WorldCom bonds lower as shares get pounded; JQ Hammons, El Paso Energy price upsized deals

By Paul Deckelman and Paul A. Harris

New York, May 14 - WorldCom Inc.'s bonds were gyrating around at lower levels Tuesday, even as the troubled telecommunications giant's shares were being beaten to a pulp by investors following the company's not-unexpected ouster from the prestigious S&P 500 equities index. Also on the downside, Magellan Health Services shares and bonds were hurting as the company reported a precipitous 56% drop in second-quarter operating earnings.

In primary market activity, lodging credit John Q. Hammons Hotels checked in with a slightly upsized $510 million issue of new 10-year first mortgage notes, while El Paso Energy Partners likewise enlarged its quickly shopped add-on issue to its existing 8½% senior subordinated notes due 2011.

And one new deal surfaced Tuesday, as Morgan Stanley administered a $200 million dose of PacifiCare Health Systems' seven-year senior notes (B3/B+) onto the forward calendar.

John Q. Hammons Hotels LP/Finance Corp. III upsized to $510 million from $500 million its 10-year first mortgage notes (B2/B) and priced them at par to yield 8 7/8%, according to a syndicate source.

Can Hammons slight upsizing and its pricing in the middle of 8¾%-9% price talk mean that the buy-side is guardedly prepared to check back into the lodging sector following the setbacks it was dealt by the events of Sept. 11, 2001?

When Moody's rated the new Hammons notes B2 with a stable outlook on May 9, the rating agency's report noted "improvements related to overall lodging industry trends."

The ratings release also noted the elimination of Hammons' upcoming scheduled debt maturities related to the existing first mortgage notes and certain other non-rated mortgage debt including the company's Omaha Embassy Suites property.

Lehman Brothers ran the Springfield, Mo.-based hotelier's new deal.

On the heels of some remarkably tight-pricing energy deals in the high-yield primary throughout the spring, Houston-based natural gas producer and distributor El Paso Energy Partners priced and upsized a drive-by offering of $230 million - increased from $200 million - via Credit Suisse First Boston. The new notes, which are an add-on to the 8½% senior subordinated notes due June 1, 2011 (B1/BB-), priced at 102 for a yield to worst of 8.139%.

PacifiCare Health Systems launched a two-day roadshow, Tuesday, marketing $200 million of seven-year senior notes (B3/B+) via Morgan Stanley. The Santa Ana, Calif.-based insurance company's deal is expected to price Thursday.

By Wednesday's close the market anticipates hearing terms on Trump Casino Holdings, LLC/Trump Casino Funding, Inc.'s two-part $470 million junk bond deal: $340 million first mortgage notes (B3/B-) talk at 9¾%-10% and $130 million second mortgage notes (CCC) talked at 12¾%-13%, both with eight-year maturities, via Deutsche Bank Securities.

The deal was originally laid out as $470 million of first mortgage notes, before becoming chopped and channeled into its present form mid-to-late in the week of May 6, when observers told Prospect News Trump's deal was originally expected to price. One sell-side official commented last week that the $130 million junior tranche, two credit notches lower and 300 basis point wider in price talk than the first mortgage notes, was custom-tailored to keep a very few big accounts at the table.

Trump's new Rule 144A deal has generated considerable conversation among various buy- and sell-side sources who have been in communication with Prospect News since the deal took to the road on April 26. Some, who cited Donald Trump's reported tactic of holding up interest payments on junk bonds last November in an attempt to finesse better terms and lower interest expenses, say the market may not presently be open to Trump's financings. Others citing the 12¾%-13% price talk of the second mortgage notes say that the players are already present upon the stage: at the conclusion of the drama, before the final curtain falls, the Trump transaction will get done, these sources say.

When the new John Q. Hammons notes were freed for secondary dealings, a trader reported, they firmed slightly off their par issue price to end at 100.625 bid/101.25 offered. The new El Paso bonds moved up to 102.5 bid going home at their 102 issue price.

But back among the existing issues, WorldCom once again grabbed the center spotlight after having been relatively subdued in Monday's action. The bonds were seen moving around at lower levels after the embattled Clinton, Miss.-based long-distance operator - newly made a junker last week by the major ratings services - saw its stock retreat 20 cents (13.89%) to $1.24 in incredibly busy trading. A Nasdaq record 670.5 million shares changed hands - over 12 times the usual daily level. Stock investors voted with their feet after Standard & Poor's late-Monday announcement that it was removing WorldCom from the S&P 500 Index. That could lead to still more selling, as mutual funds and other professional portfolios built around the widely followed index are forced to dump their shares at current levels, 90% below the stock's 52-week high-water mark above $19.

On the bond side, "it was all WorldCom," one trader opined, noting that the company's debt was "all over the place" as the equity investors headed for the exits. He saw its benchmark 7½% notes due 2011, which had finished Monday's dealings around 42 bid/43 offered "instantly weaker when I came in [Tuesday] morning, because the stock was down in Europe overnight." While the paper broke out of the chute around 42.5 bid, it quickly moved down to about 40 bid/42 offered.

At that point, he continued, "there was a little bit of a bounce" which took the bonds back up to around 42 bid/43 offered" but then around midday, "they started falling apart again," fluctuating around at lower levels before going home at 40.5 bid/41.5 offered.

"All told, it was only off about a point, but it was quite a ride today, all over the place," the trader declared. "There were a few false starts, when [the bonds] felt like they were going to go higher, but as soon as they started going higher, people took the opportunity to hit the bid, and the thing fell right back down again."

The company's debt, the trader said, was lower across the board. He saw similar weakness in WorldCom's 7 7/8% notes due 2003 - which in theory should be able to hold their own, on the assumption that the telecom giant will still have enough liquidity to make sure at least its short-term debt will be money-good at redemption time.

He noted that for a while, "it looked like people were breathing a sigh of relief, saying the '03 paper is fine" on signs that the company's lenders would give WorldCom some breathing room, while several large investment houses issued hopeful-sounding research reports. "Well, that stuff has been falling too." The 7 7/8% notes, which had finished Monday at 81.5 bid/83 offered, began retreating from the get-go. After they were being offered at 80, he added "they just fell off the cliff, to move down to offered levels around 78, about a five-point swing on the offered side. "Chalk it up to general ugliness," he said.

Another trader agreed that WorldComs "were getting cheaper" as the session wore on. He saw its 7.55% notes due 2004 offered at 62, down several points from prior levels in the middle 60s, and described the activity in WorldCom as "fast-paced."

At another desk, WorldCom's bonds were being quoted "down a couple more," a market source said. "They keep getting knocked down." He saw its 8% notes due 2006 fall to 47.5 bid from prior levels around 52.5.

WorldCom's troubles seemed to spill over to other telecom names; Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009, for instance, were seen down around a point at 67.5 bid/68.5 offered.

Adelphia Communications Corp. debt - which had been seen firming Monday after large equity holder Leonard Tow said in a Securities and Exchange Commission filing that he would exercise his right to name three members to the troubled Coudersport, Pa.-based cable TV operator's board - seemed to back off Tuesday amid uncertainty whether Tow would be able to do so and whether the Rigas family, which founded and controls Adelphia, would let him do so.

Tow is the chairman and chief executive of Citizens Communications Co. He and his family trusts own about 13% of Adelphia's common shares. The SEC filing asserted that Citizens gained the rights to the seats after it sold cable systems to Adelphia in 1999. Tow expressed concern about recent developments at Adelphia, including its need to restate several years of earnings, and the current SEC investigations into company guarantees of some $2.3 billion of loans made to the Rigas family.

Adelphia's 9 7/8% notes due 2007, which had risen three points Monday to 86 bid, were being quoted back down at 84.5 bid Tuesday, a point-and-a-half retreat. At another desk, Adelphia's 8 3/8% notes due 2007 and 7 7/8% bonds due 2009 were both seen down a point at 81 bid and 79 bid, respectively. A trader saw its 10¼% notes due 2011 at 84.5 bid/85.5 offered, off from prior levels around 87.

Outside of the communications sphere, Magellan Health Services' 9% notes due 2008 were quoted down more than five points on the session to 79 bid, after the Columbia, Md.-based provider of behavioral managed care services reported that second-quarter operating earnings slid 56% versus a year ago. It cited the rising cost of care and a fall in membership enrollment at Aetna, an important customer. Magellan's shares tumbled $2.25 (28.63%) in New York Stock Exchange dealings, to $5.61.

Also lower was Polymer Group Inc., whose 10% notes due 2011 were heard to have dipped two points to 33 bid after the North Charleston, S.C.-based textile maker filed for Chapter 11 protection from its noteholders and other creditors Monday.

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