Level 3 sells add-on deal; Alderwoods jumps on coming buyout by Service Corp.

By Paul Deckelman and Paul A. Harris

New York, April 3 - Level 3 Communications Inc. - which less than a month ago tapped the high-yield market for nearly $400 million via the sale of some new five- and seven-year notes - came back for seconds on Monday, selling an additional tranche of the latter bonds, and at a considerably higher issue price.

In the secondary market, mergermania seemed to be the watchword of the day, as a number of high yield issuers were involved in merger and acquisition activity, either as acquirers, acquirees or sellers. The biggest winner was Alderwoods Group Inc., whose bonds firmed smartly on the news that deathcare industry leader Service Corp. International Inc. has agreed to acquire Number-Two industry player Alderwoods for $856 million.

Also up were the bonds of General Motors Acceptance Corp., following the long-awaited announcement that its corporate parent, General Motors Corp., has agreed to sell a 51% stake in its lucrative financing arm to an investment group led by Cerberus Capital Management LP for $14 billion - more than the market had been expecting. GM's own bonds, however, were not helped in the long run by the news, giving up their early gains and actually finishing unchanged to lower as investors quickly discounted the GMAC good news and focused instead on the potential problems GM faces as a result of the deteriorating labor situation at bankrupt former subsidiary Delphi Corp.

And while there was M&A news out about several other junk issuers - Aztar Corp. and Constellation Brands Inc. - their bonds were unmoved. Lucent Technologies Inc.'s short-dated paper was likewise rock-steady despite the news that the New Jersey-based telecommunications equipment company will united with French rival Alcatel SA in what is being described as a "merger of equals" - however, Lucent's longer-dated bonds were seen higher.

Overall a buy-side source marked the high-yield market a quarter of a point lower on the day late Monday.

"Everything looks pretty bland," the portfolio manager commented, adding that with the GMAC sale "it's the old story of 'Buy on the expectation, sell on the news'."

The source explained that the expectation that troubled auto maker GM would make the sale had helped the high-yield market to firm over the past 10 days, but added that now that the sale has been finalized investors seem to have once again focused on the looming negative issue: a possible strike by the United Auto Workers Union against Delphi, which could pose a major hazard for credit-challenged GM.

"The GMAC sale is probably going to be positive," the investor said. "But the [UAW-Delphi situation] is just sitting out there: at best it will continue to be status quo, but it could also be very negative."

Ford Motor Credit upsizes to $1.5 billion

Although GMAC hogged the front page of the financial section on Monday, its counterpart, Ford Motor Credit Co., commandeered the lion's share of attention in the high-yield primary market with its massively upsized junk bond deal.

The financing arm of Ford Motor Company priced an increased $1.5 billion issue of six-year senior floating-rate notes (Ba2/BB-/BB) at par to yield three-month Libor plus 445 basis points, on top of price talk.

JP Morgan ran the books.

The deal was upsized from $500 million.

Level 3 prices $300 million add-on

Also on Monday, Level 3 Financing Inc., a subsidiary of Level 3 Communications Inc., priced a $300 million add-on to its 12¼% senior notes due March 15, 2013 (Caa1/CCC-) at 102.00 to yield 11.768%.

There had been no official talk on the Merrill Lynch-led deal - an acquisition financing - according to an informed source who added that the transaction had gone very well.

The original $250 million issue priced at 96.618 on March 9, 2006 to yield 13%, bringing the total issue size to $550 million, hence Monday's add-on notes represent an interest savings of more than 123 basis points compared to the yield printed on the original issue.

AutoNation downsizes, talks two tranches

Elsewhere in the automotive sector, Florida auto retail giant AutoNation Inc. downsized its two-part offering of senior unsecured notes (Ba2/BB+/expected BB+) to $600 million from $800 million, shifting $200 million to its bank loan on Monday.

The Fort Lauderdale-based company plans to sell eight-year fixed-rate notes, with talk at 7% to 7¼%. AutoNation also plans to sell seven-year floating-rate notes, with talk at three-month Libor plus 225 basis points.

The deal, which is being led by JP Morgan, Banc of America Securities and Wachovia Securities, is expected to price on Wednesday.

Tranche sizes on the downsized offering remain to be determined. Prior to the downsizing, the tranches had been announced at $400 million apiece.

Split-rated deal from Owens & Minor

Although no news of roadshow starts surfaced during the session, sources told Prospect News that Owens & Minor, Inc., plans to price a split-rated $200 million offering of 10-year senior notes (Ba2/BBB) later this week.

Lehman Brothers has the books for the debt refinancing deal from the Mechanicsville, Va.-based distributor of medical and surgical supplies and healthcare supply-chain management services.

One market source said that junk accounts would likely take an interest in the Owens & Minor deal.

Level 3 firm in trading

When Level 3's new add-on 12¼% senior notes due 2013 were freed for secondary dealings, a trader saw the bonds quoted at 102.5 bid, 103 offered, up from their 102 issue price earlier in the session.

He noted that last month, the Broomfield, Colo.-based telecommunications company had sold a $250 million tranche of those bonds at 96.782 for proceeds of about $241 million, "and now they come back and sell $300 million more, priced at 102." He quipped "maybe they'll sell some more.

"They liked the market, so they came back. Maybe they should have just waited 'till now to sell the whole issue," he added.

Between the time it last tapped the market in early March and Monday, Level 3's bonds have firmed smartly, from their mid-90s levels about a month ago to their current levels north of par. The bonds were helped by a 50% jump in the company's stock price during that time, after the company boosted its outlook and its financial health was touted by several influential pundits.

Much of the bond and stock appreciation followed Bear Stearns & Co. equity analyst Steven Randall's recent upgrade of his recommendation on the stock to "outperform" from "underperform" previously, as well as a rise in his target price for its shares. Randall declared in a March 23 research note that "we expect an improved operating environment and the impact of consolidation will benefit Level 3 over the next several years."

Randall further said at that time that "we expect price declines [in telecommunications services in 2006] to continue to moderate while traffic volumes increase, with the potential to accelerate in 2007 and beyond as the internet is increasingly used to transport voice, data and video."

The analyst also upped his fiscal 2006 EBITDA estimate to $583 million from $575 million.

The shares also got a shot in the arm - and the bonds continued along for the ride - last Thursday when widely-followed stock guru Jim Cramer predicted on his CNBC show that Level 3's share price would keep rising.

Bond investors were apparently not much dismayed - although stockholders were - by a weekend article in Barron's which suggested that investors were getting irrationally exuberant about Level 3, warning that the rise in the share price was "incorporating too many aggressive assumptions." Author Michael Santoli also said that Level 3 is "loved by too much speculative retail money."

The writer further noted that only a relatively small portion of its anticipated EBITDA is expected to come from its core telecom operations, "which are the source of all the happy hype about the shares."

While the new bonds moved up from their issue price, a trader did see "the bid drop a little" on Level 3's outstanding subordinated notes - although Santoli's screed had little or nothing to do with it. Rather, he said, "the subordinated stuff weakened, because you're piling new senior debt on top of it with this deal." He saw the company's 9 1/8% notes due 2008 ease half a point to 99.25 bid, par offered, while its 12 7/8% notes due 2010 backtracked that same half a point to 101 bid, 102 offered.

While the bonds were only down a touch Monday, and then only the subordinated issues, Level 3's Nasdaq-traded stock fell 31 cents (5.98%) to $4.87, mostly due to the Barron's piece, on volume of 43.8 million shares, twice the norm.

Among other recently priced bonds, a trader saw Armonk, N.Y.- based printing and school affinity products marketer Visant Holding Corp.'s new 8¾% senior notes due 2013 at 96 bid, 96.5 offered, little changed from Friday's issue price at 96.005. He also saw Indiana-based gaming operator French Lick Resorts and Casinos LLC Corp.'s 10¾% notes due 2014, which priced Thursday at par, hovering around issue at par bid, 100.5 offered. "Big deal," he added ironically.

Alderwood jumps on acquisition

Back among established issues without new-deal influences, Cincinnati-based funeral home and cemetery operator Alderwoods' bonds were plenty lively on the news that it has agreed to be acquired by Service Corp. for $856 million in cash, or $20 per share. In addition, approximately $374 million of Alderwoods debt will remain outstanding or be refinanced.

Alderwoods' 7¾% notes due 2012 were quoted by a trader at 106.5 bid, 107.5 offered, which he called a 3½ point rise on the day.

At another desk, a trader pegged those bonds up a full four points at 107.5 bid, 108.5 offered.

Alderwoods proved several years back that there's life after debt - even life after Chapter 11 - when the beleaguered company then known as Loewen Group International reorganized through the courts, came out largely debt-free, and did well enough financially to spur the interest of Service Corp., the largest deathcare provider in the world. So ubiquitous are the Houston giant's funeral homes and cemeteries that legendary Fidelity Investments fund manager Peter Lynch once waggishly likened it to omnipresent fast-food behemoth McDonald's Corp. and called it "McBurial" in recommending its stock.

Service Corp. will now only get that much bigger as it absorbs the Number-Two North American operator; before divestitures that are likely to be required to meet anti-trust objections to the merger of the two largest deathcare providers in North America, the two companies, pro forma, will have a total of about 1,700 funeral parlors and nearly 500 cemeteries.

Service Corp. said that it currently has $470 million in cash on its balance sheet, and intends to fund the transaction in all cash. It got a commitment letter from JPMorgan for an $850 million bridge facility. SCI also "believes it has access to a number of debt capital markets and will determine an optimal funding structure prior to the close of the transaction."

While Alderwoods bondholders hailed the combination and took its bonds upward, Service Corp.'s holders were wearing black at the somber prospect of more debt financing, taking the latter company's bonds down about 1½ points. A trader saw its 6¾% notes due 2016 fall to 98.5 bid, 99.5 offered from prior levels around par bid, 100.5 offered, and saw its 7.70% notes due 2009 lose half a point to 103.25. Another trader saw the 7.70s at 102.75 bid, 103.75 offered, which he called down a full point.

Moody's Investors Service said that it would eye Service Corp. for a possible downgrade, predicting a weakening of Service Corp.'s credit metrics pro forma for the acquisition, excluding the impact of potential cost synergies. Assuming the company uses the $850 million interim bridge facility along with cash on hand to finance the acquisition, Moody's predicted, its ratio of debt to EBITDA would increase to five times from four times as of Dec. 31. The ratings agency meantime put Alderwoods on review, but with direction uncertain. Standard & Poor's put both companies on CreditWatch with negative implications.

GM, GMAC jump, fall back

Elsewhere, the news that GM has agreed to sell control of GMAC to the Cerberus-led syndicate for a better-than-expected $14 billion helped boost both GM bonds and GMAC's issues - at least in the early going.

"When people got in this morning [Monday], the rumor" that had swept the junk market at the tail end of last week, that GM and Cerberus were nearing a deal, "proved to be true," a trader said. Initially, "from like 7:30 a.m. to 8:30 a.m. [ET], that was interpreted positively," with the automaker's benchmark 8 3/8% notes due 2033 moving as high as 76 bid, 77 offered from a 74ish context late Friday, while the GMAC 8% notes due 2031 got as good as 97 bid, 98 offered from around 95 on Friday.

However, it didn't last.

First, he said "we got some ratings commentary" - and the ratings agencies were by no means singing the praises of the deal.

S&P said that while estimated cash proceeds to GM at closing are expected to be about $10 billion, "which will bolster GM's liquidity significantly . . . GM's claim on GMAC's future cash flow and earnings will be diminished." It also warned that "in the long term, GM could face the risk that GMAC's new owners would seek to reduce funding support for GM's automotive business." S&P further said "the potential for future divisiveness among GMAC's owners for economic or business reasons also poses risks."

Moody's is also keeping the companies under scrutiny, while Fitch Ratings kept GM on its ratings watch for a possible downgrade, although it is looking at GMAC for a possible upgrade.

On top of that, the trader said, "people sort of realized that Delphi [and its labor problem] is still around, and the bonds retracted."

He saw GM give back all of its gains and actually end the day down a point at 73.25 bid, 74.25 offered, while GMAC's 8s ended at 96 bid, 97 offered, up a point on the day, but down from its highs.

"It was a definite case of [buy on the rumor,] sell on the news," another trader said of the movement in GM's bonds. He saw those bonds as having gone home at 74.5 bid, 75.5 offered on Friday, and then having initially moved a little higher on Monday's announcement. But "then the 75 bid got hit this morning, and they started to fade from there." He saw the GM flagship issue drop to a close Monday of 72.5 bid, 73.5 offered, "so they definitely got kicked around a little bit.

"At the end of the day, the most important thing for this company in the short tem is avoiding a Delphi strike, because they'll bleed money if there is one." He said that GM "already bleeds money - but they'll really bleed money if there's a strike. That's going to be ugly."

He opined that the attitude of bondholders seemed to be "well, that's done [the GMAC sale]. We thought it was going to get done, knew it was going to get done. Yes, they raised liquidity, but that was already baked in. So on to the next thing" - which is figuring out what impact Delphi's worsening labor situation might have on GM.

The bankrupt Troy, Mich. - based automotive supplier on Friday petitioned the U.S. Bankruptcy Court for the Southern District of New York for the right to void its labor contracts with 34,000 unionized hourly workers if it cannot reach agreement with the United Auto Workers union and other labor groups on cutting its heavy labor costs. Delphi said it does not intend to immediately move to junk the contracts should it get the legal power to do so - but the unions have warned that such an action will lead to a strike against the already struggling company. A strike against Delphi could also badly hurt former corporate parent GM by interrupting the steady flow of parts from Delphi, which is GM's single largest supplier. GM bondholders are also worried about Delphi's parallel legal move to get the right to reject supply contracts under which it provides parts to GM. Delphi has said it needs to get more money from GM and its other customers in order to stay in business over the long term.

A trader at another desk saw GM'S 8 3/8s unchanged at 73.25 bid, 73.75 offered, and saw the GMAC 8s "off their highs [of the day], but still a bit better." He saw those bonds ending at 96 bid, 96.5 offered - down about a point from the early peak levels, but up about a quarter to a half point on the day. GMAC's 6 5/8% notes due 2012 were likewise seen up a point at 93.5 bid, although they had been up as much as 1½ points in morning trading following the announcement from GM.

Lucent long maturities gain

Apart from GM, a trader saw Lucent Technologies' long-dated issues up about a point or two on the session, helped by the news that the Murray Hill, N.J.-based maker of telecommunications networking equipment will combine with larger rival Alcatel.

A trader saw its 6.45% notes due 2029 at 92 bid, 93 offered, which he called a two point gain, although another trader estimated the bonds were up a point at 91 bid, 92 offered.

However, he said that when it comes to the company's shorter-tenored debt, "nobody pays attention to Lucent any more," since those shorter bonds trade at tight levels.

Aztar unchanged

The junk market was equally blase about two other bits of M&A news. The bonds of Aztar Corp. were unchanged, even as a bidding war began shaping up for the Phoenix-based gaming company, which operates major hotel/casino resorts in both Las Vegas and in Atlantic City, N.J.

Ameristar Casinos Inc. made a $42 per share bid for Aztar. That would top both the original $38 per share bid for the company from rival gamer Pinnacle Entertainment Corp. which Aztar had accepted, as well as a subsequent reported $41 per share offer that emerged late last week from Colony Capital LLC, a real estate investment company. Aztar said in a statement late Monday that its board had approved negotiations with Ameristar and Colony, which appears to put into jeopardy the company's March 13 deal to be bought by Las Vegas-based Pinnacle.

Even so, a trader saw Aztar's 9% notes due 2011 at 105.375 bid, 106 offered and its 7 7/8% notes due 2014 at 108.25 bid, 108.75 offered, both unchanged on the day.

Constellation steady

And there was no movement in the 8 1/8% notes due 2012 of Constellation Brands Inc., which announced that it had reached agreement with long-time takeover target Vincor International Inc. Lockport, N.Y. -based Constellation - which had been pursuing an uninterested Vincor for months - upped its offer to the Canadian wine company to $1.09 billion, plus the assumption of $220 million of Vincor debt.

Constellation's bonds were seen unchanged at 104.75 bid, 105.5 offered.

Charter higher on refi

Outside of the M&A sphere, traders saw some gains for Charter Communications Inc.'s bonds, on the news that the St. Louis-based cable operator will enter into a new $6.8 billion credit facility. A trader saw its 8 5/8% notes due 2009 at 70 bid, 71 offered, up 2½ points on the session, while its 11% notes due 2015 were a half-point better at 84.

Just in general, another trader said, "there's a lot of M&A activity going on, and there's a lot of cash that still needs to be put to work. All of the distressed fund managers and the LBO shops - they're just filled to the brim with cash. That's why you don't even see much of a distressed market anymore - because everything is bid up. There are bids for everything.

"The market," he concluded, "is firm."

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