Charter bonds off on lowered guidance; Brake Bros. puts brakes on sterling deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 2 - Charter Communications Holdings LLC bonds were in retreat on Wednesday after the cable operator warned that its cash flow growth would be lower than originally expected, due to erosion of its subscriber rolls. Apart from Charter's troubles, secondary participants said market activity remains limited, despite the changeover to a new calendar quarter.

In the primary sphere, Brake Bros. Finance plc's planned £175 million two-part deal became the latest bond offering to bite the dust, as it was postponed due to unfavorable market conditions.

Charter's bonds fell after the St. Louis-based cable operator, controlled by billionaire Microsoft Corp. co-founder Paul Allen, warned after the financial markets closed on Tuesday that its third-quarter operating cash flow would fall below expectations, citing losses of basic analog customers. Charter is scheduled to release its third-quarter results on Nov. 5.

Charter - which back in August had predicted cash flow of between $520 million and $530 million, up 13.7% to 15.9% on a pro-forma basis - said Tuesday that its cash flow would not meet the lower end of that range. It said that the expected underperformance was "primarily due to basic analog customer losses." Charter, the fourth-largest U.S. cabler, did not specify where it thought cash-flow levels might come in.

Charter also said that revenue growth from year-earlier levels would likely be about 13%, at the lowest end of its earlier projections of growth of 13.2% to 14.6%, in the $1.185 billion to $1.2 billion range.

Charter's benchmark 8 5/8% notes due 2009, which had closed out Tuesday's trading quoted around 60 bid, were quoted by one trader as having fallen as low as 55 bid before rebounding off that low to end at 56.5 bid/57.5 offered.

Activity in the credit, he said was brisk. "There were a lot of trades. It definitely was the most active issue on TRACE (a Nasdaq compiled measure of activity in selected junk issues), even beating the mighty Nextel [Communications Inc., usually the busiest junk bond name]." On TRACE, he said, the Charter bonds had swung between lows at 53 and highs at 61.

A market source elsewhere saw the 8 5/8s as having fallen to closing levels of 58 bid from around 61 on Tuesday. He saw Charter's 9.92% notes likewise lower, at 44 bid, down a point on the session.

He said he hadn't seen any spillover into other cable names.

But at another desk, cablers were seen all over the map, although volume levels were small, compared with the Charter bonds. On the upside, Cablevision's CSC Holdings 7¼% notes due 2008 and Northland Cable Television's 10¼% notes due 2007 were each quoted up a point on the day, at 79 bid and 55 bid, respectively, while Insight Midwest's 9¾% notes due 2009 and Mediacom LLC's 9½% notes due 2013 were both seen down three points on the session, at 83 bid and 78.5 bid, respectively.

Moody's Investors Service warned that it might cut Charter' B3 senior unsecured debt rating, plus a slew of other ratings for the company and its many subsidiaries.

Moody's said that its concerns "continue to center on the company's very high consolidated financial leverage, still large capital investment needs, and recent evidence that cash flow growth may be slowing to levels that preclude the ability of management to achieve its targeted financial profile in accordance with expectations."

The ratings agency said that its review will focus on "management plans to address the company's high subscriber losses, mitigate further margin erosion, and resume higher absolute operating cash flow generation and corresponding growth. While some diminished performance in these areas had been anticipated, the impact of the same may ultimately take a larger toll than expected and remains cause for further evaluation of the company's ratings. "

On the equity front, Charter's shares lost 42 cents (21%) to end at $1.58. Nasdaq volume of 26.4 million shares was more than four times its usual turnover.

Apart from Charter, however, "it was kind of quiet," a trader said. He saw Nextel's benchmark 9 3/8% notes due 2009 continuing to hover in the 77-79 area, but said "it was just normal trading" with no real features.

"Apart from Charter and Nextel, there wasn't anything going on. It was really quiet," with most of the activity occurring in Charter. He saw Nextel bonds - which have recently enjoyed a healthy run-up - as "moderately weaker," with the 9 3/8s at 78.5 bid/79 offered, down half a point on the day.

He did see a little action in Lucent Technologies Inc. debt, quoting the troubled telecom equipment maker's 2006 notes three points higher at 43 bid/44 offered.

Junk traders saw no activity in El Paso Corp. debt after Moody's cut its senior ratings to Baa3 from Baa2 previously. The nominally investment-grade bonds have traded at junk-like levels recently after the company was cited by the Federal Energy Regulatory Commission for having allegedly withheld natural gas supplies from California during the energy crisis there early last year - an allegation that El Paso denies.

A trader said overall, however, players are "one the sidelines" despite the start of the new quarter. "We're hoping it picks up as people come back from their summers. The fourth quarter usually sees some activity, as people look to get rid of losing issues" before the end of the year for tax purposes. "We expect - and hope - that things will pick up."

Meanwhile the high-yield primary market digested two servings of news on Wednesday - events that may be related, according to sources.

Early in the session news circulated that U.K.-based food distribution services company Brake Bros. had postponed its offering of 10-year senior notes. Later in the day price talk was heard on new notes from Mid-Western U.S. scaffolding services company Brand Services Inc.

One source told Prospect News that in addition to credit ratings the deals have one aspect in common. And that aspect perhaps speaks to the present level of risk-aversion among high yield investors.

Brake Bros. cited "market conditions" as it postponed its £175 million equivalent of 10-year senior notes (B3/B-) in euro and sterling tranches, a market source advised Prospect News on Thursday.

Credit Suisse First Boston and JP Morgan were joint bookrunners.

Proceeds from the deal were to be used to fund the acquisition of the company by Clayton, Dubilier & Rice, Inc.

Meanwhile Wednesday price talk of 11¾% area was heard on Brand Services' offering of $165 million of 10-year senior subordinated notes (B3/B-). The deal, via Credit Suisse First Boston and JP Morgan, is expected to price late Thursday or early Friday, according to a syndicate source.

Proceeds from the Brand Services notes will be used to fund the acquisition of the company by JPMorgan Partners from DLJ Merchant Banking.

Pointing out the fact that both Brake Bros. and Brand Services are acquisition financings, with "implied support from sponsors," one sell-side source told Prospect News that a watchful eye might see more than a little risk-aversion in the price talk of both deals (Brake Bros., which was pulled, had been said to have widened out to 12% price talk, from the 11¼%-11½% price talk that was heard on Sept. 30).

Reiterating that Brake Bros. was pulled, the source said: "It would be a little troubling for Brand not to get done because it would just be another sign of resistance from the buy-side to buy anything."

Sell-side sources who spoke Wednesday with Prospect News insisted that part of the story on Brake Bros. was the fact that the transaction was undertaken in the eurobond market - one that the investment banks recognize as a much more cautious arena for junk bonds.

"There's a lot of weakness in the euro market and the sterling market," one source said. "To get deals done in those markets is going to be tough right now. I mean look at the weakness in the dollar market: the two European markets are much weaker than we are right now and we're pretty weak."

Another source seemed to concur, characterizing the European buy-side as "reticent," and noting that the eurobond market is less liquid

"When things go bad there they really go bad," the source commented.

"I'm not sure what happened with Brake Bros.," the source added. "But given that Clayton Dubilier is a prominent sponsor and given that price talk was moving back on that deal the underwriter may have said we can hold onto this a while until the market comes back and try again rather than stuff them with something really wide."

Asked if the waiting game made strategic sense the source said "It's a good strategy from a client-management point of view because you don't want to be remembered as the guy who priced the deal at 12½%.

"But on the other had it may not be a good strategy if you're trying to time the market. Right now the market may have accepted a deal at 12½%, and in a couple of months it may not accept any deal."

This source said that the U.S. could be on the brink of an invasion of Iraq.

"I wouldn't want to be holding a whole lot of paper if I were a bank with that happening," the source noted.

Meanwhile Wednesday Prospect News asked one official what news seemed to be catalyzing the most talk at the source's investment bank. The source responded that the record-setting mutual fund outflow, $1.4 billion for the week ending Sept. 25, was surprising in terms of magnitude. However the sizable outflow did not take this official's firm entirely by surprise.

"The large outflow last week was unexpected but not as much of a surprise because it was money from guys who were playing to time a quick rally in the market," the sell-sider responded.

"They got in and got out," the source added. "So a lot of accounts that were seeing redemptions in their funds reported that it had started happening a couple of weeks ago. It was a lag-effect.

"We didn't think $1.4 billion would flow out but we thought it would be a fairly large outflow."

What was even more interesting, this official said, was the low level of activity in the secondary market.

"It's surprising given that we thought a lot of people would begin re-balancing portfolios heading into the fourth quarter and position themselves before things start up in '03. And you're not seeing that with trading in the secondary pretty slow."

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