Qwest gains on better numbers; market levels back off from Tuesday's gains

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - Qwest Communications International bonds were quoted at firmer levels on Wednesday, after the Denver-based regional Bell operating company reported a second-quarter loss - but indicated that it's on track for meeting its 2003 financial projections. Elsewhere in the secondary market, Nortel Networks Corp. debt improved after the Canadian-based telecommunications equipment maker won a big contract from RBOC giant Verizon Communications to provide equipment for Verizon's wireless network. Otherwise, though, traders said activity remained quiet, and levels on many names came in from where they had been Tuesday, as sellers hit some bids.

Wednesday's primary market session produced little in the way of news save for a split-rated $200 million offering sold by CenterPoint Energy, which may have attracted some high yield play, according to one sell-side source.

Qwest posted a loss in the second quarter ended June 30 of $91 million (a nickel per share), including discontinued operations - a substantial sequential deterioration from the 2003 first quarter year-ago profit of $128 million (seven cents a share). Revenues dropped to $3.6 billion from $3.63 billion.

Qwest acknowledged slower demand for the local telephone service that it sells in 14 Western states.

But on the upside, the loss was a bit less than the seven cents per share that Wall Street had been looking for.

Qwest - whose accounting has been questioned by the government and the investment community - indicated that it was essentially finished with its promised restatement of its results for 2000 and 2001, and it expects to have the audits for its results from 2002 and this year's first quarter completed by the end of the month, as required by its bank lenders. Completion of the several years of audits and restatements is seen as a key step in restoring investor confidence in the once high-flying telecom company.

Qwest said that it is "on track to meet our 2003 financial objectives." The company noted that cash and cash equivalents increased approximately $200 million during the quarter to $2.8 billion, and said that it had closed a $1.75 billion senior term loan at its Qwest Corp. subsidiary.

Qwest further said that it expects its business plan "to be fully funded" upon completion of the sale of its QwestDex subsidiary - which it expects to occur shortly - based on its ability to generate operating cash flow and continued access to the capital markets. The company also completed additional private debt-for-debt and debt-for-equity exchanges, reducing debt by $122 million in the second quarter.

A trader said that with the loss mostly expected and actually a little smaller than analysts had been looking for and the company's confidence about being able to soon complete its audits of its results and stay on track to fulfill its objectives for the year, "there was a lot of pop" in its bonds, with Qwest's 7½% operating company notes due 2023 up a point at 88 bid and its 6 3/8% holding company notes due 2008 trading as high as 85 bid during the session, up from prior levels around 81 bid, 83 offered.

Another trader estimated that "the shorts are up about two points, the longer-dated paper up a point."

A trader said that Qwest's 14% coupon notes were trading around 119-120. "Personally, I have never seen them that high," he said. Qwest's 7¼% notes due 2007 (originally issued by its LCI unit before the latter's absorption into Qwest several years ago) were at 81.75 bid, up several points.

Elsewhere, Nortel bonds were firmer after the Brampton, Ont.-based telecom equipment maker announced that it had been awarded a $1 billion contract by Verizon Wireless to supply it with equipment for its next-generation voice-and-data network.

A trader quoted Nortel's 6 1/8% notes due 2006 as having traded around 98 bid, par offered at the opening, and firming to around 99 by the end of the session.

Another trader said that he hadn't really seen the 6 1/8s trading around, but said that its longer-dated notes due 2027 were up about a point to a point-and-a-half on the day.

Market participants saw only a relatively small movement in Lucent Technologies Inc. paper (the Murray Hill, N.J.-based telecom equipment maker's bonds frequently move in tandem with those of sector pear Nortel).

Lucent's 6.45% bonds due 2029 and its 2028 bonds were seen up about a quarter to a half point, at 68 bid, 69 offered, while its more widely traded 7¼% notes due 2005 had "no real move," a trader said, hanging in at 95 bid, 96 offered. He saw its 5½% notes due 2028 "maybe a little stronger," at 84 bid, 86 offered.

Outside of the communications sphere, Advance PCS debt was seen better on the news that rival pharmacy-benefits manager Caremark Rx Inc, will buy it for over $5 billion in cash and stock.

Post-news, a trader said, Advance PCS's 8½% senior notes due 2008 were two to three points better on the day at 108.5 bid, 109.5 offered, "in line with [Caremark's] MetPartners 7 3/8% notes," which were a point better at 106.5 bid, 107 offered.

On the equity side, Advance PCS's Nasdaq-traded shares jumped $7.45 (18.62%) to $47.75 on volume of 23.2 million shares, almost 20 times the norm.

Overall, though, while certain specific names did better, the trader said that things were "really quiet once again."

While on Tuesday, levels had risen as would-be buyers bid up prices amid a surfeit of new cash and a shortage of actual paper out there to buy, "today [Wednesday] was the opposite. Better sellers came in, a bid list kind of thing.

"There was not a lot of outright selling. Guys were willing to hit bids and were looking for bids on certain issues. Things were just off their highs."

Meanwhile, Prescott Crocker, fund manager of the Evergreen High Yield Bond Fund, told Prospect News that he has had no difficulty keeping his composure in light of the record-breaking inflow posted during the pre-Labor Day week.

"I'm not too excited about it," said Crocker. "I think it is all the market timers who left in July and August and came back when they saw the market moving up."

Crocker allowed that the sturdier high-yield market left in the wake of the massive inflow could set the stage for a return of troubled St. Louis cable operator Charter Communications, Inc. On Aug. 14 Charter pulled the plug on its $1.7 billion two-tranche notes offering (CCC-), attributing the postponement to market conditions.

"The market is optimistic that Charter can be refinanced," said the Evergreen fund manager. "The problem was that they never were able to deal with the 2005 converts, which they have to take out. I think they have to offer all of the '05 converts some cash: Uncle Paul (Allen) is going to have to put some money in.

"The bonds were oversubscribed," added Crocker. "The existing bondholders stayed out because they wanted the company to take care of the converts.

"They could bring the deal back any day," he added. "And I think the new deal will be bigger: around $2.5 billion probably, to take care of those converts."

Asked what interest rate Charter might expect to pay Crocker said "I think they're still going to have to offer the type of deals that they had before." (On Aug. 13 revised talk of 10 1/8% area was heard on the proposed seven-year non-call-four notes and 10¼% area on the 10-year non-call-five notes).

"They might do better because that deal was coming into a really stiff market," added the Evergreen fund manager. "It may have worked out well for them to hold back."

Late in Wednesday's session a market source told Prospect News that indeed some of Charter's existing paper was showing strength in the secondary. Charter's 8 5/8% notes, which had been seen trading 74 bid, 75 offered on Aug. 20 and then sank as low as 67, 68 on news of the pulled deal, were seen trading at 77 bid, 78 offered on Wednesday. And after the session closed, Charter announced it had signed an agreement to sell cable television systems serving 235,000 customers in Florida, Pennsylvania, Maryland, Delaware, New York and West Virginia to Atlantic Broadband, LLC for $765 million in cash.

Prescott Crocker also told Prospect News that "lumber bonds" are lately offering investors some friendly shade.

"The lumber price is sky-high and the best performing bonds in the last two weeks have been lumber bonds," he said.

"The Tembec 81/4s of 2009 have traded up from 89, 90 to 99, par in two weeks - up 10%.

"Lumber prices have gone up as people have had their attention drawn to Japan and the investment merits of Japan, which is no longer in a state of deflation. The Japanese stock market has been rising significantly and the bond market has been falling, indicating real growth and real inflationary growth."

Meanwhile, the session's only morsel of hard news from the primary side came from CenterPoint Energy Inc., which priced $500 million of notes in a two-tranche deal that included a $200 million split-rated offering. The split-rated holding company tranche (Ba1/BBB-/BBB-) priced at 99.782, coming with a coupon of 7¼% to yield 7.291%.

The notes priced at a spread of 315 basis points. Price talk was for a spread of 315-320 basis points.

One sell-side source said that the split-rated CenterPoint tranche possibly attracted some interest among high yield accounts, noting that the Ba1 from Moody's came with a negative outlook.

As to the dearth of activity in the session, this source said: "I was a little surprised. But perhaps the market is just now getting itself set after the holiday."

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