Rite Aid retreat continues; techs keep tumbling; Level 3 lower; Atlas Energy hitting the road with deal

By Paul Deckelman and Paul A. Harris

New York, Jan. 7 - Amid a market that some traders said was as quiet as last week's, if not more so, junk bonds continued to fall Monday, among them Rite Aid Corp., whose bonds had begun their slide last week after the Camp Hill, Pa.-based drugstore chain operator reported weak same-store numbers for December.

Tech names like Freescale Semiconductor Inc., Unisys Corp. and Amkor Technology Inc. also continued on the downside, extending the retreat that began Friday in line with a fall in tech-sector stocks after JP Morgan Chase & Co. downgraded its recommendation on the shares of semiconductor giant Intel Corp.

Level 3 Communications Inc. was also among the bonds seen moving lower, although no fresh news was seen out on the company; still some equity investors are betting that its shares also continue on a downward path.

Sources noted activity was low.

"There is some trading going on, but it's credit specific," one syndicate official said. "You don't see the kind of trading that creates huge market swings, one way or the other."

Meanwhile in the primary market the new year has yet to see its first new high yield issuance.

However Monday did produce another morsel of primary market news.

And once again the news emerged from the oil and gas sector.

Atlas Energy Operating Co. and Atlas Energy Finance will begin a roadshow on Tuesday for a $400 million offering of 10-year senior notes (B3/B), a debt refinancing deal via JP Morgan and Wachovia Securities.

Market seen quiet, lower

A trader said that Monday's market was "ridiculously quiet." It "opened weaker" and stayed that way all day. He saw the widely followed CDX junk bond performance index down ½ point at 93¼ bid, 93½ offered.

The KDP High Yield Daily Index continued to erode, falling 0.26 on the day to end at 76.48, while its yield paradoxically tightened by 2 basis points to 8.97%.

In the broader market, declining issues outpaced advancers by around a five-to-three margin. Overall market activity, as gauged by dollar volume levels, fell by about 14%.

"Nothing really stood out," the first trader said, while a second opined how he had hoped that market activity would pick up now that the New Year's holiday was about a week behind us, with everyone having predicted that the market would get back into full swing this week, "but if anything, it was even slower than last week was" at his shop.

Tech names continue to head lower

One area in which he did see some activity was in the tech names, noting that they were mostly down a point or two, on top of the similar sized retreat seen on Friday after JP Morgan downgraded Intel's stock and high-tech equities moved down, followed by their bonds.

He saw Austin, Tex.-based computer chipmaker Freescale Semiconductor's 9 1/8% notes due 2014 fall to 79 bid, 81 offered, down 2 points on the session, while Unisys' 8½% notes due 2015 were also down a deuce, at 86.5 bid, 87.5 offered. The Blue Bell, Pa.-based information technology solutions provider's 6 7/8% notes due 2010 were off 1½ points at 94.

Chandler, Ariz.-based semiconductor testing and packaging services provider Amkor's 9¼% notes due 2016 lost a point, he said, to 98 bid, 99.5 offered.

Rite Aid still in retreat

Also on the downside was Rite Aid, with a market source pegging the drugstore chain operator's 7.70% bonds due 2027 down nearly 8 points at 62.5 bid in active trading, while its 6 7/8% notes due 2013 were down a considerably more conservative ½ point at 67 bid.

Rite Aid's 8 5/8% notes due 2013 were also seen down ½ point at another desk, at 74.5 bid.

Bonds and shares of the Number 3 U.S. drugstore company - behind Walgreen Co. and CVS Caremark Corp. - took sick last week after Rite Aid reported softer December numbers, in line with a general downturn in the drugstore industry.

Its same-store sales - the key retailing industry performance metric - were down 0.5% in December, reflecting a drop in front-end sales of non-medicinal products, as well as no better than flat pharmacy sales, due to a milder-than-expected flu season, and the impact that lower-priced generic substitutes for brand-name prescription medications was having on pharmacy revenues. The same-store figures, measuring performance at established locations open at least a year, exclude the impact of newly opened stores, or those which Rite Aid acquired last year when it bought several hundred Eckerd and Brooks pharmacies from Canadian retailer Jean Coutu Group.

Other retailers weak

Rite Aid's woes were reflected in other retailing names, whose bonds moved lower amid general investor dismay with the sector, following soft December sales numbers industrywide and fears that a slowing economy could further crimp store sales. Claire's Stores Inc.'s 9¼% bonds due 2015 lost 3 points to end at 63 bid, 65 offered, its 9 5/8% 2015s lost 4 points to end at 58 bid, 60 offered, while the Pembroke Pines, Fla.-based specialty retailer's 10½% notes due 2017 were also down 4 points at 48 bid, 50 offered.

Another retailer, Finlay Fine Jewelry Corp., was in the same boat. Its 8 3/8% notes due 2012 lost 1 point to 57 bid. S&P cut the New York-based jewelry merchant's ratings by one notch, including a downgrade in the bond rating to CCC+.

Level 3 moves lower

Level 3 Communications bonds were lower, although nobody had seen any new negative news out about the Broomfield, Colo.-based telecommunications company. A market source pegged its 9¼% notes due 2014 down 2½ points at 88 bid, although a trader at another desk, while seeing them at that same level, said the bonds were only down by about a point.

He also saw its 12¼% notes due 2013 off by a point at 98.25 bid, 99.25 offered.

Over on the equity side of the fence, the stock was down just a little - 4 cents, or 1.33%, to $2.97. However, market technicians were noting that Level 3 was the target of heavy put-buying activity on the International Securities Exchange on Friday, with investors buying over 2,600 put options - essentially, a bet that the stock is going to head lower - versus just 130 calls, or expectations that it will rise from current levels. That translates into a single-day put/call ratio of more than 19:1, one of the highest readings on the day.

Level 3 is said to be facing many challenges, among them, integrating the various telecom assets which it has been buying from other telecom companies, having made 10 acquisitions in the last year alone - some though bankruptcy-process fire sales, such as its purchase of Genuity Inc, others such as its purchases of assets shed by other, larger players like AT&T Inc., which divested itself of some telecom properties as part of its merger with SBC Communications

In October, the company lowered its full-year 2007 and 2008 consolidated adjusted EBITDA guidance to reflect provisioning problems - in other words, difficulties completing customers' orders - that caused its revenues to fall short of expectations. It announced plans to unstop the operational bottlenecks and improve service to its customers.

A week or so before unveiling its lowered guidance, it announced that veteran chief financial officer Sunit Patel would be stepping down from that position. While Wall Street respects Patel for his financial skills and achievements, which have included cutting the company's debt load and interest costs through a series of debt buybacks and refinancing transactions over the past several years, Level 3 indicated that his replacement should also have operational experience as well as financial qualifications, in order to allow Level 3 "to take full advantage of the opportunities presented by our marketplace."

No replacement has been chosen yet.

Level 3 is hoping to soon be able to report progress on getting a piece of a $48 billion federal government telecommunications contract awarded to the Colorado company, along with such larger sector peers as AT&T, Qwest International Inc., Verizon Communications Inc. and SprintNextel Corp. But while the government announced its intentions of contracting for service for various government agencies through Level 3 and the others all the way back in May, only a handful of orders have been inked by the companies since then, leaving the bulk of the $48 billion still unspent. While getting a piece of the so-called "Networx" contract was an important step for Level 3 and the others, it was no guarantee of any specific business to any specific company - only a blanket authorization for federal agencies to have the option to select services and products from any of the companies. Level 3 has held discussions with a number of agencies, and has announced two federal contracts in recent months - one with the Library of Congress and the other to provide local telecommunications to points in the Washington D.C. service area.

A sector to like

In the primary market, sell-side sources mentioned on Monday that it may not be a coincidence that the Atlas Energy emerges from the same industry sector as the Southwestern Energy Co. $400 million offering of 10-year senior bullet notes (expected Ba2/confirmed BB+), which was announced last week and began its roadshow on Monday.

Presently Atlas and Southwestern are the only deals in the market.

Both are "corporate" deals, meaning that they are unrelated to the $200 billion-plus amount of hung LBO bond- and loan-related risk with which the underwriters continue to struggle.

Both Atlas and Southwestern announced they will use the proceeds from their respective bond sales to repay bank debt.

Most important, according to one source close to the deals, is that both come from the oil and gas sector.

"It's a good market for oil and gas, and it's a good market for corporate deals," the source said, adding that the Southwestern Energy deal, which started its roadshow on Monday, is already getting "an extremely good reception."

This source and others on the sell-side told Prospect News on Monday that good executions for Atlas and Southwestern could serve to "reopen" the high yield primary market.

However, they cautioned, underwriters will continue to struggle with the highly leveraged LBO risk.

"Some of the hung risk is probably going to come to market in order for the dealers to test the waters," one senior high yield syndicate official commented on Monday afternoon.

But another sell-side source urged caution with respect to bringing the backlog of hung risk to market.

"If underwriters rush in with these highly leveraged deals it could spell trouble," the official asserted.

"People don't want to see risky deals in the market right now.

"The accounts are in a wait-and-see mode. They want some kind of stability before they start pricing the risk.

"If no LBO deals hit the market for the next couple of weeks it definitely won't be a bad thing."

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