Market ignores latest Conseco woes; Levi slides on downgrade; URS prices smaller deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 15 - Junk marketeers seemed unfazed Thursday by the latest bad news to come out of embattled Conseco Inc., whose bonds were seen holding at their already deeply distressed levels in the face of the insurer's huge second-quarter loss and its warning that it might have to go bankrupt. Instead, trader anxiety centered on Levi Strauss &Co., whose bonds slid sharply after Moody's Investors Service downgraded the apparel maker's ratings.

In primary activity, URS Corp. was forced to downsize its offering of seven-year notes and offer more yield than talk in order to bring that deal successfully to market.

And Dynegy Inc. subsidiary Illinois Power Co. disclosed that it would head to market during the third quarter of 2002 with a speculative-grade first mortgage notes deal, after pulling a similar high-grade offering in late July when both parent and sub were downgraded to junk.

Terms were heard Thursday morning on URS' downsized offering of $200 million seven-year senior notes (B1/B). The deal, reduced from $250 million, priced at 97.64 to yield 12%, wide of the 11½% area price talk.

As the terms began to circulate it didn't take long for the sensory-deprived sell-side to slide the URS transaction under the microscope.

"Over 800 basis points for a single B credit - how do you like that?!," one sell-sider said in reference to the new notes' 820 basis points spread over the seven-year Treasury.

However this source, as well as two others who communicated with Prospect News on Thursday, said that neither the credit nor the transaction could likely be faulted. Rather, those sources explained, the downsizing and wide pricing of URS' deal is much more likely attributable to the "now-may-be-better-than-later" theory, said to currently be in play in high yield. More probably still, they concurred, the wide spread and downsizing can be explained by two words that seem to be getting quite a lot of play thus far in the second half of 2002: "Market conditions."

As to the "now-may-be-better-than-later" theory, one source pointed out that URS is in the process of "snapping up" EG&G Technical Services from The Carlyle Group for $500 million, which is what they are using the proceeds of the new seven-year notes for. "The may not have had any option but to take what they could get, although they may not like it."

Another source said that the pre-Labor Day high-yield market will almost certainly be closed after Friday, so for URS it was either finish the deal now or "See you in September."

(When reached by telephone Thursday, URS declined to make any comment whatsoever.)

As to "market conditions," all three sources cast them in a negative light Thursday.

When Prospect News raised an objection, pointing out that oil and gas exploration and production company Newfield Exploration Co. priced its transaction within talk during the week of Aug. 5 - in what various sources characterized as a successful transaction - one sell-sider responded that there are meaningful distinctions to be drawn.

"It's a different sector," the source said. An E&P may be perceived as more defensive than an engineering company like URS.

"Everything is coming wider right now," this official added. "Look at the Chesapeake deal last week: Chessy priced their most current deal 40 basis points back of their deal in April. So even on a comparable basis you can see new issuance coming out wider than in the recent past."

One other piece of color that Prospect News received from all three of the sell-siders who communicated with the primary market desk Thursday held that in the wake of URS the forward calendar for the period extending from Friday until Aug. 30, when the market breaks for Labor Day, is for all practical purposes a vacant one.

"August has always been a very quiet month," one said. "That - coupled with these market conditions - kind of doubles everything down.

"Maybe people will take a wait-and-see approach until after Labor Day and then hopefully we'll get some more activity."

Finally, filings by Illinois Power Company to the US Securities and Exchange Commission late Wednesday indicate that sometime during the third quarter the Dynegy Inc. subsidiary intends to bring a junk version of the high-grade first mortgage notes deal it pulled on July 23, when both parent and subsidiary were downgraded (see story on page one of this issue).

Back in the primary, Conseco had seemed a likely candidate for dog of the day, following its release on Wednesday night, well after the market had closed of second-quarter results which showed the Carmel, Ind.-based insurance holding company's quarterly net loss having widened out to a yawning $1.33 billion ($3.86 a share) from its modest year-earlier deficit of $25.7 million (9 cents a share). The biggest factor was its $2.95 billion writedown of goodwill, reflecting the severe deterioration in the value of its assets.

Excluding charges, writedowns and other special one-time items, Conseco reported second-quarter earnings from operations of $1.3 million, or break-even a share. That was not only well down from its year-ago operations earnings of $69.6 million, but also came in well under the eight cents per share which analysts had projected for ops earnings in the just-ended quarter.

Conseco also disclosed in its quarterly filing with the Securities and Exchange Commission that federal regulators were probing its accounting practices, specifically "as relates to events in and before the spring of 2000, including the company's accounting for its interest-only securities and servicing rights."

And it warned that it would seek bankruptcy protection if it couldn't reach agreement with its creditors on restructuring its debt (Conseco said last Friday that it had hired financial and legal advisors to help it in negotiations with its bondholders aimed at winning easier debt terms).

Conseco further disclosed that it wasn't in compliance with the covenant in its $1.5 billion bank facility (as well as its guarantees of bank loans to current and former directors and officers) setting forth its debt-to- capitalization ratio. While the banks have waived compliance through Sept. 9, Conseco said that it won't be able to meet its obligations if it fails to get the lenders to extend the waiver and they accelerate the loan's maturity. It said that any default under that debt-to-capitalization covenant could result in another default on $4.6 billion in other debt.

As if all of that company-originated bad news wasn't enough, A.M. Best, which rates the financial strength of insurance companies, on Wednesday downgraded its rating of Conseco's insurance operations.

Conseco bonds were already reeling from last week's announcement that it would not make upcoming scheduled coupon payments on its bonds, instead invoking the standard 30-day grace period to allow it to haggle with its bondholders for better terms. One might think that the latest king-sized helping of bad news on multiple fronts - earnings, regulatory, covenants and insurance ratings - would destroy what little is left of the value of Conseco's bonds, which had fallen into the mid-teens after last week's announcement.

However, in this case, one would be wrong.

Conseco's bonds were perhaps a bit softer Thursday, a trader said, "but those bonds are already so low to begin with that it's hard to knock them much lower. "With the bonds already in the lower teens, he said, "there was not a lot of trading that we saw."

Another trader said they were in "a little bit" after the company's conference call discussing its earnings report and the bankruptcy and covenant non-compliance warning, while a third saw the bonds languishing around the same levels they had been holding all week, with Conseco's 8½% notes coming due this fall at 16.5 bid, its 6.40% notes due 2003 at 12 bid and its 8½% notes due 2003 at 19 bid. At another desk, the 10¾% notes due 2009 were quoted bid at 15. Conseco shares, which were suspended from trading on the New York Stock Exchange last week, were quoted at 59 cents, unchanged on the day, in pink sheet trading.

While the junk market largely ignored all of Conseco's not-unexpected bad news, Levi Strauss debtholders were not so lucky. They were singing the blues after the San Francisco-based jeans maker's ratings were cut by Moody's and its bonds fell accordingly.

Moody's cut the ratings on Levi's senior unsecured debt to Caa1 from B2 previously , saying the downgrade "reflects the negative impact on the company's level of cash generation from a weak economy and broad global competition focused on price and fashion; significant upcoming cash outlays related to plant closures and systems improvements; and required refinancings of its $619 million credit agreement in August of 2003 and the $350 million issue of 6.8% senior notes which matures in November of 2003."

On the downgrades, Levi's 6.80% notes due 2003 declined to 72 bid from prior levels at 92. Its 7% notes due 2006 were likewise 20 points lower, to close at 61. Levi's 11 5/8% notes due 2008, which had closed Wednesday at 91 bid, fell as low as 67 Thursday before coming slightly off those lows to end at 72.

Also on the downside were various airline bonds - although not United Airlines, the catalyst for the industry slide. UAL, which this week warned that it might have to file for Chapter 11 protection this fall - something many industry observers and debt market participants had been saying anyway - seemed to be bouncing on Thursday, a distressed-debt trader said, quoting its bonds as having gone from "the medium-to-high single-digits to the mid-teens." The troubled Chicago-based airline's bonds "found a lot of buyers, while not many sellers were around, for some reason." He opined that perhaps "people looking at them still think there's an option [other than bankruptcy] - depending on what the government may or may not do for them."

A market source said the UAL notes had traded as low as five cents on the dollar during the session, before they "got better at the close." He saw the bonds trading as high as 15 toward the end of the day. Another trader quoted United's 9% notes due 2003 trading in a 15-18 context.

Among the other airlines, the trader saw Northwest Airlines' 9 7/8% notes dipping to 57 bid/59 offered from prior bid levels around 60, while seeing not much activity in Delta Airlines or American Airlines debt, besides surmising that they were likely lower, in line with the general weakness in the sector.

Another trader saw AMR's 9% notes due 2012, which on Wednesday had closed around 58 bid, "a little bit better [Thursday], but then they came in a bit later on to close lower." He saw those bonds as having firmed to 60 bid before giving it all back by the end of the day to actually end down a point on the session, at 57.

At another desk, Continental Airlines' 8% notes due 2005 were quoted as low as 59 bid, well down from prior levels in the mid 60s. Northwest's 7 7/8% notes due 2008 lost three points to end at 65.

Back on terra firma - well, maybe not quite - EchoStar DBS shrugged off the news that its business practices were being investigated by the attorneys general of 10 states, including its home base of Colorado, as investors focused instead on the satellite TV broadcaster's second quarter results, which showed a profit of $45.8 million (7 cents a share) versus the year-ago loss of $5.9 million (1 cent a share). In the latest quarter, EchoStar beat analysts' estimates by about a penny.

A market source saw the company's bonds "up a little," its 10 3/8% notes due 2007 firming to 94.5 bid from prior levels at 91, and its 9 7/8% notes due 2009 two points better at 92.5 bid. A trader noted that EchoStar's bonds had been "all over the place" in the last few sessions, with the 9 3/8% notes firming to 94.5 bid from levels early Wednesday at 89 bid/91 and 93.5 bid late Wednesday. He saw the 10 3/8% notes as high as 96 bid/98 offered.

Satellite radio broadcaster Sirius Satellite Radio Inc.'s debt, such as its 14½% notes due 2009, were seen unchanged around 20 bid, even as its shares zoomed 68 cents (89.47%) to $1.44 on Nasdaq volume of 9 million shares, about nine times normal. The company issued a response to a Reuters news story suggesting a heightened possibility of a bankruptcy filing; in its response, it noted that the possible bankruptcy warning contained in its latest SEC filing, on which Reuters based its story was "a routine cautionary term" which it had used in previous filings as well. Sirius had said it might have to file if it were unable to raise $300 million in additional funds in a timely manner.

In the company's statement, CEO Joseph Clayton asserted that "we are making significant progress in solidifying our balance sheet, and I remain extremely confident that we will secure additional financing."

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