Charter's shorter bonds jump on exchange offer; Ford, GM off after Moody's junks them

By Paul Deckelman and Paul A. Harris

New York, Aug. 24 - Charter Communications Inc.'s bonds were seen higher across the board Wednesday, with most of the St. Louis-based cable system operator's shorter bonds seen up as much as six to eight points on the session after the company announced a massive exchange offer for $8.4 billion face amount of its existing debt. The transaction could cut Charter's $19 billion mountain of debt by about $1.5 billion, while extending maturities on several classes of bonds, giving the troubled Charter more time to try to straighten itself out.

Late in the day, Moody's Investors Service announced that it had downgraded the ratings of both General Motors Corp. and Ford Motor Co. to junk bond levels, completing the process that began in May when Standard & Poor's likewise dropped the ratings of the two auto giants to junk territory. Traders said the move was pretty much expected - but the bonds of both companies retreated by as much as a point anyway.

For the market overall, a source at a hedge fund spotted the CDX 100 index down 3/16 point on Wednesday, as capital markets watchers searching for good news had to search hard indeed.

Primary market activity meanwhile remained on a late-summer hiatus.

Charter's exchange offer was the big news for most of the day in the market, and according to one trader, accounted for "something like 99% of the activity" Wednesday. Essentially, Charter offered to issue $3.53 billion in new notes due 2015 in exchange for existing notes that mature in 2009 and 2010, and will issue $4.26 billion in notes due in 2014 and 2015 in exchange for notes due in 2011 and 2012 (see related story elsewhere in this issue for full exchange offer details).

The announcement - that Charter is moving to deal with some of its debt-related problems - was "a sign of relief for the market," the trader said, and caused the company's bonds to rise "across the board," with the nearer-term maturities showing the biggest gains.

He saw Charter's 8 5/8% notes due 2009, for instance, as having firmed a few points to 82.75 bid, 83.75 offered, while its 8¼% notes due 2008, which are not being exchanged for, at 100.5 bid, 101.5 offered. The new bonds that will be issued as part of the debt exchange were quoted at 99 bid on a when-issued basis.

A trader saw the 8 5/8s pushing up to 82 bid, 84 offered from prior levels at 76 bid, 81 offered on the news, while the 8¼% notes due 2007, which are not being exchanged for, at par bid, 102 offered, up perhaps a point at most.

Another trader saw those 81/4s having moved not at all, pegging them at par bid, 101 offered.

The trader saw the Ford and GM news as certainly much more important for the market, but said that "the whole day [before the automaker downgrades], it was all Charter," with the 8 5/8s firming to 82.5 bid, 83.5 offered from prior levels at 74.5 bid, 75.5 offered, while Charter's 11¾% notes due 2010 appreciated to 85.5 bid, 86.5 offered from 78.5 bid, 79.5 offered beforehand.

"The real movement was in the shorter stuff," the trader said. Bonds like the 10% notes due 2011 were "only up a couple." In fact, the trader quoted that issue up a point at best, to 74 bid, 75 offered, even though the '11s are part of the exchange deal.

"Eight points on the '09s, seven points on the '10s - but only a point on the '11s."

A market source saw the 8% notes due 2012 a point better at 101.

Yet another trader said he "didn't really see [Charter's] bonds trade that much," although he saw the stock pop up on the news. That having been said, he opined that "a lot of people are looking to play this thing on the capital structure." He said that he had "talked to a lot of accounts, and they seemed to be pretty apt to play it."

Charter's Nasdaq-traded shares zoomed 47 cents (40.87%), to close at $1.62. Extra-heavy volume of 170 million shares was more than 22 times the usual turnover.

"The stock did pretty well on the news," a hedge fund source said, adding that Charter currently has $5.1 billion of debt due in 2009.

"This could save the company from going bankrupt," the source added.

"Charter has only had one profitable quarter in four years. This could be a big coup if they could roll things out until 2015."

Another source told Prospect News that the exchange is set up so that the unswapped Charter bonds will become subordinated, with claims to the holding company, not to the operating company where the assets are.

Meanwhile the hedge fund source said: "I think you go along with the swap. I don't think you want any part of the holding company."

Auto downgrades weigh on market

A trader agreed with the proposition that Ford and GM being downgraded was "the big news of the day," even though it came relatively late in the session.

"That kind of put pressure on high yield across the board. It was kinda weak when stocks started getting hit a little bit," battered by factors including a record high price for crude oil, "and then when that GM news came [junk marketeers] ran for the exits before they could get hit on any bonds."

He saw GM's benchmark 8 3/8% notes due 2033 down half a point at 86.25 bid, 86.75 offered, while Ford's flagship 7.45% notes due 2031 were off ¾ point. "I didn't really see that much give to them," he said, probably owing to the lateness of the hour when the news hit the tape on an otherwise fairly quiet trading day.

The general consensus was that the downgrades were "pretty much expected," the trader said, theorizing that Moody's "probably did it because the gas prices are getting so high" and undermining the chances for a healthy sales rebound in Detroit.

Moody's was the last of the major ratings services to downgrade the debt of the two auto giants to junk, but the trader noted that the bonds, even though nominally split-rated up through late Wednesday, were "already trading like junk." He saw the GM '33s, for instance, trading at bid levels equivalent to a very junky 540 basis point spread over the comparable U.S. Treasury issue. "That was in from the 740 [bps] spread reached in late May, "but it's still out there quite a ways."

Another trader saw GM and Ford as a market concern "only at the end of the day," quoting the GM '33s at 85.5 bid, 86.5 offered, and the Ford '31s at 82.5 bid, 83.5 offered, both down a point on news that was "not a big shock" to the market.

Moody's lowered Ford's senior unsecured rating to Ba1 from Baa3, and assigned a Ba1 corporate family rating and an SGL-1 speculative-grade liquidity rating. Moody's said the ratings reflect "further erosion in the operating results and cash flow generation of Ford in consideration of weakened market share and continued challenges in addressing its uncompetitive cost structure in North America. These factors are expected to result in a pretax loss from automotive operations for 2005."

As for GM, Moody's lowered the ratings of its senior unsecured debt to Ba2 from Baa3 and its short-term rating to Not Prime from Prime-3 and assigned a Ba2 corporate family rating and an SGL-1 speculative-grade liquidity rating. It cited "continuing operating losses" in GM's North American automotive operations, as well as "challenges in restructuring the company to achieve a viable long-term competitive position as a leading global automaker."

One source also suggested that the timing of the downgrades might conceivably have something to do record crude oil prices.

"The downgrades were both widely anticipated," a hedge fund source said, adding that with gasoline apparently headed for $3 per gallon there will be a tremendous negative impact on the sport utility vehicle market.

"When Goldman was predicting $100 per barrel oil it seemed like a ridiculous idea," the source added. "But it is beginning to look like more of a distinct possibility."

Suppliers dip

After the GM news hit, the trader saw the bonds of automotive parts suppliers "get active." The bonds were "quoted down - but they came back. There was no real trading."

However, another trader saw the bonds of Troy, Mich.-based automotive electronics maker Delphi Corp. down about two points on the session, even before the GM news, as the bonds continue to pull back from the highs they notched on Friday on the strength of a bullish assessment of the company's prospects by a Lehman Brothers equity analyst.

He quoted Delphi's 6.55% notes due 2006 having fallen to 90 bid, 92 offered, its 6½% notes due 2009 at 84 bid, 86 offered, its 6½% notes due 2013 at 79 bid, 81 offered, and its 7 1/8% notes due 2029 at 73 bid, 75 offered, all down two points except the 2013 bonds, which were off three points.

Beverly steady

Beverly Enterprises Inc.'s 7 7/8% notes due 2014 were being quoted around 111.5 bid, little changed from prior levels, after the Fort Smith, Ark. -based nursing home operator formally accepted a sweetened $13 per share takeover offer from North American Senior Care, pushing aside a $12.90 per share offer from a would-be buyers' group led by Foundation Capital - which had made an unsuccessful hostile takeover attempt against the company at the start of the year. Traders said that no matter who wins the bidding war for the company, those 7 7/8s are likely to be taken out by a tender offer in that 111.5-112 context.

Bombardier gains on earnings

Bonds of Bombardier Inc. "actually did pretty well," a trader said, after the Montreal-based manufacturer of small-to-midsize commercial jetliners and railroad equipment reported better earnings from a year ago in the fiscal second quarter ended July 30 (see related article elsewhere in this issue).

He saw the company's 7.45% notes due 2034 up a point at 86 bid, 87 offered.

Another trader saw its 6.30% notes due 2014 at 91 bid, 92 offered, up half a point from Tuesday's close. A market source at another shop saw those same notes at 92 bid, 93 offered, and pegged them up a point on the session.

Dog Days in the primary

Meanwhile the primary market failed to move so much as an eyelid on Wednesday.

Wednesday's primary market activity merits no mention whatsoever, except to say that sources continued to express the opinion that Tuesday's $150 million add-on from Station Casinos Inc. was an anomaly, as far as the deep August 2005 primary market goes.

The Las Vegas-based gaming and entertainment company priced a $150 million add-on to its 6 7/8% notes due March 1, 2016 (B1/B+) at 102.50 on Tuesday, resulting in a yield of 6.399%, on top of the 102.50 area price talk.

One source told Prospect New on Wednesday that the deal had gone very well.

"That deal came as a surprise to me," one market source said. "Those bonds were trading at 103.50 all day.

"There is obviously some demand."

Elsewhere there was no new issue news, sources said, adding that it is possible there will be little to no news for the rest of the sessions in the run-up to the Labor Day break which starts Friday afternoon, Sept. 2.

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