Telecoms hit as Exodus raises fears; merger aids Orion; Calpine talk

By Paul A. Harris and Peter Heap

New York, Sept. 27 - Telecommunications bonds took a hammering in the high-yield market Thursday as participants continued to digest the lessons from Exodus Communications Inc.'s bankruptcy filing. On the upside, merger news lifted Orion Power Holdings, Inc., already at lofty levels, still higher. And in the primary, talk continued on the likely shape and prospects for Calpine Corp.'s big deal although there was still no official word.

Overall, secondary market was subdued thanks to the Yom Kippur holiday.

But the telecommunications sector continued to suffer in an ongoing reaction to the Chapter 11 filing earlier in the week by Exodus.

While Exodus' own bonds were seen unchanged on the day, the big names in the sector suffered losses stretching to as much as 16 points.

The problem, one trader explained, is that investors had been anticipating that, at worst, any bankruptcy filings would come in the form of a prepackaged restructuring agreed with bondholders.

"The Exodus announcement changed that," the trader said, especially as the market generally considered the company had enough cash to keep it going until early next year.

Among the losses he saw was XO Communications, Inc.'s 10 ¾% notes due 2009 down to 20 from 27 to 28 a week ago, even though the company confirmed its third quarter EBITDA (earnings before interest, taxation, depreciation and amortization) and earnings estimates. A second trader saw the company's 12 1/2s dropping to 20 from 28 in just Thursday's session.

McLeodUSA Inc. saw its 11 3/8s drop to 32 from 38 a week ago even though it put out an announcement late Wednesday dismissing as "groundless rumors" speculation it might file for bankruptcy, which it said it had "no intention" of doing. Another trader saw an even bigger drop in McLeod's 11 1/2s of 2009, marking them down 11 points at 29 from 40 on Wednesday.

Relatively strong in this weak sector was Mpower, even though the company said it could no longer give an assurance it was fully funded. Its 13s due 2004 were seen unchanged at 40 while its 12s due 2010 were quoted a point lower at 26.

Global Crossing Ltd. was also weaker, although far from the worst performer even though it owns a 20% stake in Exodus. One trader saw its 9 1/2s of 2009 at 43, down from 47.5 Wednesday while another saw them at 45, down from 47.

That performance was despite "some decent selling," one trader noted, adding that for this credit in particular: "I get the feeling people were panicking."

Another weak name was Allegiance Telecom, which continued a long decline by falling further Thursday. One trader said its 12 7/8s due 2008 plunged to 60 from 76 while its 0%/11 3/4s gave up nine to 36.

As for the cause of the declines, Exodus' 11 1/2s were quoted unchanged at 14, trading flat, that is without accrued interest.

Overall the high-yield market was weaker, trading down with the weakness in equities seen for much of the day. The Dow Jones Industrial Average had been down 95.42 at one point but a late-afternoon rally helped it close up 114.03 at 8681.42.

But the day wasn't all gloom. Orion Power Holdings (Ba3/B+) saw its bonds trade up smartly even though they were already at high levels on news that it has agreed to be acquired by Reliant Resources, Inc., an investment-grade name. Although all three rating agencies warned they will likely lower Reliant Resource's ratings, Standard & Poor's noted the company's management is committed to an investment-grade rating. Orion got reviews for upgrade from S&P and Moody's Investors Service, the two agencies that rate is debt.

In trading, Orion Power's 12s of 2010 added 10 points to 120 from 110 at Wednesday's close. At that higher level - itself unusually strong for any security - the bonds traded with an extraordinarily wide bid-offer spread of 120 to 150, one trader said.

Orion's gains didn't spread more widely, however. AES Corp.'s debt held unchanged after losing 10 to 15 points depending on the issue in recent sessions after it warned it would no meet earnings estimates.

In the primary, considerable sell-side talk concerned the Calpine deal via Credit Suisse First Boston. Initially rumors had the offering topping $1 billion although that size is now thought to be bigger than is realistic in current market conditions.

One trader suggested talk of that deal, in all likelihood, surfaced during pre-marketing on the other side of the Atlantic where bank sales teams were testing the waters of a high yield market that just about everybody is describing with adjectives such as "volatile" and "destabilized."

The trader further conjectured that while Calpine may indeed be preparing to approach the capital markets, the specifics of that approach - whether it will entail high yield bonds, and if so, in what amount - are presently less than fully formed.

"Market conditions, here, are obviously a little unstable," the trader commented, adding that the going to the current high yield market with a billion or more - even if the deal is spread across the US, Canada and Europe, as is rumored - could prove to be a formidable task.

The trader added that trick for the bookrunner, with a deal that size in the present market, is to try to balance price and yield in such a way so that neither the issuer nor the buysiders hate you in the morning - or a week later.

The trader also said that fund managers were pacing the sidelines, presently, with a lot of cash. "Nobody really wants to take a risk, yet, until the equity market really straightens itself out," the trader said. "Until that stabilizes par-pricing is extremely difficult."

Among the deals that are headed for the primary, with some resolve, is Terra Capital, Inc.'s $200 million of senior secured notes due 2008, set an Oct. 3 pricing with Salomon Smith Barney pegged as the sole bookrunner.

Standard & Poor's, in assigning the notes a rating of BB-, commented that the rating "credit quality reflects Terra's fair business position as a commodity fertilizer producer, offset by high financial risk." The rating agency also noted that the Sioux City, Iowa agrichemical producer has been "negatively impacted by overcapacity in global nitrogen markets, exacerbated by the lingering effects of reduced demand attributable to low Chinese nitrogen imports, and higher natural gas and feedstock costs."

Moody's, meanwhile, cited "expected continuing pressure on prices and margins in the intermediate term from global overcapacity in these products, and increasing competition from imports with lower cash costs," in assigning its B3 rating to Terra's senior secured bonds.

Other deals that seem headed for the primary market, soon, are the Luscar Coal, Ltd,. $250 million senior notes due 2011, via Goldman, set to roadshow Sept. 28 - Oct.5, with an Oct. 5 pricing. The proceeds will refinance the Edmonton, Alberta coal producer's existing debt.

And the roadshow for Sweetheart Cup Company's $275 million senior notes due 2007, via Jefferies, is set to conclude Friday.

Other deals on the calendar remain on hold pending improved market conditions, according to syndicate officials.

End

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