Advance Auto upsizes new deal; Friendly up on tender; Conseco continues slide

By Paul Deckelman and Paul A. Harris

New York, Oct. 24 - Advance Auto Stores Inc. brought an upsized new deal to market Wednesday - a feat made all the more notable because the B3/B- issuer is one of the lowest-rated credits to bring a larger-than-expected deal to market in the uncertainty following the Sept. 11 terrorist attacks.

Market-watchers believe it may be due to a paucity of better-quality offerings - a sort of Gresham's Law of junk bonds.

In the secondary market, Friendly Ice Cream Corp.'s 10½% senior notes due 2007 were up nearly five points on the session after the company announced a "modified Dutch auction" tender for a portion of the issue. Another upsider was Nextel Communications Inc., which reported a narrower than expected third-quarter loss versus year-ago levels and increased subscriber rolls. On the downside, Conseco Inc.'s debt continued to erode, even as the beleaguered insurer sought to reassure investors.

The upsizing of Advance Auto Stores, Inc.'s $200 million add-on provided the highlight of Wednesday's primary market activity. The offering was increased from a planned $150 million and priced at 92.802 to yield 11.875%.

Sell-side sources who spoke to Prospect News Wednesday noted that with its B3/B- ratings, Advance represents a lower quality credit than those which have typified executions since Sept. 11.

"I think momentum is definitely increasing," one investment banker said.

"Advance is interesting because this is an automotive retail store, acquiring Discount Auto Parts. So it's really a do-it-yourself kind of thing for do-it-yourself customers. And during times of recession you would think that there would be a lot of that.

"That could have been the reason the buyside found this deal so attractive," the banker conjectured.

Having supplied this hypothesis, the banker tendered another, describing it as somewhat more likely.

"What we heard this morning was that the buyside is sitting on a lot of cash," the banker said. "The secondary market is just not doing it for them. A lot of the bonds are priced above par, and they don't want to pay such a high premium. So they're looking at the new issue market, which has practically stopped - I mean, it's flowing, but not to the extent that it was before.

"The buyside needs to buy bonds, they need to put that cash to work."

The buyside apparently had second thoughts with regard to Adelphia Communications $500 million of five-year notes which priced late Friday at 99.039 to yielding 10.5%. That deal was repriced Tuesday at 97.161, boosting the yield to 11%. The repricing was spurred by Moody's announcement that it was putting Adelphia's ratings on review for possible downgrade. Terms of the repricing also stipulate that the 10¼% coupon will increase 50 basis points if the company does not deconsolidate Adelphia Business Solutions within 180 days, according to the source.

In secondary trading, the notes were quoted around the repriced level at 971/4.

However there was some dissatisfaction with the repricing.

One trader, who was particularly angry, questioned what would happen about trades made before the issue got repriced.

"If I shorted the bond, I'm hosed," he said. "It's a major snafu and a brutal screw-up."

In other primary activity Wednesday, Virginia tobacco merchant Dimon Inc. had been expected to price its recently upsized offering of $200 million of 10-year senior units. The deal was originally $150 million.

But by late in the session terms had not emerged.

A syndicate source told Prospect News late Wednesday that the Dimon would likely price Thursday morning. Talk on the deal (BB/Ba3) is for a yield of 9 5/8% to 9 7/8%.

Also Thursday, InSight Acquisition is scheduled to price $200 million of 10-year notes (B3/B-). On Wednesday, the price talk that surfaced was for a yield in the 10% area.

In secondary news, Friendly, the Wilbraham, Mass.-based operator of a chain of restaurant/ice cream parlors, said it would buy $21 million of its bonds at a discount to face value, meaning it might take out anywhere from $28 million to $29.16 million of the notes, at a price somewhere between 72 to 75 cents on the dollar, not counting interest. Its bonds, accordingly, were heard up 4.5 points, at the 75 bid level.

Also higher was Nextel, which reported a third-quarter loss of $150 million (27 cents per share), versus $180 million (31 cents per share) in the year-ago period. Analysts had been warning of a 48-cent-per share loss. The Reston, Va.-based wireless telecom operator - fifth largest player in the U.S. wireless market - also reported that it added 481,000 new domestic subscribers in the third quarter, a 30% increase, in line with its expectations.

Nextel's debt was quoted up anywhere from two to four points on the session, its 9 3/8% senior notes due 2009 up a pair to 70 bid, its zero-coupon notes due 2008 up four points to 61 bid, and its zeroes of 2009 up three points to 54.

"Volume was light, but it seemed like there were buyers around," a trader said.

The high yield telecom bellwether - which said it would have added more than 500,000 new customers during the quarter, had it not been for the economic dislocations which followed Sept. 11 - projected during a conference call that it still expects to add between 1.9 million to 2 million net new subscribers by the time 2001 wraps up. It foresees revenues of over $7 billion and operating cash flow of $1.9 billion.

Analysts were said to be generally pleased with the company's numbers; Ronald B. Gies of Stone & Youngberg in San Francisco, for instance, said the tone of the conference call was "quite positive and seemed to dispell some of the recent concern about the company's ability to remain strong during an economic downturn."

Gies noted that many of his brother analysts "have been not-so-subtly trying to encourage the company to add subscribers at a higher rate - by taking on weaker customers. We are quite pleased that the company hasn't listened to those folks, and last quarter's results show their ability to grow in this environment."

The analyst further noted that while Nextel resisted the pressure to swell its subscriber rolls with less-desirable weak customers, it embarked on "some more aggressive customer retention programs" to retain the customers it's already got, with churn - customers jumping from one phone company to another - falling in all five of Nextel's domestic geographic territories and down overall for a second straight quarter.

He also noted approvingly that "the company continues to behave conservatively. They express no wild-eyed desire to buy spectrum at aggressive prices. Capital expenditures are being reduced to balance spending with subscriber growth. And liquidity was quite large - $5.7 billion at quarter-end, including $4.2 billion in cash and additional bank availability."

All told, Gies concluded: "we remain convinced of the quality of this business plan; and today's positive market reaction is a reflection of what we've been professing."

The market meanwhile failed to be much reassured by statements coming out of Carmel, Ind., home to troubled insurer Conseco Inc., whose bonds and shares have recently been on the slide. The company issued the latest in a series of memos under the signature of chairman and chief executive officer Gary Wendt, who declared that "many investors have let uncertainty creep into their thinking about Conseco. These concerns are misplaced. Unlike troubled companies, we are generating positive cash flow and growing earnings."

Wendt said the company, which will report earnings on Oct. 30, would show its two operating segments "generating over $700 million of cash flow before interest and dividends this year. And we project they will produce more next year even in this economy."

Wendt further declared that "comments about 'solvency issues' have spooked people into believing that we will have a liquidity problem in 2002. Here's the answer to that question: We have excellent and predictable cash flow and multiple sources of additional cash if necessary. We expect no problem meeting our debt obligations in 2002 and beyond."

The markets apparently weren't buying it; Conseco's shares were down 20 cents (4.76%), to $4, on heavier than usual volume. On the debt side, a market-watcher called Conseco's bonds down five to seven points across the board, with its 8¾% notes quoted at 50 bid, its 9% notes at 51, and its 10¾% paper at 49.

A trader said Benton Oil & Gas' 11 5/8% notes due 2003 had risen to 73½ bid/ 74 offered from prior levels around 70, and opined that there had been speculation that the Houston-based oiler might be buying back some of the bonds, "quietly going around to some of the bondholders."

Other issues he saw edging up included battered Canadian steelmaker Algoma, whose 12¾% notes pushed up to 15 bid from 12 previously after the company filed a restructuring plan with a Toronto court which would effectively sell the company to the holders of its C$550 million of first mortgage debt. They would get C$150 million of new notes and 75 percent of the restructured company's new shares. Employees would get 20% and unsecured creditors the remaining 5%, plus C$2 million cash. Existing shares would be cancelled.

The trader also saw Allegiance Telecom's 12 7/8% notes up about four points to 67 bid after the company's announcement Tuesday of what it deemed "robust" third quarter results. Allegiance reported third quarter revenues of $135.1 million, an increase of 8.9% versus the second quarter and a 68.9% jump from a year ago. Allegiance further said it sold 182,000 new lines in the quarter, consistent with plan. Lines installed for the third quarter totaled 136,200. It also installed its one millionth line during the quarter.

The bonds, the trader said, "have been on a roller coaster," falling from about 94 bid just four or five months ago to as low as 55, before bouncing back to 63 by Tuesday and 67 Wednesday.

Also in the telecom sphere, another trader saw weakness in antenna tower bonds, but for no apparent reason, with American Tower's 9 3/8% notes falling to 83 from 84 ¼ bid Tuesday. Crown Castle's 9 3/8% bonds dipped a point to 85 1/2, and SBA Communications' 10¼% bonds, pegged at 84 bid last week, were around 80.

End

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