Alliant revives postponed 7.5-year deal; Level 3 off on lowered guidance; Abitibi gains on merger OK

By Paul Deckelman and Paul A. Harris

New York, Oct. 23 - Alliant Holdings I Inc. was heard by high yield syndicate sources to be preparing to revive a $290 million offering of 71/2-year senior notes - a deal which the company was originally going to do in August, but which was delayed at that time due to unsettled market conditions.

Nuveen Investments was meanwhile preparing to hit the road Wednesday to begin marketing a $885 million offering of eight-year notes, with pricing expected around the middle of next week.

In the secondary market, Level 3 Communications Inc.'s actively traded bonds fell sharply after the Broomfield Colo.-based wholesale telecommunications company lowered its cash-flow outlook for this year and next, hurt by its own inability to integrate all of the acquisitions it has made and fulfill customer orders - a situation it vows to remedy.

Bonds of Abitibi-Consolidated Inc. and rival Bowater Inc. were both up following the news that the U.S. Justice Department had granted approval for the merger of the two big forest-products companies, although it said they would have to divest an Abitibi factory.

A high yield syndicate official said that the broad market was better along with equities on Tuesday.

No new issues were priced.

Although the primary market did produce some news, market watchers continued to be focused on the $4.5 billion two-part TXU Corp. LBO financing deal which is expected to price on Wednesday.

Late Tuesday an informed source told Prospect News that there had been no changes to the size or structure of the deal.

On Monday underwriters set price talk.

Texas Competitive Electric Holdings set talk for its $2.5 billion tranche of eight-year notes (B3/CCC) at the 10¼% area.

If it clears the market at the announced size of $2.5 billion, it will be the biggest single tranche since Community Health Systems Inc. placed slightly more than $3.02 billion of 8 7/8% notes due July 2015 on June 27 of this year.

Goldman Sachs & Co., Morgan Stanley, Citigroup, JP Morgan, Lehman Brothers and Credit Suisse are joint bookrunners for the Texas Competitive Electric Holdings notes.

Meanwhile Energy Futures Holdings set talk for its $2 billion tranche of 10-year notes (B3/CCC+) at 50 to 75 basis points behind the Texas Competitive Electric notes.

Morgan Stanley, Goldman Sachs & Co., Citigroup, JP Morgan, Lehman Brothers and Credit Suisse are joint bookrunners.

Some excitement

A money manager for a mutual fund told Prospect News on Tuesday that the TXU deal has sparked considerable interest on the buy-side.

"In the past couple of days the tone of the market snapped up and felt a lot better," the money manager said.

"It looks like this TXU deal has at least generated some excitement."

The buy-sider added that a well-known credit such as TXU, coming with double-digit coupons, "may help to provide some good footing for the market, especially when there is a high likelihood that we're going to see another [Fed Funds] rate cut."

The money manager added that right now investors are especially keen on companies such as TXU, which have limited exposure to an economic downturn.

"Even though leverage is quite high because of the business, it will be quite appealing," the buy-sider said.

"First of all it's the yield which sells. But also it's a well-known credit with a highly liquid deal so many people can trade around it.

"And it has nothing to do with housing or construction, and no exposure to deteriorating consumer credit."

Credit cycles without junk

In the wake of the sell-off in the subprime mortgage market, this investor's macroeconomic outlook has become somewhat more cautious.

"This is the first credit cycle where high yield has not played a major role," the investor observed, noting that the exceptions, presently, are credits in the housing sector, and those with any exposure to subprime mortgages.

"Basically this has not been a story about high yield," the investor asserted.

"CDOs are somewhat peripheral to bond issuance. And there has been indigestion, but no real blow-ups in loans.

"So all the subprime and CDO news has evolved away from the high-yield market."

The investor also pointed out that as the credit markets labor to right themselves they do so against a backdrop of historically low high yield defaults.

"It's interesting to see this really large credit problem, with high yield off to the sidelines," the money manager commented.

Nuveen launches $885 million

Nuveen Investments Inc. will start a roadshow on Wednesday for its $885 million offering of eight-year notes (expected ratings B3/B-).

Merrill Lynch, Deutsche Bank Securities, Wachovia Securities and Morgan Stanley are joint bookrunners for the LBO deal from the Chicago-based provider of investment services.

Elsewhere on Tuesday Alliant Holdings I, Inc. set price talk for its $290 million offering of 7.5-year senior notes (Caa1/CCC) at the 11¾% area.

The notes are expected to price in a quick-to-market Wednesday transaction via bookrunner JP Morgan and co-manager UBS Investment Bank.

Proceeds will be used to fund the acquisition of the company by the Blackstone Group and management.

Level 3 slides on lowered guidance

Back among the established issues, Level 3's 9¼% notes due 2014 were seen lower in heavy trading, with a market source pegging the bonds at around the 94 level, down from their Monday close at 95.625 and well down from intraday levels as high as 99 reached during an abortive rally try late in the morning and another flurry in the afternoon.

Another trader called the bonds down 2 points at 93.5 bid, 94.5 offered. Still a third quoted them at 94 bid, 94.5 offered, and said "the trend on them was lower all day."

The company's other bonds were also mostly lower, with its 8¾% notes due 2017 falling about 2½ points at one stage in the day to a low around 90, before coming off that bottom to end at 91, still down some 1½ points on the session. Its 12¼% notes due 2013 were off more than a point on the session at 107.375 bid, while its floating-rate notes due 2015 lost nearly 2 points on the day, trading just above 90.

Level 3's Nasdaq-traded shares nosedived $1.04, or 24.07%, to $3.28, on volume of 280 million shares, seven times the norm. Its 3½% convertible notes due 2012 were likewise in freefall at 90.6182 - bludgeoned down from prior levels around 104.794.

The bond, stock and convertible carnage took place after the company announced that its net loss for the third quarter was $174 million, or 11 cents per share, sequentially better than its second-quarter net loss of $202 million, or 13 cents per share. However, it was wider than the year-ago $138 million loss, although the year-ago per-share loss of 12 cents was wider because the company has since upped its outstanding share float.

Revenue for the quarter was $1.061 billion, versus $1.052 billion in the second quarter and up 21% from $875 million a year ago. Level 3 beat Wall Street estimates of a 12 cent per share loss and about $1.04 billion of revenues.

Even so, bond and stock investors reacted with dismay to the company's lowered cash-flow forecasts for this year and 2008.

While the company's consolidated adjusted EBITDA for the latest quarter increased to $215 million in the third quarter from $193 million in the second quarter and $174 million a year earlier, the company was forced to lower its full-year 2007 and full-year 2008 consolidated adjusted EBITDA guidance.

The company, said chief executive officer James Q. Crowe in a statement and later, a conference call, " had difficulties with provisioning orders for its services" - in other words, difficulties completing customers' orders, causing revenues to fall short.

Over the past several years, Level 3 has made a slew of acquisitions - 10 in the last two years alone - ranging from snapping up failed telecom competitors like Genuity Inc. out of bankruptcy to buying assets shed by other, larger players like AT&T Corp., which divested itself of certain telecom properties as part of its merger with SBC Communications Inc.

However, integrating all of these different companies and their differing systems into its network has proven to be a challenge. Hoping to improve customer service, Level 3 plans to put its president of global services, Neil Hobbs, in charge of correcting all of these operational bottlenecks. Meanwhile, it plans to seek a new chief financial officer with operational experience as well as financial qualifications to replace the departing Sunit Patel, whose resignation and eventual exit from the company were announced last week.

Patel said Tuesday that because of the provisioning issues outlined by Crowe, Level 3 is cutting its consolidated adjusted EBITDA projections for this year to a range of $813 million to $833 million from previous guidance of $860 million to $920 million, and cutting next year's consolidated adjusted EBITDA projections to a range of $950 million to $1.1 billion from its prior forecasts of between $1.15 billion to $1.3 billion.

The CFO said that assuming the guidance range for the fourth quarter, the implied annualized revenue growth rate for 2007 in the company's key core communications services segment has been lowered to a range of 9% to 12%, versus the 17% which company executives had previously projected.

Crowe proclaimed that he was "disappointed by our inability to increase our provisioning productivity at the rate we had expected," but said that Level 3's problems "are not caused by demand, pricing or our ability to market and sell our services"; delivery, on the other hand, is apparently another story.

He added that "our ability to grow faster is in our own hands, and we realize the urgency with which our provisioning problems must be addressed."

The Gimme Credit research service downgraded Level 3's debt to "stable" from "improving" previously, citing the "materially" reduced guidance, the magnitude of which - combined with the recent announcement that it seeks a CFO with more of an operating background to replace Patel - "suggests that there could be more downside into 2008," analyst Kim Noland wrote in a research note.

However, Noland added that longer term, "the company should get control of its provisioning systems - the cause of the reduced sales and EBITDA expectations - aided by still relatively healthy industry conditions." Noland also noted Level 3's comfortable liquidity situation, with large cash balances and no substantial debt maturities other than some convertibles until 2014, and projected that if all goes according to plan, the heretofore money-losing wholesale telecom provider "should be generating breakeven cash flow in 2008."

Abitibi, Bowater gain as DOJ says 'yes'

Away from Level 3, a trader saw solid price movement in Abitibi-Consolidated's bonds, "up a couple of points across the board," on the news that the merger between Abitibi and sector peer Bowater had taken a major step closer to fruition, as the U.S. Justice Department gave the union the green light, on the proviso that the company sell an Abitibi mill in Arizona - one of the largest and most profitable in North America," the DOJ said - in order to allay anti-trust concerns. The companies agreed to divest the property.

The U.S. approval of the proposed $1.6 billion combination sent Abitibi's 6.95% notes due 2008 up to 98 bid, 99 offered from levels around 96.5 bid, 97 offered on Friday, when the bonds last traded significantly. Its 7% notes due 2009 rose to 95 bid from 91 bid, 92 offered on Friday.

A trader saw its 8.85% notes due 2030 move up to 72.5bid, 74.5 offered from prior levels at 69 bid, 71 offered.

Another saw those bonds start the day at 71.25 and then trade up to 75; on Friday, they had been as low as 70 bid, 71 offered, although the trader said that Friday's session, driven by the big stock slide, was probably "not a good day on which to judge" the Abitibi bonds; over last Wednesday and Thursday's sessions they had traded at 72 bid.

Bowater's bonds also caught a bid on the news, its 9% notes due 2009 rising to 97.5bid, 98.5 offered from opening levels around 96.75 bid, 97 offered, and well up from last week's levels at 96 bid, 96.5 offered.

Even with the merger now having been given official approval, a trader said, "they still have a rough road ahead" because of problems with the whole forest-products sector, from the strong Canadian dollar that harms sales of Canadian-produced lumber and paper products abroad, to the sagging U.S. home construction market, normally a big buyer of lumber.

"But maybe as a combined company, they can pull it all together" and do better than either Greenville, S.C.-based Bowater or Montreal-based Abitibi could separately, the trader added.

GM, GMAC firming trend continues

Elsewhere, a trader saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 a point better at 90.5 bid, 91.5 offered, and saw the auto giant's 49% owned GMAC LLC financing arm's 8% notes due 2031 also up a point at 93 bid, 94 offered.

However, another trader saw those GM bonds starting from a higher level and pegged them down some 2 points on the day at 90.25 bid, 91.25 offered, while the GMAC 8s were up perhaps 1/8 point at 92.625 bid, 93.25 offered.

Yet another market source saw the actively traded GMAC paper at 93.375 bid, better than 2 points ahead on the day, while the GM benchmarks were also 2 point winners, at 91.375. GM's 7 1/8% notes due 2013 were up ½ point at 93.5 bid, while GMAC's 6 7/8% notes due 2012 were almost a point better at 91.75.

Overall, a trader noted that the widely followed CDX index of junk market performance - which gained about 3/16 on Monday - was off about 1/16 on Tuesday, to 98 9/16 bid, 98 13/16 offered. But among other market gauges, the KDP High Yield Daily Index - which on Monday had shed 0.05 on the day, recovered all of that and then some, firming by 0.12 to 79.76, while its yield, which had edged up by 1 basis point, tightened by 3 bps to 7.95%. Advancing issues meantime led decliners by a five-to-four ratio.

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