Nextel seen as mandatory candidate; high-grade spreads seen tightening

By Ronda Fears

Nashville, Tenn., Aug. 16 - Nextel Communications Inc. firmed further Friday in a continued response to its latest debt buyback disclosure. But analysts said it may be also be a candidate to issue a new mandatory in its effort to trim leverage and that was luring bids.

As the flight to quality into Treasuries eased, market watchers are expecting spreads to tighten for high-grade credits.

Overall, however, it was still a slow trading session for converts, even though tech stocks gained nicely with the 1.19% rise in the Nasdaq. But the Dow Jones Industrial Average ended flattish, off 0.45%, as was the case with the S&P 500, down 0.16%.

In general, convertibles were described as mostly unchanged with moderate activity.

"It's the middle of August, dead," said one market source.

"I'm just glad there's only two more weeks of August left."

Convertible players continued to watch the credit markets, noting that money was moving out of Treasuries and back into corporate bonds, and were happy about that. Many convert arbs had already begun shifting from a long Treasury to a short position, looking to buy high-grade paper with blown out spreads.

Now, some see a signal for spreads to begin tightening.

"Quality spreads should tighten as safe havens lose luster relative to higher-yielding instruments," said David Goldman, head of research in the global markets group at Banc of America Securities.

Nextel (B3/B+) is far from high-grade, but the paper continues to be extremely popular in the wake of its disclosure that it had bought back a further $733 million of notes and convertibles preferreds, bringing the total buybacks to $1.83 billion. Market players are speculating there will be more of the same, also have thoughts that it may issue a mandatory as part of its balance sheet refurbishment efforts.

"The Nextel credit story continues to get stronger. We believe this management team will continue to work toward delevering the balance sheet, while reporting solid fundamentals," according to a report Friday by convertible analysts Jeanine Oburchay and Brian Park at Wachovia Securities, Inc..

"We would not be surprised to see the company purchase more debt directly from holders, or to possibly issue a mandatory convertible security to pay down some of its higher-coupon debt. We believe either of these would be perceived as positive credit events."

Standard & Poor's said Nextel's (B+/negative watch) retirement of securities has no impact on the credit rating or outlook, but the agency "views this action favorably because the company did not use a material amount of liquidity to accomplish this moderate reduction in total debt."

Nextel retired some $1.83 billion by issuing about 94 million shares of common stock and $500 million in cash.

However, S&P pointed out that intense competition in the wireless industry and the fact that Nextel remains highly leveraged somewhat offset the impact of this move.

Nextel was very active, more so than usual, traders said. And the prospect of a new mandatory "is very interesting, exciting," one trader said.

The Nextel 6% due 2011 were quoted up 0.75 point to 60.75 bid, 61.75 asked. The 5.25% due 2010 were quoted up 1.5 points to 58 bid, 59 asked. The 4.75% due 2007 were quoted up 1.5 points to 61.75 bid, 62.75 asked.

Nextel's 9.5% junk bonds due 2011 were quoted up 1 point to 66.5 bid, a junk bond trader said, with a spread-to-worst of about 1,310 basis points.

The common shares ended up 66c to $6.70.

While some tech converts were marked up, and a few were even finding bidders such as Advanced Micro Devices Inc., much of the better quality paper was suffering from a weaker consumer sentiment index and the 2.7% drop in housing starts.

The University of Michigan consumer sentiment index fell to 87.9 in August from 88.1 in July.

Several retailers were hit, but none quite as smartly as Gap Inc.

"Gap still has a long way to go, from getting the fashion right to getting a new CEO. We've lost count of the number of months in a row same-store sales have dropped, but it has to be in the high 20s by now," said Morningstar analyst Mike Porter.

"We expect a large number of store closings before Gap rights itself."

Gap's failure to produce a turnaround has caused a widespread exodus from the credit, traders said.

The retailer late Thursday reported a 37% drop in second quarter profits and warned that August sales already are far were worse than expected.

Gap's 5.75% convertible due 2009 fell 6.625 points to 98.625 bid, 98.875 asked. One trader noted the spreads had widen 100 to 200 basis points from a week ago, when credit default swaps for five-year Gap paper were at about 750 basis points bid, 850 basis points asked. The trader noted that Gap's 6.9% junk bonds due 2007 dropped 2.5 points on Friday to 80 bid, and a spread-to-worst of about 888 basis points.

Charter Communications Inc. also continued to track southward as mounting investigations worry investors who have become skeptical that Paul Allen, billionaire investor and controlling shareholder of Charter, will be able and/or willing to take the company private.

"The furor about Paul Allen taking out the Charter converts, debt, and taking the company private has fizzled," said a dealer.

"There's just too much hair on it. The complications of getting such a deal done are multiplying as we speak. So a lot of people just want to get out."

Charter's 5.75% due 2005 plunged 3.625 points to 40 bid, 42 asked and the 4.75% due 2006 dropped 1.5 points to 36.75 bid, 38.25 asked. Charter's 10.75% junk bonds due 2009 were seen down 2 points to 60.

Charter shares closed off 18c to $2.53.

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