Williams falls on default fears; Tyco seems to edge toward junk status

By Paul Deckelman and Paul Harris

New York, Feb. 4 - They say the best defense is a good offense - but bondholders and shareholders of troubled telecommunications operator Williams Communications Group Inc. apparently weren't buying it. Both the bonds and the debt slid Monday despite the Tulsa, Okla.-based long distance network operator asserted that it had no plans to head for the bankruptcy courts, as such well-known telecom names as McLeodUSA Inc. and Global Crossing Ltd. have recently done.

But that brave declaration, as well as a less-than-expected fourth quarter loss were overshadowed by the company's acknowledgment that its banks might consider it in default on its credit facility.

In the primary, three new deals were announced for a total of $380 million added to the calendar.

Back in the secondary, Williams' 10 7/8% senior notes due 2009 "traded down," observed a trader who quoted the paper as having opened at 19 bid/21 offered, well down from Friday's closing levels around 29 bid/31 offered. But later in the session, he said, the bonds had bounced back somewhat, recouping half of the early loss to close down about four or five points on the session, at 25 bid/26 offered.

"What a riot," another trader mused on the credit's roller-coaster action Monday on the possibility that the company might face some problems with its banks. "When the news hit," he said, the 10 7/8% notes, which had gone home Friday quoted in the mid-to-high 20s, suddenly went as low as 18-20 from 25-30, although he added that "not a lot of bonds traded in that context."

However, he continued, "it didn't take long for things to start bouncing," with the bonds eventually ending the day around 25 bid/27 offered. "There was a lot of action, but we didn't see a lot of price movement." While there really wasn't much trading going on at the day's lows around 18, "in the mid-20s, some bonds traded. There were a lot of buyers, who said there seemed to be a bit of an over-reaction (to the bad news) and that's when we started to see the bids move up a bit."

At another desk, the 10 7/8% notes were quoted at 23 bid at the end of the day, down from Friday's 28.5.

Williams reported that in the fourth quarter, its revenues rose by 28% to $330.3 million from $287 million a year earlier. While the company continued to lose money, its net loss narrowed to $372 million (76 cents a share), from $546.6 million ($1.18 a share) a year earlier. Excluding one-time items, Williams' fourth-quarter loss was 52 cents a share, somewhat less than the 57 cents a share that Wall Street analysts were expecting. Cash flow, as measured by consolidated operating EBITDA (consolidated earnings before interest, taxes, depreciation and amortization and other adjustments, considered a key bond market measure of cash flow generation and ability to service debt) remained in the red, but the $12.8 million was 43% less than the third's quarter's $22.5 million of red ink. Williams said the results, "which met market expectations and Company guidance, reflect the Company's continuing execution on its business plan."

But that relatively positive news was pushed aside, in the minds of many investors, by Williams' noting in its earnings release that on Jan. 29, the company's banks had informed it that "in their view, the Company may be in default under its credit agreement, and have reserved their rights accordingly. Williams Communications has informed the banks that it strongly disagrees with their position, and that it is not in default under the credit agreement or any other material agreement."

Williams explained that the possible default "relates to the fact that, due to recent negative developments in the telecommunications industry, the banks are questioning whether the Company can confirm the representations and warranties included in the credit agreement. The banks also have reserved their right to claim that the purchase by Williams Communications of certain of its senior redeemable notes in 2001 previously reported by the Company may violate the credit agreement."

Williams - which was already working jointly with its bank group to perform a comprehensive review of its credit agreement - said that the company and the banks had agreed to extend the negotiating period for an amendment to the credit agreement until Feb. 28. To assuage the banks' concerns about the company's note repurchases, Williams agreed that it would not purchase its securities and said that it would limit transactions through certain of its subsidiaries through mid-2003. It further promised that, consistent with its current business plan, Williams - which to date has borrowed $975 million from the bank group under the existing terms of the credit facility - would not draw upon its $525 million credit revolver prior to the expected utilization under the business plan in mid-2003.

Williams also promised to submit a comprehensive plan for restructuring and de-leveraging its balance sheet to the banks by Feb. 25. The company said that in developing this plan, it is considering "various possible restructuring alternatives. However, successful execution of the options currently envisioned does not include seeking bankruptcy court protection or the substantial dilution of equity security holders."

Despite the company's relatively benign earnings data (at least from the standpoint of the money-losing start-up telecom industry), its assertions that it does not envision a bankruptcy filing or a massive dilution of shareholder equity and its promises to work with the banks and present a comprehensive de-leveraging plan, equity investors, like bondholders, voted with their feet on Monday, taking the company's shares down 42 cents (29.58%) to an even $1 in New York Stock Exchange dealings. Volume of 25.9 million shares was almost five times the usual daily turnover.

A trader saw another long-distance telecommer, Level 3 Communications Inc., "trading down in sympathy" with its rival. The Broomfield, Colo.-based company's benchmark 9 7/8% senior notes due 2008, which finished Friday quoted around 39 bid/41 offered, moved down to 35 bid/38 offered, although the trader observed that "there was not a lot of action in the credit."

He also saw the battered Global Crossing - whose bonds had initially been quoted trading as high as the 9-11 area in the aftermath of its Chapter 11 filing last week before dropping back into the mid-single digits - as "hanging in at a 4-5 context." The Hamilton, Bermuda-based international fiber-optic network operator said Monday that it would form a special committee of independent directors to review a former employee's allegations of improper accounting. The company will also turn to an independent accounting firm - its regular auditor is the trouble-plagued Arthur Andersen - to review its accounting. Global Crossing also said the Securities and Exchange Commission is also looking into the matter.

The flap over Global Crossing's accounting is the latest in a spate of such incidents to hit the financial world since the shocking crash of Enron Corp., which has been accused of deceptive book keeping practices allegedly sanctioned by Andersen, which in turn is in hot water over charges of wholesale document shredding.

With investors running scared at even the slightest hint of fishy book keeping, companies with accounting problems have been taking a pounding - and on Monday, Tyco International was squarely in the financial markets' crosshairs, after The Wall Street Journal reported that the Bermuda-based holding company had spend $8 billion on some acquisitions over the past three years, which were never publicly announced. This included $4.19 billion last year, more than one-third of its total of $11.3 billion in acquisitions for the year. "The revelation raises new questions about the completeness of the financial disclosures by the conglomerate, which has come under close investor scrutiny in recent weeks for its complex accounting practices," the paper added. Tyco hotly denied any suggestion that there was any accounting trickery involved, saying it would have made no sense for a company with $36 billion in annual revenues to issue press releases for every tiny acquisition.

But the jittery markets may be in no mood for technical explanations; Tyco shares, which have fallen by nearly half just since December, swooned another $5.73 ($16.08%) to $29.90 in NYSE action. Volume of 75 million shares was over three times the usual. On the debt side, Tyco's ratings were taken down three notches Monday by Standard & Poor's , which lowered its unsecured bonds to BBB from A (Moody's Investors Service rates the bonds at A2).

"This is getting worse and worse as it goes along," a market observer said of the deterioration in Tyco's bonds. He quoted its 5.80% notes due 2006 - still officially quoted on a spread-versus-Treasuries basis, as investment-grade issues usually area - as having widened out to a massive , junk-like 600 basis points over, versus a 300-basis point bid spread on Friday. At another desk, Tyco's 6.75% notes due 2011 were being quoted at spreads equivalent to a dollar price as low as 83 during the session before improving slightly off those depths to go home around 86 bid.

According to news reports, company investors were also rattled by Tyco's decision to pay down $4.5 billion in commercial paper and replace it with bank borrowings, which has raised investor concerns the company's access to cash to fund day-to-day operations was limited. "There's talk that they may be barred from the commercial paper market," the observer said, "and might have to resort to using bank credit" to fund short-term expenses.

Back among issues which are already junk bonds, telecom wireless bellwether Nextel Communications Inc.'s 9 3/8% notes dipping as low as 68 bid/70 offered from early levels around 72 bid/73 offered.

A trader saw bankrupt retailer Kmart's senior notes "creeping up," with its 9 3/8% senior notes due 2006 getting as good as 48.25 bid from prior levels around 46.5 bid/48.5 offered. With the troubled Troy, Mich.-based discounting giant now having its debtor-in-possession financing in place, its suppliers once again shipping merchandise to its 2,114 stores and the company now having the legal right under the bankruptcy code to try to wriggle out from burdensome leases, "in hindsight, this bankruptcy certainly looks strategic," the trader said.

Among new issues, Solectron Corp.'s 9 5/8% senior notes due 2009, which priced Friday at 99.369 "has done well" since having been freed for secondary dealings, he said, quoting the new bonds around 101.875 bid/102.25 offered.

A trader said the new Pathmark Stores 8¾% senior subordinated notes due 2012, which recently priced at par, seemed "tightly controlled. There are different buyers out there now, but nobody is showing any paper." He theorized that when the supermarket operator decided to exchange the 144A bonds for new publicly tradable paper, "they might loosen up" and trade around.

He said the ease with which the paper was snapped up, and at par, yet, was surprising, given the company's checkered history (it issued the new paper after getting rid of almost $1 billion of old debt in 2000 via a Chapter 11 restructuring) and the fiercely competitive, low-margin industry it operates in. "I can't believe it's as strong as it is, " he opined. "The company is such a pig."

In primary activity, the week opened with $380 million of new issuance announced: two new deals with full roadshows and a drive-by add-on.

Meanwhile, by late in Monday's session no terms were heard on TSI Telecommunications, Inc.'s $245 million offering of 10-year notes via Lehman Brothers. Sources have told Prospect News that the market has been expecting those terms since last Thursday, Jan. 31.

One sell-side official, noting Monday's 220-point decline in the Dow Jones Industrial Average, expressed the belief at the end of Monday's session that such a fall-off in equities is bound to impact high yield.

"I think it's making high yield investors more cautious at this point," the source said. "They're willing to buy stuff, but they're not going to be willing to buy just anything."

This official also remarked that the buy-side continues to hold significant cash and that armed with this knowledge investment bankers remain positioned to operate in a seller's market.

"Underwriters will try to push the investors even harder, knowing that they have a lot of cash," the source said.

"What's the difference between 9¾% and 10%, when you have $20 billion sitting on the sidelines? If they see something that they like they're all going to be buying it up."

The menu for the primary market increased Monday when New World Restaurant Group announced it would bring $155 million of seven-year senior secured notes via Jefferies & Co. The deal is expected to price late in the week of Feb. 11.

And the Georgia-based commercial floor covering company, Tandus Group, Inc., is set to roll out $175 million of eight-year senior subordinated notes, with Credit Suisse First Boston and Banc of America Securities as joint bookrunners. The roadshow starts Wednesday, and the new Tandus notes figure also to price during the week of Feb. 11.

In addition, Compagnie Generale de Geophysique, a French company that makes geoscience equipment and software, and does geoscience for the petroleum industry, announced it will bring a $50 million add-on to its 10 5/8% senior notes due Nov. 15, 2007 (Ba3/BB). The joint bookrunners are RBC Dominion Securities and Salomon Smith Barney.

Hence, as the first session ended, in the first full week of February, 2002, the market was anticipating at least six deals, worth $945 million, to price by the close on Friday.

Finally, price talk of the 9½% area emerged Monday on Klöckner Pentaplast SA's €180 million of 10-year senior notes (B2/B) via joint bookrunners Deutsche Banc Alex. Brown and Credit Suisse First Boston. The deal is expected to price Wednesday.

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