Staggering high-grade credit Qwest grabs junk market attention; five new deals price

By Paul Deckelman and Paul Harris

New York, Feb. 14 - Embattled investment-grade credit Qwest Communications Inc. moved closer to junk bondland Thursday, both in terms of its debt ratings and the level at which its paper was trading, after the troubled telecommunications company was forced to draw down its bank credit line after failing to roll over its commercial paper, and the three ratings agencies downgraded its debt.

In the primary market, investors pretty much cleared the week's forward calendar, beginning a busy session by rolling out the red carpet for Collins & Aikman Floorcoverings Inc, which priced its $175 million issue of eight-year notes inside pre-deal market price talk. Buyers also came out for upsized offerings from Williams Scotsman Inc., Bluewater Energy Services BV and Graphic Packaging International Corp., as well as a new deal from American Achievement Corp.

Altogether, Thursday's five deals totaled $1.062 billion.

Graphic Packaging's offering was upsized to $300 million from the planned amount of $250 million. The company priced its 10-year senior subordinated notes at par to yield 8 5/8% via joint bookrunners Credit Suisse First Boston and Morgan Stanley.

Graphic Packaging "has a free rein to go in and get as much as they want" thanks to strong investor demand, commented one sell-side official on the increase in size.

In a Thursday press release, the company stated it intends to use proceeds from the new notes and its new credit facilities to refinance existing credit facilities and its existing $50 million of 10% subordinated unsecured notes, to pay the costs of the financing and for general corporate purposes.

Commenting on the financing, Luis E. Leon, chief financial officer of Graphic Packaging, said: "The issuance of $300 million of 10-year senior subordinated notes will give the company a solid base of long-term unsecured financing at an attractive fixed interest rate. Coupled with the new $450 million bank financing, it gives Graphic Packaging greater liquidity, flexibility and a more balanced capital structure with which to operate in the foreseeable future."

The bank facilities are expected to consist of a $150 million seven-year term loan and a $300million five-year revolver.

"The existing bank facilities would have matured in about two years," according to Leon. "Current market conditions make it possible to cost effectively restructure these facilities concurrently with issuing notes.

"We are also pleased that the Coors family trust, who indirectly hold the $50 million of 10% subordinated notes issued in August 2001, were willing to be redeemed at par."

The terms of these notes would normally require a 3% redemption premium at this time.

Terms were also heard Thursday on Collins & Aikman Floorcoverings, Inc.'s $175 million of eight-year senior subordinated notes from joint bookrunners Credit Suisse First Boston and Banc of America Securities. A syndicate source commented that the deal was "multiple-times oversubscribed and it priced through (10%-10 ¼%) price talk."

The other three deals that priced Thursday did so at discounts.

American Achievement Corp.'s $177 million senior notes due 2007 priced at 99.128 to yield 11 7/8% via Deutsche Banc Alex. Brown.

Bluewater Finance Ltd. priced an upsized $260 million - from $200 million - issue of 10-year senior notes at 98.471, to yield 10 ½% via ING Barings and Morgan Stanley.

And Williams Scotsman Inc.'s add-on to its 9 7/8% senior notes due June 1, 2007 was upsized to $150 million from $100 million and priced via bookrunner Deutsche Banc Alex. Brown at 98.751 with a yield 10.179%.

Back in the secondary sphere, Denver, Colo.-based Qwest - which earlier in the session was reported by news services to be drawing $1 billion from its $4 billion bank credit line after failing to find buyers for a like amount of commercial paper. Then, later in the session, the company announced that it would draw down the entire $4 billion bank cushion, to repay $3.2 billion of commercial paper scheduled to come due this year, with the remaining $800 million to be used to give Qwest additional financial flexibility in the capital markets.

In announcing the credit line drawdown, Qwest also said that it was exploring "additional longer term refinancing options," the form and timing of which would depend on market conditions.

Qwest tried to reassure the financial community that "any refinancing option is not expected to increase total net debt outstanding," and further asserted that "neither the draw down under the facility nor any refinancing options are expected to affect Qwest's previously announced objective of strengthening its balance sheet by reducing debt by $1.5 to $2 billion."

But the three major ratings services were unmoved by the attempted positive spin; all saw fit to downgrade the company's debt Thursday, with Moody's Investors Service cutting the ratings on its senior unsecured debt to Baa2 from Baa1 previously, warning that "Qwest's difficulty in rolling its commercial paper has required the company to utilize its $4.0 billion bank facility. Without access to commercial paper, the company's alternate liquidity has been reduced by the drawdown on its bank facility. This lack of alternate liquidity considerably limits the company's financial flexibility and poses a risk to damage Qwest's overall competitive profile if not resolved expeditiously." Both Standard & Poor's and Fitch expressed similar concerns about Qwest's liquidity situation in cutting their ratings on its bonds to BBB from BBB+ previously.

Investors were not reassured either, nor were they mollified by Qwest's reiteration of its previously announced projection that the giant regional Bell operating company, which provides local phone service in 14 states, would likely turn free cash flow positive in the 2002 second quarter.

Qwest's shares swooned $1.10 (12.89%) in New York Stock Exchange dealings Thursday, to $7.49. Volume of 59 million shares was around five times the usual turnover.

On the debt side, Qwest bonds "got killed today," one market observer exclaimed, "really getting smacked around." He quoted the notes as having widened out by around 150 basis points from Wednesday's levels (the notes, still technically investment-grade instruments, remain quoted in spread-versus Treasuries levels, rather than in dollar prices, as junk bonds would be). Qwest's 6½% notes due 2018, for instance, were being quoted at bid levels 500 basis points over the comparable government paper - the equivalent of a dollar price of 69.25, down from 78.75 on Wednesday.

The company's capital funding debentures were still bid a little higher, he said, with the 7¾% paper due 2031 bid at spread levels equivalent to a dollar price of 78, the 7 5/8% debentures due 2021 at the equivalent of 79.25, and the 2011 debentures at the equivalent of 84 bid.

But even the company's short-dated paper has widened out seriously, he said. "Players are just knocking things down. Yesterday, the five- to 10-year paper was bid around 475 (basis points over), and now, we're seeing bids of 500 (basis points)."

A trader at another desk said that his shop "was watching Qwest" and even dabbling a bit in the bonds of another recently troubled investment-grade telecommer, WorldCom Group, even though he observed that those credits were "still being quoted off the investment-grade desks or the crossover desks at a lot of other places and still being quoted on spread."

He estimated that Qwest's bonds had widened out as much as 200 basis points from Wednesday evening levels, quoting its 2011 paper at 575 basis points bid/525 basis points offered and its 2009 paper at 540 basis points bid/490 basis points offered. He saw the 2006 paper quoted at bid levels as low as 750 basis points off Treasuries, explaining that "when it comes to these distressed names, the short end gets beaten up more than the long end.

Meanwhile, he said, WorldCom paper had also widened out about 10 to 15 basis points on the session, with the Clinton, Miss.-based long distance, Internet and data services provider's 8% notes due 2006 trading at a wide 500 basis points bid/440 basis points offered.

Back among the purely junk telecommers, the trader saw Nextel Communications paper "trade a little weaker in the morning, and then come back later," with the Reston, Va.-based high yield wireless bellwether's 9 3/8% notes due 2009 pegged at bid levels around 60. Its zero-coupon bonds discount bounds due 2008 ended the day at 55 bid. Williams Communications Group Inc.'s 10 7/8% notes were heard up half a point at 23 bid.

American Tower Corp.'s 9 3/8% notes due 2009 dropped two points to finish around 69 bid. During the session, Moody's dropped the Boston-based communications antenna tower company's senior unsecured debt rating to Caa1 from B3 previously. Moody's noted that in the past, it had expressed concern with the weak operating results from the company's services and Verestar divisions, which had growth of EBITDA (earnings before interest, taxes, depreciation and amortization, a key bond market measure of cash-flow generation capacity and potential ability to service debt) and the company's anticipated delevering. Now, "in Moody's opinion, results from the services and Verestar operations are unlikely to rebound as much as previously expected. Also, due to fewer towers being built and acquired, EBITDA from the core leasing business is also not growing as quickly as anticipated."

Also on the ratings front, both Moody's and S&P cut the formerly investment-grade-rated Gap Inc. down to junk status, worried about the San Francisco-based apparel seller's declining sales and earnings in the face of a soft economy and difficult retailing environment. First S&P cut Gap's long-term credit and debt ratings three notches to BB+ from BBB+ previously, and lowered its short-term ratings to B from A-2. Gap's bonds, a market watcher said, seemed little moved by the downgrade, since "they were already trading like junk bonds anyway in anticipation, and it was built in." He quoted the company's 2008 notes trading at bid levels 625 basis points over Treasuries, with the 2007 notes at 670 basis points over, the 2005 notes at 735 basis points over and the 2003 bonds at 850 basis points over.

"That's pretty damn wide (versus Treasuries) for Baa3/BB+ paper," he opined, suggesting that it was a sign the market was expecting a further downgrade.

Sure enough, it got one, announced after trading had pretty much wound down for the day, as Moody's followed the lead of S&P and lowered the rating on Gap's bonds two notches to Ba2 from Baa3 previously. The ratings service cautioned that "Moody's expects that it will be difficult for Gap Inc. to achieve significant improvement in its operating performance in 2002 given the soft economy, fierce competition and sated consumer appetite for apparel."

On the upside, energy refiner Premcor's bonds continue to appreciate, its 10 7/8% holding company notes had moved up to 86.5 bid, up a point on the day, while its operating company bonds also were on the rise - Premcor's 8 7/8% notes moved up to 87 bid from prior levels around 85, while its 8 5/8% paper firmed two points to 93 bid, and its 8 3/8% bonds up three points on the day, also to 93 bid.

The former Clark Oil/Clark USA holding company bonds "just keep moving on up," said George Kirchwey, an analyst with SAMCO Capital Markets in Dallas. He attributed most of the credit's recent movement - "about 80%, I'd say" - to market expectations about the St. Louis-based refiner's upcoming initial public offering.

"The Premcor bonds are being pushed up on market expectations that the IPO will get done," he declared, "rather than on company or industry fundamentals such as crack spreads" (i.e., the difference between the value of a barrel of crude oil and the value of the refined products such as gasoline and heating fuel derived from that barrel; with oil prices currently soft, these have come down in recent months).

"Clearly, the injection of funds from an IPO will be of enormous benefit to the bondholders," Kirchwey continued, "since there have always been expectations that the proceeds from the IPO will be used to take out either the 10 7/8% holding company bonds or the operating company's 9½% notes due 2004, which have the most controlling indenture, with the most restrictions on the company's use of cash and the like. These have always traded up near par, on the expectation that they might be taken out after the IPO."

While attributing most of the recent price movement to the IPO expectations, Kirchwey added that "it's also due about 20% to a rumored short squeeze. If that's so, someone is getting killed, with the bonds continuing to go up."

A trader who also saw Premcor's notes firming pegged the senior operating company bonds in the 91-93 area, saying "better buyers" had come out.

"It looks like the market likes what they had to say in their earnings announcement and while I'm not going to say that it definitely looks like their IPO is going to get done, they're certainly going to put on a full-court press to try to get it priced." Still, he cautioned, "no refining company has brought an IPO to market in the past 10 years, if that's any indication of investors' attitudes toward refiners. The business is just too cyclical."

But as has been the case pretty much all week, market activity outside of specific names with stories attached to them was muted, with many buyside decision makers no doubt still in Boca Raton, Fla., where Morgan Stanley held its annual High Yield Global Leveraged Finance Conference. Still others were absent ahead of the Presidents' Day three-day holiday weekend (The Bond Market Association is recommending a 2 p.m. ET close on Friday, and U.S. financial markets will be off on Monday).

"It was definitely a pre-holiday market," a trader said, "with people just cleaning up positions. Everyone was talking about cutting out early - and a lot of people did."

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