Charter bonds up on Paul Allen investment speculation; Williams bounces

By Paul Deckelman and Paul A. Harris

New York, July 29 - Billionaire Paul Allen already owns 55% of Charter Communications Inc. - and market speculation that he might wish to buy up the rest of the St. Louis-based cable company, and/or buy a big chunk of its debt sent Charter's recently depressed stocks and bonds solidly higher Monday.

The New York Times reported Monday that Allen - who co-founded Microsoft Corp. back in the 1970s with a then-unknown fellow entrepreneur named Bill Gates and who walked away from the company some years later with several billion dollars in his wallet, "is considering several steps to significantly increase his stake in [Charter] and perhaps even take it private, according to executives briefed on the deliberations."

Given the recent fall in Charter's share price (from over $16 at the beginning of the year to $2.64 on Friday afternoon), thanks to the investor angst which has brought down the whole cable sector in the wake of the Adelphia Communications Corp. accounting fiasco and other media and communications industry problems, The Times said that Allen could buy the remaining 45% of Charter that he does not currently own for less than $400 million - a mere bag of shells for the Microsoft co-founder - and then return to the public equity markets again sometime in the future when he feels currently pessimistic investor sentiment will have become more positive.

However, the paper noted, Charter is burdened by debt with a face value of some $17 billion - although its actual market value is far less than that, given that some of the subordinated debt has been trading as low as 35 cents a dollar. The Times, citing information from the executives who are said to have been briefed on those deliberations, floated the idea that "after buying the bonds while they are cheap, Mr. Allen would then make a new investment in Charter's stock or perhaps in newly issued bonds convertible into stock," noting that such an investment might be structured like the $500 million investment in Level 3 Communications led by a Warren Buffett-led investment group earlier this month.

The Times piece acknowledged that Allen could just as easily choose to do none of these things - but that's not the way Wall Street was seeing it on Monday.

Charter's beleaguered shares surged 97 cents (36.74%) in busy New York Stock Exchange dealings to $3.61. Volume of 17 million shares was nearly triple the usual.

On the bond side, Charter debt was suddenly "hard to find," a trader said, quoting the cable company's zero-coupon step-up 9.92% bonds , which had finished Friday in the middle 30s, as having initially pushed up to levels around 37 bid/40 offered, before building on those gains as the day progressed and going home around 42.5 bid. "They were zeroes - but they were up a couple of points today," he observed.

Another trader quoted Charter's 8 5/8% notes due 2009 up around 58 bid/59 offered from prior levels at 53 bid/54 offered, calling the Paul Allen speculation "semi-exciting."

But he saw little follow-through for other cable names, quoting Cablevision's 7 5/8% notes due 2011 actually down a point at 74.5 bid/75.5 offered while Mediacom's 11% notes due 2013 lost four points to close at 76 bid/78 offered.

"Charter was the only one of those that was up, and that was for obvious reasons," he said. "I would expect them to maintain those levels until their earnings come out."

At another desk, Charter's 9.92s were quoted closing around 39 bid from 37 on Friday, while its 8 5/8% notes advanced to 55.9 bid from 54 on Friday.

Even though it competes with Charter and the other cablers for the right to bring a hundred or two hundred channels into the average American's living room, a trader said EchoStar DBS "felt better," quoting the Littleton, Colo.-based satellite broadcasting operator's 9 3/8% notes "up three or four points" on the session, at bid levels around 92-92.5

"It was hard to find anybody who was weaker today," a trader said - except for Qwest Communications International Inc.

The company - already under investigation by the Securities and Exchange Commission and by the Justice Department - announced over the weekend that it had improperly accounted for about $1.16 billion in sales of optical capacity on its network, as well as sales of communications equipment and certain expenses, said it would restate results for 1999 to 2001, and withdrew its financial forecasts for 2002. It did not say by how much it would restate the 1999-2001 results, or when such a restatement might be completed.

That caused Qwest's already shrunken stock price to nosedive from Friday's close at $1.50 to an all-time low of $1.11, a 26% slide, although the shares later climbed off the deck - even at one point hitting a peak level of $1.77 before coming off that peak to close at $1.49, down just a penny (0.67%), on NYSE volume of 46 million shares, four times the usual.

The trader quoted the Denver-based regional Bell operating company's holding company paper (which trades well below its operating company paper because it is considered a level removed from the assets and thus worth that much less in a reorganization scenario), down around two to three points on the session; its 7¼% notes due 2011 moved from Friday's 40 bid/42 offered to 38 bid/39 offered, he said. On the other hand, the operating company paper was also lower, Qwest's 6 7/8% notes due 2033 dipping to bid levels around 65.5-66 from Friday's 69.

"With the exception of Qwest, it seemed like everything was pretty much hanging in there."

But at other desks, even Qwest was seen "hanging in there," the bonds tracking the stock's down-up-down slightly motion. A distressed-debt trader said that Qwest initially was "a little softer, but then was grinding up higher the rest of the day, to end up a little on the day."

He said there had not been "a huge volume - it was sort of a moderate volume. Guys sold it down two or three points in the morning on the news stories," but he saw the intermediate maturities "came back" to finish around the 40 bid level.

"The general press is certainly starting to go overboard on these stories a little bit. A lot of this is old news." He said that cooler heads in the market realized that Qwest - which recently ousted longtime CEO Joseph P. Nacchio in favor of Richard Notebaert - has a good management team in there from the Ameritech days [Notebaert's old shop] that is basically trying to set things square and do things the right way. So in some respects, you could look at it as a positive that they're trying to do the right thing, and they're willing to work with the SEC and do anything they need to do in order to square it."

By the same token, he said, energy names - the power producers like Williams Companies and others in that field which got clobbered last week as Williams was downgraded to junk levels - were a little bit higher, after the Tulsa, Okla.-based pipeline operator and energy trader reported second-quarter results largely in line with what the company had predicted and what the analysts were expecting. Williams lost $349.1 million (68 cents a share) versus a profit of $339.5 million (69 cents a share) a year ago.

But because the stock had been so beaten down last week and the results came in as expected - and because Williams announced that it would be receiving $225 million in cash and $100 million in notes as part of a bankruptcy deal its former subsidiary, Williams Communications Group Inc., had worked out with Leucadia National Corp. - Williams stock soared, its shares jumping 93 cents (87.74%) to $1.99 in NYSE trading of 28 million shares, about four times normal.

A trader quoted Williams' 7 1/8% notes due 2011, which had closed at 30 bid/32 offered on Friday, as having climbed to 36.5 bid/37.5 offered Monday as "everyone was looking for them to go into Chapter 11 and when they didn't, the stock was up big."

The distressed-debt trader, meantime said that "Williams paper was better, El Paso Corp. paper was better. AES paper was a little bit better. It seems that a lot of [selling in that sector] was overdone, which I can understand given what happened ratings-wise, and headline-wise. But these are all real companies with some real assets. I would be very surprised to see their senior bonds on any of these things [go to ultimate levels] close to zero."

Outside the communications and energy spheres, some airline paper was better, in line with the sector's strengthening stocks. United Airlines' 10.57% notes due 2004 closed up 7½ points at 46.5, while Northwest Airline's 8 3/8% notes and 8.52% notes due 2004, which had finished last week in the high 70s, were seen up about a point-and-a-half to around 80 bid on Monday.

A trader said that "some names which have been beaten down were up three or four points [Monday], although there really was nothing more dramatic."

He continued that "it wasn't like people were tripping all over themselves to buy stuff. Some of the telecoms and the energy guys that got beaten up late last week bounced three or four points, but everything else was up a point." With a nod to Fed Chairman Alan Greenspan's famous characterization of the runaway upside stock market just a few years back (even though that now seems like one or more lifetimes ago), he quipped "it was rational exuberance."

With the forward calendar for the week of July 29 carrying just two deals that are expected to price, the high yield primary market found itself on a low-protein news diet as the end of July 2002 draws nigh. However a syndicate source did deliver price talk on the deal from Mothers Work, Inc.

Philadelphia-based maternity clothes-maker Mothers Work, Inc. heads for the delivery room on Wednesday, according to a syndicate source who told Prospect News that the official price talk is for a yield in the 11¼% area.

The refi deal, via Credit Suisse First Boston, is comprised of $125 million of eight-year senior notes (B3/B+), non-callable for four years, with an equity clawback of 35% for three years.

The only other deal on the calendar for the July 29 week is The Manitowoc Co.'s $175 million of 10-year senior subordinated notes (B2/B+) via Deutsche Bank Securities and Credit Suisse First Boston, also a refinancing transaction. That deal is set to price Thursday. Late in Monday's session no price talk had been heard.

One sell-side source told Prospect News late last week that Manitowoc might serve as a coal miner's canary in the present high yield market - to gauge whether the U.S. new issuance market is indeed open.

And late in Monday's session Crown Cork & Seal CFO Alan W. Rutherford told Prospect News that Constar International's bank loan, IPO and junk bond financing of the spin-off from Crown Cork & Seal has technically not been launched as of yet. The company will wait until the equity market improves before it pops the cork (see related story in this issue).

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