Amkor dives on lowered guidance; Belden & Blake, Allied Security price; funds see $2 million inflow

By Paul Deckelman and Paul A. Harris

New York, July 1 - Amkor Technology Inc. notes suffered a four to five point drop across the board Thursday after the high-tech manufacturer cut its second-quarter earnings outlook, blaming the reduction on weaker than expected sales of high-margin products.

In primary market activity, Belden & Blake Corp. and Allied Security Inc. were heard by syndicate sources to have successfully priced new deals, the latter upsized slightly. Both new issues were heard to have moved up in aftermarket dealings.

And the closely-watched high yield mutual fund flow numbers issued every week by AMG Data Services of Arcata Calif. were virtually flat in the week ended Wednesday, according to market participants familiar with the numbers.

Amkor was the big news of the day, a trader said, livening up what was otherwise a fairly restrained session as the junk market began winding down ahead of the upcoming three-day July 4 holiday. The Bond Market Association has recommended a 2 p.m. ET close on Friday and a full market closure on Monday.

Amkor's notes were initially quoted down about two to three points in morning dealings, but their loss deepened as the day wore on and they went home off about four to five points, after the West Chester Pa.-based provider of contract semiconductor assembly and test services released bearish guidance for the second quarter ended June 30, representing a sharp comedown from the company's earlier, more optimistic projections.

A trader quoted Amkor's 7 1/8% senior notes due 2011 as having dipped to 91 bid, 92 offered, and its 7¾% seniors due 2013 at 92 bid, 93 offered in the early going, both down two points, while the company's 9¼% senior notes due 2008 initially retreated to 102.5 bid, 103.5 offered, while its 10½% senior subordinated notes due 2009 were at 102.75 bid, 103.75 offered, also off a deuce.

By the end of the day, a trader at another desk saw the 7 1/8s down to about 90.5, although he had seen the paper as having opened higher than the first trader, at about 94.25. The activity level, he said, was "big," with lots of institutional selling.

Amkor "was down a lot," another trader said late in the session, quoting the 7¾% notes going home at 89.75 bid, 90.75 offered, well off from opening levels at 94.75.

A market source quoted the 7 1/8s and the 73/4s both ending at 89.5, a five-point drop, while the 9¼% notes and the 101/2s were each off more than four points, the former to 100.25 bid from Wednesday's close at 105, while the latter kerplunked to par bid from 104.75.

At another desk, slightly higher levels were seen for the 7¾% notes, estimated to have fallen four points on the day to 91 bid from 95 at the open.

Amkor - which plans to release its results for the quarter and hold a conference call on July 27 - said early Thursday that revenues for the second quarter would be about 6% above year-ago levels - after it had previously predicted revenues would be up anywhere from 5% to 8%.

Even worse, net income will come in around six cents a share - well down from the company's earlier forecasts of 17 to 22 cents. Gross margin for the quarter will be around 19%, a drop from the 24% that it originally projected. A trader said that the fall in the gross margin projection "is the key" to the bonds' decline since debt investors generally don't attach as much significance on earnings per share as a measure of a company's economic performance as equity investors understandably do.

Both the prior and revised earnings guidance for the latest quarter include an after-tax gain of 11 cents per share from the sale of 10.1 million shares of common stock in Anam Semiconductor Inc., a Korean-based electrical components manufacturing company in whom it made a large equity investment in 2000.

Amkor blames product mix

Amkor blamed its lowered expectations - particularly the gross margin shortfall - on what Ken Joyce, the company's chief financial officer called "a very unfavorable product mix."

In announcing the lowered guidance, Joyce said that Amkor's revenue from several high-margin advanced packages, including its MicroLeadFrame, Stacked CSP and ChipArray BGA product lines, was "less than we expected, reflecting weaker than normal support of customer forecasts in the wireless sector and some shortages of high-end wafers from the foundries."

Joyce said that the soft demand in Amkor's higher margin advanced packages was offset - but only partly - by stronger than anticipated support of forecasts in its lower margin PBGA business. He said that the company was also still absorbing higher factory costs related to its capacity expansion initiatives, as well as an overall rise in material costs.

Amkor's president and chief operating officer, Bruce Freyman, said that the company hopes to turn things around by "focusing our efforts on enriching our product mix, selectively raising prices, accelerating our movement to lower-cost material vendors and negotiating lower prices with our existing laminate substrate vendors."

Freyman said that if normal seasonal trends hold, Amkor expects an improvement in its product mix - presumably laying the groundwork for better gross margins and overall results - in the year's second half.

Amkor's Nasdaq-traded shares meantime nosedived on the lowered guidance, plummeting $2.39 (29.22%) to $5.79 on heavy volume of 17.2 million shares, more than eight times the usual turnover.

Colt loses on warnings

Another issue heading south Thursday after an earnings warning was Colt Telecom plc, which cautioned that in the face of "challenging" market conditions the British telecommunications operator "does not now believe that it will meet market expectations for the quarter ended 30 June and the year ending 31 December 2004."

A market source quoted Colt's 7 5/8% notes due 2009 at 96.25 bid while its 7 5/8% notes due 2008 were at 97.75, both down about a point or so on the session.

As was the case with Amkor, while the percentage loss in the bonds was relatively small, the company's stock completely capitulated, its Nasdaq-traded shares swooning $1.95 (33.05%) to end at $3.95. Volume of 381,000 shares was nine times the usual activity level.

While Colt said that second-quarter revenues would likely exceed both year-ago levels and, sequentially, first-quarter revenues, it noted that since it released first-quarter results back on April 21, the company has experienced "tougher than expected trading conditions. In addition, there has been slower than anticipated uptake of its data products and the performance of some higher margin voice products has been disappointing."

As was the case with Amkor, Colt said that its revenue growth for the second quarter has thus come "mainly" from the lower-margin segments of the business. "As a result, even though costs continue to be under tight control, overall margins are now under pressure." The telecommer said it expected these trends to continue throughout 2004 the rest of the year, making it unlikely Colt will meet the quarterly and full-year expectations of the market.

It now expects that for calendar 2004, reported revenues will be above last year's and that EBITDA will be "slightly below or in line with last year. Operating free cash flow will, however show an improvement over 2003, reflecting lower capital expenditure and improvements in working capital."

Qwest unveils sale late

Also on the telecom front, Qwest Communications International Inc. announced that it was selling its PCS licenses and other wireless assets in the 14 states in which it operates to Verizon Wireless, the top U.S. wireless provider. But the deal was announced after 4 p.m. ET and was seen having little market impact Thursday. A trader quoted Qwest Communications Corp.'s 13½% notes due 2010 up a point to 117 bid, but said that the company's 14% notes due 2014 had retreated by nearly the same amount to end at 121.

Verizon Wireless - a joint venture between Verizon Communications, the dominant local phone company in the eastern U.S.,and Britain's Vodafone Group - will pay $418 million to Denver-based Qwest for the wireless assets, in a deal expected to close in the fourth quarter of this year or early 2005.

While the deal includes Qwest's wireless spectrum licenses in 62 markets in 14 Western and Midwestern states, and Qwest Wireless' network switching centers, cell sites and related network equipment, it does not include Qwest's wireless subscriber base.

According to published reports, Wall Street analysts consider the deal a bargain for the expansion-hungry Verizon, with Qwest selling the assets at about half of their market value in order to get some quick cash in for further efforts to try to improve its balance sheet, which had an estimated $25 million of debt and other obligations at the end of the first quarter

Lucent moves little on deal news

Lucent Technologies Inc. bonds were little changed Thursday, even as the Murray Hill, N.J. -based telecommunications equipment maker and Novatel Wireless Inc. announced a pair of equipment supply deals with European telecom operators, one of them potentially huge.

Lucent's 6.45% bonds due 2029 were seen half a point better at 77.5 bid while its 7¼% notes due 2006 were a quarter-point down at 102.25.

Lucent and Novatel will supply the Merlin U530 wireless PC card modem they jointly developed to European wireless giant Orange SA, which will use it with its Orange 3G mobile office system in the UK and France, where Orange serves 33 million customers. They will also supply the Merlin modems to the leading Portuguese wireless operator, TMN, which serves over five million customers in that country.

The companies did not offer financial details on either deal.

Tenet up again

Outside of the communications and technology sphere, Tenet Healthcare Corp. bonds were seen improved for a second consecutive session, with the Santa Barbara, Calif.-based hospital operator's 6 3/8% notes due 2011 were seen having firmed to 88.875 bid, 89.25 offered from 87.5 bid, 88.5 offered, while its 6½% notes due 2012 were a point ahead at 88 bid, 89 offered.

Even though the only positive news out on the company in the past few days is relatively small in scope - completion of the sale of a Brownsville, Tex. Hospital for $82 million in gross proceeds, to be used for general corporate purposes - a trader said "people consider that the company is going in the right direction."

Tenet, looking to cut debt and shed underperforming non-core assets, announced earlier this year that it was downsizing by about a third, looking to unload more than 30 of the nearly 100 hospitals it began the year with.

At another desk, a market source quoted Tenet's 7 3/8% notes due 2013 almost a point better at 91.5 and saw the company's recently issued 9 7/8% notes due 2014 as having improved to 102.75 bid from 101.5.

A trader at another shop said that Tenet had enjoyed "a good bid all day" on "rumors" that company might announce still further asset sales. With the rise in the Tenet 9 7/8% notes to above 102, he said that a swap that his company had been urging on its customers, involving selling medical sector peer Iasis Healthcare Corp.'s recently issued 8¾% notes due 2014 and swapping into the new Tenet bonds "is looking pretty good now."

Inflow of $2 million

After trading had wound down for the day, market participants familiar with the weekly AMG high yield mutual fund flow numbers told Prospect News that the funds had a net inflow of $2.2 million.

Meager though that may be, it represents the first inflow in the last four weeks, following a three-week stretch - including last week's $69.5 million outflow - in which a total of roughly $255.77 million more had leached from the funds than has come into them, according to a Prospect News analysis of the AMG figures.

Even though mutual funds account for a relatively small percentage of the total capital in the high yield universe, market-watchers consider their movements a generally reliable barometer of overall junk bond market liquidity trends.

For the year so far, outflows have been seen in 16 weeks against just 10 inflows, and the cumulative net outflow is about $5.397 billion, according to the Prospect News analysis.

And discarding the inflows seen in the first four week of the year, which were essentially a continuation of the unusually strong tide of liquidity seen throughout the 2003 fourth quarter, the depth of the liquidity drain since then becomes even more pronounced. Since the week ended Feb. 4 - which saw the first of two consecutive billion-dollar-plus outflows that abruptly shifted the momentum in both the high yield primary and secondary markets - inflows have been seen in only six of 22 weeks and outflows in the other 16, and the net capital hemorrhage from the funds since then has totaled some $6.768 billion, according to the Prospect News analysis.

Sources commenting on the inflow number late Thursday characterized it as totally meaningless.

"Nevertheless I remain optimistic about high yield," said an investment banker late in the session, adding that money is coming into the asset class from sources other than the high-yield mutual funds and that the debt refinancing deals that have come into the new issue market are taking the high-yield funds out of the old paper and into the new.

Terms on 2 new deals

The primary market continued its somewhat listless drift toward the Independence Day break on Thursday, with terms emerging on the final two transactions that U.S. market observers were expecting to price before the holiday.

Belden & Blake Corp. sold $192.5 million of eight-year senior secured notes (B3/B-) at par to yield 8¾%, at the tight end of the 8¾%-9% price talk.

Goldman Sachs & Co. ran the books for the debt refinancing deal from the North Canton, Ohio natural gas and oil exploration and production company.

And Allied Security, Inc. priced an upsized $180 million of 11 3/8% seven-year senior subordinated notes (Caa1/B-) at 98.823 to yield 11 5/8%, in the middle of the 11½%-11¾% price talk. The offering was increased from a planned $175 million.

Bear Stearns & Co. ran the books for the acquisition and debt refinancing deal from the King of Prussia, Pa.-based private security company.

Prospect News asked one informed sell-side source to shed light on the buy-side's appetite for what one investor, earlier in the week, termed "small illiquid deals."

"These are tough deals," the source responded, adding that the level of participation has been characteristic, and certainly nothing unusual.

Nonetheless, when the new Belden & Blake 8 ¾% senior secured notes due 2012 were freed for secondary dealings, the notes were quoted having moved up to 101 bid, 102 offered from their par issue price earlier in the session.

And doing even better was Allied Security's new 11 3/8% senior subordinated notes due 2011, which priced at 98.823, but were heard to have zoomed to 101.75 bid, 102.75 offered by the close.

Intertape Polymer to hit the road

News of one roadshow start surfaced on Thursday, shortly before press time.

The roadshow will get underway during the week of July 5 for a $125 million offering of 10-year senior subordinated notes from Intertape Polymer US Inc..

Citigroup will run the books for the debt refinancing deal from the subsidiary of Bradenton, Fla.-based Intertape Polymer Group Inc.

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