Telecoms, cable firmer on cash infusion stories; Mail-Well bonds fall on earnings warning

By Paul Deckelman and Paul A. Harris

New York, July 9 - Telecommunications, media and cable company junk bonds were higher Tuesday, the blanket of gloom which had hovered over the communications sphere having been lifted - at least temporarily - by news of cash infusions for two well-known companies, Level 3 Communications Inc. and nominal investment-grade giant AOL Time Warner Inc. On top of that, late in the session, embattled WorldCom Inc. said it expected to soon receive term sheets on a $3 billion financing proposal from at least two different lenders.

On the downside, Mail-Well Inc.'s bonds plunged 10 points on the session as the Englewood, Colo-.based printing concern issued an earnings warning.

In the primary market, Mobile Storage Group, Inc. was heard getting ready to hit the road with a $160 million bond issue later in the week.

High yield, "contrary to what happened the equity market, was better on the day," a trader said, noting the stock market decline that took the benchmark Standard & Poor's 500 Index to its lowest finish in five weeks.

He saw strength in the communications constellation, with cable names in particular doing better on the coat tails of AOL Time Warner's announcement well after the market had closed on Monday that it had secured $10 billion of financing, with two new credit facilities that replace credit lines scheduled to mature this coming fall. One of the new facilities, for $6 billion, has a five-year term, while the other, for $4 billion, is a 364-day maturity with a two-year term-out option. They come at a time when lenders and investors alike seem to be casting a wary eye at the debt of the heavily leveraged communications companies, and even AOL's own investment-grade (BBB+) rated bonds have been trading at junk-like yields of anywhere from 350 basis points to nearly 600 basis points wide of comparable Treasury paper.

The trader saw junk cabler Charter Communications' bonds "up several points," helped by the AOL news, and he saw some carryover for non-cable media names like Radio One Inc., whose 8 7/8% notes due 2011 pushed up to 100.75 bid from prior levels at 98. At another desk, Charter's 8 5/8% notes due 2009 were a point better at 66.5 bid.

A trader saw AOL's own paper - which on Monday had been quoted at spreads versus Treasuries anywhere from 380 basis points over for its 6¾% notes due 2011 to 545 basis points over for its 5 5/8% notes due 2005, in a sort of inverted curve phenomenon - as having tightened another 25 to 30 points Tuesday on the news of the new financing, on top of a similar tightening on Monday, in apparent anticipation of the funding announcement. He estimated that over the past couple of sessions, AOL debt had tightened "at least 60 to 75 basis points." AOL's 6 7/8% notes due 2012, for instance, were quoted as having tightened Tuesday to a bid level of 360 basis points over from 380 basis points on Monday.

He saw the AOL funding - along with the $500 million of new funding for junk market telecom bellwether Level 3, which was announced Monday - as having given the whole telecom sector a boost.

Level 3's 9 1/8% senior notes due 2008, for instance, which had zoomed nearly 20 points Monday to above the 50 bid level on the news of its big private placement of new convertible debt with an investment group that includes billionaire Warren Buffet's Berkshire Hathaway Inc., "continued on up" on Tuesday, to about the 53 bid level. Level 3's zero-coupon step-up bonds were likewise firmer on Tuesday, as "people finally noticed them again and they bounced," going to 34 bid from prior levels in the 30-32 bid area.

At another desk, the Broomfield, Colo.-based long distance network operator's 9 1/8s were being quoted as having pushed as high as 60 bid on the session before ending with a more moderate second-day gain at 54.

WorldCom - whose bonds had fallen into the teens from higher prior levels last month (some short-dated issues as much as 60 points higher) after the troubled Clinton, Miss.-based long-distance operator admitted that it had wrongly reported almost $4 billion of expenses as capital expenditures rather than as operating costs, touching off a federal probe of the alleged book-cooking - was back on the rise Tuesday, aided by the generally better tone in the communications names, courtesy of AOL and Level 3, and a report of progress in its own financing situation.

Recently appointed CEO John Sidgmore said that his company was in talks with J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and two "nontraditional" lenders for about $3 billion in financing, and will get two proposals this week.

Bloomberg News quoted the WorldCom chief as adding that written plans would be submitted by one of the banks and one of the non-bank lenders, while another bank may submit a proposal, although Sidgmore said he didn't know when. Sidgmore also said in another interview that the company would know within three weeks whether it will try to reorganize through the bankruptcy courts or go another route.

WorldCom's benchmark 11% senior notes due 2011 pushed up to 17.5 bid Tuesday from prior levels around 16.25, while its 7 7/8% notes due 2003 were also up at least a point-and-a-half, to 19.5 bid/20.5 offered.

Another beleaguered beneficiary of the sudden strength of the telecom and communications sectors was Qwest Communications International Inc., whose 7¼% notes due 2011 jumped to 57 bid/59 offered from prior bid levels around 50 bid/52 offered. Qwest's badly battered shares, meantime, also enjoyed a rare boost, up 50 cents (23.81%) in New York Stock Exchange dealings to $2.60.

Echostar DBS paper "has been down recently," a market source said, as the Federal Communications Commission revoked its license to sell Internet access and other telecom services in the ultra-high-frequency Ka band of the radio spectrum - a move that EchoStar said it will fight. But the source said that on Tuesday, anyway, "it had a little pop."

EchoStar bonds were quoted up anywhere from half a point to five points on Tuesday, with its 9 3/8% notes due 2009 up five at 92.5 bid.

Other telecoms showing strength included No.5 U.S. wireless player Nextel Communications Inc., whose benchmark 9 3/8% notes due 2009 rose more than two points on the session to 52.5 bid. Sprint PCS affiliates Alamosa PCS and AirGate PCS - whose bonds had fallen sharply in June after they warned of lower-than-anticipated second-quarter net new-subscriber addition numbers - were up three points and more than four points respectively, Alamosa's 12½% notes due 2011 ending at 31 bid and AirGate's zero-coupon notes due 2009 closing at 24.

"While the Nasdaq remained weak, I think you've seen a couple of things in the news the past few days that have led some people to start to think that things might not be so bad for the beaten-up communications names," a trader said. "I'm not convinced that this rally will keep going in telecom - but there's a critical mass of things that has caused [telecom] to be bid up here."

Outside of the telecom and communications spheres, Mail-Well's bonds dipped as the company warned that it expects second-quarter earnings before restructuring and other charges to be below forecast results, largely as a result of lower-than-expected revenues.

Mail-Well had forecast pro forma second quarter EBITDA in the range of $26-$30 million before the effect of restructuring charges on sales of approximately $380 million. The company now expects second quarter pro forma EBITDA in the range of $16-$17 million before the effect of restructuring charges on sales in the range of approximately $345 million.

Mailwell's 9 5/8% notes due 2012 dropped to 90 bid from prior levels at par, while its 8¾% notes due 2008 likewise ended down 10 points at 77 bid.

Back on the upside, Fleming Cos. 10 1/8% notes due 2008 firmed to 102.5 bid from 101, after the Dallas-based food wholesale giant said that the No. 3 U.S. discount retailer, Target Corp., had selected Fleming to supply candy, cookies, as well as frozen and refrigerated foods to all Target stores nationally. The contract is worth at least $300 million annually - which is also the main food products supplier for Target's troubled rival, Kmart Corp.

In the primary, news continued to come at a trickle Tuesday as the market heard that Mobile Storage would set out to entice investors with a roadshow that gets underway Thursday. And further out on the horizon, new junk bonds were heard to be a likely piece of Gray Communications, Inc.'s financing of its $500 million acquisition of Benedek Broadcasting.

Also, just before press time it appeared that the Medco Health Solutions' split-rated note deal, in which high-yield accounts had taken a substantial interest, had been postponed due to market conditions - conditions which could hardly have been improved by the news that the Merck subsidiary had included as revenue over the past three years $14.1 billion in co-payments that are actually the pharmacies' share of prescription expenses.

Meanwhile one sell-side source told Prospect News on Tuesday that given the present circumstances in the financial markets - with corporate restatements of earnings running the gamut from "sobering" to "shocking" - the investment banks conceivably face steeper challenges in persuading issuers that now is the time to bring a new junk bond deal.

"With the market acting the way it has it's a harder sell than it was a month ago," the source said, adding that companies might reason that cleaving to the sidelines is a wise strategy.

"Some issuers are no doubt saying to themselves 'let's hold off and let some of this WorldCom turbulence clears out of the market,'" the sell-side official said.

Potential issuers, the source added, are no doubt aware of a spate of downsized early July primary market transactions that priced wide of talk. This list includes LBI Media, Inc. which priced $150 million (decreased from $200 million) at 10 1/8% (price talk 9% area), Dave & Busters $155 million (down from $165 million) which priced to yield 13% (price talk 12¼%-12½%), Plains Exploration & Production Co. LP's $200 million (down from $250 million) priced to yield 9% (price talk 8½%-8¾%) and Solutia, Inc.'s SOI Funding Corp. $200 million, down from $250 million, which priced at 89.992, with warrants, to yield 13½% (price talk 12% area).

Nevertheless, the sell-side official continued, the market continues to be open to the right credits, and there are circumstances under which certain issuers will brave the chop.

Oregon Steel Mills, Inc., which is scheduled to price $300 million of seven-year first mortgage notes (B1/BB-) on Wednesday via Goldman Sachs & Co., might be a case in point, the source allowed.

On Monday Oregon Steel Mills director of investor relations Vicki Tagliafico told Prospect News: "Our existing $228 million [of 11% first mortgage notes] expire in June, 2003, and the call premium expired on June 15, 2002. We just saw an opportunity to do the refinancing now because who knows what will happen a year from now."

The sell-side official elaborated on the company's line of reasoning.

"There's an old saying in the investment banking business that holds 'It's not the $100 million you owe 10 years from now that gets you in trouble, it's the $10 you owe tomorrow'

"If you have a maturity in the short term you just have less flexibility. You come to market and the buy-side says 'We know you need the money, so here's my bid.'

"You'd rather work on that now than six months from now or certainly nine months from now."

Price talk is 10¼%-10 ½% on the Oregon Steel Mills' deal.

On Tuesday the primary market learned of a new deal from La Crescenta, Calif.-based Mobile Storage. The company will start roadshowing its $160 million of new seven-year senior notes on Thursday. Lehman Brothers and Credit Suisse First Boston are the joint bookrunners. The roadshow wraps up on July 19.

And Prospect News heard Tuesday that Gray Communications, Inc. will likely bring new junk bonds as part of the financing of its $500 million acquisition of Benedek Broadcasting Corp. (see related story elsewhere in this issue).

Finally, just before press time Tuesday Prospect News heard from an informed source that the split-rated $1 billion notes deal from Medco Health Solutions, Inc. (Ba1/BBB+) has been postponed along with the pricing of its IPO.

In a press release announcing the postponement of the IPO the company cited "market conditions" as its reason for postponing.

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