Charter firms despite downgrade, Lucent up again; Dex deal downsized

By Paul Deckelman and Paul A. Harris

New York, Oct. 28 - Charter Communications Holdings LLC bonds firmed for a second consecutive session Monday despite a ratings downgrade by Moody's Investors Service, the latest piece of bad news to hit the staggering cable-TV operator. Lucent Technologies Inc. debt was also on the upside, continuing a week-long advance.

In the primary market, the upcoming Dex Media East LLC two-part mega-deal was heard to have been downsized slightly in overall size, although it will still weigh in at almost $1 billion. The deal's configuration was re-jiggered to upsize the more senior tranche and cut back the subordinated note portion.

Investment bankers also issued price talk on both tranches of what is reported to be the biggest LBO financing in well over a decade.

The deal is now $975 million in size, reduced from $1.05 billion.

The seven-year senior notes (B2/B) were increased to $450 million from $350 million and are talked at 9¾%-10% while the 10-year senior subordinated notes (B3/B) were cut to on $525 million from $700 million and are talked at the 12% area.

To make up for the reduction, equity sponsors Carlyle Group and Welsh, Carson, Anderson & Stowe committed an additional $75 million, a syndicate source told Prospect News.

"If they (the leveraged buyout firms) are putting in more equity, then that's a good thing" from a bondholder perspective, a trader commented.

Bookrunners for the notes are JP Morgan, Banc of America Securities, Deutsche Bank Securities, Lehman Brothers and Wachovia Securities.

The deal is expected to price late Tuesday or Wednesday.

"This is the benchmark deal of the year," a syndicate official commented, adding that it seemed clear that given present circumstances in the market it would be to the advantage of everyone in high yield to have the large LBO offering "get done well."

News also surfaced Monday about an acquisition financing from Houston-based oil and gas industry equipment and services provider Grant Prideco, Inc., which stated that it will bring up to $150 million of notes along with a $265 million credit facility.

The bank piece will be led by Deutsche Bank.

A company source told Prospect News Monday that the timing depends on market conditions, adding that the acquisition is expected to be completed by year-end.

The company currently has an issue of 9 5/8% senior notes that mature in Dec. of 2007.

Finally a source said that new issuance from emerging markets issuer Tyumen Oil is headed into the market with $300 million via Credit Suisse First Boston and Salomon Smith Barney.

On May 15 the Russian petroleum company priced $500 million of 10% senior unsecured loan participation notes due in May 2007 (Ba3/B+/B+) at par, via the same bookrunners.

No timing was heard on the new emerging markets deal, as details became available only after the markets closed in Europe.

Finally on Monday, Bear Stearns analysts noted that the yield gap between B and BB issues in the Bear Stearns High Yield Index was 360 basis points, and estimated that "about 25% of the current high yield universe is not refinanceable."

In the secondary market Qwest Communications International Inc.'s bonds were seen hanging in at their recent levels, unaffected by the news that the Dex bond deal was being tinkered with and that the companies buying the phone book unit were boosting their equity stakes in the new company.

Qwest's 7¼% notes due 2011 held steady at their recent levels around 50.5 bid. The notes were not affected by the news - released after trading had wound down for the day - that the troubled Denver-based telecommunications company will take a goodwill- impairment charge of about $24 billion following an accounting review as called for by new accounting rules, and will also take another $10.8 billion in charges due to the reduced value of long-lived assets. Other charges could bring that writedown as high as $40 billion, news reports said. Qwest will additionally restate a total of $1.48 billion in optical capacity deals done since its June, 2000 acquisition of local telephone operator U S West.

Also in the communications area, Charter Communications debt - which had firmed on Friday despite the St. Louis-based Number-Four U.S. cable operator's announcement of anticipated lower fiscal third-quarter revenues and EBITDA - did so again on Monday, even though Moody's Investors Service downgraded its debt ratings, dropping its senior unsecured bonds to B3 from prior levels at B2.

The ratings agency warned the downgrade reflects "growing concerns about operating performance, as supported by recent disclosures of disappointing third quarter results and the removal of the company's chief operating officer, and subsequent downward revisions to our expectations governing future performance over the ensuing rating horizon."

Moody's said that specifically, it "believes that cash flow growth at sub-double digit levels, spurred in large part by heightened customer churn and bad debt expense, will fall considerably short of prior expectations with respect to affecting targeted de-leveraging and balance sheet strengthening by 2004. Today's interim rating actions are intended to represent our belief that the negative operating trends and broader risks facing the company are greater than we previously thought and may not be imminently reversed and/or mitigated. "

While Charter's shares dipped seven cents (5.60%) to $1.18 in busy Nasdaq dealings of 22.6 million shares, about triple the norm, its bonds, a trader said, "did better. They did bounce a bit," with its benchmark 8 5/8% notes due 2009 going home quoted at 43.5 bid/45 offered from prior levels around 42 bid/44 offered.

At another desk, Charter's 9.92% notes were heard to have firmed to 31.5 bid from previous levels around 28.

The trader opined that "maybe that Mark Cuban news may have helped, or whatever it is," referring to the information first heard in the market Friday from a Securities and Exchange Commission filing that Cuban, the wealthy Dallas-based technology entrepreneur and sports team investor, had taken about a 5.3% equity position in Charter.

Another factor may have just been that the bonds had been so beaten down over the last week or so that it appeared to some investors that there might be value there. The Charter bonds and shares had slid badly last week in response to the company's cryptic announcement that its chief operating officer, David Barford, had been put on paid leave pending the outcome of a St. Louis federal grand jury probe of certain aspects of Charter's operations.

Fellow cabler CSC Holdings Inc. - a unit of Cablevision - was seen essentially unchanged on the session, its 11 1/8% notes due 2006 at 56 bid and its 7 5/8% notes due 2011 at 77.5 bid, despite the news that satellite broadcaster Echostar Communications, in a desperate bid to keep its proposed $18 billion merger with Hughes Electronics' rival DirectTV from being grounded permanently by federal regulators, had offered to sell and lease its own satellites to Cablevision and give Cablevision the capacity to deliver programs nationwide.

Whether the feds will go for the scheme is anyone's guess - they had opposed the original merger several weeks ago on the grounds that combining the nation's two largest satellite broadcasting companies would create an unstoppable juggernaut capable of running roughshod over any competitor.

Echostar's 10 3/8% notes were meantime unchanged at 102.5 bid.

The trader said that WorldCom Inc. bonds continued to look a little better, with the bankrupt Clinton, Miss.-based telecom giant's paper quoted slightly higher than Friday's levels at around the 16½% -17% level (with the company in bankruptcy, all of its unsecured debt issues trade "right on top of one another" regardless of coupon or maturity). WorldCom's MCI long distance unit's bonds were unchanged at 39.5.

WorldCom has benefited lately from a market perception that it would be able to keep stringing together decent cash-flow numbers they way it had done in July and August.

Monday was another up day for Lucent Technologies, whose bonds have recently been firming smartly. A market watcher quoted the Murray Hill, N.J.'s telecommunications equipment company's 7¼% notes due 2008 as having pushed up to 50 bid from prior levels at 48.

Lucent - which last week announced that it would be getting a contract from China Unicom potentially worth more than $400 million as part of the Chinese wireless carrier as part of the latter's $1.2 billion equipment spending binge- was reported by lightreading.com, a website that keeps watch on developments in the optical networking industry, to possibly be negotiating to sell a telecommunications data-switching unit for somewhere between $200 million and $600 million.

Citing unidentified people close to Lucent, lightreading.com reported that Cisco Systems Inc. and Sycamore Networks Inc. may be interested in buying the Westford, Massachusetts-based unit that develops and markets asynchronous transfer mode-type switches.

Nortel Networks Corp., a Canadian-based Lucent rival whose shares and bonds have recently been trading almost in tandem with Lucent's, were also seen a little better, its 6 1/8% notes due 2006 half a point improved at 48 bid/50 offered.

Apart from the communications area, a trader said that apparel maker Levi Strauss & Co. "continues to be one of the best performers - although nobody seems to know why. Its 11 5/8% notes went from recent levels at 92.5 bid/93.5 offered to 93.75 bid/94.75 offered., and have firmed more than 10 points in the past week-and-a-half.

Other gainers included Fleming Cos., whose 10 5/8% notes pushed up to 63.5 bid/66 offered from Friday's close around 60 bid/61 offered, and Allied Waste Industries, whose 10% notes due 2009 closed at 93.5, up from 92 on Friday. Over the weekend, Barron's had some kind things to say about the Louisville, Ky.-based waste disposal company, calling it "trash that could eventually be recycled into treasure." The influential publication said that the company's more than $9 billion of debt doesn't seem to be worrying its bondholders overly much, since the bonds are trading not too far from par bid. The article further noted that Allied - which faces no significant cash obligations until 2005 - is currently reducing its debt at a rate of $300 million or so annually out of cash flow.

Allied Waste shares jumped $1.08 (16.56%) to end the day at $7.60, on volume of 1.5 million shares, double the usual.

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