop early on Friday and remain closed all day Monday), "a lot of people must still have sand between their toes."

But not completely. Moody's dropped the ratings on some $5.6 billion of Conseco debt, warning that the Carmel, Ind.-based insurer - which last month exchanged some $1.29 billion of existing bonds for new longer-dated notes which rank ahead of the remaining old bonds in the capital structure - faces a greater possibility of bankruptcy than it did the last time Moody's checked it, when it had embarked upon the exchange offer. At that time, Moody's anticipated dropping its remaining outstanding debt by a notch but said Tuesday it would lower the ratings two notches, with the remaining old bonds moving down to Caa1 from B2.

Moody's cited Conseco's "slower than anticipated progress in generating cash from reinsurance and other transactions and its continued weak net income performance from its finance and insurance subsidiaries," which the ratings agency said "leads Moody's to believe that the possible risks of bankruptcy for Conseco are more problematic. The lower ratings on the old senior unsecured notes are based also on the fact that old noteholders will become structurally subordinated to new noteholders."

Conseco did not take the downgrade lying down, with Chairman and Chief Executive Gary Wendt firing off a memo saying the company took "strong issue" with the Moody's pronouncement, which it said was based on outdated information; Wendt said that his company's recently amended bank covenants eliminated some of the pressure on Conseco to raise a lot of cash very quickly.

A trader said that he had seen little or no movement in Conseco's 8½% notes coming due later this year, even after the downgrade; he pegged the bonds at 96.5 bid/97.5 offered, same as they had been Friday - an apparent sign that investors consider the bonds money-good, come what may.

But at another desk, Conseco's 8¾% notes due 2006 dropped two points, to 54 bid, while its 9% notes due 2006 pushed as low as 50 bid from prior levels in the mid-50s.

Also on the ratings front, Standard & Poor's dropped its ratings on the bonds of Williams Cos. one notch to BBB-, just one notch away from junk, even after the Tulsa, Okla.-based pipeline operator and energy trader announced plans to shore up its balance sheet to the tune of more than $3 billion over the next year. It would do this by selling assets, issuing new stock, tightening its corporate belt and, possibly, cutting its 20-cent quarterly stock dividend.

But S&P cautioned that although Williams plans to reduce debt "significantly over the next year through a combination of asset sales and equity issuances, the plan is subject to substantial execution risk."

A market source said that Williams' bonds had taken "a significant jump" in early dealings, after the company announced its financial plans. He saw its 8 1/8% notes due 2012 at 98 bid/99 offered and its 7½% bonds due 2031 at 85 bid/86.5 offered, both "much better" than Friday's levels.

But after the late-session S&P move, which Williams called disappointing but not surprising, the 8 1/8% notes - which had closed Friday around 94 bid - backed off from the 98-area peaks it hit, to finish at 96, still a two-point gain on the session.

Williams's shares and bonds - like those of other energy trading and power generating companies - have been reeling for months, in the wake of the Enron Corp. debacle late last year, on investor fears that other companies in the same industries or related areas might be next to develop accounting problems or even to be in danger of collapsing like Houston-based Enron, now in Chapter 11, did.

Those fears gained new currency earlier this month on revelations that several energy companies - not specifically including Williams - had engaged in bogus electricity trades over the past year or so. Such trades don't benefit either company economically, but serve to artificially inflate their trading volume statistics.

One such company was CMS Energy Corp., which on Friday announced that its chairman, William McCormick, resigned in the midst of the continuing controversy over those bogus "round trip" power trades, said it would appoint a special committee to look into the pseudo-trades and would restate 2000 and 2001 results to eliminate their effect on revenues and earnings. Its bonds firmed on Friday on the news, and continued to improve Tuesday, its 7½% notes due 2009 quoted two points ahead, at 93. But at another desk, one observer thought they were at best unchanged.

One of the companies CMS is linked to in the "round-trip" trade controversy is Dynegy Inc., which announced Tuesday that its chairman, Chuck Watson, had resigned. Glenn Tilton, a Dynegy board member and vice chairman of energy giant ChevronTexaco Corp, was named as Watson's interim replacement. ChevronTexaco already own 26% of Dynegy, and which has an option to raise that stake to 36% by buying 1.5 billion of Dynegy preferred stock. Dynegy director Dan Dienstbier meantime takes over from Watson as interim CEO.

Dynegy shares improved Tuesday in New York Stock Exchange dealings on investor perception that the changes mean the deep-pocketed international oil giant will now take a larger role in the Houston-based energy producer and trader's affairs.

On the bond side, Dynegy's bonds - nominally investment grade but recently trading at junk levels on the industry's woes - were "a little better," a source said. Its 8¾% notes due 2012 firmed to 83.5 bid from prior levels at 79, while its 6 7/8% notes due 2011 were four points up, at 77 bid.

Outside of the troubled power generating and trading arena, Adelphia Communications was "pretty quiet, with not much activity," a distressed-debt trader said.

But at another desk, a trader saw Adelphia "off a couple of points" in the wake of new revelations about the embattled Coudesport, Pa.-based cable television system operator's apparently extensive network of self-dealings with its founding Rigas family. Adelphia in late March revealed some $2.3 billion of off-balance-sheet obligations related to company-guaranteed loans to partnerships controlled by the family, which up until last week also controlled Adelphia's board and occupied all of the top management slots. That caused the stock and bonds to slide badly and sparked several federal investigations of the alleged self-dealings. Late Friday, Adelphia, in a filing with the Securities and Exchange Commission, acknowledged that it gave Rigas family members hundreds of millions of dollars to pay for a wide variety of investments not related to Adelphia. The company has estimated that company founder and former chairman John J. Rigas and his family members owe the company as much as $3.1 billion, between the loan guarantees and the advances. The Rigas agreed to turn over $1 billion of their assets in partial payment.

In the wake of the new disclosures - which come as Adelphia struggles with its massive $17 billion debt load and tries to get its bankers to give it waivers of reporting requirements that could trigger a default that could bring the massively complicated capital structure crashing down - the trader said Adelphia's 10 7/8% notes were several points lower, at 76 bid/78 offered, while its 9¼% notes due later this year dropped to 80 bid/82 offered from 84.5 bid last week. Its 9 7/8% notes due 2007 were quoted two points lower, at 74.

Late in the day, Adelphia said it would put 12% shareholder and vocal dissident Leonard Tow and an associate, Scott Schneider, to the board, in place of two of the resigned Rigas family members. Tow had been critical of the way previous management was running the company.

Adelphia shares plunged 77 cents, or 27.8%, to $2 on Nasdaq trading Tuesday on the revelations of the company's dealings with the Rigases.

Elsewhere, Great Atlantic & Pacific Tea Co. - the widely known A&P supermarket chain - said that an accounting review would force it to delay the filing of its financial report for the fiscal year ended Feb. 23. That caused the Montvale, N.J.-based grocer's bonds to trade "much softer," said a trader, quoting its 7¾% notes as having fallen to 96 bid/97 offered from 100.25 bid/100.5 offered. Its 9 1/8% notes retreated to 98 bid from 104.5 previously. A&P's shares swooned $4.03 (16.06%) Tuesday on the NYSE, to $20.27.

Bankrupt telecommer Global Crossing Ltd. said that it is preparing a company-sponsored restructuring plan, as an alternative to bids it anticipates receiving from independent investors next month. The announcement followed the Bermuda-based global fiber optic cable operator's failure to win a sweetened offer from would-be buyers Hutchison Whampoa and Singapore Technologies Telemedia, who refused to come up from a $750 million "stalking horse" bid which most creditors called inadequate.

Failure of that offer was seen as a positive by many creditors, who feel Global Crossing may now be able to get more from prospective buyers for the whole company or for its individual assets.

But Global Crossing's bonds, at least initially, were seen unchanged from their recent levels around two to three cents on the dollar. Its bank debt was quoted around 20.

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