Charter down on 3Q numbers; UAL flies on debt pact; Owens Brockway prices upsized deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 5 - Charter Communications Holdings LLC bonds moved lower Tuesday, after the St. Louis-based cable operator reported a mixed bag of results for the third quarter. On the upside, United Airlines bonds took wing on the news that the troubled air carrier had reached agreement with one of its banks on refinancing $500 million of debt, buying UAL some time as it struggles to avoid a threatened bankruptcy filing.

In the primary market, Owens-Brockway Glass Container Inc. sold an upsized offering of 10-year notes and priced it at the tight end of talk.

Tuesday also produced terms from an emerging markets deal from Ukrainian wireless firm Kyivstar GSM.

And one new deal surfaced late in the session from engine-maker Cummins Inc.

Owens-Brockway's offering was upsized to $450 million from $300 million. The 10-year senior secured notes (B2/BB) priced at par to yield 8¾%, at the tight end of the 8¾%-8 7/8% price talk. Salomon Smith Barney, Banc of America Securities and Deutsche Bank Securities Inc. were joint bookrunners.

In the wake of the transaction, John Puchalla and Jessica Walker, analysts with Moody's Investors Service, noted the upsizing in a report and commented: "If upward revisions to high yield bond offerings increase in frequency, U.S. economic forecasts might be ratcheted higher. Economic activity suffers in part from an increase in risk aversion. A recovery in speculative-grade bond sales or significant narrowing of high yield spreads would be good indicators that the appetite for risk was growing."

The report went on to state that the 467 basis point spread on the Owens-Brockway notes was above the 420 basis points average for 18 comparably rated 10-year bonds sold thus far in 2002 but the 8¾% yield was below the 9.29% average on those earlier issues.

Still, October's $2.1 billion of US corporate high yield bond sales fell short of September's $2.4 billion, the Moody's analysts commented. High-yield bond sales have not improved much from the weak $1.3 billion monthly average for July-August. "Speculative-grade bond issuance will need to strengthen to something much closer to the $8 billion monthly average of 2002's first half to ease the refinancing risks of lower-rated borrowers."

When the new Owens-Brockway bonds were freed for secondary dealings, they were heard to have firmed to 100.5 bid/101 offered from their original par issue price. By the end of the session, however, the bonds had come slightly down from those heights, ending at 100.5 bid/100.75 offered.

Elsewhere Tuesday terms also emerged on an emerging markets deal from Ukrainian GSM mobile network operator Kyivstar. The company priced $100 million of three-year loan participation notes (B2/B-) at par to yield 12¾% via Dresdner Kleinwort Wasserstein as the lead.

Finally, late Tuesday a syndicate source told Prospect News that the roadshow starts Thursday for Cummins Inc.'s $200 million of eight-year senior notes (Ba1/BB+). Salomon Smith Barney and JP Morgan are joint bookrunners on the Columbus, Ind. engine-maker's new deal. The roadshow wraps up on Nov. 15.

Back among existing issues, Charter bonds were initially heard by some market sources to have firmed in the early going after the company issued third-quarter earnings data. But by the end of the session, those bonds had moved into negative territory.

A trader quoted its 8 5/8% notes due 2009 - which had closed Monday's dealings around the 47-48 bid level - as having opened down several points at 43 bid/44 offered, and then having retreated to 41.75 bid, before firming off the lows to come back to the 43 bid/44 offered area.

Charter shares meantime dropped 27 cents (18.62%) to $1.18 in busy Nasdaq trading of 21.9 million shares, three times the norm.

Charter reported higher third- quarter operating cash flow and revenue - but it also said that it might need to adjust past tax expenses tied to purchases it made in 1999.

Charter said that its operating cash flow rose to $496.9 million on revenue of $1.18 billion, an 8.7% increase from year-ago cash flow of $457.2 million. Revenues were up 12.6% from $1.05 billion a year earlier. The operating cash flow and revenue increases were in line with recently lowered guidance.

But some observers were not impressed. Robert V. Green of the Briefing.com Internet investment advisory site, for instance, wrote in a research note that Charter's earnings release "is reminiscent of the bubble era - they publish all the good information - and conveniently overlook the important information."

Green urged investors to "forget stuff like new digital subscribers signed up (226,000 - about 75,000 a month) - forget 'homes passed numbers' (does that remind you of @Home, or what?) - forget everything except interest payments and debt levels and capital expenditures."

The bottom line, he continued, is "whether they can make their interest payments long term."

With Charter having some $17 billion of outstanding debt, he said, "the total debt is swamping this company. Charter's press release highlights operating cash flow of $496 million, but who cares? After you take out capital expenditures of $584 million and then cash interest payments of $161 million you get negative cash flow of ($267) million."

While that is an improvement from last quarter's negative cash flow of $553 million, Green wrote, "it is still in the wrong direction. For more than 2 years Charter has been averaging between $500 and $600 million per quarter in borrowing to finance its cash flow. You can't do this forever. The question is how long can Charter do it? We predict less than six months more - a debt restructuring is virtually inevitable - because they will never grow their way out of this debt hole."

Green noted that to reach positive cash flow, Charter "would need to close the gap between capital expenditures and interest payments by about $300 million. They won't get it by increasing operating profits - the best projection that was made was 8% over prior year results - that gets them to only about $505 million - only $9 million over this quarter. That leaves $291 million to come from either lower capital expenditures or lower interest payments. Interest never declines - so can capital expenditures be reduced by $291 million per quarter? That would cut them by more than 50% - a trend not shown by any cable company - and certainly not shown by Charter."

While Charter reported revenues and cash-flow on Tuesday, it did not release any bottom line earnings figures; it instead said that it will report earnings when it files quarterly results with the Securities and Exchange Commission.

Charter also said that it might adjust past tax expenses related to acquisitions made in 1999.

While Charter's bonds were going backwards, Cablevision bonds continued to hover in the high 80s, after having pushed up to those lofty levels on Monday on the news that the Woodbury, N.Y.-based cable systems operator had agreed to sell its 80% stake in the Bravo! cable channel to General Electric Co.'s NBC unit, taking back its own shares held by NBC and getting the additional portion of the purchase price in GE shares.

Also in that sector, Mediacom LLC bonds were seen as having firmed, in fairly active trading. Its 9½% notes due 2013 were about three points higher, at 79.5 bid, while its 8½% notes were likewise up, at 80.5 bid.

A trader saw Canadian-based telecom operator Telus' debt as better, with its 7½% notes due 2007 at 89 bid and its 8% notes due 2011 at 86.

Telecom market bellwether Nextel Communications Inc. bonds were seen essentially unchanged, with its 9 3/8% senior notes due 2009 at 86 bid/87 offered and its 9¾% notes at 86.5 bid/87.5 offered.

Outside the communications sphere, United Airlines debt continued to get a lift. The troubled Number-Two U.S. air carrier's bonds had firmed Friday on market buzz that it had made the scheduled Nov. 1 debt payment on its 10.67% notes due 2004, and again on Monday on the news that UAL and its pilots' union had come to agreement on five years worth of wage concessions from the union totaling $2.2 billion.

That rise continued Tuesday, with UAL reporting late in the session that it had struck a deal with one of its lenders to refinance $500 million of debt coming due this month and next (see related story elsewhere in this issue).

UAL's bonds "were flying after the news" quipped a trader who quoted its 9 1/8% notes due 2012 six points higher, at 25 bid/27 offered, while its 10.67% notes due 2004 rose five points to 30 bid/32 offered.

Northwest Airlines 7 7/8% notes due 2008 also gained altitude, up a point-and-a-half to close at 43.5 bid.

Back on the ground, the trader opined that "there seems to be a good bid on a lot of paper."

Retail names such Saks, Gap Stores and Dillard's Department Stores "seem to be strong. Revlon paper is a little beat up right now. Food processors, such as Dean Foods, seem to show some activity."

With the high-yield market having a generally firmer tone, investors, he said "are looking for paper - it's just more difficult to find some of that stuff right now." Another name in demand he saw was Yum! Brands; "there seem to be some people looking to that people as well."

Another trader was seeing supermarket paper better, quoting Stater Brothers 12¾% notes left bid at 102 with no offers, and saw Winn Dixie Stores' 8 7/8% notes due 2008 hanging in at 101 bid/102 offered; the regional supermarket chain's paper had firmed to that level on Monday from prior levels around 97 bid/98 offered. The trader also saw Fleming Cos. bonds holding in the mid-to-upper 80s, in the 87.5 bid/89.5 offered area.

Even the badly battered bonds of bankrupt Enron Corp. were better, he said, quoting the failed Houston-based energy trader's paper - all of which trades on top of one another at the same level as the company restructures, regardless of coupon or maturity - as having pushed up to 12 bid from previous levels around 10.5 bid/11 offered.

Bonds of homebuilders appeared to have a solid foundation Tuesday, with Standard Pacific Corp.'s 9¼% notes due 2012 quoted as much as 6 points better, at 97 bid. Toll Brothers' 8% notes due 2009 were two points better, at 98.5 bid, while Ryland Corp.'s 9¾% notes due 2010 were more than two points better at 109 bid and MDC Holdings' 8 3/8% notes were 2½ points up, at 102.5 bid.

OM Group Inc. suspended its stock dividend and announced that it had hired Credit Suisse First Boston Corp. as a financial consultant as the Cleveland-based specialty chemicals maker restructures.

However, its 9¼% notes due 2011 - which last week swooned down to the mid 30s from original levels in the upper 80s after the company posted a sizable third-quarter loss and warned that its prospects wouldn't be much better in the forth quarter - remained unchanged around 36 bid.

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