Xerox sells upsized dollar/euro issue; Kmart clobbered again; Nextel, wireless issues lower

By Paul Deckelman and Paul Harris

New York, Jan. 14 - Xerox Corp. sold an upsized $800 million offering of dollar- and euro-denominated senior notes Monday. In secondary market activity, Kmart Corp. bonds and shares continued heading downward for a third consecutive session, dealt a double blow by the two major ratings agency. Also on the downside, for a third day was AT&T Canada Inc, while Nextel Communications Inc. led the wireless sector lower, the skids greased by a Lehman Brothers downgrade of the whole PCS/cellular group.

Xerox opened up primary market activity for the week of Jan. 14 with its approximately $800 million of senior notes, increased from $500 million. The deal was divided into two tranches of $600 million and €225 million. Both pieces priced were discounted to 95.167 for a yield of 10¾%. Price talk was for the 10¾% area.

Prescott Crocker, manager of the Evergreen High Yield Fund, told Prospect News that he declined to play Xerox.

"We thought the best part about Xerox was the fact that they had a lot of long-term leases they were financing," Crocker said. "So when they split that off, and they just become a copier company, we said: 'No, there's too much competition against the Japanese.'

"We also think that the role that e-mail and things like Lotus Notes plays in communications is dramatically lessening the need for copiers."

However, the Evergreen High Yield Fund is playing the cinema credits, Crocker said, adding that he bought AMC Entertainment, which priced last Friday, and he plans to buy Regal Cinema, set to price later this week.

"We thought that AMC was frankly about 50 basis points rich," he said. "But nobody owns the sector, so people are going to come into the sector. So AMC got away with that.

"We think that Regal is a stronger company," Crocker added. "We'll be buying Regal."

According to Crocker, those analyzing the cinema credits may be paying too much attention to the bad news and not enough to the good.

"It looks like the cinema companies are being successful at closing down screens," he commented, adding that Evergreen expects to see "a lot" more screen closures.

"The prices of movies have been creeping up," Crocker added. "So it's an industry that is basically successfully reconfiguring itself. It's an industry that can have some counter-cyclicality, so we thought we better put it on the books."

Although Prospect News saw no new deals announced on Monday, details on pending offerings from PanAmSat Corp. and Jacobs Entertainment, Inc. began swimming into focus.

PanAmSat will bring $700 million of notes, according to a syndicate source who identified Credit Suisse First Boston and Deutsche Banc Alex. Brown as dealrunners. Market sources advised Prospect News that the launch of PanAmSat's new bonds is imminent.

And although reports of the size vary, Jacobs Entertainment looks to be coming with a deal for seven-year senior secured notes (B2/B) via CIBC World Markets and US Bancorp.

Overall, however, conversations on Monday conveyed something of a bleak tone, as Prospect News talked to the buy- and sell-sides of the high yield primary.

Professing a somewhat bear-ish outlook, Crocker said that Evergreen sees the US economic recovery picture is looking less like a "V" and more like a "W."

"What drives that is the record-high debt on the part of the consumer and the enormous capacity on the part of everybody who is a producer and the realization that the beginning of the year is the time for all the analysts to try to justify their jobs by hyping forecasts.

"We think that it's a sort of a bear trap."

Beyond the cinema credits he mention above, Crocker does not anticipate playing any of the five credits that thus far inhabit the forward calendar of business for the week of Jan. 14.

"We're looking, but we've really got our hands in our pockets," he said. "We think that it's time to be particularly picky.

"We think the stock market is in for a corrective experience. We're positive on high yield going forward, but we think that just for a shorter period of time the stock market is corrective and the high yield calendar is pretty large. So it may be a better time to step back."

Back in the secondary sphere, it was more of the same for Kmart investors, on both the stock and the debt side. On Friday, approximately $4.7 billion of debt was downgraded three notches by Moody's Investors Service, which cut the bonds to B2 from Ba2, although the cut was announced very late in the session - too late to have much market impact on the already-falling bonds. Moody's also warned that the ratings remained under review for a possible further downgrade.

Standard & Poor's came across with a similar cut early Monday, chopping the bonds' rating four notches, to B- from BB previously.

Kmart's continued slide "was where most of the activity was today," said one trader, who quoted the Troy, Mich.-based discount retailing giant's bonds down "about five points across the board."

He saw Kmart's benchmark 8 1/8% notes due 2006, which closed quoted around 60 bid/63 offered on Friday, opening Monday around 50 bid/55 offered, before ending quoted bid in the 52-54 area.

At another desk, Kmart's 8 3/8% notes due 2004 falling about 10 points on the session to 62.5 bid. Its 9 3/8% notes due 2006 dropped eight points on the session to 60 bid.

The company's shares meanwhile dropped 46 cents (13.94%) to $2.84. New York Stock Exchange volume of 40 million shares was more than five times the average daily turnover of seven million shares. The close was Kmart's lowest since 1967. Since the start of the year, Kmart shares have lost over 40% of their value as the company has been battered by a barrage of bad news.

Kmart's bonds, along with its shares - had started the new year off on the wrong foot, when Prudential Securities equity analyst Wayne Hood warned that unless cash-flow improves, Kmart might have to consider a bankruptcy filing. Hood also predicted a sharply reduced fiscal fourth quarter net from his earlier estimates and changed his forecast of a modest full fiscal year profitto a loss. Although Kmart securities began a week-long recovery when investors decided that a bankruptcy filing probably wasn't around the corner, they were back on the slide by the end of last week, after Kmart reported lackluster December sales data and cautioned that earnings probably wouldn't even meet the meager penny-per-share consensus estimate of Wall Street analysts. Kmart also said that it was in talks with its lenders on possibly lining up supplemental financing - seen by investors as a sign that the company's liquidity and financial flexibility are constrained.

Another company which has been closely tied to Kmart's ups and downs in recent days has been Fleming Companies Inc., the Dallas-based grocery wholesaler which has a large contract to supply food and other items to Kmart's approximately 2,100 stores. As Kmart's securities have risen and fallen, Fleming's have tracked them, although at considerably higher levels.

On Monday, Fleming's 10½% notes due 2004, which had closed Friday at 94.5 bid/96.5 offered, dropped to bid levels "in the 92ish area," a trader said, although he acknowledged that the debt was "not much traded."

Fleming sought to downplay any notion that Kmart's financial problems might be contagious, declaring that its business relationship with Kmart "remains strong," and further noting that its receivables from Kmart (i.e., payments owed to Fleming by Kmart for merchandise which Fleming has supplied to the retailer) currently vary between zero and approximately $70 million, or less than one-half of one percent, on average, of Fleming's annualized sales. Kmart, which pays for its supplies from Fleming on a seven-day invoice basis "is current in its payments to Fleming," the latter company said.

Mark Hansen, chairman and chief executive officer of Fleming, said in a statement that "our experience to date indicates that food and consumables sales are robust in the Kmart stores and, fueled by our low-cost supply chain, a strength in this critical category of their current operations." Meanwhile, the wholesaler pointed out, it has not put all of its eggs into Kmart's basket, reporting that its non-Kmart business grew in excess of 10% in Fleming's third quarter.

But Moody's was apparently not convinced that all is well with Fleming, putting its Ba3 rated senior notes and B2 rated senior subordinated debt under scrutiny for a possible downgrade, in line with its earlier downgrade of Kmart.

Moody's noted that the troubled discount retailer is Fleming's "most important customer with more than 20% of sales." While the ratings agency acknowledged that in a worst-case scenario Fleming has "sufficient liquidity resources to absorb a sizable accounts receivable write-off," it nonetheless cautioned that "franchise difficulties at Kmart would represent a setback for Fleming's business plan." Further, given the important role which Fleming's supply contract with Kmart plays in the company's finances, "decreased confidence in Kmart may impact Moody's view that significant (Fleming) debt protection measure improvements resulting from higher revenue and increased purchasing efficiencies can reliably be expected over the intermediate term," the ratings agency concluded.

Elsewhere, AT&T Canada Inc.'s bonds remained in freefall for a third consecutive session, amid concerns that corporate parent AT&T Corp. might refuse to stand behind its debt, even in the event that it is successful in buying the 61% of the Canadian long-distance and Internet provider which it does not currently own.

The bonds are technically still investment-grade rated instruments, but have been trading like badly distressed junk bonds for the last few sessions.

AT&T Canada's 7.65% notes due 2005, had fallen between 10 and 20 points last week, continued to erode, with a trader quoting the bonds as having ended at 35 bid/38 offered, down from Friday's bid levels around 38. Another market source pegged the bonds slightly higher, around 38 bid/40 offered.

The AT&T affiliate's bonds began sliding last week after Moody's announced that it was putting the Baa3 rating on some $2 billion of long-term AT&T Canada debt on review for a possible downgrade. The ratings agency warned that the action "reflects our concern that the company's weak financial status and lack of regulatory progress in Canada may cause AT&T Corp. to reevaluate its long term support of AT&T Canada." Moody's noted that A3 rated Ma Bell "has been clear in stating that it has no legal responsibility for the debt of ATTC.,"

Another sector of the telecom world was jolted Monday, when Lehman Brothers issued an equity downgrade on the whole wireless sector.

The chief victim was the wireless bellwether in the high yield world, Nextel, whose stock was specifically singled out for the worst downgrade. On the debt side, its 9 3/8% notes due 2009 dipped to 79 bid from 83 previously, while its 9½% notes likewise lost four points to close at 78. Nextel's 10.65% notes due 2007 dipped three points on the day to 76. Nextel shares meanwhile plummeted $1.64, or 16.40%, to $8.36. Nasdaq volume of 30 million shares was more than double the usual turnover.

While sector leader Nextel was the biggest downside leader, other high yield wireless credits heading lower Monday included Airgate PCS, whose zero-coupon notes due 2009 were down two points, at 74.5 bid; Dobson Communications, whose 12¼% notes lost a point to 92 bid and whose 10 7/8% paper dipped a point-and-a-quarter to 103.75; and Alamosa PCS, whose 12½% bonds were off a point at 99.

Lehman telecom analyst John Bensche cut his recommendation on wireless operators to "market-weight" from "overweight," as the investment bank cautioned that subscriber growth will be slower than expected in the face of a weak economy.

The Lehman screed was the latest bearish signal for investors in the once-burgeoning sector; Merrill Lynch, for instance, recently downgraded the global wireless sector to "underweight." A number of wireless firms have said their total net new subscribers for the fourth quarter would miss their targets, or, at best, would only come in at the low end of estimates.

In turning more cautious on the sector, Bensche, in a research note, likewise lowered his expectation for industrywide subscriber growth, and for cash flow margins.

Turning to specific names, the Lehman analyst downgraded his rating on Nextel's shares to "sell" from "market perform," previously, and lowered its price target to $4 from $14, citing an uncertain outlook.

Bensche also cut his ratings on Dobson, AirGate and Alamosa to "buy" from "strong buy" previously, and made the same recommendation for investment-grade wireless giants AT&T Wireless Services Inc. andSprint PCS Group. He kept high yielder Triton PCS Holdings Inc. at "market perform."

Other communications names which were active Monday included Telewest plc, whose 11¼% notes dropped two points to 79 bid and whose 11% paper was also off a deuce at 77.

Outside of the communications constellation, Enron Corp. - under federal investigation and battered in the media by questions of whether its executives acted wrongly in connection with the collapse of the Houston-based energy trading giant - dropped more than two points, to 21 bid.

End

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