Nortel gains on results; CMS off; upsized Houghton-Mifflin $1 billion leads new-deal parade

By Paul Deckelman and Paul A. Harris

New York, Jan. 24 - Nortel Networks Corp. bonds and shares firmed smartly Friday pushed higher on what was otherwise pretty much a down day for most other issues by investor response to its better-than-expected fourth-quarter results and guardedly optimistic outlook. On the downside, CMS Energy Corp. debt retreated after the power producer released bearish earnings guidance.

Meanwhile in the face of tumbling stock prices and geopolitical jitters, evidence of a hot high-yield primary market continued to mount, and mount impressively, during Friday's busy session.

Investors must have been hitting the Houghton Mifflin book, as the deal upsized to an even $1 billion. And they staked a sufficient claim on the notes of Freeport McMoRan Copper & Gold Inc. that the company doubled the size of its junk bond offering.

As the smoke was clearing one sell-side source told Prospect News at the conclusion of Friday's session - which saw five deals price in the States and one in London - that $3.8 billion priced in the high yield primary market during the week of Jan. 20.

Boston publisher Houghton Mifflin Co. upsized to $1 billion from $650 million its offering on Friday. The company upsized its seven-year senior notes tranche (B2/B) to $600 million from $250 million and priced it at par to yield 8¼%, at the tight end of the 8¼%-8½% price talk. It left the 10-year senior subordinated tranche unchanged, meanwhile, pricing $400 million of the 9 7/8% securities (B3/B) at 99.22 to yield 10%.

Goldman Sachs & Co., CIBC World Markets and Deutsche Bank Securities Inc. were joint bookrunners, and Fleet Securities was co-manager on the Houghton Mifflin deal.

Also upsized - in fact doubled - Friday was Freeport McMoRan Copper & Gold Inc.'s offering. The New Orleans based precious metals producer priced $500 million of seven-year senior notes (B3/B-) at par to yield 10 1/8%, inside of the most recently heard price talk of 10¼%-10½%. JP Morgan, Merrill Lynch & Co. and UBS Warburg were joint bookrunners. The deal was originally $250 million.

More modestly upsized was Herbst Gaming Inc., which increased its add on to $47 million from $45 million. The 10¾% senior secured notes due Sept. 1, 2008 (B2/B) came via Lehman Brothers at 104.50 for a yield to worst of 9.512%.

Although California-based pet and garden supplier Central Garden & Pet Co. declined to grow the $150 million of 10-year senior subordinated notes (B2/B+) it had marketed to investors, it did wrench down its price talk to 9 1/8%-9¼% from 9¼% area early Friday, according to a source close to the deal. The deal priced at par to yield 9 1/8%, at the tight end of that revised talk, via Banc of America Securities and CIBC World Markets.

Also pricing Friday was AMI Semiconductor, Inc.'s $200 million of 10-year senior subordinated notes (B3/B). That deal, managed by Credit Suisse First Boston, priced at par to yield 10¾%, at the wide end of the 10½%-10¾% price talk.

And finally from London, U.K.-based battery recycler Eco-Bat Technology Ltd. was reported to have priced €165 million of 10-year senior guaranteed notes (B1/B+) at par on Friday to yield 10 1/8%, in the middle of the 10%-10¼% price talk, via joint bookrunners Credit Suisse First Boston and Salomon Smith Barney.

Those pricings - and upsizings - came in the session after Georgia-Pacific Corp. tripled the size of its note sale to $1.5 billion from $500 million, making it the biggest deal to hit the high-yield market since Charter Communications brought a $1.502 billion transaction on May 10, 2001.

In the Friday edition of "The Situation Room," Banc of America Securities' David Goldman, head of Global Markets Group Research, and senior high yield credit strategist Ali Balali noted that "Even with the looming threat of war with Iraq, the domestic equity markets retracing (and now giving back) all of their early gains this year and continued global economic uncertainty, demand in the U.S. primary credit market remains robust."

In addition to Georgia-Pacific, they also cited General Electric's $5 billion 10-year investment-grade transaction and Tenet Healthcare's $1 billion deal, double from $500 million.

"All across the credit curve demand remains strong," the Banc of America Securities research team noted. "Our dialog with customers suggests that any weakness due to the potential conflict with Iraq will be met with very strong buying."

They also noted in the same issue of "The Situation Room" that the majority of the high yield transactions priced in 2003 have enjoyed strong executions due to robust demand from investors who have plenty of cash on hand.

When the new AMI Semiconductor bonds were freed for secondary dealings, they took a small step back, dipping to 99.5 bid from their par issue price earlier in the session. The new Houghton Mifflins had not yet been freed by the time Friday's trading wound down, a trader said.

And he said that the two tranches of new Georgia-Pacific bonds which had priced on Thursday "didn't exactly blow the doors off" when they went into secondary, easing from their issue price. The company's 8 7/8% senior notes due 2010, which had priced at 99.360 Thursday, were trading Friday at 98.5 bid/98.75 offered, while its 9 3/8% seniors due 2013 were at 99.25 bid/99.5 offered, down from their par issue price.

The Atlanta-based forest products company's' existing 8¼% notes due 2011 were meantime a point lower, at 91.5 bid.

Back among companies that weren't issuing new bonds, Nortel was clearly the star of an otherwise generally lackluster day. The Brampton, Ont.-based telecommunications equipment maker's 6 1/8% notes due 2006 were seen having traded as high as 86 bid during the session - a five-point gain from Thursday's levels - before easing from that peak to close at 83 bid/84 offered, up a more modest two points on the session. "They started strong - but then hit a wall," he opined.

Nortel's less-frequently traded 7 7/8% bonds due 2026 did even better, pushing up to 72 bid from prior levels in the lower 60s.

Nortel's New York Stock Exchange-traded shares rose 18 cents (7.50%) to close at $2.58, on unusually heavy volume of 114.6 million, more than triple its usual turnover.

Nortel reported after the close on Thursday that its fourth-quarter net loss narrowed to $248 million (6 cents a share), from $1.83 billion (57 cents a share) a year earlier. And excluding reorganization costs and one-time gains brought the per-share loss down to a penny, versus the 6-cent-per share deficit analysts were expecting.

Revenues for the quarter totaled $2.52 billion - a 27% drop from a year earlier, but still much better than the $2.33 billion that Wall Street had anticipated.

And looking ahead, chief executive Frank Dunn said on a conference call that Nortel expects to be able to post a profit, excluding certain expenses, by the second quarter.

With Nortel up, its U.S. rival, Lucent Technologies Inc. - affected by many of the same telecom industry dynamics as Nortel - was moving in the same direction, since the securities of the two firms frequently zig-zag in tandem. Lucent's 7¼% notes due 2006 were seen up two points on the session, at 76.25 bid/77.25 offered. Its 6.45% bonds due 2029 were a point-and-a-half better, at 54.

One market observer said that he had seen almost all of the activity in both Nortel and in Lucent late in the morning; of the latter name, he said, "there was nothing really after 10 o'clock (ET)."

But those were the only names that were really pushing upward; a trader said that the overall market was characterized by "moderate weakness, after we saw our first outflow of the year."

He was referring to the $81.4 million more which left high yield mutual fund than came into them in the week ended Wednesday, according to market sources familiar with the weekly fund-flow statistics compiled by AMG Data Services of Arcata, Calif. The company tracks those flows as a reliable gauge of overall high yield market liquidity trends.

The outflow in the latest week follows a five-week stretch of inflows in which a net total of approximately $2.756 billion had flowed into the funds, according to a Prospect News analysis of the weekly AMG figures.

With the funds showing an outflow and, probably more importantly, stocks taking their worst beating in weeks and the popular indices falling to levels not seen since October, a wet blanket was thrown over what had previously been a respectably strong junk market showing.

And beyond the overall feeling of market malaise which sent even strong issues like Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009 down about a point to the 95.5 bid/96 offered level, individual names which had bad news out were punished.

CMS Energy bonds and shares nosedived after the Dearborn, Mich.-based power producer said that it had raised its estimated loss for 2002, citing higher expected reductions in the book value of some of its assets. Including those write-downs, CMS figures to lose somewhere between$4.25 and $4.75 per share. Excluding the write-downs, it reaffirmed its likely earnings for the year at $1.50 to $1.55 per share, with analysts looking for $1.52.

But for 2003, CMS warned that earnings from continuing operations would come in around 80 to 90 cents per share, and overall earnings would be about break-even - all well below the $1.34 per share analysts' consensus.

CMS had further bad news for the financial markets when it said it was suspending its common-stock dividend to conserve cash, hoping to save $100 million in 2003.

CMS's NYSE-traded shares plummeted $2.47 (28.92%) to $6/07, on volume of 15.1 million shares, over ten times the norm.

Its 9 7/8% notes due 2007 were quoted at 92.5 bid, down four points on the session, while its 7½% notes due 2009 were also down four, at 85 bid.

At another desk, the company's 9 7/8% notes due 2005 and its 8.90% notes due 2008 were each seen two points lower, at about 93 bid and 89.5 bid, respectively.

Also on the downside, bankrupt WorldCom Inc.'s bonds were quoted as low as 21.5 bid, down about a point-and-a half on the session and four points lower on the week.

With major airlines wallowing in red ink and the government opposing alliance efforts by Delta Airlines, Continental Airlines and Northwest Airlines on possible antitrust grounds, Continental's 8% notes due 2005 were seen four points lower on the session, at 61 bid, while Northwest's 8% notes due 2005 lost three points of altitude to land around 63.

Even the prospect of a debt exchange failed to get a rise out of the bonds of troubled Sprint PCS affiliate UbiquiTel Inc. Its zero-coupon notes due 2010 remained mired at recent levels around 6 cents on the dollar.

Back among the thin ranks of the upsiders, shorter-dated Williams Companies paper was seen by one market-watcher as having firmed to around the 91 bid/92 offered area from recent levels around 88 bid/89 offered.

And Kmart Corp. debt was heard up a point as the bankrupt Troy, Mich.-based discount retailer finally filed its plan for reorganization, over the objections of some creditors who reportedly dispute company assessments of what the new equity in a reorganized Kmart might be worth - and how much of it they'll be entitled to. The second-largest U.S. discount retailer behind Wal-Mart filed for protection a year ago, and hopes to emerge from the throes of bankruptcy by April 30.

Kmart's 9 3/8% notes due 2006 were quoted a point better, at 17, while its 8 1/8% notes due 2006 firmed to 19.25 bid/20.25 offered, up a point on the session and three points on the week.

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