Enron soap opera continues to hold junk market interest; XO lower

By Paul Deckelman and Paul A. Harris

New York, Nov. 8 - The high yield market continued to follow the ups and downs - literally - of embattled energy seller Enron Corp. on Thursday, watching the almost-junker's bonds bounce around as it first acknowledged that it was in talks with rival Dynergy Inc. which could lead to a big (and badly needed) cash infusion or even a merger, but then announced that it would have to restate its results for the past four years and all of this year so far as well.

The result, a trader said, was that the Houston-based energy marketer's bonds (nominally still investment grade rated at Baa2/BBB but recently trading in dollar values, like junk bonds and considered likely to become fallen angels soon) "were all over the place." In the primary market, Land O'Lakes Inc. increased its offering to $350 million from a planned $300 million and price to yield 8¾%, the tight end of talk of 8¾% to 9%. Bookrunner was J.P. Morgan.

Enron and Dynergy confirmed that they were in talks, but declined to offer much information otherwise.

However the prospect that the liquidity-challenged company may have found a savior in the considerably smaller Dynergy - and/or in Dynergy's deep-pocketed backer, oil major Chevron Texaco - initially helped boost the bonds for a second straight session, particularly as The New York Times reported that the board of Dynergy had tentatively agreed to acquire the once-mighty Enron at the fire-sale price of $8 billion in stock, or about $10 per share. Less than a year ago, the company's market value was estimated at nearly $70 billion. As part of the reported deal, Chevron Texaco, which owns 27% of Dynergy, would front Enron at $1.5 billion in cash immediately, with another $1 billion waiting till the deal closed.

Enron's 6½% bonds due 2002, a typical issue, initially "had raced up" levels as high as 87 bid/90 offered on the early positive news, a trader said, noting that the issue had closed around 81 bid on Wednesday and had been trading water before that in the mid-60s.

But then, he said, "after they sat there for a few minutes, and that was all over, people just hit the bids," and the bonds started to drift back downward, suggesting that the quick, strong upside may have come from people covering shorts in the credit. As the bonds were giving back those hefty early gains, news hit the tape that Enron had told the Securities and Exchange Commission that it its earnings reports for 1997 through 2000, plus the first three quarters of this year "should not be relied upon" and would have to be restated. It also announced that it had fired its treasurer and general counsel in the wake of the snafu, which revolved around a failure to include three unconsolidated entities - i.e., outside businesses run by Enron officials during that period - in the company's consolidated results, effectively meaning that Enron had overstated its earnings and understated its debt for the period in question.

The problems are the latest in a string of troubles for the company which were initially disclosed last month, leading to the ouster of the former CFO, Andrew Fastow and a formal investigation by the SEC, triggering a slide in both its stock and bond prices.

By mid-afternoon, the trader said, Enron's bonds had fallen back around 10 points from their early highs to around 78 bid/82; then by the close, they had partially recovered to bid levels "in the 80-84 context. Talk about getting whipsawed."

Apart from Enron's roller coaster-like action, the overall junk market on Thursday "ran like a fleeing bandit on the equity rally, with prices up about a point-and-a half across pretty much across the board, a trader said.

The market was "very, very strong" initially, he continued, although late in the day, "equities pulled back. High yield pulled back, but didn't really trade down."

"The last couple of days, the market has been pretty strong," a second trader agreed. "You had AMG inflows (for a third consecutive week) and then it's been running. It ran a little bit this morning, but then just kind of tapered off a little bit. I don't know if it's ahead of a three-day weekend or what (The Bond Market Association has recommended a 2 p.m. ET close on Friday ahead of the Veterans' Day holiday, which will shutter the debt markets - though not stock trading - on Monday). It seems like the guys lifted offerings, but then they weren't there any more."

Turning to specific issues, Nextel paper "was certainly stronger," getting as high as 75 bid, the trader said. Another trader, though said that the bonds, such as its benchmark 9 5/8% notes due 2009 had pushed as high as 77 during the session, "but at the end of the day, I could have bought them at 75.5, which is only marginally better. They were up a point on the session - but at one point, it was up much more than that."

XO Communications Inc.'s 10 ¾% notes due 2009 were heard offered at 17.5, with a "small odd lot" bid as low as 14.75, a trader said, down from Wednesday's level around 16 bid/18.5 offered. The Reston, Va.-based telecommunications operator had some positive news for the market Thursday, posting a substantially narrower third-quarter loss ($22 million/12 cents per share vs. $394.2 million/$1.20 a year ago) after it posted a $712.6 million net gain from repurchasing preferred stock and senior notes at lower prices. Without that gain and other unusual items, the loss would have ballooned to $734.7 million in the latest quarter.

But on a conference call, company executives chose not to provide sales estimates for the fourth quarter, citing continued economic uncertainty. That lack of guidance and concerns about what it called XO's "weakened liquidity position" caused Standard & Poor's to drop its rating on the company's bonds to CCC- from CCC earlier, while its corporate credit was downgraded to CCC+ from B-.

XO also said that it had retained the investment bank of Houlihan Lokey Howard and Zukin to help the company find potential investors and possibly restructure its balance sheet.

Also in the telecommunications sphere, Global Crossing announced that it has been chosen by Computer Sciences Corp. to manage and provide telecommunication services for CSC's global wide-area data and voice network in a 12-year contract valued at $700 million.

A trader saw its 9½% notes were heard bid late in the day at levels around 14.25-14.75, up from levels around 12 which the bonds had held the past two sessions, after having been beaten down on news that its proposed merger with its Asia Global Crossing affiliate was off. Another trader pegged the 9½% notes at 14 and the company's 8.70% notes at 13, both up a point.

He said he had heard that Asia Global Crossing, the 59%-owned Asian unit of the parent company, had a conference call which "went better than expected, so the bonds rallied."

However, he said, "keep in mind that the coupon payment is due next week (Nov. 15). That's the magic date, and a lot of questions about the company will be answered when - and if - they make that coupon payment."

American Tower Corp. bonds were on the rebound for a second consecutive session, its 9 3/8% notes due 2009 up four points on the day to 79 bid, almost where they had been prior to Tuesday, when the bonds had slid as low as 72 bid on news that the Boston-based communications antenna tower company had posted a wider-than-expected third-quarter loss and saw more of the same ahead for the fourth quarter.

In addition to the Land O'Lakes pricing, Thursday's primary market saw price talk of 10 5/8%-10 7/8% emerge on the week's last announced new issuance: ResCare $150 million of seven-year notes (B2/B), set to price Friday.

One sell-side source, who is not a participant in the ResCare deal, took note of this offering and termed it "a thinking man's credit."

The source said that the Louisville, Ky.-based company, which provides contract services for special needs individuals, is a first-time high-yield issuer, and that the success of its pricing could serve as a bellwether of the present high yield primary market.

"Here's a B2/B credit that's a bit of a story because there isn't anything to readily compare it to," the source said.

"If a company like ResCare, which is a good company, comes to market and gets done at the tight end of talk, it will show that the market is healthy."

Also Thursday, Resolution Performance Products LLC priced a $75 million add-on to its 13½% notes due Nov. 15, 2010 (B2/B) via Morgan Stanley. The deal priced at 106.971 for a yield of 12%, the tight end of price talk of 12%-12¼%.

End

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