Level 3, ProLogis lower after earnings; NII weaker; LifePoint Hospitals down ahead of earnings

By Rebecca Melvin

New York, Oct. 23 - Corporate earnings and outlooks were a big motivator of action in the convertibles market Thursday, where pricing continues to languish, market players said.

Level 3 Communications Inc.'s 2.875% convertibles moved down 7 or 8 points as their underlying shares plunged 39%. The decline came as the network-service provider posted a third-quarter loss that was within expectations but lowered guidance for the rest of the year as investors worry about refinancing issues.

ProLogis fell after the real-estate investment trust reported a drop in funds from operations and as the sector, with its ties to financials and real estate, is under fire.

NII Holdings Inc. saw its convertibles edge lower by about a point amid another share sell-off despite posting fairly good numbers, a sellside source said.

LifePoint Hospitals Inc. convertibles were also in trade and a little weaker ahead of earnings that are expected to be reported Friday morning.

LifePoint was a "touch weaker, but basically you could put any ticker in front of 'a little weaker' and be accurate," a Connecticut-based sellside trader said.

The trader said that moves in the stock markets aren't really affecting the convertibles market, which is reacting instead to credit market conditions and weakness in the high-yield and bank loan markets.

"If stocks go up, the convertibles are not going to follow," he said.

Stock markets gyrated Thursday. They began on the quiet side, but the Dow Jones Industrial Average was down by almost 300 points at one point before rallying back to close on the upside by almost 200 points.

The Dow closed up 172 points, or 2%, to 8.691.25, and the S&P 500 closed up 11 points, or 1.3%. But the Nasdaq closed down 12 points, or 0.7%, to 1.603.91.

Level 3 tracks lower

Level 3's 2.875% convertible due 2010 ended at about 51 versus a share price of $0.75, compared to 58 versus a share price of $1.23 on Wednesday.

Last Thursday, the 2.875s were seen at 51.5 against a stock price of $1.30.

Level 3's 6% convertible due 2009 didn't really trade but were offered lower at 67. And last Thursday, the 6s were trading at about 89 versus a share price of $1.30.

Level 3 common stock sank 39%, or $0.49 to close at $0.75.

The slide for the Broomfield, Colo.-based internet services company "makes a little bit of sense" in light of the company's refinancing risk, a New York-based sellside analyst said.

"They have enough for that debt coming due in '09, but what's going to happen after that? There's a lot of debt coming due in 2010. The question is, they've been doing debt for equity exchanges, but how much more are they going to do, how much more are they going to dilute shareholders," a sellside analyst said.

If the company doesn't do more debt for equity, what will it do? Tap the capital markets? What capital markets?" he asked.

Level 3 has enough cash, about $587 million, for 2009, when it has $250 million to $300 million of debt coming due. That will take cash down to $300 million to $350 million, the analyst said.

But "Level 3 has nine lives: they've run into these situations before, and they've been in worse situations, and they always seem to come through. That's why we have the 10% converts out there," which was a private transaction, the analyst noted.

The company still expects to have positive cash flow in the second half of 2008 and for the year 2009. But chief executive Jim Crowe sparked concerns when he told analysts on a conference call that clients were re-examining purchasing plans due to the credit crunch.

It lowered its outlook for core communications revenue growth to 7.5%, from the 8% to 13% forecast earlier in the year.

The company also narrowed its guidance for consolidated adjusted EBITDA to between $980 million and $1 billion, down from a prior forecast of $950 million to $1.1 billion.

Last week, Level 3's convertibles strengthened after the company moved to exchange some of its outstanding convertible debt, or about $108.21 million, including the 2.875% convertibles as well as the 6% convertibles of 2009 and 2010, for equity.

At that time, the company said it was a great time to be proactive and opportunistic in debt refinancing.

ProLogis drops again

ProLogis' 2.25% convertibles due 2037 fell to 45.375 in trade on Thursday, compared to 52.5 on Wednesday. Shares, which initially dropped after the Denver-based REIT reported earnings, ended on the upside.

The REIT reported a 55% fall in quarterly funds from operations to $169.3 million, from $376.2 million a year earlier, and cut its 2008 forecast for the second time in a month.

The company has refinanced its debt due in 2008 and had about $300 million of debt on its balance sheet coming due in 2009. Its funds have about $1.46 billion coming due next year.

To help keep its debt levels down, the company has begun cutting back on development.

Standard & Poor's revised its the outlook on ProLogis to negative from stable and affirmed the BBB+ corporate credit rating and BBB+ ratings on its senior unsecured debt and preferred stock.

The revision reflects expected declines in debt service coverage measures resulting from reduced gains on the sale of properties under development, according to the agency.

Operating headwinds have slowed lease-up, which has delayed property stabilization, S&P said. Additionally, a less-favorable capital market has pushed capitalization rates higher, which lowered expected valuations and profit margins upon sale, the agency added.

ProLogis' stable, moderately leveraged portfolio of quality, well-diversified industrial properties support the ratings, the agency noted.

Independent research firm CreditSights said in a report Thursday that "in its opinion, ProLogis isn't recession proof, but that it will likely be a survivor of the current economic crisis given its strong franchise and assets and relatively solid liquidity profile."

While the disappearance of development gains will hurt short-term profits, ProLogis will likely see itself transformed in the intermediate term into more of a typical rental-based property owning REIT, with an opportunity to take advantage of the market dislocation, CreditSights said.

With ProLogis trading like a distressed credit, CreditSights continues to believe that the sell-off in debt securities is overdone given the company's status as a leading franchise in the industry property market, "with solid liquidity, strong tenant relationships, and many options to combat the current crisis," the CreditSights report stated.

During the third quarter, ProLogis began construction on $528 million of new facilities, down from $1.01 billion in the second quarter. It ended the third quarter with a pipeline of $8.2 billion, down from $8.65 billion in the prior quarter. The company cited the strong dollar as one reason for the lower construction activity.

ProLogis expects development in the full year to be between $2.7 billion and $2.9 billion.

NII edges lower on good earnings

NII Holdings' 3.125% convertibles due 2012 traded down to about 49 versus a share price of $15.79, compared with 49 bid, 50 offered versus a share price of $18.87 earlier.

NII's 2.75% convertibles due 2025, which don't trade as frequently, were seen at about 69.5 bid, 70.5 offered versus a closing stock price of $15.79, compared to recent trade at 79 bid, 80 offered, a sellside analyst said.

The Reston, Va.-based wireless services provider's shares sank $3.08, or 16%, after initially trading to the upside on its earnings news.

"NII reported very good numbers. There's no reason for the sell-off. There's questions about Latin America, but ... I just think there was selling into the strength, taking profits, and it was overdone. These were very good numbers," a sellside analyst said, citing better-than-expected EBITDA and reiterated guidance.

"They were trying to be conservative, and this is positive for the credit," he said. "From the equity perspective, they just didn't like being in the space."

NII's third-quarter net income rose to $91.8 million, or 54 cents a share, from $81.6 million, or 46 cents a share, in the same period last year.

The company said it added 394,500 net subscribers during the quarter, boosting its subscriber base to 5.8 million subscribers.

LifePoint weakens a touch

LifePoint Hospitals' 3.25% convertibles due 2025 closed at about 60.45 versus a share price of $21.97 compared to an early trade at 65 versus a share price of $23.25.

LifePoint's 3.5% convertibles due 2014 closed at about 58.6 versus the $21.97 close, compared to an early trade at 63 versus the $23.25 share price.

LifePoint shares fell $1.39, or 6%, on Thursday ahead of earnings.

The Brentwood, Tenn.-based rural hospital owner and operator was a touch weaker, moving with the shares, a sellside trader said.

Mentioned in this article:

Level 3 Communications Inc. Nasdaq: LVLT

NII Holdings Inc. Nasdaq: NIHD

LifePoint Hospitals Inc. Nasdaq: LPNT

ProLogis NYSE: PLD

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