Kmart bonds bounce as bankruptcy seems remote; Argentina trouble leaves Nextel unfazed

By Paul Deckelman and Paul Harris

New York, Jan. 3 - Kmart Corp. debt bounced at least part of the way back Thursday from the pummeling it took Wednesday on negative analyst comments, as market participants took a second look and sensed that a bankruptcy filing for the giant discount retailer might not be coming just yet. Nextel Communications Inc. bonds firmed despite problems with its subsidiaries in strife-wracked Argentina.

In primary market dealings, meantime, two new deals saw the light of day in the form of official announcements. But much of the session's sell-side talk focused on the "shadows," where sizable new issuance is said to be stirring.

Various sell-siders spoke of a substantial offering coming soon from Charter Communications Corp. Near the end of Thursday's session one syndicate official disclosed the offering's existence to Prospect News. That official, however, would say no more.

Several market sources said that Charter would bring $600 million, and that the syndicate would include Salomon Smith Barney, J.P. Morgan, Banc of America Securities and TD Securities.

One market watcher, claiming knowledge of the deal, said that Charter could easily upsize to $1 billion.

This source expects other business of similar size to come onto the primary in the next several days - including a $750 million deal from PanAmSat via Credit Suisse First Boston and Deutsche Banc Alex Brown. The PanAmSat deal was not officially confirmed, however.

"We did $6 billion in January 2000," the market watcher said. "We did $15 billion in January, 2001. I don't think you're going to see the $15 billion this January. But I wouldn't be surprised if you got $8 billion in January and another $8 billion in February.

"It all depends on how the market holds together of course."

Stepping from the shadows back into the light, it was announced Thursday that Rural Cellular Corp. intends to price $300 million of eight-year notes via Dresdner Kleinwort Wasserstein on Jan. 11. And Canadian exploration and production company Compton Petroleum will price $150 million of 10-year notes via Lehman Brothers on Jan. 19.

Also on Thursday, price talk of 12¼% emerged on Paxson Communications Corp.'s $310 million of eight-year discount notes. The deal is set to price Friday.

"The market was sluggish yesterday," one syndicate official commented, "but it's shaping up to be a food fight next week. Before you know it everybody is going to be fighting for face-time with the accounts.

"This is a new year and a hot market. If there are no catastrophic events, January and February are going to be extremely busy."

In secondary trading, Kmart's "bleeding has stopped and we're starting to see it bounce a little bit," a trader said, noting that the company's debt had come off its early lows.

He quoted Kmart's 8 1/8% notes due 2006, which had been fallen Wednesday to about the 68 bid/71 offered area from prior levels in the mid-70s, as trading down as low as 62 bid/63 offered early on before coming off those lows and steadying around 65 bid. "I think they've stabilized for now."

He noted that while Prudential Securities analyst Wayne Hood cut his 2001 fourth-quarter earnings estimate, revised his full-year profit prediction to a loss and warned that Kmart could be forced into bankruptcy if its cash-flow continues to deteriorate over the next six months, "he's still projecting them to have earnings for the 2002 year (25 cents per share). If he's still projecting them to have a profit, then the company's not going to go bankrupt."

The trader acknowledged the possibility of a "strategic" bankruptcy to get the Troy, Mich.-based retailer out from under burdensome leases (most of its approximately 2,100 current nationwide locations are leased, and the company is also believed to retain some lease obligations from former operating units, such as its old Builder's Square unit), and noted that Hood's bankruptcy caution was predicated on a continued erosion of its cash-flow generation, but he added doubtfully "I don't see it today. I feel like they may bounce a little bit here."

He further opined that the slide in Kmart (which continued Thursday in the equity market) might be a phenomenon of current investor overreaction to even the slightest bit of bad news - or potential bad news - about a company. "It used to be that the motto was that something was 'too big to fail' - but now nobody is 'too big to fail' any more," he said. "If the credit starts to smell, people don't ask questions - they just sell."

Kmart's bonds "bounced about three points off their lows when people realized that the likelihood of bankruptcy is premature," another trader said. He saw Kmart's benchmark 9 7/8% notes going home bid at 71, after having fallen as low as 67 during the session, while its 9 3/8% paper also firmed to 71 from prior lows at 67.

"The paper is well off its lows," he declared. "And now, people are scrounging around to buy a lot of the their structured paper, which has leases behind it, such as Kmart's 8.99% notes and 8.80% notes, both of which he saw as having bounced three or four points. "The bargain-hunters are out for Kmart."

Nextel's 9 3/8% "have been strong," a trader said, quoting them as having risen to around the 83.25 bid/83.75 offered level, well up from prior levels around 81.25 bid/81.5 offered. "They were nicely today, and they were up yesterday as well."

There seemed to be no immediate negative impact from the announcement by NII Holdings Inc. - a/k/a Nextel International - that its Argentine operating subsidiaries failed to make an $8.3 million credit facility principal payment which came due on Dec. 31, and that it has entered into a forbearance agreement with its lenders, which will stay them from taking any action until Jan. 22. The company has also hired Houlihan Lokey Howard & Zukin Capital to assist in examining restructuring alternatives and is beginning discussions with its noteholders. The Argentine problem caused a cross-default on NII's vendor financing facility, but it signed a similar forbearance agreement with the vendor lender, Motorola Credit Corp. NII warned, however that it could give no assurances of being able to successfully restructure any of its obligations and said that it might have to file for Chapter 11 protection.

"I think that some people think that (parent Nextel ) is not going to have to fund them any more if they default, after having put something like $2 billion into International. This actually could be a positive for the domestic Nextel," the trader said.

Even though Nextel International is virtually wholly owned by Nextel Communications, the latter said it is not a party to the Argentine borrowings.

Therefore, "Nextel is not on the hook," he said. "There isn't any recourse. The debt can't travel to the domestic operations." The definite strength in the parent Nextel's bonds, he said, is a sign that "people think that they're just not going to have to shell out any additional funds on this."

Nextel International's senior redeemable discount bonds meanwhile remained Thursday where they have recently been - in deeply distressed territory, with its 12 1/8% notes due 2008 at 5.5 bid, its 12¾% notes due 2010 at 6 bid and its 13% notes due 2007 at 8.

The trader said that Calpine Corp. bonds were up on news that the San Jose, Calif. -based independent power producer had sold an additional $200 million of 4% senior convertible notes due 2006 in the exercise of the over-allotment option on its $1 billion offering of the notes which it sold on Dec. 19, and then announced that it had bought back $59 million of outstanding 20-year zero-coupon convertibles. He saw Calpine's senior bonds offered around 92.5, up around two points on the session.

"I think things are continuing to get a little bit better. They've been moseying up over the past couple of weeks," the trader said, as the market's initial panic last month over the swift demise of Enron Corp., now in bankruptcy, and its fears that Calpine (in the same power producing and energy trading sector) might follow suit, seemed to recede.

Service Corp. International Inc. "was up strongly," a trader said, quoting its benchmark 6% notes due 2005 as having pushed up to about the 87.5-88.5 bid range from recent lows around 84, which had followed the news last month that the Houston-based funeral home and cemetery giant was being sued by angry customers, who contended that employees at two of its Florida cemeteries had buried bodies in the wrong graves, and worse, had allegedly dug up some already-buried bodies and had dumped them in nearby woods, to make room for further graves. Before the Dec. 20 announcement of the lawsuit, the bonds had hovered around 92 bid.

"At first the litigation looked bleak, and the bonds looked weaker, but then they bounced back very strongly, when it was apparent these were isolated instances at those two cemeteries," he said.

Service Corp. itself strove to put some distance between itself and the lawsuit, saying the charges were disturbing and that the alleged actions were "completely contrary to our policies and procedures." It added that it was conducting an internal investigation of the matter.

"I can't stand the (deathcare) industry - but they say the only inevitable things are death and taxes," the trader quipped.

Elsewhere, he saw steel issues "continuing to be strong," with Bethlehem Steel's 10 3/8% notes up about a point-and-a-half at 12.5 bid. "I guess a lot of people had their buying shoes on."

He also saw continued buying in Sea Container Ltd bonds, after investment guru John Dorfman listed the Hamilton, Bermuda-based transportation and lodging company among his top picks for the year; Dorfman, the president of Boston-based Dorfman Investments, wrote in a year-end Bloomberg News column that Sea Containers stock "is due for a rebound" adding that while "most of the businesses are in a down phase, yet in good years, the company has earned $2 to $6.54 a share, and the stock trades near $12."

Sea Container's 2003 and 2004 paper "looks cheap," the trader said, with its 9½% notes due 2003 at 86 bid, up around a point or a point-and-a-half on the session, while its 10½% notes due 2003 are up around the same amount, at 87, although on "very thin trading." Sea Container's 12½% notes due 2004 were also "up pretty strongly today," but the bonds were being held back only "by lack of supply," he said.

Another gainer was J. Ray McDermott's 9 3/8% notes due 2002, which the trader said "got real strong today," although it wasn't immediately apparent why. He quoted the bonds at 94 bid/97 offered, up from recent levels at 90 bid/91 offered.

The New Orleans-based company's corporate parent, McDermott International Inc., interestingly, is another name touted by John Dorfman, who noted in the same piece that it "builds offshore oil-drilling platforms, an item I believe will be in increasing demand over the next five years as the economy rebounds and energy usage grows."

The downside of McDermott, however, is its exposure to the asbestos-litigation issue, through its bankrupt Babcock & Wilcox subsidiary. The trader noted that he had also heard of some investor qualms about whether the company would have the cash to redeem the 9 3/8% bonds when they mature on March 15.

"Paper that short usually either trades near par - because everyone knows it's going to be redeemed - or trades near 60, because nobody thinks it will be." For these notes to have climbed back up to the mid-to-high 90s, he speculates, could be a sign that McDermott has gotten the financial wherewithal to redeem the bonds.

Another upside name Thursday was Conseco Inc., whose 8 1/8% notes were up three points to 78 bid, and whose 10½% paper firmed a deuce to 84 bid. The bonds rose ahead of the Carmel, Ind.-based insurer's late-session announcement that Charles H. (Chuck) Cremens had been named president and CEO of its Conseco Finance subsidiary. Cremens succeeds Bruce Crittenden, who resigned to pursue other interests.

On the downside, XM Satellite's 14% notes dipped to 77.5 bid from prior levels around 79. A wall Street Journal column on the fledgling automotive satellite radio broadcasting industry touted XM's pioneering role - but also pointed out many drawbacks to its technology as it currently exists.

End

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