Traders: Swift likely to trip covenant; Investors bet on Trump; Level 3 debt 'pops' on numbers

By Stephanie N. Rotondo

Portland, Ore., April 23 - The possibility of tripping a bank covenant might be what has caused Swift Transportation Co. Inc.'s bonds to decline of late, traders said Wednesday.

The bonds continued their downward drive during the session in active trading. As Swift is a privately held company, there is very little news flowing into the market. One trader said he has heard the market buzzing that the bank covenant could be "busted" soon, which would likely force the company into a restructuring.

Meanwhile, Trump Entertainment Resorts Inc.'s bonds remained on their upward climb, though traders were not sure what was prompting the movement. Earlier this month, the company said it was considering an asset sale and Moody's Investors Service cut its rating on the casino, citing increasing competition.

Level 3 Communications Inc. was on the tip of many market players' tongues after the company posted improved first-quarter numbers. The company's debt - bank and corporate - gained a decent bit on the back of the figures. Still, not all believe the company has completed its turnaround.

Overall, the distressed bond market remained on the firmer side.

"The tone still kind of feels firm," a trader said, though he added trading was "on the quiet side, no doubt."

Traders: Swift likely to trip covenant

Swift Transportation's debt continues to slide as the market buzzes that the company might bust its bank covenant.

One trader quoted the 12½% notes due 2017 at around 36, while another pegged the bonds at 35.5 bid, 38.5 offered. The second trader called the name active during the session and noted that the bonds hit a high of 37.

"This thing just can't hold a bid," he said.

When asked what had caused the company's bonds to decline recently, the trader said that he had heard "talk that they are likely to bust their bank covenant," which he said would then throw the company into "Linens [n'Things] hell [i.e., restructuring]."

Swift and Linens are often referenced in tandem, as both were the objects of leveraged buyouts in the last couple years. When both companies issued their bonds, they began to decline right out of the gate.

"As soon as they came out they went straight down," a trader said of Swift's debt.

"I am sure they will bust [the covenant]," the trader continued. "Look at all the negatives against them - diesel, fuel prices."

It is also believed that in the event of a bankruptcy or other type of restructuring, recovery on the company's bonds is expected to be next to nothing.

"I have heard estimates of single-digits to the mid-teens," a trader said.

A Bloomberg article Wednesday discussed that very issue. The article stated that given the current cycle, distressed bondholders overall are looking at recoveries around 10 cents on the dollar.

Swift Transportation is a Phoenix-based transportation provider.

Investors gambling on Trump bonds

There has been no fresh news out on Trump Entertainment, but the casino operator's bonds keep edging upward anyway.

One trader called the 8½% notes due 2015 up 1.5 points to 65 bid, 66 offered. At another desk, a trader placed the bonds at 66 bid, 67 offered.

The second trader, however, did note that the company's stock was lower. The equity closed the day down 2 cents, or 0.75%, to $2.65.

Earlier this month, the company said it was considering selling some of its casino assets. Shortly thereafter, Moody's cut its probability of default rating to "Caa1" from "B3," citing increased competition from new gaming centers in Pennsylvania.

Trump will hold its quarterly conference call to discuss the first-quarter financials at 11 a.m. ET on May 8.

Trump Entertainment is an Atlantic City, N.J.-based casino operator.

Level 3 structure 'pops' on numbers

Level 3 Communications' debt structure took off after the company released its first-quarter numbers, traders reported.

On the bank debt side, the term loan headed higher during Wednesday's market hours, with a trader quoting the loan at 91¾ bid, 92¼ offered, up from 90¾ bid, 91¼ offered on Tuesday.

Among the company's various corporate debt issues, a trader said the bonds "popped" during trading, moving up 3 to 4 points on the day. He pegged the 8¾% notes due 2017 at around 82 and the 9¼% notes due 2014 at 87.

"They were somewhat active and up a good bit," he said.

At another desk, a trader called the name "very strong," its 12¼% notes due 2013 ending at 97.5 bid, 98.5 offered. He deemed that level up 2.5 points from the morning's opening trade around 95.

"There were very strong bids," he said.

For the quarter, Level 3 reported consolidated revenue of $1.09 billion, an increase of 3% from $1.06 billion for the first-quarter 2007 and a small decrease from $1.10 billion in the fourth quarter.

Net loss for the quarter was $181 million, or $0.12 per share, compared to a net loss of $647 million, or $0.44 per share, for the first-quarter 2007. In the first-quarter 2007, excluding a loss on the extinguishment of debt of $427 million, the net loss would have been $220 million, or $0.15 per share.

Consolidated adjusted EBITDA was $211 million in the first quarter, an increase of 24% from $170 million for the same period last year.

"Over the last several quarters, a growing number of telecommunications industry participants have noted the growth in the demand for optical and IP services," said James Q. Crowe, president and chief executive officer, in a news release. "We certainly benefited from that trend during the quarter, driven by growth in the delivery of video and other media over the Internet. Additionally, the pricing environment for our Core Communications Services continued to be positive.

"From an operational perspective, we believe we have substantially increased available installation capacity, which was previously a significant constraint on our ability to meet market demand for our services. With these operational improvements, we believe that we are on track to meet our two primary goals for 2008 - to reach free cash flow breakeven on a run rate basis during 2008, and to increase our sales and installations to rates that match customer demand for our services.

"With respect to the first goal, our performance has exceeded our earlier expectations and we expect to be free cash flow breakeven for the remaining three quarters of this year," Crowe added in the release.

But despite the better numbers, not everyone believes Level 3 is out of the woods just yet.

In an afternoon report, Gimme Credit analyst Kim Noland wrote that while the company has decent liquidity at around $700 million, there is a large sum of convertibles maturing in 2009 and 2010.

"While significant refinancings in the first quarter of 2007 pushed out maturities of the fixed notes, the company still faces some refinancing risk because it probably won't be free cash flow positive in 2008," she stated.

And while there are not covenants to trip up the company, leverage is still high at over 8x.

Level 3 is a Broomfield, Colo.-based provider of fiber-based communications services.

Broad market ends firmer

A trader said there was "definitely some activity" in Residential Capital LLC's paper. He saw the 6 3/8% notes due 2010 at around 58 and the 6 7/8% notes due 2015 at around 54.

"That's slightly lower, down roughly a point," he said.

Another trader, when asked of the name, said he did not like the bonds at the current levels.

"We think they go to zero," he said.

Meanwhile, another trader said he saw Insight Health Services' floating-rate notes due 2011 up at 59 bid, 60 offered. He attributed the move to short covering.

Primus Telecommunications Group Inc.'s 8% notes due 2014 closed unchanged at 40 bid, 42 offered.

A trader said Winn-Dixie's stubs were being "shopped around" at 5, which he called "interesting."

Sara Rosenberg contributed to this article.

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