Rite-Aid all right, but Lucent a loser on sales forecast; United Auto, Entravision upsize new issues

By Paul Deckelman and Paul A. Harris

New York, March 12 - Healthy February same-store sales figures were just what the doctor ordered for pharmacy giant Rite-Aid Corp. Tuesday. But a less-than-robust sales prognosis for Lucent Technologies Inc. sent its bonds and shares reeling.

In the primary, two upsized offerings priced Tuesday from Entravision Communications Corp. and United Auto Group, Inc. for a total of $525 million. Add the Coast Hotels add-on that priced Monday, and at the close of Tuesday's session the primary market had seen $625 million price week-to-date with three days remaining.

"With $1.1 billion coming last week, and a bunch of these deals getting good execution - especially in the broadcasting sector - everybody's starting to pour it on," one syndicate official commented.

Speaking of the broadcasting sector, Hispanic media company Entravision, a first-time issuer, priced $225 million of senior subordinated notes in a deal upsized from $200 million. UBS Warburg reportedly made its debut as a lead manager in the media sector with this transaction.

The real news, however, is that Entravision priced at par to yield 8 1/8%. Hence it becomes the third single-B credit to price below 8 3/8% in the past seven days (Sinclair, B2/B, yielded 8% on March 6, and Coast Hotels, B2/B, yielded 8.266% on Monday).

Asked if an improving economy could tighten high-yield spreads even further, an official from the Entravision syndicate expressed doubt.

"It can't go on like this for a long time. I mean, the 10-year's at 531," the official said. "You have a lot of mutual funds that pay a dividend that's north of the coupon on some of these deals. So they can't continue to buy this low-yielding paper."

Also upsized on Tuesday was United Auto Group's $300 million 10-year senior subordinated notes (B3/B), increased from $225 million. The deal priced via joint bookrunners Banc of America Securities and JP Morgan at par to yield 9 5/8%, on the "tight end" of the 9 5/8%-9 7/8% price talk.

Philippine wireless company Globe Telecom rang in with a new offering, Tuesday, of $175 million of 10-year senior notes via Salomon Smith Barney. The deal is set to hit the road on Monday, with stops in Asia, Europe and the U.S.

Another sell-side official who spoke Tuesday with Prospect News pointed to a pair of deals - Steel Dynamics and Von Hoffman - that remain on the forward calendar for business that figures to price during the week of March 11.

Remarking that both are single-B credits, from sectors that "haven't performed that great," the official commented: "If those deals can get done, that's a sign of strength in the market.

"The big question that's on everybody's mind is what are first quarter earnings going to look like," this sell-side source added. "I think the high yield market will continue to do well until people get a better feeling for what those numbers are.

"If the numbers are strong, the market continues to roar. If not, then everything starts falling, and it will be selective issuers getting done, instead of the masses."

Back in the secondary, Rite Aid's bonds and shares got a shot in the arm from the news that the Camp Hill, Pa.-based drugstore chain - third-biggest in the U.S. - reported a 9.2% gain in same-store sales (i.e., sales at stores open for at least a year, considered a key measure of a retailer's performance), in the five weeks ended March 2.

Rite Aid said pharmacy sales were up 12% in the period, while non-pharmacy revenues were up 4.9%. Total sales for the month, including those of stores open less than a year, rose 7.4% to $1.54 billion.

Rite Aid debt was "definitely up points on the day across the board," a trader said, quoting its 7 5/8% notes due 2005 going out at 81 bid/83 offered, well up from 73 bid/75 offered at the opening.

Rite Aid shares were up 39 cents (11.71%) in New York Stock Exchange trading, to $3.72. Volume of 10.3 million shares was somewhat above the usual turnover.

Also in the retailing sphere, Kmart "had some life to it," the trader said, quoting the troubled Troy, Mich.-based discount store chain operator's 8 3/8% notes due 2022 as having risen to about 44 bid, up from bid levels in the 41-3 area previously. That follows by a day a massive management shakeup which saw the blue light flicker out for Chief Executive Officer Charles C. Conway, who resigned after reportedly losing the confidence of his board of directors; Conway's post was assumed by turnaround specialist James Adamson, who in January had already supplanted Conway as chairman. Kmart announced the appointment of several other senior executives, presumably hand-picked by Adamson to help him lead the company out of Chapter 11. Kmart's beleaguered shares meanwhile rose 14 cents (9.66%) to $1.59 in NYSE dealings. Volume of 41.1 million shares was about one-and-a-half times the usual activity level.

On a related note, Fleming Cos. bonds "still seem strong," the trader said, quoting the 10½% notes due 2004 of the Dallas-based wholesale grocery distributor as having risen a point to 101.5 bid/103.5 offered. Its 10 5/8% notes due 2007 were likewise up a point to 99. Fleming supplies Kmart's 2,114 stores with grocery items, and said that it expects earnings to be down 20 cents a share this year because of its exposure to Kmart, its largest customer. However, Fleming said its overall earnings would rise, despite the Kmart problems.

Lucent Technologies had no such good news for its investors, warning that due to the slowdown afflicting the whole telecommunications industry, it now expects second-quarter sales to be up a "modest-to-10% improvement" on a sequential basis, not counting its optical fiber unit, down from the previously predicted 10%-to-15% gain in the top line.

Lucent also cautioned that "this ongoing uncertainty in the service provider market will most likely cause Lucent's return to profitability and positive cash flow to slip into fiscal year 2003," a delay from the projected return to profitability in the current fiscal year.

Also delayed, the Murray Hill, N.J.-based telecommunications operator said, would be the planned completion of the spin-off of its Agere Systems Inc. Telecom chip-making unit, since Lucent will not be able to use the results from its second fiscal quarter to meet the EBITDA performance condition, as defined under the company's credit facility, necessary to complete the spinoff of Agere (EBITDA - earnings before interest, taxes, depreciation and amortization, is considered a key bond market measure of a company's cash flow generation capacity and potential ability to service debt). Lucent said it "still remains fully committed to completing the spin-off as soon as possible and believes it is likely that it will be able to use the results from the third fiscal quarter to meet the condition.

Lucent bonds "got whacked," a trader said, quoting its longer-dated debentures as having fallen as low as a wide 57 bid/67 offered in morning dealings before tightening up later in the session to end at 64.5 bid/65.5 offered - still down about two to three points on the session from prior levels in the upper 60s.

At another desk, Lucent's 7¼% notes due 2006 were heard having fallen as low as around 82 bid from prior levels at 85, while its 6.45% debentures due 2029 dropped to 65 bid from around 67. Lucent shares meanwhile dropped 61 cents (9.74%) to $5.65 on heavy NYSE volume of 72 million shares, more than three times the daily average.

Bond and shareholders weren't the only ones dismayed by Lucent's announcement; Standard & Poor's cut Lucent's corporate credit one notch to B+ from BB- previously, cautioning that "any cost-reduction actions necessary to adjust to evolving market conditions are expected to be more modest in scope than the actions taken last year and will be disclosed concurrent with March earnings. While Lucent has reduced its costs by billions of dollars annually, depressed revenues and a weaker-than-anticipated product mix have continued to impede its return to profitability."

Moody's Investors Service meantime put the company's Ba3 senior unsecured rating and B3 preferred stock rating on review for a possible downgrade, citing "continued deterioration in telecom carrier capital spending plans, which will likely have a material impact on Lucent's operating performance. As a result, Lucent's already weak operating performance may deteriorate further."

Later in the day, Lucent moved to reassure investors about its liquidity situation, announcing plans to sell $1.5 billion in convertible notes in a private placement. Assuming the sale goes through, it would be Lucent's second trip to the well in seven months, following its $1.89 billion convertible sale last August.

Also in the telecommunications world, Nextel Communications Inc. Made a presentation at Merrill Lynch's Global Communications conference in New York, at which company executives reiterated previously issued 2002 guidance, including projected EBITDA of $2.5 billion and $2.3 billion of capital expenditures. Further, Nextel said it is not in any danger of default under its bank covenants and has ample flexibility - no small matter in the sagging telecom world. And it reiterated that it is not liable for the debts of its troubled Nextel International subsidiary, and won't provide it with more than $250 million in funding. Nextel's benchmark 9 3/8% senior notes due 2009 were seen up half a point in the 69.5-70 bid area.

News that investment-grade telecom carriers Qwest Communications and WorldCom Group are both under scrutiny by the Securities and Exchange Commission caused the bonds of both companies to widen out by about 60 basis points Tuesday, a market source said. The federal regulators made requests to both WorldCom, the Clinton, Miss.-based No. 2 U.S. long-distance carrier and to Denver-based Qwest, the No. 4 provider of regional and local phone service, for internal documents relating to their accounting practices. In recent weeks, accounting and liquidity concerns have caused the bonds of Qwest, WorldCom and several other nominally investment-grade companies to sometimes trade down to levels which have drawn some passing interest from junk investors trying to handicap the next possible fallen angel credit, although none of those comapnies ha ve crossed that threshold yet.

WorldCom's 7.5% notes due 2011were heard having widened out to bid levels 375 basis points over the comparable Treasury paper. Qwest's 8.875% notes were 385 basis points off Treasuries.

Back on the junk side of the ledger, Calpine Corp. moved to shore up its liquidity position by pledging its North American natural gas assets and several power plants, collectively worth some $3.2 billion, as collateral for about $2 billion of loans. The San Jose, Calif.-based independent power producer had predicted weeks ago that it would finish lining up its financing by the end of January, but was unable meet that initial deadline for various reasons; the delay, in turn, has recently caused some nervousness among stock and bond investors.

News that Calpine would secure the loans, and would also cut capital spending by about $3 billion over two years by cancelling plans to buy 115 turbines for power production pushed the company's senior bonds, such as its 8 5/8% notes due 2010, up as high as 81.5 bid, a trader said, but the bonds dropped back to close at around 77 bid/78 offered, down a point-and-a-half on the session.

S&P, meantime, said it might consider a ratings downgrade and expressed skepticism about the Calpine loan maneuver, cautioning that while it might improve Calpine's short-term liquidity position," the additional debt will likely increase interest expense ... and limit financial flexibility."

Elsewhere, Tricon Global Restaurants Inc. - the operator of the Taco Bell, Pizza Hut and KFC fast-food chains - announced plans to expand by purchasing the Long John Silver's fried fish chain and the A&W fast-food operation for $320 million in cash. But little movement was seen Tuesday in its bonds, with its 8 7/8% notes holding steady at 108.25 bid/109.25 offered, and its 7.45% paper hanging in at 102.25 bid/103.25 offered, both unchanged on the session.

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