McLeodUSA bank debt firms smartly on peer's rally; aaiPharma up solidly for second straight day

By Paul Deckelman and Sara Rosenberg

New York, Sept. 29 - McLeodUSA Inc.'s bank debt was up approximately three points Wednesday, seen rallying in sympathy with the recent upturn in the debt of sector peer Choice One Communications Inc.

In bond trading, aaiPharma Inc.'s notes were up four points for a second straight session in the wake of the accounting-challenged Wilmington, N.C-based pharmaceuticals company's announcement earlier in the week that it had hired a new chief executive officer.

A "good chunk" of McLeod's bank debt traded in the 47.5 bid, 48 offered area Wednesday, according to a trader who said the strengthening in the Cedar Rapids, Iowa-based paper was as a result of Choice One's rally over the past two weeks or so.

The debt of Choice One, a Rochester, N.Y.-based integrated communications provider, was seen having enjoyed an eight to 10 point jump in levels over the course of a number of sessions, and was quoted Wednesday at 58 bid, 59 offered.

The cause of Choice One's improvement was not pinpointed, although the trader did hypothesize that the bank debt "was just oversold".

Late last week, Choice One announced that its financial restructuring plans remain on track and that it has undertaken a series of actions that would reduce costs and enhance the efficiency of its back-office and sales operations.

The company plans on filing a prepackaged Chapter 11 petition later this month or in early October, with the restructured company expected to emerge by year's end.

Under the bankruptcy court protective umbrella, the company anticipates that some $404 million of outstanding senior debt would be converted into $175 million of new senior secured term notes payable over six years and 90% of the common stock of the reorganized Choice One. About $252 million of outstanding subordinated debt would be converted into the other 10% of the common stock and into two series of seven-year warrants to purchase additional common shares from the company. Upon completion of the restructuring, the company would get a revolver of up to $25 million from a subset of its senior lenders to provide for ongoing working capital requirements.

Interstate loans still trade

Elsewhere, while some desks saw activity slow on Interstate Bakeries Corp.'s bank debt, others still found the name to be active - a trend that really began once the company filed for Chapter 11 the other week. On Wednesday, it was seen up a touch at 98 bid, 98.25 offered for the term loan and 99 for the revolver.

The Kansas City, Mo. wholesale baker and distributor of fresh baked bread filed for Chapter 11 in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City, citing liquidity issues resulting from declining sales, a high fixed-cost structure, excess industry capacity, rising employee healthcare and pension costs and higher costs for ingredients and energy.

aaiPharma bonds gain

Back among the bond investors, aaiPharma's 11½% notes rose to 64 bid from Tuesday's close around 60 and from levels before that in the low to mid 50s, with one trader seeing the bonds as having begun the week as low as 52 bid, while another saw a more conservative move up from around 55.

On Tuesday, the company said that Ludo Reynders would immediately take over as aaiPharma's permanent president and chief executive officer, replacing the company's founder, Frederick D. Sancilio, who had stepped into those jobs on an interim basis back in February, replacing Philip Tabbiner. Sancilio also immediately relinquishes his chairman's position - also assumed temporarily in February - to former North Carolina governor James G. Martin, a member of the company's board, who will serve as non-executive chairman. Sancilio will retain his board seat.

The new CEO most recently held executive posts at Quintiles Transnational, a medical research services unit of Durham, N.C.-based Pharma Services.

He comes to a company which has been struggling to regain investor confidence lost when it announced back on Mar 1 that it had uncovered "sales abnormalities" in key product lines. The resulting need to delay earnings as it recalculates data for several recent quarters drove the company's bonds down over the months from previous levels near par, and cost shareholders most of the company's value.

Delta lower

Among other distressed names, a trader quoted Delta Air Lines Inc.'s bonds as "just gyrating one to two points down," with the troubled Atlanta-based air carrier's benchmark 7.70% notes due 2005 "back down" to 44 bid, 46 offered, while its 8.30% notes due 2029 languished at 22 bid, 24 offered.

Intermet gains

He saw Intermet Corp. - whose bonds slid more than 40 points last week, to the lower 30s, after the Troy, Mich.-based automotive components maker warned that it would sustain losses of between $19 million and $24 million in the quarter, putting the company in violation of its credit facility covenants and necessitating a waiver from its lenders - was slightly firmer, its battered 9¾% notes due 2009 up a point to 35.

Another mover was Mississippi Chemical Corp., whose 7¼% notes due 2017 traded at 59 bid, 60 offered, down from 60 bid, 62 offered, recently.

Adelphia bonds mixed

The trader saw Adelphia Communications Corp.'s bonds mostly mixed, with its 10¼% notes due 2011 three points better at 93 bid, 94 offered, while its 10¼% notes due 2006 were likewise up a trey at 89 bid, 91 offered.

Another trader agreed that the bonds of the bankrupt Greenwood Village, Colo.-based cable operator "seem better bid," and cited speculation over the outcome of the auction process which began this month for the company. He saw Adelphia's defaulted 9¼% notes due 2002 at 87.5 bid, 88.5 offered.

Adelphia began the process of auctioning itself off - either in whole or piecemeal. Analysts say its assets could fetch total proceeds in excess of $20 billion.

One of the companies mentioned as a possible buyer for all or most Adelphia assets is Comcast Corp., the nation's largest cable operator. Presenting at Merrill Lynch's annual media and entertainment conference Wednesday, Comcast CEO Brian Roberts gingerly skirted an analyst's query about the Adelphia situation, saying only that "we have been carefully advised to say that we and Time Warner are going to try to pursue the process jointly."

He noted that as part of Comcast's purchase last year of AT&T Broadband last year, it inherited a 21% stake in Time Warner that had been held by AT&T Broadband as the result of an earlier transaction. Comcast said at the time that it would divest the Time Warner stake within five years of the acquisition.

Observers believe that Comcast and Time Warner may work together to buy up Adelphia's assets, with Time Warner then ceding certain of those assets to Comcast in return for getting its stock back.

"That transaction would begin with the disposal of the Time Warner stake," Roberts said, and added that the two companies "are going to try to work together on that."

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