MCI modestly higher on Verizon merger news; Aero Invest bringing new euro floater deal

By Paul Deckelman and Paul A. Harris

New York, Feb. 14 - MCI Inc. bonds were up - slightly, to be sure - on the news Monday that the Ashburn, Va.-based long-distance telecommunications company will be acquired by Verizon Communications Inc. in a $6.75 billion deal. Verizon will assume MCI's net debt of about $4 billion as part of the arrangement.

In primary market activity, Aero Invest was heard by sources to be quickly shopping an issue of 10-year floating-rate securities. Focus Wickes was also heard getting ready to sell an issue of new bonds, with proceeds expected to go for debt refinancing.

MCI's 8.735% notes due 2014 were being quoted up about half a point on the session at bid levels anywhere from 114.25 to 114.75, depending on whom you spoke to. That's a relatively small gain, especially given the news announced Monday morning (see related story elsewhere in this issue).

However, a trader noted that those bonds - which had been trading at bid levels around 103-104 not even two weeks ago - had already enjoyed their run up of more than 10 points, pushed higher by recent speculation that either Verizon or rival regional Bell operating company Qwest Communications International might buy MCI, the second-largest U.S. long-distance operator. That speculation started after MCI's bigger rival, AT&T Corp., was reported in merger talks with yet another RBOC, SBC Communications Inc. Those talks culminated with SBC agreeing to buy out "Ma Bell," - the former corporate parent of all the RBOC companies - for $16 billion.

"MCI was rather quiet despite the news," the trader said. "All the merger activity was already priced into the market, and there was no movement today [Monday]."

MCI's other two bond issues - which had really not moved much at all in the previous sessions, while the 8.735s were climbing - were likewise little changed Monday, with a market source quoting the 7.688% notes due 2009 up a quarter-point at 106, and the 6.908% notes due 2007 higher by 1/8 point at 102.625.

The source did see movement in Qwest's bonds, which were lower across the board, even though the Denver-based RBOC will apparently not be buying MCI.

Normally, debt investors are leery of merger deals which come with large price tags - particularly investors of companies that already have too much debt, like Qwest does. Losing out on a costly acquisition like MCI would thus seem to be a blessing in the eyes of debt holders - but in this case, the debt holders were probably sobered by the realization that losing MCI puts Qwest further behind the 8-ball relative to its bigger RBOC rivals like Verizon, SBC and BellSouth Corp. The thought was that with MCI along, Qwest would have generated sufficient free cash flow to allow it to pay down some of its $17 billion of debt. But now, it appears that is not going to happen since MCI chose Verizon, even though Qwest's reportedly revised $7.3 billion final offer was half a billion dollars more than Verizon's.

On the conference call announcing the MCI-Verizon merger plans, the latter's chairman and chief executive officer, Ivan Seidenberg, indicated that he was not worried about the possibility of Qwest again upping its bid for MCI in an effort to derail the merger. He described the $200 million breakup fee that a successful acquirer other than Verizon would be forced to pay as helping to "keep the bar high."

As a mark of market disappointment with Qwest's MCI-less future prospects, its bonds "fell about a dollar [per $100 face value] today," a source said. He saw Qwest's 7½% notes due 2014, 7 5/8% notes due 2021 and 6 78% notes due 2021 each down a point on the session, at 102 bid, 91 bid, and 84 bid, respectively.

Some Qwest bonds did even worse than that, with its 7¼% notes due 2011falling 1¼ points to 97 bid, while its 7% notes due 2009 were at 96.75, down 1¾ points on the session.

Hollywood Entertainment higher

Elsewhere in the secondary arena, Hollywood Entertainment Corp.'s bonds were seen better even as one would-be acquirer, The Movie Gallery Inc., said that its acquisition offer for Wilsonville, Ore.-based Hollywood, the second largest U.S. video rental chain, had survived the federally mandated Hart-Scott-Rodino Act waiting period without any challenge from government anti-trust regulators and could now proceed. Hollywood has accepted the $850 million offer from Movie Gallery, of Dothan, Ala., the Number-3 movie rental chain, while rejecting a hostile takeover from the top player in the industry, Blockbuster Inc.

Meanwhile, Monday's editions of The Wall Street Journal reported that the Federal Trade Commission is leery of the anti-trust implications of Blockbuster's $991.6 million offer and has been hiring economic experts and taking sworn depositions from Blockbuster executives - steps seen as a precursor to a possible FTC challenge of the Blockbuster bid, although no decision has officially been reached by the government agency yet.

Hollywood's 9 5/8% notes due 2011 were seen up ¾ point on the Movie Gallery news to 113.375. Blockbuster's 9% notes due 2012 were a quarter-point better at 98.75.

AK Steel gains as Moody's upgrades

AK Steel Holding Corp.'s bonds were seen better on the session as Moody's Investors Service upped its ratings on the Middletown, Ohio-based steelmaker's debt.

AK's 7¾% notes due 2012 were up half a point at 103.875, while its 7 7/8% notes due 2009 were a quarter-point better at 103.25.

The agency upgraded AK's senior implied debt rating to B1 from B2, and raised the company's senior unsecured issuer ratings to B1 from B3, citing the company's improved operating performance and cash flow.

Cenveo mixed on earnings

On the earnings front, Cenveo Inc. - the former Mail-Well Inc. - announced that it had a fourth-quarter loss of $3.6 million (eight cents per share), a deterioration from its year-earlier profit of $2.5 million (five cents a share). The Denver-based envelope maker and commercial printer cited rising paper costs as a key factor.

However, the company said that it was making progress on the debt front. While total debt at year-end was $770 million - virtually unchanged from the previous quarter and $21 million above year-ago levels - company chief financial officer Michel Salbaing noted on the company's conference call that the company "took advantage of favorable bond market costs" earlier in the year to take out its $300 million of old Mail-Well 8¾% notes due 2008 and replace them with $320 million of new 7 7/8% notes due 2013.

The additional debt covered the redemption premium on the old notes and issuance cost on the new, and led to slightly higher interest costs, despite the lower average borrowing rate.

By doing so, the CFO noted, the company has "no significant maturities before 2012," when its 9 5/8% notes are to mature, since he said that "we expect there to be no amounts outstanding on our [revolving credit agreement] when it matures in 2008.

There was a $78 million year-end balance on the revolver. Salbaing said that the company expected to generate at least $35 million of free cash flow - and possibly even as much as $50 million - and would use that to pay down debt.

He further noted that 87% of the company's debt is fixed-rate, so Cenveo is "not vulnerable' to a rising interest rate environment like some other companies might be. And if anything, he said, its exposure to interest rate rises would be lowered still further as free cash flow is used to pay down the revolver borrowings.

A market source quoted Cenveo's 7 7/8% notes down a point at 89, while its 9 5/8s were unchanged at 108. At another desk though, the 7 7/8s went home quoted at 90, up half a point on the day.

Primary quiet

Valentine's Day was anything but hearty in the junk bond primary market, as no issues were priced.

Among the paucity of news items, the preponderance emerged from Europe where Aero Invest 1 SA, formerly FiatAvio, showed up with a €350 million floating-rate PIK note deal that it expects to price on Tuesday.

And British home improvement retail owner and operator Focus (Finance) plc, formerly Focus Wickes Group, was heard to be coming with a bond deal of unspecified size to refinance debt.

Focusing on March 15

As was true late last week, the sell-side, when quizzed on Monday about the anemic forward new issue calendar, pointed to the March 15 deadline for many companies to file annual reports with the U.S. Securities and Exchange Commission in order to comply with Sarbanes-Oxley legislation.

"There are still deals to be done, and a lot of them are being held up by Sarbanes-Oxley," one investment banker asserted on Monday.

"And a lot of the deals in the pipeline are also part of larger financings, and are dependent upon other transactions to flow through," the source added.

"But there is no reason for companies to announce right now. You just can't get the companies to sign off on earnings during this blackout period. They're basically waiting until their earnings are no longer stale.

"We started to run into this in late January and early February, but we were able to work around it.

"Now, as we get closer, the companies are losing interest."

Top of the market?

Elsewhere on the sell-side, however, another high yield syndicate official pointed to the quartet of junk deals expected to price during the present week, and wondered where the market could go from here.

"The market right now seems to be dominated by dividend deals, and that may not be a good thing," said the source.

Indeed, each of the four deals expected to price during the Feb. 14 week lists equity-related distributions among the uses of proceeds.

"Usually that means you are at the tip-top of the market," the sell-sider added.

"There really is a severe lack of investment opportunities out there," the source specified. "But we already had one bankruptcy (Tower Automotive). And it looks like Winn-Dixie is on its way to the bankruptcy court.

"Once you start seeing that kind of thing it's not good for high yield, where people really tend to play the 'low-default' scenario.

"I'm not saying that defaults are going to jump dramatically. And as long as they stay between 2% and 3%, high yield is still a relatively attractive asset class.

"After all, there aren't that many places where you can clip a 7% coupon."

Aero Invest talks PIK at Euribor+850

The only truly solid news on Monday came from Aero Invest 1 SA (Avio). The company, formerly FiatAvio, was acquired in July 2003 by the Carlyle Group which has a 70% stake and by Finmeccanica which has a 30% stake.

Avio plans to price a €350 million offering of 10-year senior floating-rate PIK notes, which it has talked at Euribor plus 850 basis points, on Tuesday.

Goldman Sachs & Co. has the books.

Proceeds will be used to repay debt and fund a shareholder distribution.

Beyond Avio, three deals are expected to price during the current week.

Bear Creek Corp. (Harry and David) are in the market with $245 million in two tranches (B3/B-) via UBS Investment Bank and Banc of America Securities. Proceeds will be used to pay a dividend to sponsor Wasserstein & Co., and to repay debt.

CPI Holdco Inc. carried its roadshow for $80 million of senior floating-rate cash or PIK notes due 2015 (Caa1/B-), also via UBS, into the present week because of an illness on the management team. Proceeds will be used to fund a distribution to shareholders.

And FPL Energy National Wind Portfolio LLC is expected to market its $100 million of senior secured bonds due March 25, 2019 (Ba2) to investors today. Credit Suisse First Boston is the bookrunner. Another FPL subsidiary, FPL Energy National Wind LLC, is concurrently in the market with an investment grade $351 million offering of senior secured bonds due 2024 (Baa3). Proceeds from both issues will be used to fund required reserves and return about $435 million to FPL Energy LLC, the indirect parent of both issuers.

Focus Wickes to take out mezzanine notes

Elsewhere during Monday's news-starved session, Focus (Finance) plc, formerly Focus Wickes Group, was heard to be headed into the high-yield market with new bonds, although the size of the deal, its timing and its syndicate remain to be determined.

Proceeds will be used to take out two issues of mezzanine notes that were sold in 2003 via ING.

From the shadows

Finally on Valentine's Day, with little else to talk about, primary market sources looked beyond this coming Friday, which at Monday's close appeared to be a kind of junk bond event horizon, with no deals known to be in the market.

However there are names that sources expect to step from out of the shadows and possibly bring deals during the week beginning Feb. 21.

Rural/Metro Corp. is one, according to a market source. The Scottsdale, Ariz., ambulance company plans to sell $190 million in two tranches: $140 million of 10-year senior subordinated notes (Caa1/CCC+) and $50 million proceeds of 11-year senior discount notes (Caa2/CCC+). Citigroup has the books.

Elsewhere Stile Acquisition Corp./Masonite International Corp.'s $825 million of bonds in two tranches (B-) could show up next week, according to a market source. Deutsche Bank Securities, UBS Investment Bank and Bank of Nova Scotia have committed to provide the debt financing.

And finally Exide Technologies' $350 million of eight-year senior notes is expected to be the business of the week of Feb. 21.

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