Luscar makes it 3 new deals in 3 days; Global Crossing continues slide

By Paul Deckelman and Paul A. Harris

New York, Oct. 5 - The high-yield market finished the session before the three-day Columbus Day recess with the third new issue pricing in three new issues price in three successive days. And two out of those three were upsized, indicating more vigorous demand than expected, even against the looming economic, political and military uncertainties that continue to unsettle many investors.

In the secondary, Global Crossing Ltd. took a beating for a second consecutive session Friday, traders said, the carnage limited only by the fact that the once high-flying telecom issue's bonds have already surrendered most of their value, and by the fact that not too many participants were in for the abbreviated pre-holiday session (the market followed The Bond Market Association's recommendation for a 2 p.m. ET close ahead of Monday's Columbus Day legal holiday).

Despite the early close, Canadian coal producer Luscar Coal Ltd. managed to sell $275 million senior notes in an offering upsized from the $250 million amount originally announced. Luscar's offering, underwritten by bookrunner Goldman, Sachs & Co., priced to yield 9¾%.

That followed the late Thursday pricing of Fleming Cos.' $150 million add-on to its existing 10 5/8% senior subordinated notes due 2007, which priced to yield 11.25%. The deal, via joint bookrunners Deutsche Banc Alex. Brown, and J.P. Morgan, was also upsized from its original amount, $100 million in this case. Like Luscar, it also came to market at the tight end of price talk.

"It seemed like a pretty healthy transaction," one source close to the deal told Prospect News Friday. "Remember," the source added, "they were only trying to price $100 million."

Characterizing the Fleming bonds as a defensive credit, this sellsider added: "Fleming is a food distributor, it is a very large company, in terms of cash flow. They had a lot of bonds out there, and those bonds traded relatively well."

Asked whether the deal might serve as a reviving force for a market that sat dormant for nearly a month, the sellsider expressed cautious optimism. "I think you'll start to see progressively more deals announced - maybe even next week - and the market start to progressively feel a little better, as long as you don't see another shock to the system, like Sept. 11."

Another trader took a pragmatic view when asked if the Fleming and Luscar deals signaled some rejuvenation in the primary.

"In a market like this I think you have to start with the stuff that can get done," the trader said. "There are a handful of sectors out there that are viewed as fairly recession-resistant: anything that's higher quality in terms of the ratings, anything that's further up in the capital structure. You have to start with those.

"There's a lot of stuff that just can't get done," the trader continued, but added that even for those deals that can get done, there is the question of whether issuers will like the yields on offer.

"Everything's widened out, even if it's the best of the best, since pre-Sept. 11," the trader said. "So of the stuff that can get done, in many cases the issuers don't want to issue at these levels because a lot of these deals are opportunistic."

However, as the primary emerged this week from its long dormancy, with three pricings in as many days, the most widely spoken noun remained "uncertainty." In every conversation, in the course of the week, traders and investors insisted that until the US government takes convincing steps to counteract the terrorism seen in the Sept. 11 attacks, the high yield markets, like the other financial markets, will be struggling with uncertainty.

"This is new ground for all of us," commented Pilgrim High Yield Bond Fund manager Ed Schriver.

"You have the added problem, going forward, of dealing with the fact that we've never had anything like Sept. 11, and we've never had a war like we're going to have," he added. "I don't know whether we get back to business as usual. Sept .11 was a rude awakening."

In the secondary, trading was generally quiet in Friday's shortened session ahead of the holiday weekend - with the big exception of Global Crossing.

"There was not a whole lot of people doing anything," a trader said, "and no big mover except for Global Crossing. The market is treating this company and its debt as though it were going out of business."

The Bermuda-based international telecommunications carrier's bonds were being quoted in the mid-teens Friday; on Thursday, they had fallen to around the low-to-mid 20s from prior levels around 40 bid after the company warned that it expected revenues and cash flow for the just-concluded third quarter to come in well below previous Wall Street projections.

Specifically, Global Crossing had warned that cash revenue in the third quarter ended Sept. 30 would likely total approximately $1.2 billion and recurring adjusted EBITDA would be "significantly less" than $100 million. Analysts had predicted nearly $400 million of EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of a company's cash flow generation and ability to service debt) and revenues of about $1.6 billion.

Global Crossing's announcement was not all gloom and doom - it indicated that it was sitting on a cash cushion of about $2.4 billion, even before any divestitures, and said it would sell two non-core units, its Global Marine Systems Ltd. undersea network building operation and its IPC unit, which provides desktop trading systems to the financial industry. Global Crossing also announced that it was holding merger talks with its 59%-owned Asia Global Crossing Ltd. affiliate, in hopes of realizing substantial cost savings and other benefits.

But the trader remonstrated that "while the news was decent, it wasn't what the market wanted to hear." With telecommunications dominoes continuing to fall left and right, "the market wanted to hear Global Crossing say 'we're OK' not 'we've got cash, but we also have a lot of expenses.'" He noted that Global Crossing was facing $1 billion of maintenance costs for its network in the coming year and another $1 billion of capital expenditures. "Suddenly, they don't have quite so much cash, and maybe they can't cover their costs."

Even more unsettling to the market, he noted was the fact that Global Crossing has pretty much burned through most or even all of its estimated $1.7 billion of bank revolving credit availability. "The market wants to hear that if you eat through your cash cushion, you still have something in reserve, and maybe a bank or two willing to step up and lend you more."

In the absence of such reassuring news and with the whole telecom sphere trading off anyway, he cautioned, "we could test the single-digits on Global Crossing on Tuesday."

Still, the trader said that if someone were to buy the bonds at current level and Global Crossing were to recover, "you'd look like a superstar." With its network pretty much built out, he noted, even if the company were to be liquidated in a bankruptcy scenario, its breakup value could be as much as 35 or 40 cents. "But to buy Global Crossing bonds now would take a lot of guts."

Another trader said Global Crossing's situation was "pretty ugly, really nasty" quoting its 9.5% bonds as having been offered - with no bids - at 17. "What a mess," he exclaimed.

The trader said that he had heard that some of Global Crossing's bank debt had been offered in the 50s, "and that is secured paper. Once the bondholders heard that, the unsecured paper just tanked."

Even with the company's boast that it is - for now - sitting on a nice fat cash cushion and doesn't expect any liquidity problems, the trader said that another looming problem for Global Crossing which could quickly eat up much of that reserve is that "they may be on the hook" for lease payments connected with Exodus Communications Inc., arising out of the latter's purchase (back in its pre-bankruptcy days) of Global Crossing's Web-hosting business, Global Center. That deal left Global Crossing holding 108 million shares of Exodus, or about a 20% stake in the Santa Clara, Calif.-based Web-hosting company. With Exodus having last month sought restructuring under Chapter 11, the value of those shares is dubious at best and what's more, the trader speculated, Global Crossing could find itself holding the bag on up to $1 billion of lease payments.

In a sense, the situation may be reminiscent of the mess which Kmart Corp. found itself in back in June, 1999 after selling its Builder's Square home improvement products chain to Hechinger Co., only to see the latter file for Chapter 11, leaving the Troy Mich.-based discount giant responsible for the leases at as many as 115 locations. Kmart ended up taking a $230 million charge in its 1999 fiscal second quarter due to the Builder's Square fiasco.

The trader marveled that not so very long ago, Global Crossing, rated 4B by the major agencies and with its debt trading near par while most telecoms seemed to be falling off the cliff, "looked liked the ones who were supposed to last, supposed to hang in there." Now, however, he said "it looks like the Level 3s and the Williamses are the ones who seem like they will last."

But both of those long-haul telecom carriers continued to follow Global Crossing downward on Friday. Williams Communications Inc.'s 10.875% senior notes due 2009 which had hung in around the 40 mark, were quoted Friday at 33 bid.

"There was no real news on them," a trader said, "they were just down along with everything else." He had seen the Williams paper offered at 37 with no bids.

Meanwhile, he said, Level 3's benchmark 9.125% senior notes due 2008 were heard offered at 33 with no bids seen, down from 36 bid on Thursday. "The telecom sector continues to be very heavy."

But not completely heavy. A trader noted that Nextel Communications Inc. continued to enjoy "a good bounce" in the wake of the Reston, Va.-based No.5 U.S. wireless carrier's Thursday announcement that it would upgrade its existing iDEN mobile communications network, looking to double its voice capacity by 2003.

He quoted its 9.375% senior notes due 2009, and its 9.5% notes bid around 67-68, up from levels around 65.5-66 on Thursday and from 60-61 before Thursday's announcement.

Outside the telecom sphere, traders said, "there were just not tons of people in."

About the only significant news development on the session was the approval by a federal judge in California of a proposed settlement of Southern California Edison Inc.'s lawsuit against state regulators who had refused to allow the troubled utility to raise rates in order to recover an estimated $3.3 billion of its wholesale power debts.

U.S. District Judge Ronald Lew called the settlement "fair, adequate and reasonable," and SoCalEd's corporate parent, Edison International Inc., praised the ruling, which should keep the utility out of bankruptcy.

But SoCalEd's bonds "have already been trading in the high 90s" in anticipation of such a ruling, a trader said, and so there was little reaction in the otherwise quiet and half-staffed market Friday. "Everyone had already run their paper right back up."

End

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