WorldCom, Adelphia turn higher; Trumps off after bond deal dies

By Paul Deckelman and Paul A. Harris

New York, May 20 - WorldCom Inc. debt and that of Adelphia Communcations Corp. both turned points higher in Monday's dealings, investors apparently encouraged by indications that the beleaguered communications companies might be able to put their recent troubles behind them. Meantime, Trump Hotels & Casino Resorts Inc. paper was lower following the demise of a new-issue deal which would have meant the buyback of some of the debt-laden gamer's outstanding bonds.

Primary market activity was termed slow, outside of players hearing that Herbalife International would be bringing a $220 million two-part offering to market soon.

"Nothing was really going on, except for WorldCom and Adelphia," said one market source, who saw the former's debt up anywhere from one to three points on the session, as the market absorbed news reports - neither confirmed nor denied by the company - that the troubled Clinton, Miss.-based long-distance giant's banks had agreed to a new $1.5 billion financing facility, which could be in place by Thursday. WorldCom told Prospect News it is still on track to have the new financing in place by Thursday. (See separate story in this issue.) That facility would replace a previous $2 billion facility that let WorldCom quickly raise funds by selling short-term accounts receivable, such as customer bills. The company also remains in talks with its banks on a separate $5 billion credit line that it expects to close on next month.

News of the smaller facility's imminent completion pushed WorldCom's battered shares up nearly 14 cents (10.21%) in Monday's busy Nasdaq trading, to $1.49. Volume of 190.6 million shares was nearly three times normal.

On the bond front, the market source said, WorldCom's benchmark 7½% notes due 2011 were up three points to 45 bid, while its short-dated 7 7/8% notes due 2003 rose to 82 bid from Friday's 79. On the longer end of the curve, its 8¼% bonds due 2023 were a point better at 40 bid, while its 8¼% paper of 2031 was a deuce improved at 42 bid.

At another desk, WorldCom's 7½% bonds were being quoted as high as 46.5 bid/47.5 offered, up from 43 bid/44 offered Friday.

"WorldCom was up a couple of points because clearly, people were feeling better about it," presumably in the wake of the apparent new financing news, a distressed-debt trader said.

Another trader said that WorldCom "and its slightly improved financial profile" helped to pull Adelphia up about two points across the board. "Everything is moving in tandem now."

Adelphia's 10 7/8% due 2010 pushed up to 74 bid, while its 9 7/8% notes due 2007 were seen a point-and-a-half higher at 70 bid. The 10¼% notes due 2011 firmed two points to 73 bid. A trader noted that Adelphia's gains - he saw some issues up more than four points from their opening levels - came despite Standard & Poor's downgrade of the Coudersport, Pa.-based cable TV systems operator's debt ratings to defaulted levels following the company's acknowledgment that it had missed millions of dollars of interest payments last week. S& P lowered Adelphia's corporate credit, as well as the rating on its $500 million of 9 3/8% senior notes to D from CCC- and CC, respectively, and lowered the ratings on its other unsecured debt issues to C from CC. It also kept those ratings on CreditWatch for a possible further downgrade, warning that "at this juncture, we anticipate that Adelphia will miss payments on other unsecured, subordinated, and preferred stock issues," at which time those issues will be lowered to D.

But the trader noted that "the cut to D was not much of a shocker" to a market which has already seen Adelphia's once high-flying shares and bonds tumble to deeply distressed levels, with the bonds now trading flat following the missed coupon and the shares continuing to languish at $5.70 on Nasdaq, as trading remained halted all day. The securities started to tank in late March, following the disclosure that $2.3 billion of off-balance-sheet obligations related to loans extended to partnerships controlled by Adelphia's founding Rigas family and guaranteed by the company. Since then, there has been a steady barrage of bad news, including lawsuits, delayed and restated earnings results, ratings agency downgrades and even a Securities and Exchange Commission investigation. The cumulative impact forced the resignations last week of 77-year old company founder John J. Rigas as chairman and Chief executive officer, and of his son, Timothy J. Rigas, as chief financial officer.

"It looks like Adelphia has some outside management running the company," a trader said, with the replacement of the elder Rigas by an outside director and the appointment of a committee of outside directors to investigate questions which have arisen about the company's tangled finances - including the controversial Rigas transactions. "That should help them a little bit, and hopefully, there's nothing else off the balance sheet that we don't know about."

But The Wall Street Journal reported that federal prosecutors conducting criminal investigations into Adelphia's affairs "are focusing on a number of questionable related-party transactions and possible accompanying irregularities involving the company's founding Rigas family." The Journal story attributed the damning information to people familiar with the probes.

Outside the communications sphere, the bonds of Trump Hotels and Casino Resorts were lower, after the company called off its $470 million junk bond sale, proceeds of which were to have been used to redeem Trump's Castle Funding's 11¾% notes due 2003 and the parent company's 15½% notes due 2006.

A trader quoted the Castle paper down as much as 10 points, to 83.5 bid/85.5 offered, versus prior levels in the mid-90s it had reached when it appeared that the paper would in fact be taken out with the bond deal proceeds.

The Trump holding company bonds, which were also to have been taken out, dropped to 70 bid from 75. But there seemed to be no real movement Monday in the Trump Atlantic City Associates 11¼% first mortgage bonds due 2006, which were not scheduled to be redeemed with any of the new-deal proceeds, but which had nonetheless crept as high as levels above 80 on the premise that the new funding might prove that THCR chief Donald J. Trump, the self-proclaimed master of "the art of the deal," might still have his old magic. But as the prospective new deal ran into trouble - caused, some observers said, by bondholder anger at The Donald's hardball tactics in withholding interest payments last fall to pressure bondholders to make concessions to him on lower interest rates and longer maturities - the A.C.s began to sink back to the mid 70s, and were being quoted Monday around 76 bid, essentially unchanged from Friday. "There was no real followthrough" from the news of the failed bond deal - since the A.C.'s weren't going to be redeemed - said a trader.

Elsewhere, Dynegy Inc. "was up huge," a trader said, after the electricity generating and trading company - at the center of controversy over allegedly bogus power trades which some companies in that industry indulged in - announced plans Friday that the company plans to boost its liquidity by $1 billion this year via asset sales.

Dynegy's 6 7/8% notes due 2011 were quoted up at least five points on the session, at 67 bid, while its 8¾% notes due 2012 were up even more, jumping to 70 bid from 62.

A trader saw CMS Energy Corp. - like Dynegy, roiled last week by the revelations of the sham "round trip" trades - also higher, its 9 7/8% notes due 2007 firming several points to 95 bid/97 offered.

Back on the downside, Tesoro Petroleum's 9% notes dropped to 90 bid from 95, and its 9 5/8% paper fell to 89.5 bid from 96, after the refiner's ratings were cut to B2 from B1 by Moody's Investors Service.

The post-Memorial Day calendar took on one new deal Monday as Herbalife International announced a remedy that will help high yield investors reduce those reportedly large cash positions: a dollar/euro two-parter that actually starts its roadshow on Memorial Day in Europe.

And that was Monday. "Boring," one sell-sider commented, adding that hopefully the remainder of the week will unfold more eventfully, and forecasting that things do stand to pick up.

Meanwhile, with the news of Trump Casinos' postponement of its $470 million two-piece offering (B3/B-) and (CCC) still relatively fresh, and with another "triple-hook" credit, Venetian Casino Resort LLC/Las Vegas Sands, Inc.'s $850 million (Caa1/expected B-) expected to price Wednesday, Prospect News inquired of its sources how 2002's year-to-date lower-rated new issuance volume stacks up in an historical context.

"Unusually small," was the response from Martin R. Fridson, chief high yield strategist for Merrill Lynch & Co.

Fridson added that in its measure of bottom-tier issuance Merrill Lynch uses B-minus or lower at the senior-equivalent level.

In the first quarter, according to Fridson's numbers, the ratio of such issuance was 5.96%. "It was 8.01% in 2001 and it was above 20% in every year from 1994 to 2000," he added.

In the report released by Fridson and his team on May 6, "Supply/Demand Gap at Record Level," Merrill Lynch stated that there is "an unprecedented gap between supply and demand for high yield bonds. For the first four months of 2002, weekly average inflows to high yield bond mutual funds ran at a higher rate than in any full year since AMG Data Services began reporting flows in 1992. Weekly average new issuance, meanwhile, was on a par with the 2001 rate, the second lowest on record." (Figures were adjusted for the size of funds and the market, respectively.)

Given such supply/demand fundamentals, Prospect News wanted to know why such a small number of "bottom-tier" credits are coming into the high yield at present when circumstances would seem to indicate that such an imbalance improves the chances of those deals. And why are so many of those credits (for instance Trump, Panavision, Hollywood Video, PCA Entertainment) faltering when they do come?

The answer, one syndicate official said, is that even though there is so much cash in high yield chasing such a limited supply of new issuance there is not a great deal of pressure on investors to buy.

For openers, this official pointed out, some investors are constrained from owning much, or in some cases any, bottom-tier junk bonds.

However, this official continued, the key to why investors are not swarming upon the low-rated bonds - even in the face of the supply-demand gap that Fridson described above - lies in the underperformance of other capital markets.

"People are less concerned right now about chasing their top-line growth, about really putting up spectacular numbers, because there is consistent cash flowing into the funds.

"In previous years they had to compete with the equity markets so much. It was a 'Show me right now'-type of mentality," the official added, pointing out that during robust times in the equity markets the demands upon high yield performance tend to stiffen.

The underperformance of the equity market has taken some pressure off high yield to show a return quickly, the source said.

This official was the second sell-side source in the past three business days to use the word "discipline" to describe the present market to Prospect News.

"We are definitely seeing investors be much more disciplined. If a triple-C deal gets done it's always going to be the correct situation."

This official spoke of the ongoing "tug of war" between the asset classes.

"Given the money that we've seen flowing into high yield, people are probably thinking that rates may remain low for a little while, but when the comeback occurs high yield is going to be the first sector to benefit."

This source invoked the novelist Charles Dickens to describe the present situation in high yield: "A Tale of Two Cities."

One is the telecom (including wireless), power and cable TV sectors that have "all kind of blown out. There are very wide spreads on those businesses.

"But in other businesses, like energy, you're seeing very tight credit spreads; probably too tight.

"Investors are very picky right now. There's not the sense of urgency that they had during the bull market."

The present bear market circumstances probably make for a more stable high yield, this source added, explaining that during the bull market when cash flowed into high yield the investment banks would tend to oversupply the primary with new deals and "swamp" the cash that flowed in.

"It isn't happening that way now," this sell-sider said, "because it's a different market."

Monday's only news was that a two-part deal from Herbalife International, Inc., $200 million of eight-year senior subordinated notes in dollar- and euro-tranches, will start its European roadshow on May 27, Memorial Day. UBS Warburg is the bookrunner. Tranche sizes and ratings remain to be determined.

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