Primus Telecom slammed on 1Q; MCI gains as Qwest surrenders; Calpine, Mirant bank paper higher

By Ronda Fears and Sara Rosenberg

Nashville, May 2 - Primus Telecommunications Group Inc. was the talk of the day among distressed debt traders Monday as the McLean, Va.-based company reported a first-quarter net loss that tripled its deficit a year ago and said it now expects 2005 revenues will come in 10% below last year. But, the company said its priority is to "establish a trajectory" to be free cash flow positive in 2006.

Another telecom story headed activity in the distressed markets, too. MCI Inc. bonds gained 1 to 2 points after Qwest Communications International Inc. pulled out of a bidding war, giving Verizon Communications Inc. a clear path in its quest for MCI.

Level 3 Communications Inc.'s bonds, which eased last week following its first-quarter results, began to stabilize on Monday with the 9 1/8s at 79.25 bid, 80.25 offered, up from 77.5 bid, 78.5 bid on Friday and the 11s due 2008 up 1 point at 87 bid, 89 offered from 86 bid, 88 offered on Friday.

Calpine Corp.'s paper - bank debt as well as bonds - extended gains from Friday's rebound following reassuring guidance from the company on first-quarter numbers.

"It's more of the same. Herd turns the other way and all of a sudden everybody wants to buy it," a bank debt trader remarked.

A bond trader commented, "People are either starting to believe what the company says, or they're at least breathing a sigh of relief. Bankruptcy does not look imminent with $800 million of cash on the balance sheet."

On the bank debt desks, power seemed to be a theme, as Mirant Corp.'s 2003 and 2004 bank debt also was heading higher with the paper quoted up about 1 to 1.5 points at 72.25 bid, 73.25 offered, according to a trader. Nothing specific was seen as pushing the Atlanta power company's debt higher other than there just being more buyers in the market, the trader added.

Too, American National Power Inc.'s third-lien bank debt regained some of its losses on Monday, moving up about 3 points during the session after an 8-point drop during Friday's session, according to a trader. The Marlborough, Mass.-based power company's paper was quoted at 84 bid, 85 offered by day's end, compared to Friday's closing level of 81 bid, the trader said.

"It [American National Power] fell off on bad numbers on Friday. Today people realized the numbers weren't as bad as initially thought," the trader explained.

Back among bond traders on distressed desks, Kaiser Aluminum Corp.'s bonds were sinking with the 10 7/8% issue traded down to 86, bid, 89 offered from 89 bid, 91 offered on Friday, a trader said. In the metals concern's bankruptcy case, there was a request Friday by the "liquidating debtors" for more time to file a reorganization plan, and the company reported monthly earnings on Friday that were weak.

Primus paper pummeled

Primus Telecom was hammered Monday after it reported a walloping net loss, warned of revenue declines and remarked in general about a tough business climate worldwide.

The 8s of 2014 traded down to the 46.75 bid, 47.75 offered context from 59 bid, 60 offered on Friday, and the 12¾% due 2009 fell to 59.5 bid, 60.5 offered from 75 bid, 80 offered on Friday. Another trader saw the straight debt "all over the place," and he pegged the 123/4s at 66 bid with the 8s at 49.75 bid. Meanwhile, the Primus 3¾% and 5¾% convertibles similarly fell into the high 30s from the 50s last week.

Primus shares were nearly halved in value, plunging 74 cents to close Monday at 77 cents - a 49% decline from Friday. The stock traded as low as 73 cents during Monday's session.

"They're getting killed," commented one bond trader. "To my mind, their numbers were absolutely atrocious. Their stock got cut in half ... They blew through every low-end EBITDA estimate out there. It was horrible."

Losses triple, outlook dims

Primus largely blamed its weak operating results for first quarter on greater-than-expected sequential revenue erosion in it high-margin core long-distance and dial-up ISP businesses, as well as severe revenue declines in its European prepaid-services business.

Thus, Primus reported adjusted EBITDA for the quarter of $6 million and a net loss of $35 million, or 38 cents per diluted share, compared to a net loss of $10 million, or 11 cents per diluted shares, a year ago. Revenues declined to $314 million from $348 million.

Based on those results and "potential continuation of similar trends," the company said it expects adjusted EBITDA for 2005 now to be in the range of $35 million to $50 million. The company forecasts prepaid services revenue to decline further in second quarter and forecast annual revenue to be 10% below 2004 reported revenue, or slightly above $1.2 billion.

Primus positive on 2006

But, Primus stressed, "Management's priority is to establish a trajectory to be free cash flow positive in 2006, through managing profitability from existing businesses and reducing costs while providing optimal support to its most promising new initiatives."

Primus ended first quarter with a cash balance of $130 million, including $13 million of restricted funds. Free cash flow stood at a negative $25 million. Long-term debt as of March 31 was $656 million, including a new $100 million senior secured term loan facility.

Currently, Primus said its major new initiatives are focused on broadband customers in Australia - which in first quarter rose 25% sequentially - retail voice-over-internet protocol, or VoIP, services - which rose 40% sequentially in first quarter, and residential local telephone service in Canada - which grew 60% sequentially in first quarter.

"We are executing our strategy of offering a broader portfolio of services, including voice, DSL, wireless and VoIP services to strengthen our competitive position in our major markets," said K. Paul Singh, chief executive of Primus. "Our major challenge continues to be generating margin contribution from our new initiatives at rates that exceed the declining contribution from our core long distance and dial-up ISP businesses. Growth from our new initiatives, however, is continuing at anticipated levels."

MCI better as Qwest concedes

MCI Inc. bonds gained at the apparent end to the bidding war for the company formerly known as WorldCom, which was forced into a sensational bankruptcy in mid-2002 under pressure from $26 billion in debt and ultimately led to federal investigations that that took down several former executives.

Qwest Communications International inc. pulled out of a bidding war on Monday, giving Verizon Communications Inc. a clear path in its quest for MCI. Over the weekend, MCI had agreed to another new deal with Verizon, rejecting a higher-priced bid from Qwest for the fourth time.

As a result, MCI bonds were described as 1 to 2 points higher, depending on the tenor.

"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the Denver-based company said in a statement. "We pursued MCI with tenacity and discipline and feel strongly that our bid would have brought far more value to MCI shareholders."

MCI shares on Monday lost 83 cents, or 31.13%, to close at $25.70, below the latest $26.00 per share offer from Verizon, which was most recently bested by Qwest's offer of $30.00 a share. Verizon's improved bid is estimated at $8.5 billion, about $1.3 billion less than Qwest's. Both bids were in cash and stock combinations.

MCI rejection stings Qwest

"By accepting a lower offer, without even contacting Qwest, and by reportedly allowing Verizon to instruct MCI to impugn Qwest, it is only fair to conclude that MCI is more interested in bending to Verizon's will than serving its shareholders," the Qwest statement said. "Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value."

The latest Verizon bid includes $5.60 in cash, the same as in its prior bid of $23.10 per MCI share, plus Verizon stock worth at least $20.40, and possibly more if Verizon's stock rises by the time the deal closes. Specifically, in addition to the cash, each MCI share would be exchanged for either 0.5743 of a Verizon share. That ratio would only be adjusted if Verizon's shares were to fall.

MCI, based in Ashburn, Va., and New York-based Verizon stressed that their merger is the best for stockholders and customers.

"A large number of MCI's most important business customers had indicated that they prefer a transaction between MCI and Verizon rather than a transaction between MCI and Qwest," MCI said in a prepared statement. "Additionally, as their contracts come up for renewal, a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction. These customer concerns, in the board's view, pose risks in connection with a Qwest transaction."

Calpine still climbing back

After a wild ride last week with regard to Calpine, amid rumors of defaults and even bankruptcy, followed by "assurances" from the company, Calpine debt continued to see a "nice bounce," gaining "smartly" across the board.

Calpine's second-lien bank debt continued to climb higher on Monday with levels moving up about a point to 74 bid, 75 offered still on follow-through from Friday's reassuring pre-announced first-quarter numbers, according to a trader.

On Friday, the San Jose, Calif.-based independent power company released preliminary first-quarter results to retaliate against recent bankruptcy rumors by assuring investors that numbers would be in line with expectations and that the company remains on track to achieve 2005 earnings goals. The company said it would end the first quarter with cash and cash equivalents on hand of about $800 million and restricted cash totaling $500 million.

After remarks from the company Friday, Calpine's second-lien paper moved up to around 73 bid, 74 offered from 71.5 bid, 73 offered.

Calpine is scheduled to report results Thursday, followed by a conference call.

"People are either starting to believe what the company says, or they're at least breathing a sigh of relief," said a bond trader. "Bankruptcy does not look imminent with $800 million of cash on the balance sheet."

The trader pegged Calpine's 8¼% due 2005 bonds at 90 bid, 92 offered, up about 1 point from 89 bid, 91 offered late Friday, and the 10½% due 2006 bonds at 77.5 bid, 79.5 offered at Monday's close, up from 75 bid, 77 offered, and the 8½% bonds due 2011 at 53 bid, 55 offered going out on Monday, up from 48.5 bid, 51 offered on Friday.

(Paul Harris contributed to this report)

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