Junk market ignores OPEC output cut; WCI, MetroPCS price deals

By Paul Deckelman and Paul A. Harris

New York, Sept. 24- The surprise decision Wednesday by the Organization of Petroleum Exporting Countries to lower daily crude output by 900,000 barrels per day clobbered the stock market - but the bond market seemed underwhelmed by the news with little real movement seen in either energy issues or airline credits. Level 3 Communications Inc. firmed despite revelations that billionaire Wall Street wise man Warren Buffett has nearly halved his initial stake in the telecom operator. Meantime, Centennial Communications Corp. eased following news that the company had scrubbed plans for a stock issue whose proceeds would likely have gone to pay down debt.

Two deals went down on Wednesday in the high yield primary market as Dallas wireless firm MetroPCS, Inc. found the capital markets lines were open for its $150 million eight-year deal (B3/CCC+) and Florida homebuilder WCI Communities, Inc. nailed down a 7 7/8% yield with its $125 million drive-by.

Meanwhile the investment banks penciled in two more deals on the gradually building forward calendar.

A roadshow is set to get underway Thursday for Montreal-based cable television operator Videotron Ltee. The company is selling $325 million of 11-year senior notes, with pricing expected on Oct. 2 or 3.

Banc of America Securities and Citigroup are bookrunners on the deal, which is part of a refinancing that also includes a new C$368 million credit facility.

And Houston's Parker Drilling Co. will start the roadshow Tuesday for $175 million of 10-year senior notes (B-).

Lehman Brothers and Deutsche Bank Securities are joint bookrunners on the Parker Drilling offer, which is also a refinancing deal.

"It's good to see a couple of new deals coming," said a sell-side source during the middle part of Wednesday's session.

"I think it is also a healthy sign to see a weak single-B credit receive what appears to be a good execution."

The official made that comment shortly after terms emerged on the offering from MetroPCS, which priced $150 million of eight-year senior notes (B3/CCC+) at par to yield 10¾%, right at the middle of the 10¾% area price talk. Bear Stearns & Co. and UBS Investment Bank were bookrunners.

Another official, on Tuesday, had told Prospect New that the MetroPCS deal was especially of interest because the proceeds will be used to fund capital expenditures. Identifying the Dallas wireless firm as "a first-time issuer doing a build-out strategy," the sell-side source said that in certain respects the deal harkened back to the high yield market of 1998-99.

However, MetroPCS hardly lacks for company, but rather numbers among a handful of telecoms that have tapped - or are about to tap - the new issue market during the August-September time frame.

Most conspicuous by far was Nextel Communications, Inc. with its massively upsized $1 billion add-on to its 7 3/8% senior serial redeemable notes due Aug. 1, 2015, which priced on Sept. 17 at 101 for a yield to worst of 7.204%.

Then there was Dobson Communications Corp., the Oklahoma City-based rural cellular telephone services provider, which sold an upsized offering of $650 million 10-year senior notes (B3/CCC+) at par on Sept. 12, to yield 8 7/8%, inside the 9% area price talk.

Prior to that, on Aug. 15, Alaska Communications Holdings priced $182 million of 9 7/8% eight-year senior notes (B2/B-) at a discount price of 96.687 to yield 10½%.

And of course the sector remains in play in the wake of the recent pricings from Nextel and MetroPCS.

Sources tell Prospect News that Level 3 Communications is expected to price $500 million of eight-year senior notes before the end of this week.

As Prospect News went to press Wednesday no official price talk had yet been heard on the Broomfield, Colo.-based company's deal, which is coming via joint bookrunners Citigroup, Credit Suisse First Boston. However Wednesday's session saw Standard & Poor's rate the new Level 3 paper CCC-.

Meanwhile during the session, price talk of 8½%-8¾% emerged on Rayovac Corp.'s $300 million of 10-year senior subordinated notes (B3/B-), which are expected to price mid-day Thursday via Banc of America Securities.

And price talk of 8¾%-9% was heard on EMI Group plc's split-rated €300 million of 10-year senior notes (Ba1/BBB-), which are expected to price on Monday. According to a source close to the deal the EMI notes are being marketed to traditional high yield accounts.

Royal Bank of Scotland, Barclays Capital and Citigroup are joint bookrunners.

One source in the eurobond market who spoke Wednesday to Prospect News remarked that the new deal pipeline in Europe might possibly fail to overly impress observers of the U.S. market. Nonetheless, in comparison to recent seasons, that pipeline now seems to be running a notable volume of deals.

"If you looked at issuance levels before the August break we were up, on issuance levels, over 100% over the same period last year," commented the sell-side official. "So it really grew by leaps and bounds.

"But there have been a lot of people fired and a lot of underwriter staffing was really pretty thin. It has stretched the infrastructure and from a sequencing standpoint people really didn't have the deals lined up for the start in September.

"Consequently EMI looks like the only deal that will price in September. There are some other corporates and LBOs in the pipeline. And I think you're going to see a reasonable amount of issuance this year. Compared to last year, this year is going to see over a 100% increase in issuance.

"And I think people are looking at sectors which might have previously been taboo, such as cable and telecom."

Elsewhere on the euro front, Wednesday, Deutsche Bank Securities was heard to be the bookrunner for IFCO Systems NV's offering of €110 million eurobonds due 2010, with timing and structural details remaining to be determined.

On Sept. 18 the Amsterdam-based company announced that its board of directors passed a resolution for the placement of the offering.

In the secondary market, what was big news everywhere else elicited mostly yawns in junkbondland, as OPEC said that it had agreed to cut 900,000 barrels a day from the international cartel's average daily output, lowering it to 24.5 million barrels a day as of Nov. 1.

That caused great excitement in the trading pits at the New York Mercantile Exchange, where November delivery crude zoomed $1.11 a barrel to end at $28.24 - quite a turnaround from the four-month low of $26.65, which was set just last Friday.

But while oil romped stocks got whomped, with the output cut seen likely to undermine the fragile U.S. economic recovery that had lately been underpinning equities. The bellwether Dow Jones Industrial Average swooned 150.53 points to close at 9425.51, while the broader market indexes did no better; the S&P 500 lost 19.65 to finish at 1009.38, while the Nasdaq was down 58.03 to 1843.69. Treasuries firmed on a flight-to-safety response by investors.

But there was scant reaction in the high yield world.

"You would think that it would make them stronger," a trader said of the energy names, quoting AES Corp., Calpine Corp. and CMS Energy Corp. "flat on the day, nothing."

A market observer saw exploration and production operator Chesapeake Energy Corp.'s 8 1/8% notes due 2011 actually slightly lower at 106.5 bid, down from 107.25 on Tuesday, and pegged XTO Energy's 7½% notes due 2012 at 110 bid, essentially unchanged. Tesoro Petroleum Corp.'s 9 5/8% notes due 2012 were up less than a point at 98.5 bid.

The OPEC production cut certainly unexpected - but was essentially "a non-event," said high yield energy and chemicals analyst Christy Parsons of CIBC World Markets. "It's not like we saw a flurry of trading - everyone saying 'oooooooh, OPEC has cut production.' It almost came as a non-event."

She said the production cut seemed like an attempt by OPEC to "get out in front of the market before you get Iraq's production back - sort of heading off what could be that much supply and more sometime next year," when Iraq's oilfields are expected to be pumping oil at their full pre-war capacity.

"Instead of waiting till prices drop, they're doing it before prices drop."

Parsons told Prospect News that she's seen estimates of two million barrels per day "and above" for Iraq's potential pumping capacity - more than offsetting the OPEC cuts when the U.S. occupation administration gets the oil fields fully operational again.

"I think a piece of news like this is not going to help [high yield energy and production companies] on a shorter-term basis," she continued, "even though oil prices were on the rise more than a buck today, and that gives people confidence that OPEC's going to try to support prices."

Indeed, she said, over the last year or so, "people have believed that OPEC has supported them and has done things to support them ever since 1999. They said that they've got a band of $22 to $28 [dollars per barrel] and they've done what it takes to keep it in that band."

Parsons added that from a bond-trading point of view, the OPEC production cuts were probably "more of a piece of news" for large end-users such as the airlines than for the energy companies - partly because "our [energy sector] yields are so tight and the fundamental outlook has been positive for the sector, so this kind of news doesn't really boost it, while for the airlines, you get this sort of news, it may cause some worry."

That may well have been true on the equity side of the ledger, where the stocks of the major air carriers all lost altitude, with American Airlines parent AMR Corp.'s New York Stock Exchange-traded shares off 47 cents (3.70%) to end at $12.24, while Continental Airlines lost 58 cents (3.20%) to end at $17.54, and Delta Air Lines retreated 72 cents (4.90%) to $13.97. On the Nasdaq, Northwest Airlines' shares fell 61 cents (5.60%) to $10.25.

On the bond side, however, airlines were maybe "unchanged to a little worse," in the words of one trader.

Another said that for Delta and Northwest, the two most active junk air carrier names, "the short end of the curve was really unchanged. Delta's '04 and '05 paper was unchanged," while for Northwest, "I didn't see much change In the 8.52s and the 7 7/8s, pretty much unchanged on the day. You would think those would get beat up a little bit since it will be more expensive to fuel their planes - but I didn't see that take place."

He said the Delta 7.70% notes due 2005 had "opened and closed" at the same 90-91 level. "Not much change there, not in the airlines."

At another desk, Northwest's 7 7/8% notes due 2008 were perhaps a quarter point lower, at 75 bid.

Airline industry analyst Ray Neidl of Blaylock & Partners said the production cuts and the resulting rise in crude prices - and from there, prices of distilled products, such as jet fuel - "is going to have an effect on everybody [in the industry]" - but he said that the effect "will vary, depending on the newness of a given airline's fleet, and their efficiency and their hedge positions."

Still, he said, "it's going to have a negative effect on everybody, as you can see from the stock prices today. High fuel prices always do hurt airlines, lower fuel prices always help," since fuel accounts for a sizable chunk of airlines' expenses, anywhere from 11% to 15%.

Neidl said the prospect of high fuel costs had an immediate impact on airline stock prices. Bond prices, he said "wouldn't be as volatile as the stock prices, but just by the effect of the negative spin it would tend to affect the bond prices as well.

One mitigating factor, Neidl said was that a lot of carriers "to a certain degree are hedged through at least part of next year [i.e. they locked in lower prices for some of their fuel by buying forward supply contracts back before oil prices began to climb]."

Carriers such as American, Delta, AirTran and others are anywhere from one-third to 50% hedged in this way, he said - but bankrupt carriers such as UAL Corp.'s United Airlines and Air Canada "cannot hedge - so they'd be the ones who will be most exposed" to spiraling jet fuel prices.

Back on terra firma, Level 3 Communications shrugged off the news that Berkshire Hathaway Inc. - the investment vehicle for legendary investment guru Warren Buffett - had cut its stake in the Broomfield, Colo.-based telecommunications network company almost in half.

In a filing with the Securities and Exchange Commission, Berkshire said that it its stake in Level 3 had fallen to 19.9 million shares as of June 30, down some 46% from 36.7 million shares earlier in the year, when Berkshire converted the Level 3 bonds which it had received a year ago when it participated in a $500 million investment in Level 3 - Buffett's first foray into telecom after having assiduously avoided both the telecom boom of the late 90s and the bust that inevitably followed.

But Level 3 shares and bonds shrugged off the possible negative implications of that - the bonds especially after Standard & Poor's revised its outlook on Level 3 to "developing" from "negative," based on Level 3's improved financial flexibility following the anticipated retirement of its senior secured credit facility and elimination of associated covenants, and rising cash flow. Level 3 plans to sell $500 million of new bonds, and expects to use the proceeds of the offering, plus cash on hand, to repay the credit facility.

"Level 3 was trading stronger" despite the Buffett news, a trader said. "Go figure."

He quoted its benchmark 9 1/8% notes due 2008 at 86.5 bid, 88.5 offered and its 12 7/8% notes having firmed to 76 bid from 72 bid, 74 offered, "definitely stronger. I didn't see it [the Buffett news] kill anything yet."

The 11% notes due 2008 were a point better at 91.

The company's Nasdaq-traded shares were up 52 cents (10.86% to $5.31, particularly after Needham & Co. initiated coverage with a "buy" recommendation and analyst Vik Grover wrote in a generally positive research note that "the company has managed through the communications downturn and is starting to see signs of improvements in its business, characterized by decreasing disconnects and better customer credit quality" - although he noted that " a return to organic growth is likely one to two quarters out."

Elsewhere in the communications area, Centennial Communications Corp. bonds were lower after the Wall, N.J.-based regional wireless carrier said that it had withdrawn plans for a 30-million-share equity offering, which likely would have raised over $150 million at its current stock price level; the money was to have been used to pay down debt.

Centennial's 10 1/8% notes due 2013 dipped to 103 bid from prior levels at 104.25, while its 10¾% notes due 2008 fell to par from 101.25.

Flextronics International Ltd.'s 6½% notes due 2013 were seen down two points at 96 bid after the Singapore-based electronics manufacturer was ordered by a California jury to pay medical devices maker Beckman Coulter Inc. in a breach-of-contract suit. Its 9¾% notes due 2010 were quoted slightly lower at 109 bid. Flextronics' shares were halted late in the session at $15, down 82 cents (5.18%).

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.