Level 3 bonds rise on buyback scheme; L-3 sells upsized quickie deal

By Paul Deckelman

New York, Oct. 29 - Level 3 Communications Inc. bonds were seen anywhere from two to four points higher Monday, after the Broomfield, Colo.-based fiber optic telecommunications network operator announced plans to tender for up to $450 million principal amount of its outstanding bond debt dated 2008. On the downside, R.J. Tower Corp. bonds were lower on reports that the Novi, Mich.-based auto components maker had run into trouble with its financing plans.

In the primary market sphere, L-3 Communications Corp. - no relation to Level 3, despite the similar-sounding name - brought a quickly shopped, upsized offering of 101/4-year notes to market via Lehman Brothers and Credit Suisse First Boston. Herbst Gaming announced plans for a new 10-year deal, and Elan Corp. plc was heard getting ready to hit the road to market its planned two part offering of seven-year fixed- and floating-rate notes.

Level 3 bonds initially firmed smartly on the news, announced late Friday, that the telecom company would be looking to buy up to $450 million of its 2008 bonds.

Those bonds "were up initially, right out of the gate," said a trader, who quoted the 9 1/8% notes due 2008 as having firmed to 84 bid, 85 offered from prior levels at 79.5 bid, 80.5 offered, although he saw them fall back later in the day to 82.75 bid, 83.75 offered.

He also saw the company's 10½% notes due 2008 firm to around 81.5 bid, 82.5 offered from that same 79.5 bid, 80.5 offered level, and then end at 81 bid, 82 offered.

He also saw the 11% notes due 2008 jump to 85 bid, 86 offered from 83 bid, 84 offered, before falling back to end just a point higher on the day, at 84 bid, 85 offered.

The 9 1/8% issue "is the one they are really targeting to take out," he said in explaining why that bond did better on the day than the other bonds, despite a common starting point with the 101/2s.

Level 3, in announcing its tender offer, set up a hierarchy, with the 9 1/8s at the top, followed by the 11% senior notes due 2008, the 101/2s and finally the euro-denominated 10¾% notes. With the company seeking to buy just $450 million face amount of bonds total, and with a current float of some $1.203 billion of outstanding 9 1/8s, it is theoretically possible that the entire tender offer might consist of buying the 9 1/8s, if at least $450 million of the notes are tendered.

The trader also saw Level 3's 10¾% secured notes due 2011 fall to 83 bid, 84 offered from Friday's levels around 85.75 bid, 86.75 offered, before coming off its nadir to end at 84 bid, 85 offered.

"They zig-zagged each other," he said, in comparing the bearish behavior of the 2011 secured bondholders with the bullish behavior of the 2008 unsecured bonds. He said the 2011s fell on the news that Level 3 would fund its tender offer for the 2008 bonds with bank debt, thus creating another layer of debt in the capital structure that outranks the secured bonds.

"It's another case of the banks grabbing more of the collateral," a second trader said, in noting the retreat of the secured bonds, vis a vis the gains in the unsecured.

He saw the 2008 bonds firming to decent levels, with the 9 1/8s actually doing the best, going to 83.5 bid, 84.5 offered, up from around the 79 level, while the other bonds showed smaller gains, with the 11% notes left at 83 bid, 84 offered and the 101/2s at 80 bid. He saw the 10¾% secured bonds at 83 bid, 85, off several points on the session.

He noted that in each case, the level at which the bonds traded was well below the announced takeout price of the bonds - 85.75 for the 9 1/8s, 88.75 for the 11s, and 85.75 for the 10½% bonds.

He said that there were "a lot of people out there recommending that people tender the bonds" - but even in the case of the 9 1/8s, the company's first priority for redemption through this tender offer, "it's a $1.25 billion deal so obviously only about [less than] 50% will be accepted." As for the other issues, "it's really luck of the draw."

The trader also said that investors realized that "this really isn't going to improve the credit," first because only $450 million of bonds at maximum are being taken out from more than $2 billion combined principal amount of the four series of bonds - and the company is funding the takeout with a similar amount of new debt, so the net effect on the overall leverage is relatively small.

"The net looks like a four point gain on the average," he said, mostly in the 9 1/8s. "If you can sell them up six or seven points you are probably ahead of the game."

Tower Auto down

Elsewhere, Tower Automotive's R.J. Tower Corp. 12% notes due 2013 were quoted having fallen two points, to 68 bid, after having pushed up to 70 last week on news that the company was in the process of lining up some new financing.

However, Standard & Poor's cited a report Monday that the parent company's senior secured second-lien bank credit facility lenders have rejected a proposed amendment to increase its accounts receivable securitization basket to $200 million from $50 million, although the ratings agency said that this would have no immediate impact on the ratings it assigned to Tower.

S&P said that Tower's plan to increase the size of the securitization basket is in response to U.S. Big Three automakers, which are eliminating early payment programs they have with many suppliers. Negotiations are ongoing with lenders, and the company is expected to submit a revised amendment proposal that will meet the approval of lenders.

L-3 brings drive-by

In primaryside activity, L-3 Communications announced around noon ET that it was bringing a new deal to market - and it priced just several hours later amid good investor demand, upsized to $650 million from the originally announced $500 million.

The bonds, which mature on Jan. 15, 2015, priced at par to yield 5 7/8%, at the wide end of price talk of 5¾% to 5 7/8%. They were brought to market by joint bookrunning managers Lehman Brothers and Credit Suisse First Boston, along with co-managers Banc of America Securities, Morgan Stanley, SG and Wachovia Securities.

L-3 Communications Corp. is a wholly owned subsidiary of L-3 Communications Holdings Inc., a New York-based provider of secure communications systems and intelligence, surveillance and reconnaissance systems to the Defense Department and other U.S. government agencies. It plans to use a portion of the new-deal proceeds net proceeds to redeem its outstanding $200 million of 8% senior subordinated notes due 2008 and will use the remainder for general corporate purposes, including acquisitions.

Elan lines up roadshow

Also planning to use new-deal proceeds to take out existing bonds is Irish pharmaceuticals maker Elan Corp., which was heard by high-yield syndicate sources Monday to be getting ready to hit the road to market its planned $850 million two-part offering of seven-year notes.

Elan's roadshow begins Tuesday and will wrap up on Nov. 9, after presentations in such cities as New York, Boston, Philadelphia, Los Angeles and Houston, among others, and investor conference calls.

The deal is being brought to market via sole bookrunner Morgan Stanley with joint lead manager Goldman Sachs, the sources said.

Elan plans to use proceeds from the Rule 144A offering of fixed- and floating-rate notes to fund a tender offer and related consent solicitation for up to $351 million principal amount of series B guaranteed notes and series C guaranteed notes.

The remainder of the proceeds will be used for working capital and other general corporate purposes.

Herbst unveils deal

And the forward calendar was joined by a planned offering by Herbst Gaming, which plans to sell $150 million of new senior subordinated notes via a Rule 144A offering being brought to market by Lehman brothers. Following a short roadshow that starts Wednesday, the deal is expected to price Friday.

The Las Vegas-based gaming operator plans to use the proceeds of the bond deal to fund its planned $287 million acquisition of Grace Entertainment's riverboat casino assets in Missouri and Iowa.

The current deal will be Herbst's third of the year. On Jan. 24, it priced a $47 million add-on issue of 10¾% senior secured notes due Sept. 1, 2008, slightly upsized from the original $45 million principal amount, and on May 27, Herbst priced $160 million of new 8 1/8% senior subordinated notes due June 1, 2012, upsized from the originally planned $150 million. Lehman Brothers brought the January add-on deal to market by itself and was also the bookrunner on the May 8 1/8% deal, with Banc of America Securities, Piper Jaffray and Wells Fargo Capital as co-managers.

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