WorldCom higher on possible SEC settlement; busy new-deal market

By Paul Deckelman and Paul A. Harris

New York, Nov. 22 - WorldCom Inc. bonds and those of its MCI long-distance subsidiary firmed smartly Friday on news reports that the bankrupt telecommunications giant might be nearing a settlement with the Securities and Exchange Commission that could enable it to avoid fines and criminal charges in an effort to bring it out of Chapter 11 that much quicker.

In the primary arena, the investment banks opened up the throttle as the last full week before Thanksgiving 2002 came to a close. Four deals priced -the first time the primary has undergone that level of volume in a single session since June 13.

Two drive-by deals appeared and then were gone Friday, as AmeriGas Partners, LP priced an add-on and D.R. Horton, Inc. brought new notes, upsized from the announced size.

And two deals that had run the full investor gauntlet, El Paso Energy Partners LP and Stena AB, priced on Friday as well, with El Paso Energy Partners also upsizing.

In addition to those, terms were heard Friday on an add-on from Allied Waste North America, which priced Thursday night.

"This market is crankin'," one sell-side official commented Friday, adding that issuers nursing cases of late summer-early fall stage fright are no doubt taking deep breaths and preparing to burst onto the stage.

The primary market awoke Friday to news that Allied Waste North America had priced a $75 million add-on to its 9¼% senior notes due Sept. 1, 2012 (Ba3/BB-) at 103.25 for a yield to worst of 8.669% via Credit Suisse First Boston. The original $300 million deal priced at par on Nov. 12.

And by the time that observers had settled in for a day's work two more surprises appeared.

King of Prussia, Pa. propane marketer AmeriGas Partners jointly issued with AP Eagle Finance Corp. a rapidly marketed $88 million ($91.08 million proceeds) tack-on to its 8 7/8% senior notes due May 20, 2011 (Ba3/BB-) at 103.50 for a yield to worst of 8.166%. Credit Suisse First Boston also ran the books on AmeriGas.

And Arlington, Tex.-homebuilder D.R. Horton upsized its drive-by deal to $215 million from $200 million and priced the five-year senior notes (Ba1/BB) at par to yield 7½%, spot on to the 7½% area price talk. Bookrunner was Banc of America Securities, co-manager Wachovia Securities, Inc.

The investment banks also completed transactions Friday on two deals that had run full roadshows.

El Paso Energy Partners upsized its offering to $200 million from $150 million and priced the 10-year senior subordinated notes (B1/BB-) at 99.242 to yield 10¾% via the bookrunning triumvirate of JP Morgan, Goldman Sachs & Co. and UBS Warburg.

And Swedish maritime and investment firm Stena AB priced $200 million of 10-year senior notes (Ba3/BB-) at par Friday to yield 9 5/8%, inside of the 9¾%-9 7/8% talk, via JP Morgan.

Stena was the second deal to price inside of talk during the week of Nov. 18. On Nov. 19 Rexnord Corp. priced $225 million of 10-year senior subordinated notes (B3/B-) at par to yield 10 1/8%, inside of 10¼%-10½% price talk.

Price talk of 9%-9¼% emerged Friday on Grant Prideco, Inc.'s upcoming $175 million of seven-year senior notes (Ba3/BB-) via Deutsche Bank Securities, according to a syndicate source who added that the deal is set to price Monday.

And it is notable that on Friday, amid the relative flurry of activity described above, much of the talk centered not on the deals that got done, but on the one deal that had been expected by some to price as early as Thursday: R.H. Donnelley Corp.'s $750 million two-parter via Salomon Smith Barney, Bear Stearns & Co. and Deutsche Bank Securities, to help finance R.H. Donnelley's $2.23 billion acquisition of Sprint's directory publishing business.

Syndicate sources confided late in the week of Nov. 18 that demand for Donnelley's notes is intense and thus allocating bonds is proving tricky. Late Thursday a rumor began to circulate the market that indeed the deal had priced, but that the bookrunners were nose-to-the-grindstone working those allocations out.

"I know the deal is done," one informed source told Prospect News on Friday. "The book is filled; they got more orders than they know what to do with.

"Allocations are an issue when you get a book of this magnitude. The company needs to make a decision on how much money they want to take down."

When the new El Paso Energy Partners bonds were freed for secondary dealings, they were heard to have pushed up to bid levels around 102-102.25, about a three-point gain from their issue price.

D.R. Horton's new bonds moved as high as 101.25 bid from their par issue price before coming off that peak level to close at a more modest 100.5 bid, while Stena's new issue moved up to 101.5 bid, also from par, a trader said. "The new deals were the most exciting part of the day" in secondary, he added.

Back among existing bonds, WorldCom - whose bonds have been steadily grinding up over the past few weeks on improved investor sentiment about the troubled Clinton, Miss.-based telecommunications company, as well as on the overall rise in the junk secondary market - were once again on the upside on Friday.

"They traded up a bit, again, today," a trader said, in pegging the company's bonds around the 26.625-26.875 level - up from around 24.75 on Thursday.

At the same time, the bonds of WorldCom's MCI unit "were also up, obviously," he said, quoting them at 56 bid/58 offered - up from Thursday's close around 54, and well up from levels around 42 bid/44 offered a week ago. "Certainly, WorldCom paper is up a lot," he observed.

Another trader likewise saw parent WorldCom's bonds as high as 27.5 bid/27.75 offered during the session before the bonds came down from that level to end around 26.5 bid/27 offered, up two points on the session.

With the company in bankruptcy, all of the WorldCom bonds, and all of MCI's notes, trade at the same respective levels, regardless of coupon or maturity (since all are assumed to have the same claim on the company's assets, as senior unsecured debt).

WorldCom's pink-sheet-listed shares were meantime up two cents (8.25%) to 21 cents Friday, on volume of more than 75 million shares.

WorldCom has recently benefited from investor belief that once it gets out of bankruptcy it will be able to show respectable cash-flow numbers, based on results for July and August which the company recently submitted to the bankruptcy court overseeing its reorganization.

It also scored a coup in luring Michael D. Capellas, the highly respected former chairman and chief executive officer of Compaq Computer - now a unit of Hewlett-Packard Co. - down to Clinton to take over as president, chairman and CEO of WorldCom. Capellas, who had taken the position of president of H-P after it absorbed his company, gave up that post to lead the turnaround at WorldCom.

And he appears to have some high-powered help, in the person of former New York Mayor Rudolph Giuliani, whose eponymous New York-based consulting firm has been retained by a major WorldCom investor - believed to be big bondholder David Matlin - to advise WorldCom after it emerges from the biggest corporate bankruptcy in U.S. history. Matlin leads a group that has spent more than $300 million to buy more than 10% of WorldCom debt.

Some news reports indicate that Matlin is even pushing for Giuliani to become chairman of the restructured company, although that would involve Capellas giving up one of his three posts. Giuliani has been quoted as saying that it is too soon to talk about himself as chairman - but he has also said that the company should have a separate chairman and CEO.

Having the superstar ex-mayor of America's greatest city on board for the turnaround in addition to snagging a well-known corporate executive from a much-better-off (and much better-run) company, has got to be a big confidence booster for WorldCom investors. Giuliani's image as a straight-shooter who does not suffer fools gladly and who vigorously prosecuted white-collar crooks in his pre-mayoral days as a prosecutor is perceived to be just the tonic for WorldCom - reeling from allegations of over $9 billion in accounting fraud that led to the indictments of several former executives, including ex-chief financial officer Scott Sullivan.

With the turnaround team of Messrs. Capellas and Giuliani in place, attention now turns to extracting the company from bankruptcy, and Bloomberg News was reporting Friday that WorldCom was nearing a settlement with the SEC that would permit it to avoid fines and criminal charges. Citing people familiar with the matter, the news service said that the regulators want to try to help bring WorldCom out of bankruptcy quickly - perhaps on the theory that WorldCom is, as the saying goes, "too big to fail."

The company, which in the past has said it carried more than half of the world's internet traffic, may have lost some of that business while wallowing in bankruptcy, but is still estimated by independent observers to carry about a quarter of the capacity on the 20 largest U.S. Internet routes. It also services big government customers such as the Defense Department, which in April granted the company a 10-year contract to provide as much as $450 million in data-transmission services, and the General Services Administration, which recently renewed a big contract with the company.

Bloomberg reported that the proposed settlement "would require WorldCom to establish court-approved financial controls and possibly pay a fine if it doesn't comply with them, people familiar said" - a far less onerous punishment, it said, than that meted out to former Enron Corp. auditor Arthur Andersen LLP, effectively driven out of its bread-and-butter corporate auditing business after its criminal conviction June 15.

It may take U.S. District Judge Jed Rakoff "months to determine whether WorldCom is complying with any settlement," the news service reported, adding that delaying or avoiding a penalty "may put WorldCom and Michael Capellas, who will become chief executive officer in two weeks, in a better position to repay creditors and emerge from bankruptcy."

Elsewhere, Lucent Technologies Inc. - another troubled (though not bankrupt) company whose debt has recently been firming solidly - was again higher on Friday, its 7¼% notes due 2006 quoted as having gained three points on the session, to end at 66 bid. Its shares, meanwhile, rose 14 cents (10.22%) to $1.51, on volume of 83 million shares, almost double the norm.

Lucent has recently benefited from winning a big contract to supply China's Unicom mobile phone network with over $400 million of gear and several other nice contracts. Also helping has been a perception that the telecommunications industry that buys Lucent's equipment and that of rivals such as Nortel Networks Corp (whose shares and bonds have also lately been rising) may finally be nearing the end of the two-year long industry-wide implosion that has driven once high-flying firms like WorldCom into bankruptcy and has caused numerous others to cut back on their capex budgets, with the Lucents and Nortels of the world the big losers from such cuts.

There was also a bit of short-lived, and probably unfounded, speculation this week that Lucent might be a takeover target of someone, with the name of giant defense contractor General Dynamics Corp. having surfaced on Internet investment websites that report market rumors. That scenario apparently went nowhere - but Lucent was still up.

A junk trader opined that Lucent - and WorldCom, and other previously beaten-down issues - was probably being lifted because "there's not much paper around and everything - whether it's [garbage] or not - seems to be trading better."

He noted that "stuff that has been languishing for weeks, and all the money coming into the market [as evidenced by six straight weeks of high-yield mutual fund inflows] and not much of new deals, everything is up two or three points, and some stuff is up even more. No news, no reasoning - it's just lack of liquidity and looking for paper, that's what's driving a lot of this stuff. Most of it is not anything specific."

He noted that retailer Saks' paper was "up a couple of points, just on earnings that were OK" rather than great, quoting the bonds has having jumped from bids around 65-66 to 70. "Crazy stuff. That's what this week was like."

American Tower Corp.'s 9 3/8% notes due 2009, which also have recently been grinding steadily higher, were the exception to the rule on Friday; after having pushed all the way up to around 80 bid on Thursday, the bonds were heard to have come in a point or so Friday, possibly because investors were taking a few profits from the heady gains notched during the recent strong run-up.

Qwest Communications International Inc. paper - up over the previous several sessions after the troubled Denver-based regional Bell operating company (RBOC) announced a huge debt-exchange offer - was seen holding steady at the higher levels it had reached, although one trader said "it was status quo today, not tighter."

At another desk, however, a trader quoted the bonds as having firmed some more, with the 5 7/8% issue due 2004 at 84.5 bid/86.5 offered, and its 7.90% notes due 2010 at 63 bid/64 offered.

Qwest's offer is aimed at taking out over $12 billion (face amount) of its existing bonds, replacing most of those issues with longer-maturity - but substantially higher coupon - debt.

Some bondholders are balking at the terms the company laid out, since they are being asked to exchange their bonds at discounts from par value ranging from about 17% on the shorter-dated issues to over 45% for the long-dated paper - but when all is said and done, said Thomas Friedberg, an analyst at Janco Partners Inc., " I think by and large they will [go for it] because it's something that's been carefully crafted to [give incentives] to people who have near-term maturities to tender, while it's far less attractive for people who have maturities beyond 2010."

Friedberg, an equity analyst at the Denver-based investment firm, said that most likely, "we would expect that around 80% of the [face amount of the] subscription will be made by [the holders of the shorter-dated paper]. It's really targeted at people who have maturities before '09," in that their discount from par is not as large as that laid out for the holders of the longer-dated paper - while at the same time, all of the holders are being given coupons roughly double what their bonds now have.

He predicted that "there will be 100% subscription on the first four tranches [i.e. the shortest-dated paper]; just for simplicity of analysis, the rest of the debt available [to be paid out to the bondholders ] will be spread over the remaining tranches."

Qwest indicated in a recent SEC filing that it might have problems meeting its debt obligations over the next few years. "If that's the case, why bother taking out bonds that won't come due for as long as almost 30 years and in the process, obligate the company to pay substantially higher interest on them, while shortening their maturity (Qwest proposed swapping its bonds maturing in 2018, 2021, 2028 and 2031 for higher-coupon 2014 paper)?

Friedberg believes that "if you have the opportunity to buy these things at 30 to 35, which is what the offer is, you would want to do that simply to reduce the amount of the obligations outstanding."

He said that the fact that the company is obligating itself to pay much higher coupons down the line is probably not much of a problem.

"If you don't think that operations will improve, that [replacement of lower-coupon debt with higher-coupon debt payable further down the road] is always a concern. But it's not something you have to worry about for another four to five years."

Speaking as an equity analyst, he said: "I consider this a positive. I like what I see here. By my calculations, it looks like they would reduce the face amount of their debt by $2.175 billion if this goes according to the way [Qwest plans it to go]."

Fundamentally, he said, "I think that this company, by getting rid of $2.2 billion of debt, is reducing its leverage ratios by roughly 50 basis points, from 4.3 (times EBITDA) to 3.8 . However, I really think the [goal], if you are a Qwest shareholder or a Qwest bondholder, is you want to get this company down to a capital structure that makes them an attractive acquisition target to one of the other RBOCs - and that would suggest that they've got to go well below 2.0 (times EBITDA)."

Qwest, bloated with $26 billion of debt, is now paying the price, he said, for the spending spree that the company - and many other telecommers - went on in the late 1990s and afterward, using borrowed money to build out their networks and grow through acquisitions.

"Frankly, I don't have a lot of sympathy for bondholders, because when you are in this situation, much like with other emerging communications players of the 1990s, things that should have been funded with equity were funded with debt, and the caveat emptor is with the buyer. The bill is coming due [for the excesses of the late 90s telecom bond binge], so what do you do?"

He suggests that even though there is some initial resistance to taking such a large haircut on the long end of the curve in terms of the discount from par, "with more credit agency downgrades, maybe people with longer maturities would be willing to take substantial discounts to face value - perhaps people with longer-term maturities may have to end up taking equity for their debt positions. When you're sitting with paper at 30, and its trading in the low 30s and you are truly concerned about your ability to retain your coupon, then maybe you're willing to consider additional offers."

Overall, the equity analyst said: "I like what I saw. I would have liked to see the size of the exchange offer be much larger than it was. I would applaud an expansion of the offer. Moody's and S&P might not like it - but they have a far different constituency than I do, and what they may see as bad for their constituency may end up being good for mine."

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