Lucent firms on continued profits, Owens-Illinois better; Kraton prices deal, Dobson announces

By Paul Deckelman and Paul Harris

New York, Oct. 20 - Earnings season was seen dominating the activity in the high-yield secondary market Wednesday, with Lucent Technologies Inc. and Owens-Illinois Inc. seen among the names whose bonds firmed in response to favorable quarterly results.

In primary-side activity, the biggest deal of the day wasn't a bond issue at all, but Calpine Corp.'s $360 million private placement of redeemable preferred securities.

Otherwise one deal priced during the mid-week session in the primary market, as Kraton Polymers' discount notes came wide of price talk.

And the forward calendar grew by a single deal - a substantial $700 million three-tranche offering from Dobson Communications Corp.

Meanwhile sources told Prospect News that although the high-yield primary market remains hot, investors have lately been seen turning up their noses at some offerings, and voicing a range of issues.

Lousy with small deals

"There is still money to be put to work," one investment banker told Prospect News late Wednesday, "but there seems to be a very soft market for the small deals and the holding company deals.

"You can't really tell what is going to be well received and what isn't.

"People are looking at the operating company and listening to the story and taking note of the use of proceeds. But the buy-side right now is taking a very close look.

"Some of these deals are coming pretty rich, as well," added the banker. "And of course there's the lack of liquidity with these small issues. If you get one player that wants to own all of the paper for 10 years, then you're good. But you can't trade it.

"And it's hard to get a deal done with nothing but a bunch of small players."

Indeed, an examination of the Prospect News High Yield Daily forward calendar bears this banker's color out.

Of the dozen dollar-denominated offerings presently thought to be in the market, all but four issuers are selling less than $250 million of bonds.

Kraton wide of talk

The sole issue to price Wednesday came from Houston-based Kraton Polymers.

Its subsidiaries, Polymer Holdings LLC in conjunction with Polymer Capital Corp., sold $150 million of 10-year senior discount notes (Caa2/B-) at 61.276 to yield 12%, wide of the 11 1/8%-11 3/8% price talk.

Goldman Sachs & Co. and UBS Investment Bank ran the books for the debt refinancing deal.

Dobson bringing $700 million

The only issuer to climb aboard the new deal calendar on Wednesday was Oklahoma City-based Dobson Communications Corp.

Subsidiary Dobson Cellular Systems, Inc. began a roadshow for a $700 million three-tranche offering of bonds that is expected in the middle of Oct. 25 week.

The company is offering $500 million that will be split between a tranche of seven-year first priority senior secured fixed-rate notes and a tranche of seven-year first priority senior secured floating rate notes.

Dobson is also offering $200 million of eight-year fixed-rate second priority senior secured notes.

Morgan Stanley, Lehman Brothers and Bear Stearns & Co. are joint bookrunners.

Mixed fortunes on euro deals

Meanwhile Wednesday, the only two euro-denominated junk issues that have been on the road issued price talk.

Editis subsidiary Odyssee Financing SA, whose €150 million of 10-year senior notes (B3/B) are said by market sources to be getting a warm reception, issued price talk of the 8½% area Wednesday.

The Paris-based publisher's deal is expected to price on Thursday via BNP Paribas, Credit Suisse First Boston and Lehman Brothers.

Elsewhere it is said to be a somewhat different story with the deal from Milan, Italy-based IT Holding Finance SA, which downsized to €150 million from €185 million its offering of eight-year senior notes (B3/B+) on Wednesday.

The company also revised price talk to 10½% from the 10% area, with the notes to price at a discount. Originally the notes had been talked at 9¼%-9½%.

Also call protection was extended for the life of the bond. Previously the bonds were to come with four years of call protection.

Merrill Lynch & Co. is the bookrunner for the deal, which is expected to price on Thursday.

In the dollar-denominated market price talk of 9%-9¼% emerged Wednesday on CBD Media LLC's $100 million of eight-year senior notes (Caa2/CCC+), which are expected to price on Thursday via Lehman Brothers, Banc of America Securities and Goldman Sachs & Co.

Lucent gains on earnings

In secondary trading, Lucent's bonds "were strong," said one trader, who quoted the Murray Hill, N.J.-based telecommunications equipment maker's benchmark 7¼% notes due 2006 a point better at 105.75 bid, 106.5 offered, while its 6.45% bonds due 2029 were more than a point better at 82.5 bid, 83.5 offered.

A market source at another shop had the 71/4s doing even better, pushing up to 106.375 bid, although he had seen them opening around the 106 level. The 6.45s, he said, firmed to 82.5 from 81.625, while Lucent's 6½% bonds due 2028 rose to 82.25 bid from 81.5.

The company's New York Stock Exchange-traded shares were meantime modestly higher, at $3.48, up 10 cents (2.96%), on volume of 71.7 million shares, nearly double the usual 38 million share turnover.

Lucent reported earnings of $348 million (seven cents a share) in the fiscal fourth quarter ended Sept. 30, an improvement from year-earlier earnings of $77 million (two cents a share). More importantly, said Lucent's chairman and chief executive officer, Patricia Russo, on the conference call for analysts and investors following release of the results, was the fact that the company turned a profit for the full fiscal year - the first time Lucent has done that since 2000. For the fiscal year, Lucent earned $1.15 billion, or 25 cents a share, after the payment of preferred dividends - a sharp turnaround from the fiscal 2003 net loss of $1.16 billion (29 cents a share), following the dividend payment.

"Positive momentum"

Russo said that Lucent has "maintained positive momentum" since the year-ago quarterly profit, which had been Lucent's first winning quarter since early 2000, when the telecommunications industry the company traditionally depended upon began to implode.

"We knew those efforts [of Lucent's management and employees to restructure the company] would pay off ultimately as and when the market stabilized and returned to growth and that's what happened this year," Russo continued. "We achieved tremendous operating leverage as the cost-reduction work really materialized. At the same time, we were able to grow our top line."

The company had annual revenues of $9.05 billion, up 7% from 2003 revenues of $8.47 billion, and it predicted that revenues would continue to grow in fiscal 2005 at a percentage rate in the mid-single digit area.

The new, once-again profitable Lucent certainly bears little resemblance to the bloated entity which went into a long red-ink spiral in 2000 that it only emerged from a year ago. To turn itself around Lucent - whose bonds fell as low as the 60s during its doldrums - shed assets, spun off operations and slashed its 100,000-plus person workforce down to about 31,800 as of Sept. 30.

It also re-invented itself as a company that not only sells telecom equipment to large U.S. telephone service providers like Verizon Corp., but one which now also sells services, such as maintenance and network management, and communications solutions to a wide variety of companies in more than three dozen countries.

"We have, and will continue to focus on areas where we see opportunities to expand our revenue base," Russo declared, "such as services, the government and emerging markets outside the U.S."

With greater revenues coming in from such new streams, Lucent's cash position has "dramatically" improved, to a $634 million surplus at the end of the 2004 fiscal year, from a deficit of $948 million a year earlier, a swing, she pointed out, of some $1.5 billion.

Chief financial officer Frank D'Amelio said that Lucent's total amount of outstanding debt and convertible notes decreased to $5.99 billion as of Sept. 30 from $6.162 billion as of the end of the preceding quarter, on June 30, with net debt down $350 million in that stretch, to $1.117 billion.

During the fourth quarter, Lucent was able to repurchase $58 million of its 8% convertible notes, and has retired a total of $2.5 billion of debt since the fourth quarter of fiscal 2002, by issuing a total of 643 million common shares and paying out $736 million of cash to debtholders. That in turn has brought the company's interest burden down by $150 million. Three-quarters of Lucent's public debt and convertibles don't come due until 2004 or after.

Owens-Illinois up on results

Elsewhere, Owens-Illinois bonds were firmer after the Toledo, Ohio-based packaging maker posted better quarterly results. It reported net earnings of $69 million (42 cents per share) in the third quarter, up from $28.9 million (16 cents a share) a year earlier.

A trader saw its 7.80% notes due 2018 firm to 98.5 bid from prior levels at 97.375, while its 7.35% notes due 2008 were 3/8 point better at 103.375. However, its 8.1% notes due 2007 were quoted half a point down at 105.5.

Its NYSE-traded shares jumped $1.64 (10.47%) to $17.30, on volume of 3.3 million, about five times the average daily handle.

Owens reported that during the third quarter, its cash flows from operating activities rose 51% to $256.8 million from $170.6 million a year ago, principally due improved operations and significantly improved working capital management. Free cash flow (defined as cash flow from operating activities less capital spending) for the quarter was $147.1 million, nearly double the $75.3 million of a year ago. For the first nine months of this year, free cash flow was $183.9 million - a sharp swing from negative $173.7 million for the same period a year ago.

The company said that this strong free cash flow during the first three quarters of 2004 allowed it to voluntarily prepay $150 million of term loan debt.

Looking beyond the end of the third quarter, the debt reduction continues; with the receipt of proceeds following the closing on Oct. 7 of the recent sale of its blow- molded plastic container operations, Owens paid down an additional $1.2 billion of term loan debt. On October 12, it received $82 million cash proceeds from the sale of its 20% equity interest in Consol Limited of South Africa, which were used to further reduce outstanding term loan debt.

United Rentals rises

Another earnings winner was United Rentals Inc., which posted adjusted net income for the third quarter of $57.5 million (58 cents a share), well up from adjusted net income of $42 million (44 cents a share) a year earlier.

That helped push the Greenwich, Conn.-based equipment rental company's 7¼% notes up ¾ point to 91.25, while its 7¾% notes were up half a point to 95.25, a trader said.

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