Qwest gains on upgrade possibility; Quintiles to roadshow 10-year deal after holiday

By Paul Deckelman and Paul A. Harris

New York, Aug. 27 - Qwest Communications International Inc.'s bonds were firmer on Wednesday, in the wake of a Standard & Poor's analyst saying that the telecommunications company could win a multiple-notch ratings upgrade from the agency if it manages to complete certain financial tasks.

Although sources lamented that the new issue market remained predictably listless as the run-up to Labor Day proceeded during Wednesday's session, the primary did manage to produce a modicum of news.

Quintiles Transnational Corp. plans to hit the road with a $450 million offering of ten-year notes right after the Labor Day holiday break.

The marketing begins on Sept. 3 for its offering of senior subordinated notes (B3/expected B), which are expected to price on Sept. 12 via Citigroup.

The company is a Research Triangle Park, N.C.-based service provider to healthcare industry will use proceeds from the sale to fund the LBO by One Equity Partners, LLC, and to repay debt.

And a brief roadshow is set to begin Tuesday for Unilever's sale of $406 million face value of seller notes issued by JohnsonDiversey Holdings Inc. The senior discount notes due May 15, 2013 had a $277 million accreted value as of Sept. 10. The coupon is 10.67%, accreting until May 2007. Bookrunner is Citigroup.

The notes were issued to Unilever on April 2, 2002 as part of the purchase price of its Diversey-Lever unit.

The deal is expected to price on Sept. 5.

One capital markets source who spoke Wednesday with Prospect News commented that the recent travails of the high-yield market - a succession of outflows from high yield mutual funds and several pulled deals - might not necessarily continue to prevail into the post-Labor Day market.

"The money flow can turn around on a dime," said this source. "The fundamental reason that money was coming into the market continues: yields on high yield are way better than Treasuries and investment-grade corporates, which get nailed as rates go up, in a way that junk bonds won't. Junk bonds will benefit fundamentally from an improvement in the economy.

"Of course there is a yin and a yang with regard to the stock market. If the economy really looks strong then the fast money starts flowing to the stock market and away from high yield.

"But in the present scenario, where the economy does not appear to be improving that fast, flows could come back to high yield, which is a nice middle ground between the investment-grade market and the stock market."

As to the pulled deals, this source, who operates on the buy-side of the leveraged markets, was prepared to comment on the one that was perhaps the most conspicuous: Charter Communications, Inc.'s $1.7 billion two-tranche notes offering (CCC-) that was postponed because of market conditions on Aug. 14.

"We discussed it a lot and watched it and were completely confused with why they continued on with the changed version of it after the initial deal was not going particularly well," said the source.

"I thought the initial deal made a fair amount of sense but it didn't get the response they wanted. And they changed it to something that didn't make sense. Their stated reason for doing it was to 'prove we can get access to the capital markets.' It didn't seem worth the millions of dollars in investment banking fees it would have taken to get that deal done because they weren't really cutting leverage. They need to cut leverage or they need to extend maturities. And it seems to me that that deal wasn't doing much of either."

According to this source, the demise of the Charter deal also had to do with its timing despite its weak CCC- rating from Standard & Poor's.

"Things had already gotten weaker before that deal didn't get done," said the source. "When they first contemplated it we were in the midst of good high yield inflows. Everything was getting priced. Little single-B deals were getting priced with ease. A lot of rather risky companies were redoing their capital structures - like El Paso and Calpine - and the investment bankers appropriately saw an opportunity for Charter, and started launching it. And even as they were launching it some deals started not getting done. The market cooled a little bit. Inflows came off.

"By the time we really got to fruition on Charter the whole feel of the market was off. And August is not the best month to bring a deal, anyway. Maybe they had no choice, but there are a lot of people out in August.

"In a slightly more bullish market I think that deal could have maybe gotten done."

Qwest's bonds were generally quoted up about 1½ to 2 points in the wake of a Dow Jones report of a late-Tuesday conference call on which S&P analyst Catherine Cosentino indicated that once the Denver-based regional Bell operating company gets certain financial issues behind it, "the business would support a high rating in the BB category." S&P currently gives Qwest at a B- rating with a developing outlook.

The possibility of the multiple-notch ratings jump boosted Qwest Services Corp.'s 13½% notes due 2010 two points to 114 bid.

A trader quoted the company's 7% notes due 2009, which had finished Tuesday bid in the 83-83.25 area, as having traded as high as 85.25-85.5 on Wednesday, before having come off those peak levels to end at 84.5-84.75.

At another desk, Qwest's 6 3/8% notes due 2008 were seen having firmed to 81 bid from 79.25 on Tuesday, while its 7 3/8% notes due 2030 were a point better, at 79.

Qwest Capital Funding Corp.'s 7¾% notes due 2031 closed bid around 77.5-78, and a market source said its other issues were up about a point-and-a-half across the board.

"Qwest just keeps grinding higher," a trader said, "with buyers definitely around."

S&P's Cosentino believes that chief among the financial challenges Qwest must successfully overcome to be rewarded by her agency with a big upgrade is completion of its $4.3 billion sale of the western half of its directory business to spin-off Dex Media West LLC, which recently issued more than $1 billion of new bonds in a two part deal to help fund that transaction (Qwest, which provides phone service to 14 states in the Western U.S., had previously sold the directory business for the eastern part of its territory to Dex Media East LLC).

Qwest needs the proceeds from the Dex Media West deal to help cope with an estimated $5 billion of upcoming maturities through 2005.

The S&P analyst has also mentioned other challenges facing the company, including its need to address ongoing investigations of its activities by the Justice Department and the Securities and Exchange Commission, and its need to set an overall financial policy that investors find credible; on the latter point, Cosentino noted that some in the investment community are still rankled by Qwest's efforts last year to cram a bond exchange with unfavorable terms down the throats of debtholders.

Elsewhere, traders noted that WorldCom Inc. debt continued to hang in there - and some even saw it firming a bit - despite the latest bad news about the bankrupt Ashburn, Va.-based telecom company, coming out of Oklahoma, where officials filed criminal fraud charges against former WorldCom chief executive officer Bernie Ebbers and five other top ex-executives. They were accused of violating state securities laws and defrauding Oklahoma-based investors by allegedly artificially inflating the value of WorldCom stock with questionable accounting practices. It's the first time Ebbers has been officially charged with anything; the parallel federal probe indicted certain other WorldCom figures, such as former chief financial officer Scott Sullivan, who was also included in the Oklahoma indictment.

Federal officials expressed dismay at the news out of the Sooner State, worrying aloud that the Oklahoma prosecution could compromise the federal scrutiny of the Number-Two U.S. long-distance player, which went bankrupt last year amid allegations of the largest accounting fraud in U.S. corporate history.

Despite the bad news coming from out West, WorldCom bonds "were up despite what I was watching on TV," said a trader, who quoted its notes as having firmed to 29.75 bid from 29 on Wednesday. But notes of WorldCom's MCI long-distance unit were being quoted about half a point weaker, at 76 bid, 76.375 offered.

Also in the communications area, DirecTV's 8 3/8% notes due 2013 were seen little changed, a trader said, at 107.25 bid, 108.25 offered, not much helped by the news that the largest U.S. satellite television broadcasting concern announced an agreement with regional phone giant BellSouth Corp. to bundle digital satellite TV service with BellSouth's phone services.

However, at another desk, the 8 3/8s were quoted up a quarter point at 108.25.

Vivendi Universal's bonds were "basically unchanged," a trader said, quoting its 6¼% notes due 2008 at around 98.5 bid, 99.5 offered, while its 9¼% notes were at 111.5 bid, 112.5 offered, as the French based media giant continues its efforts to sell its U.S. entertainment properties, which include Universal Studios' film and television production division, the USA and Sci Fi cable TV networks, and Universal-branded theme parks around the world.

Vivendi had been hoping to sell the whole package for more than $14 billion, but its hopes have been dashed, with major would-be buyers MGM and Liberty Media having pulled out of the sweepstakes, leaving General Electric Corp.'s NBC broadcasting unit and an investor group led by Vivendi vice-chairman - and former Universal owner - Edgar Bronfman Jr. as the leading negotiating partners for Vivendi, with both offering far less than $14 billion.

The Bronfman offer is said to include more upfront cash for debt-laden Vivendi than the NBC deal.

The trader noted that the Vivendi 9¼% notes at one time traded as high as 119 bid "when it looked like they were going to get the deal done on their terms", while the 61/4s - issued in a two-part $1.3 billion equivalent mega-deal on July 2 - had soared up to a high of 108 - only to come cascading down several weeks ago when MGM owner Kirk Kerkorian indicated that $14 billion was too rich for his blood. The bonds had actually gone even lower than current levels - the 91/4s falling all the way down to 108.5 bid, 109.5 offered at one point - but have been relatively stable around current levels recently with the emergence of NBC and Bronfman as suitors for the assets. He said that the 61/4s especially "are low coupon; the bonds aren't going anywhere until we see what becomes of the negotiations between Vivendi and the two rival would-be buyers.

Outside of the communications and media area, a trader said that maritime transportation and hotels operator Sea Containers Ltd. "continues on a rampage, going up a bit every day;" he quoted its 10¼% notes due 2006 as having firmed to 99 bid from prior levels at 96, while its 7 3/8% notes due 2008 were a point-and-a-half better, at 87.5 bid.

On the downside, NorthWestern Corp.'s bonds were seen several points lower; a trader cited the decision by the Sioux Falls, S.D. provider of energy and electricity in the upper Midwest to adjourn its shareholders' meeting until Sept. 15.

NorthWestern's 8¾% notes due 2012 were quoted at 74.5 bid and its 7 7/8% notes due 2012 at 75, both down a point-and-a-half.

But NorthWestern was the exception to the general rule of a market with a firmer bias, albeit on limited activity.

"The market was firm," a trader said, "but most accounts were not in, and traders were not in."

He said "buyers are looking for stuff across the board," and were starting to turn defensive, moving away from the riskier sectors where the big money has been made over the past quarter or two into more defensive areas "to lock in profits. People are looking to lighten up [on the risky stuff] as we head into the fourth quarter. "

He further said that some players were pulling in their horns because "we've got a big calendar looming - we haven't had a new issue in a week - and people are concerned about what's been happening to Treasuries," which have been getting soundly cuffed around of late.

Another trader opined that given the recent blood-letting in the Treasuries market, "the [junk] market continues to do pretty well."

On Wednesday, he said, there was "quite a lot of buying. People were just cleaning up stuff in a pretty thin market."

Overall, he noted, the activity level was "pretty dismal. But it will all be over soon; people will be kicked up after Labor Day."

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