AES stabilizes; Nextel debt firmer; RFS deal, two drive-bys price

By Paul Deckelman and Paul Harris

New York, Feb. 21 - AES Corp. bonds finally braked their alarming freefall and seemed to stabilize Thursday, although at considerably lower levels than they had been a week earlier. On the upside, Nextel Communications Inc. debt firmed after the big wireless telecommunications carrier reported encouraging results from its domestic operations.

In the primary market, lodging REIT RFS Partnership L.P. checked in with a $125 million issue of 10-year bonds, while two drive-by deals - for Penn National Gaming and Key Energy Group - also came clattering down the chute.

AES - whose steady erosion on both the stock and the bond side has mesmerized financial markets for the past week, "hung in" around recent levels, a trader said. "They didn't do very much, but they also didn't trade down, and seemed to be stabilizing."

At another desk, the Arlington, Va.-based power generating company's senior unsecured bonds, which had been treading water in the mid-to-upper 50s, "were back up," one participant said, quoting them as having risen to 62 bid from prior levels around 58. The company's subordinated bonds, which had swooned as low as the mid-30s, were seen having improved to around the 40 bid level from 37 previously. About a week ago, the senior paper was in the upper 60s, and the subs were seen around 50.

On the equity side, however, the company's shares continued to head southward, although the relatively small decline (14 cents, or 3.29%, to $4.11 in New York Stock Exchange dealings) was almost a cause for celebration among shell-shocked shareholders who had seen double-digit percentage losses in each of the previous three sessions.

AES' bonds had been taking a licking in recent sessions based on its exposure to the economic problems of Venezuela, which was forced to let its currency unit, the bolivar, float against the dollar - with predictable results. Company statements outlining plans for asset sales and capital spending cuts seemed to do little to assuage market concerns, and Moody's Investors Service warned of a possible downgrade in AES' Ba1 senior unsecured debt rating.

But Standard & Poor's, while keeping its ratings on CreditWatch for a possible downgrade (including the BB on its senior unsecured bonds), declared that it "views AES' plans to shore up its liquidity position in the short term and to boost credit quality by divesting riskier assets and growing its cash flow cushion in the longer term as positive for the company's credit."

While AES remains on CreditWatch with negative implications due to pressure on the bolivar and the resulting potential impact on parent-level cash flows, "the successful implementation of AES' plans to boost liquidity would diminish the potential for a downgrade resulting from the Venezuelan situation," S&P said.

Commenting on the sharp slide seen in the company's securities over the previous several sessions, S&P added that it "does not believe that the extent of the measures announced by AES is a sign of panic, and believes that the market's response to recent events has been somewhat overblown."

Calpine Corp., a rival independent power producer subject to many of the same industry dynamics as AES (including the continued investment community fallout from the collapse of Enron Corp.) was also seen higher Thursday. A market watcher saw its bonds up about a point across the board in the lower 70s.

In the telecommunications sphere, Nextel bonds were seen "up a couple of points," he said, quoting the Reston, Va.-based Number-Five U.S. wireless carrier's bellwether 9 3/8% notes due 2009 firming to 59.5 bid from prior levels around 56.5, while its 9½% paper was likewise up three points, at 58.5.

At another desk, Nextel's zero-coupon discount notes due 2008 were likewise quoted up a trey, at 52 bid.

A trader said "we saw a little run-up in Nextel in the morning," after the company announced that it would have to delay its fourth-quarter and 2001 results, pending its determination of how large a charge it would have to take in connection with its NII Holdings international operations. The company said earlier in the week that could be anywhere from $1 billion to $2 billion. But it was able to release numbers for its core domestic business, and these were looking good.

Nextel reported that while its net loss from U.S. operations widened to $188 million from $96 million a year before, EBITDA - earnings before interest, taxes depreciation and amortization, a key bond market measure of a telecom company's cash-flow generation capacity and expected ability to service debt - jumped 29% to $539 million, in line with guidance released earlier in February. Its U.S. revenue total for the quarter rose 23% , to $1.88 billion from $1.53 billion a year earlier, as it added more wireless subscribers than expected - 500,000 domestic subscribers during the quarter, beating the analysts' forecasts of 460,000 to 490,000 new customers.

Looking ahead, Nextel said it expects to add 2 million domestic subscribers in 2002, which would represent a 23% rise from the 2001 full-year total of 8.7 million domestic customers.

The trader saw Nextel's 9 3/8% notes opening around their Wednesday close of 57 bid/58 offered, and then observed them trading as high as 61 bid/62 offered after release of the domestic results and what has been described as a fairly benign conference call with investors and analysts. The bonds came off those highs, but still closed up about two-and-a-half points, he said, at 59.5 bid/60.5 offered. "They seemed to have a little life in them today," he opined.

Going in the other direction, Williams Communications' battered 10 7/8% notes due 2009 lost three points on the session to close at 18.

Another telecom loser was Canadian-based CallNet Enterprises, which on Wednesday had unveiled a restructuring plan which would convert its C$2.6 billion in senior notes into US$377 million of new 10 5/8% secured debt, US$81.9 million in cash, and 80% of the recapitalized company's new equity. Current shareholders would get the rest of the stock.

Although the company said the plan is backed by over half of its note holders and 38% of the shareholders - including, importantly, its partner, Sprint Communications LP - market response to the scheme was tepid; the shares - already worth only half a dollar - fell about 10% in Toronto trading; its 9 3/8% notes due 2009 were heard quoted at 29.4 bid, well down from prior levels around 40, and its 10.80% paper due 2009 fell to 22.75 bid from prior levels around 31.

A plan by Conseco Inc. to take out the rest of its outstanding Conseco Finance bonds, on the other hand, was well-received by the Carmel, Ind.-based insurers' debtholders. Conseco is already tendering for the finance unit's 10.25% notes due June 1, an offer that's scheduled to close on March 1. It announced Thursday that it would also tender to tender for all of the troubled unit's remaining public debt - $167 million of 6.5% notes coming due this Sept. 26, and the $4 million of 6.52% notes due 2003. The 6.5% notes moved up to the 99-par level from the mid-90s, a gain of about six points, Other Conseco issues not being tendered for also gained, its 9% notes due 2006 firming a point to 52 bid/54.5 offered and its 8.5% notes due 2002 firmer at 95 bid/96 offered.

Nominally investment-grade credit Computer Associates - the latest high grade name to run afoul of the financial markets on reported allegations of possible accounting irregularities - continued to sink in Thursday's dealings. The Baa1/BBB+ bonds, which were quoted Wednesday as having widened out about 150 basis points or so to junk-bond-like levels over 600 basis points off comparable Treasuries, "widened out another hundred points" Thursday, a market source said. He saw its 2003 bonds now bid at levels of 750 basis points off the government bonds, while its 2008 paper was 700 basis points over.

Back among the purely junk issues, Charter Communications debt was seen down about two to three points on the session, its 9 5/8% notes dropping to 96.5 bid and its 10¼% paper at 96.5. Its 8 5/8% notes due 2009 lost three points to end at 89.25.

Of the $560 million of new dollar-denominated business that was announced Wednesday in the high yield primary market $275 million had been transacted by Thursday's close. In all the market saw three deals price Thursday for a total of $400 million.

One sell-side observer invoked images of domestic pets, as the source told Prospect News that although the market is indeed seeing new business none of it falls into the "mammoth"-category.

"It's all cats and dogs," this official stated. "They are relatively small deals, not the large repeat issuers that help drive the strength of the market.

"You can only piece together so big of a market from cats and dogs."

This source confided that more formidable new issuance (and here no animals were specified) can be expected from this official's institution, as well as ones nearby. And the source mentioned that Lucent Technologies has been rumored to be heading into the high yield with a sizable deal, and that Adelphia Communications has refinancing requirements, and hence is also expected to show up.

A drive-by deal from Key Energy Services, Inc. - a $100 million add-on to its 8 3/8% senior notes due March 1, 2008 - priced Thursday at 101.50 to yield 8.005%, via sole bookrunning manager Lehman Brothers. Price talk had been 101-101.5 on a deal that, according to one market source, had only been a rumor until Thursday morning.

Memphis, Tenn.-based REIT RFS Partnership LP priced its $125 million of 10-year senior notes at par to yield 9¾% via joint bookrunners Credit Suisse First Boston and Banc of America Securities. It priced "on the tight end" of the 9¾%-10% price talk, a syndicate source said.

In secondary trading, RFS' new bonds were seen having moved up smartly to 102 bid.

And Penn National Gaming, Inc. priced its drive-by deal for $175 million of new eight-year senior subordinated notes Thursday via Bear Stearns & Co. and Merrill Lynch & Co. The notes were priced at a discount of 99.287 to yield 9%, "right in the middle" of the 8 7/8%-9 1/8% price talk, according to a syndicate official.

Penn National Gaming is one of a three gaming credits coming or recently transacted on the high yield.

Mohegan Tribal Gaming Authority priced an upsized offering of $250 million, on Feb. 12.

And on Friday terms are expected on Circus and Eldorado Joint Venture/Silver Legacy Capital Corp. $160 million 10-year mortgage notes (B1/B+), via Banc of America Securities, Dresdner Kleinwort Wasserstein and Merrill Lynch & Co. joint books. Official price talk is 10¼%-10½%.

Louise Rieke, portfolio manager of the Waddell & Reed Advisors High Income Fund, told Prospect News Thursday that two of the gaming credits are of interest to her.

"I bought a little bit of the Mohegan and I'm looking at the Silver Legacy," Rieke said.

"Silver Legacy is a 50-50 joint venture between Mandalay Bay and Eldorado," she continued. "The two joint venture partners are a positive for me. And it's one of the better facilities in the Reno market. Also it's secured so you've got asset protection.

"And according to Silver Legacy their market is 65% drive-in. So they were slightly impacted after 9/11, although not all that much compared to everybody else. It was down 7% or 8% and they're almost back to normal."

Asked what if any changes she perceived in the high yield market, in recent weeks Rieke said that hedge fund activity seems to be having an impact on the market.

"One of the things that has come across to me so far this year is that the hedge funds seem to be driving more of our market in the fact that there is so much volatility," she said

"I don't have any way to prove it but I have to think they're sort of behind it: they short things and just drive them into the ground.

"Maybe it's the direction the credits are supposed to be going. I don't know.

"The hedge funds seem to be the person at the tiller, at the moment."

Reaction to this comment among the sell-side sources Prospect News spoke with Thursday afternoon was mixed.

"The hedge funds do play in the high yield universe," one syndicate official conceded, "But I don't think they have the capital to move the market, really, in one direction or the other."

Another sell-sider seemed to give the theory a little more credence, however.

"The hedge funds definitely are more active in the market right now, just in general," this official said. "The mutual funds and the insurance funds just aren't that active.

"I don't know if that's causing the volatility or if that's driving down some of the issues in the secondary."

In addition to Silver Legacy, the market anticipates receiving terms on Concordia Bus AB's €50 million add-on to its 11% senior subs due Feb. 15, 2010, on the last day of this week. Goldman Sachs & Co. is running the books. Official price talk is 102 area.

Also, New World Restaurant Group is in the market with $155 million of seven-year notes (B3/B-) via Jefferies. A syndicate source told Prospect News that terms are expected to emerge before the end of the week. However, at the close of Thursday's session Prospect News had heard no price talk on the Eatontown, N.J.-based restaurant owner and franchisor's new notes.

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