McLeod up on Chapter 11, but Williams keeps sliding; Six Flags, MeriStar sell drive-bys

By Paul Deckelman and Paul Harris

New York, Jan. 31 - The troubled telecommunications sector proved to be mixed bag in Thursday's secondary trading, with McLeodUSA Inc issues firming after the company announced plans for a bondholder-approved Chapter 11 and long-distance bellwether Level 3 Communications Inc. also higher. But one of the latter's rivals, Williams Communications Group Inc., continued to stumble after its debt was downgraded two notches by Moody's Investors Service, and the bankrupt Global Crossing Holdings Ltd's. debt continued to erode. Apart from the tottering telecoms, things got pretty ugly for beauty products maker Elizabeth Arden, which released bearish earnings projections.

In the primary market Thursday, January came to an end with two drive-by deals, both announced and priced during last session of the month. Six Flags, Inc. came screaming down the rails with $480 million of new eight-year notes and there was room at the inn for MeriStar Hospitality, which brought a new $200 million add-on.

Back in secondary trading McLeodUSA announced it had reached agreement on a recapitalization of the company with an ad hoc committee of its bondholders. Under the plan, which is to be implemented via a pre-negotiated Chapter 11 filing, some $3 billion of the Cedar Rapids, Iowa-based telecom operator's bond debt will be eliminated, with the bondholders to receive pro-rata shares of up to $670 million in cash, $175 million of new preferred stock convertible into 15% of the reorganized company's common stock, and five-year warrants to purchase an additional 6% of the common stock for $30 million. The current common stockholders will own 17% of the restructured company, current preferred shareholders will have 10%. Buyout firm Forstmann Little & Co., which has already invested some $2 billion in the company, will put in another $175 million, and will get 58% of the revamped McLeod's common.

A trader saw McLeod's debt "up a bit" on news of the coming restructuring, quoting the company's 11 3/8% notes a point better at 25.5 bid/26.5 offered.

"They got a deal done that the bondholders were obviously behind," another trader noted, "and guys think it's worth 26, 27, 28." He saw the company's senior notes in the 23-25 bid range, "which is pretty much where they were, give or take a little bit." With McLeod debt already hanging around that mid-20s area and the bankruptcy filing announcement pretty much expected sooner or later - especially following the Global Crossing Chapter 11 filing earlier in the week - "it was pretty much a yawn (today), to be honest with you. Bonds definitely traded, but there was not a lot of price action."

The trader saw some price movement in two other familiar telecom names, but in divergent directions, as Williams Communications got weaker and rival long-haul telecommer Level 3 strengthened a little.

Williams, whose senior unsecured bonds had fallen about 10 points over the previous two sessions, to around the 30-31 level, on investor angst about the problems of former corporate parent The Williams Cos. Inc., dropped further on Thursday to close at 28 bid/30 offered, after Moody's downgraded all of the Tulsa, Okla.-based telecom operator's debt, dropping the bonds two notches to Caa3.

At another desk, Williams' 10 7/8% notes due 2009 were heard to have traded as low as 26 bid during the session.

Moody's said the downgrade "reflects our heightened concern regarding WCG's financial performance, which continues to fall substantially short of our expectations and our view that the protracted softness facing the whole broadband fiber sector will persist in constraining WCG's revenue growth. "

The ratings agency, in attaching a negative outlook to the ratings, further warned that the ratings could be lowered still further "if WCG's management is unable to significantly improve the company's financial performance and liquidity position."

Besides the downgrade and generally bad vibes in the investment community about the telecom junkers, the trader noted that Williams also has interest payments due Friday. "Personally, I think they're going to be fine on that score," he projected, "although obviously, in the current situation, people are always a little nervous about the bond payment dates."

Williams sought to allay market worries, announcing late in the session that it would move release of its fourth-quarter and full year 2001 earnings up to Monday, from their originally scheduled Wednesday release date. Williams also said that the Moody's downgrade is "largely driven by current uncertainty surrounding the telecom industry and (is) consistent with recent downgrades in the company's peer group, as well as downgrades by other rating agencies," and would have no direct effect on the cost of its existing debt. The embattled company declared that the whole telecom sector "is being painted with the same broad brush."

Level 3 Communications, which competes with Williams in the long-distance business and whose own bond ratings were knocked down two notches to CCC- on Wednesday by Standard & Poor's on a sharply wider fourth-quarter loss and company projections of continued customer cancellations and customer disconnections, and a possible credit facility violation "actually seemed a little stronger today," the trader said. Its benchmark 9 1/8% senior notes due 2008, which fell Wednesday into the upper 30s from prior levels around 46-47 bid, were quoted up about a point, at 39.

Another trader saw the Broomfield, Colo.-based long distance operator's bonds trade as high as 42 bid in the morning, before coming down off of those highs to close at 39 bid/40 offered.

There was no such bounce for the deeply distressed bonds of Global Crossing, which were "really crummy," he said, its senior notes down another point or so to levels around four or five cents on the dollar and "headed for zero."

Lucent Technologies Inc.'s debt was quoted about a quarter point firmer, its 7¼% notes due 2006 inching up to 87.25. Solectron Corp., a provider of electronics manufacturing and supply-chain management services, announced that it is in talks with Lucent on buying specialized equipment and usable inventory for between $250 million and $290 million in cash from the Murray Hill, N.J.-based telecommunications equipment maker.

Outside of the telecommunications sphere, Conseco, whose bonds have recently been firming on news that the Carmel, Ind.-based insurer has been quietly buying back large chunks of its 2002 maturity debt in private transactions, got yet another boost on Thursday when the company announced that it would tender for all of the remaining $110.5 million of the 10.25% senior notes issued by its Conseco Finance Corp. unit, which come due on June 1. Conseco will pay par plus accrued interest under the tender, which expires on March 1.

The 10.25% notes moved up to 99 bid from prior levels around 97. Its other paper also improved, the 10½% notes due 2004 firming to 85 bid from prior levels around 79.5 and its 8¾% notes due 2004 rising to 61 bid/63 offered from 57 bid/59 offered previously.

On the other hand, news that Six Flags Inc. plans to call its outstanding 9¼% senior notes due 2006 and the 8 7/8% senior notes due 2006 of its principal operating subsidiary, Six Flags Operations Inc., paying for the redemption with the proceeds of its $480 million bonds priced Thursday, had little impact on the prices of those bonds, as well as the company's 9½% notes due 2006 and 9¾% notes due 2007. All of those bonds had already been trading around their expected call levels, in the 102-103 neighborhood, for some time in anticipation of such a redemption.

Elsewhere, Lyondell Chemical Co.'s bonds firmed after the Houston-based chemicals maker posted a smaller-than-expected fourth-quarter loss. Lyondell reported a net loss of $53 million (46 cents a share) - wider than the year-ago loss of $48 million (41 cents a share), but less than the 52-cent-per-share loss Wall Streeters had expected. Its shares were meanwhile upgraded to "buy" from "hold" by Prudential Securities, which opined in an investment report that the downturn affecting the whole chemicals business may be over. Prudential cited rising off-grade and spot polymer prices, and increased inquiries for spot purchases of petrochemicals. It upgraded the whole Chemicals group, apart from Lyondell, to "outperform" from "market perform."

On the debt side, Lyondell's bonds "were up a little," one observer said, quoting both its 9 7/8% notes and 9 5/8% notes at 99.75 bid, up from 97 and 98, respectively.

Also higher on earnings news was Calpine Corp., whose earnings declined from a year ago and fell just short of analysts' estimates, but were not as bad as some Enron-shocked market participants had feared.

The San Jose, Calif.-based independent power plant operator and energy trader, whose securities had suffered during the quarter from analogies which some market players drew to the failed Enron Corp., reported a profit of $111.5 million (33 cents a share), down from $134.7 million (40 cents a share), a year-ago. The most recent results include a one-time gain worth 2 cents for the assumed conversion of certain convertible securities. On an operating basis, Calpine earned $104 million (31 cents a share), off slightly from the 33 cents a share the analysts had been expecting.

But Calpine's bonds were quoted about three points higher across the board, at 89 bid.

Enron debt, meanwhile continued to languish around 17 bid. But a trader noted that several Enron-linked obligations, such as its Yosemite Securities Trust notes "took off" the last half hour of trading from levels around 17-19, not far from the parent company's own paper, to close at 30 bid/33 offered. "I don't know why," he mused, "but obviously, somebody knows something about something."

Another trader said he had heard talk that it looked like the Yosemite notes "may have gotten Enron North American trade claims as part of their collateral package, which is viewed as potentially a lot better debt claim than the straight Enron debt has." He saw those bonds leap up to bid levels around 30-32 from prior levels at 19-20.

Meanwhile, he said, the similar Enron CLN (Credit Linked Notes) Trust paper, which had already been hovering around the 30 area, since "people felt better about them going into this whole situation," on Thursday "were definitely at 30 today."

Finally, the results were anything but pretty for cosmetics maker Elizabeth Arden Inc., whose bonds and shares were both off sharply Thursday after it warned of weaker-than-expected fourth quarter results, which will force it to cut 10% of its U.S. staff and close one of its three distribution centers.

The Miami Lakes, Fla.-based maker of the Elizabeth Arden cosmetics line and such well-known fragrances as Elizabeth Taylor's White Diamonds and Passion, Geoffrey Beene's Grey Flannel, Halston, and Red Door warned of a projected fourth-quarter EBITDA loss of $1 million to $4 million, excluding $2 million in restructuring costs. EBITDA - earnings before interest, taxes, depreciation and amortization - is a key bond market measure of a company's cash flow generation and ability to service debt.

The company also cautioned that it will be out of compliance with certain of its covenants in its credit facility, although it expects to win a waiver of non-compliance for the fourth quarter and for fiscal 2003, an amendment of certain covenant levels in the credit facility.

Arden's 10 3/8% notes dropped to 91 bid from 96.125, and its 11¾% paper fell to 95 bid from 104.375. On the equity side, its shares swooned $3.94 (28.14%) to $10.06 in Nasdaq trading. Volume of 1.9 million shares was over 12 times the usual daily turnover.

The high yield primary ended January with two drive-bys, both announced and priced on the last day of the month. Six Flags, Inc. came screaming down the rails with $480 million of new eight-year notes and there was room at the inn for MeriStar Hospitality, which brought a new $200 million add-on.

While Six Flags and MeriStar brought new drive-by deals, terms were unavailable late in Thursday's session on a scheduled offering from TSI Telecommunications, Inc. of $245 million 10-year notes. Earlier in the week price talk of 12% area was heard on that deal.

Noting that Lehman Brothers had the books on all three deals mentioned above, one sell-sider told Prospect News late Thursday that the Federal Reserve's decision to hold the line on interest rates Wednesday may have prompted the drive-bys from Six Flags and MeriStar.

"As a result of what the Fed said yesterday I'm sure investment bankers were calling on companies - ones that have been doing very well - and telling them that bond prices have improved substantially since October, and that they should be doing bond offerings to take advantage of the low rates, and the improved tone of the market," this official said.

"They (Lehman) probably got a couple of phone calls last night, saying 'OK, let's do a deal.'"

This official added that the Federal Reserve's decision not to lower interest rates likely favors the equity market more than the bond market.

"If the Fed had lowered rates again I think that would definitely be a positive thing for bonds," the source said. "And since the Fed said they were not going to lower again soon, if at all, (Six Flags and MeriStar) jumped to take advantage of that.

"I was hoping they would cut," the sell-sider added. "I think the equity markets would have had a tough time if they did, but the bond markets would have just had lower rates. People would have gotten a little more scared of the equity markets and put a little more money into bonds.

"That lowers rates," the official continued. "Maybe spreads don't contract, basis point for basis point as Treasuries fall but there will be some constriction, or tightening. And I think that way the bondholders make out, for the stronger-quality names that have been performing."

In any event, January's business increased unexpectedly on Thursday, with $680 million in new issuance.

Six Flags' $480 million of eight-year senior notes priced to yield 8.938%. Sources said that price talk had been 9.0%.

As with Six Flags, Lehman Brothers also ran the books on the Meristar Hospitality Operating Partnership LP $200 million add-on to its 9 1/8% senior notes due Jan. 15, 2011. It priced at 98.125, Thursday, to yield 9.438%. Price talk, a source said, had been 98-98.50.

Louise Rieke, portfolio manager of the Waddell & Reed Advisors High Income Fund, told Prospect News that she would have a look at some of the deals being offered Thursday. However Rieke stopped short of specifying that she would play them, or any of the business presently on the forward calendar of the high yield primary.

"We are going to listen to the Six Flags and MeriStar conference calls because we own both of them," she said.

Rieke, whose Waddell & Reed Advisors High Income Fund was up 6.7% in 2001, also told Prospect News that rapidly emerging business, such as the Six Flags and MeriStar drive-bys, allows scant time for the careful scrutiny that the buy-side prefers, when it comes to playing new issuance.

"They're coming at a faster pace," she said, "with few full roadshows. Investors are supposed to look at them in a lot of cases without a document, with just a quick conference call."

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