AirGate leads wireless plunge; AK Steel, Mexico's TFM price deals

By Paul Deckelman and Paul A. Harris

New York, June 6 - AirGate PCS Inc. shares and bonds tumbled Thursday after the Sprint PCS affiliate sharply lowered its estimates for subscriber additions for the quarter - and just about the whole wireless group went down along with AirGate.

In primary market activity, AK Steel Corp. sold $550 million of new 10-year senior notes, while Mexican railway operator Transportacion Ferroviaria Mexicana SA de CV slightly upsized its 10-year senior issue in what one source characterized as a blowout. L-3 Communications and Riviera Holdings slated new deals, with the proceeds to be used in each case to take out the company's existing bonds.

However the question that observers on the sell-side asked each other throughout Thursday's session was "Whither Wyndham?" as terms on the Dallas-based upscale hotelier's downsized and restructured deal had not emerged by day's end.

Initially expected to price during the week of May 27, Wyndham International's transaction was downsized Wednesday to $500 million from $750 million, its talk widened to 11% from 10¾% area and its call lockout lengthened to four years from three years.

One syndicate source told Prospect News that the investors presently have Wyndham over the proverbial barrel.

"They came too low with the price talk and investors are hammering them for it," the official said, adding that the company is reportedly eight times leveraged, which is "a lot."

"I think it can get done," the official added. "But are the sponsors and the company willing to take it at the level investors want? The problem is that investors smell blood right now and they're going for the throat.

"I think they'd be willing to take senior secured notes at an 11%-11¼% type of yield provided that they have covenants to protect themselves.

"Right now it's my understanding that the covenants are structured so that if anything happens the banks control the whole process. What the bond investors want is something in there that will help them."

In contrast, during Thursday's session Transportacion Ferroviaria Mexicana SA de CV (TFM) upsized its offering to $180 million from $170 million and priced the 10-year senior notes (B1/BB-) at 98.606 to yield 12¾%, at the tight end of price talk of 12¾%-13%. Salomon Smith Barney was bookrunner.

One market source commented that TFM was a blowout, its book five-times oversubscribed.

A syndicate official said that while TFM seemed to flourish there will not likely be very many emerging markets corporate credits following in its wake.

"I think in general we won't see a lot because most of the credits that could access the bond market can also access the bank market and the local market in their own markets," the official said.

"This TFM deal's coming in the upper 12%-range on a coupon. And they're also in the market, or will be, with a loan that will probably come at LIBOR plus 2½% or 3% or something like that.

"The bond market gives them longer maturities than they can get in the bank market. And that's obviously attractive. But most of these companies have better alternatives outside of the bond market."

In addition to TFM, Middleton Ohio-based AK Steel priced $550 million of 10-year senior notes (B1/BB) at 99.570 on Thursday to yield 7.8125% via Credit Suisse First Boston.

While two deals exited the primary-market stage with completed transactions, Thursday, three others appeared to take their places. The market heard of new business from AmeriCredit Corp., L-3 Communications Holdings and Riviera Holdings.

Under the shadow of the struggling Wyndham deal, with 19 straight-up dollar-denominated high-yield offerings presently parked upon the forward calendar, Prospect News inquired of one investment banker Thursday whether there was indeed enough cash in the market to absorb all of that business.

"This is the ultimate test," was that sell-side official's response.

Another sell-sider from a different institution who spoke to Prospect News reported experiencing a sense of deja vu. This official could swear he has been in such circumstances before.

"This is a very similar event to one that happened last year," the source said.

"Last year June was the busiest month. And I think you're going to have the same situation here, where the first handful of deals do pretty well, then after that it goes on a name-by-name basis.

"Last year Key 3 Media did very well. Then a couple of days later a company very similar to that, Penton Media, got smacked around.

"I think it's going to be like that again."

Using the adjective "huge," to describe the forward calendar -Prospect News tallies $5.19 billion of deals - this sell-sider said that in addition to its volume one must consider the economic circumstances in which it has been built, noting that the Dow Jones Industrial Average dropped 172 points on Thursday.

"I think that's what's going to be causing more problems than necessarily the size."

Among the entrants to the "packed" forward calendar, Thursday, details emerged on AmeriCredit Corp.'s deal, announced late Wednesday. The auto finance company will start roadshowing $300 million of new seven-year senior notes (Ba1/BB-) on Friday via joint bookrunners Bear Stearns & Co. and JP Morgan.

New York-based defense communications technology firm L-3 Communications Holdings, Inc. announced it will start the roadshow Tuesday for $750 million of 10-year senior subordinated notes (existing ratings Ba3/B+) via joint bookrunners Lehman Brothers and Banc of America Securities.

And the roadshow starts Friday for Riviera Holdings Corp.'s offering of $210 million of eight-year senior secured notes (B2 expected/B+), via Jefferies & Co.

Finally Thursday, price talk of a yield in the 9¾% area emerged on Intermet Corp.'s upcoming sale of $175 million of seven-year senior notes (B2/B+), which are expected to price Monday via joint bookrunners Deutsche Bank Securities and Banc of America Securities.

In secondary action, AirGate PCS' bonds "got knocked around," a trader said, after the Atlanta-based Sprint PCS affiliate slashed its estimates for net new-subscriber additions in the fiscal third quarter ending June 30. Previously, the company had confidently predicted that it would add between 35,000 and 40,000 new customers. But late Wednesday, AirGate changed its tune, forecasting that it would only add between 22,000 and 27,000 new customers for the period.

That news really came too late to have much impact on Wednesday's dealings - but when AirGate's zero-coupon/13½% notes due 2009 began trading on Thursday, they fell as low as 42 bid, down 10 points from previous levels, and well down from recent levels in the 60s. AirGate shares, meantime, swooned $5.65 (67.27%) in busy Nasdaq dealings, to end at $2.75. That's way down from its 52-week highs around $60, reached last year, and down as well from levels in the $12 range as recently as last week. The shares have been sliding all this week, with analysts first citing investor uneasiness with the overly optimistic original subscriber-add projections, and then, response to AirGate's actual downward-revised guidance. Equity volume Thursday was 17 million shares, about 25 times normal.

AirGate blamed the overall slowing trend in the telephone industry, as well as "a greater-than-expected reduction in the number of new sub-prime customers in our territory," after the company reinstated a requirement that sub-prime credit quality customers put down a $125 deposit - a tactic AirGate insists is necessary to maintain the credit quality of its customer base, reduce churn (the practice of customers frequently hopping around to different providers) and minimizing bad-debt expense. "We believe this is the right business strategy for AirGate and will favorably position the company to continue to achieve balanced growth in subscribers and operating earnings," AirGate asserted in its statement.

But it warned that it will be challenged to meet minimum subscriber targets for its Midwest Region written into a covenant under the senior credit facility of its wholly owned iPCS Wireless Inc. operating subsidiary, and has both aggressively increased its advertising and promotion activities to try to bring in more subscribers, while also holding discussions with the administrative agent for the iPCS senior credit facility, regarding the potential need for amending the covenant in question.

Standard & Poor's said on Thursday that it placed AirGate's B- corporate credit rating on CreditWatch with negative implications, based on its concern about the iPCS Wireless covenant problem. S&P also expressed worry that "AirGate's overall liquidity may not provide adequate cushion against significant execution risks." The ratings agency said that AirGate had about $116 million in cash and bank availability at the end of the first calendar quarter of 2002. It cautioned that after adjusting for still-sizable capital expenditures for the remainder of 2002, this level of liquidity "may not allow AirGate to comfortably address any unexpected deterioration in operating metrics over the next several quarters."

AirGate's having to eat crow on its subscriber projections had a sobering effect on the whole wireless sector, with investors apparently assuming that its various rivals might also be unable to meet overly hopeful subscriber projections. Another Sprint PCS affiliate, Lubbock, Tex.-based Alamosa Holdings Inc., was likewise getting crushed by both bond and stock investors, its 13 5/8% notes due 2011 dropping to 63 bid from prior levels in the high 70s, while its shares plummeted $1.16 (31.78%) in New York Stock Exchange trading to $2.49, on volume of 1.32 million shares - more than six times the normal turnover.

U.S. Unwired Inc.'s zero-coupon/13 3/8% notes due 2009 dropped to 44 bid from prior levels around 52, while its shares slid $1.05 (21.21%) in Nasdaq dealings to $3.90, although volume of 432,000 shares was only a little greater than usual. Horizon PCS Inc.'s zero coupon/14% notes due 2010 fell to 18 bid from 14. Both U.S. Unwired and Horizon are also Sprint PCS affiliates.

Triton PCS Holdings' shares fell $1.91 (18.89%) in NYSE dealings to end at $8.20, with its volume of 2 million shares 10 times the usual, mirroring the slide among its peers and rivals. But Triton's zero-coupon/11% notes due 2008 were heard unchanged at 84 bid, while its 9 3/8% notes due 2011 were likewise steady at 88.5. The Berwyn, Pa.-based AT&T Wireless Network provider, unlike AirGate, on Thursday reaffirmed its earlier projections for the second quarter, of expectations of key operating metrics for its second quarter, including net customer additions in the 40,000 to 45,000 range, ARPU - average revenue per customer, an important measure of earnings in the communications industry - at $57, and EBITDA of $37 million (EBITDA, earnings before interest, taxes, depreciation and amortization, is considered a key bond market measure of cash flow generation and a company's potential ability to service debt).

The sector weakness spilled over from the PCS operators to such other players as junk telecom bellwether Nextel Communications Inc., whose widely-traded 9 3/8% senior notes due 2009 were heard having fallen to 62 bid from 63.5 on Wednesday.

But on the upside, WorldCom Inc. bonds "were much firmer," said a trader who quoted its 7½% notes due 2011 at 50.5 bid/51.5 offered, up about a point, while its 7 7/8% notes due 2003 got as good as 91 bid, up two points, apparently helped by news reports that circulated late Wednesday, indicating that the troubled Clinton, Miss.-based telecom giant had moved a step closer to getting the $5 billion bank facility it has been negotiating for, by convincing three large European banks and a Japanese bank to join its troika of U.S.-based bank underwriters.

Elsewhere in the communications sphere, Adelphia Communications Corp.'s senior bonds remained in the mid 70s, while the bonds of its Arahova Communications unit - the old Century Communications, bought by Adelphia several years ago - continued to languish in the lower 60s, following Wednesday's downgrade of the latter's Caa1 bonds to Ca by Moody's Investors Service, which projected that holders of the Century bonds would likely recover far less in the event of a restructuring than the holders of parent Adelphia's bonds or those of its financially stronger subsidiaries might. A trader the bonds had "gotten hammered" on speculation that "the notes may be tied into an intra-company loan to the Rigas family, to the tune of $2 billion."

Adelphia on Thursday meantime declared in a Securities and Exchange Commission filing that it would not provide legal protection to four members of the family, which tightly controlled the Coudersport, Pa.-based cable operator from its 1952 founding until last month. In removing its legal umbrella for any actions which ousted chairman and chief executive officer John Rigas, his sons Timothy and Michael, son-in-law Peter Venetis and another - unrelated - employee, longtime Rigas loyalist James Brown, may have taken in their official capacities, Adelphia said they had breached their duty to the company.

The SEC and other authorities are currently investigating several billions of loans from Adelphia and other self-dealing transactions allegedly instigated by the Rigases. Timothy and Michael Rigas, along with their father, theior brother-in-law Venitas and another Rigas son, James, served on Adelphia's board until they were forced out last month, giving the family ironclad control of the nine-member body. The Rigas sons also doubled as top executives of the company until their ouster. Brown, an 18-year employee, formerly served as vice president of finance until his resignation last month.

Outside of the communications area, "Gap really gapped upward," one observer quipped, quoting the San Francisco-based apparel retailer's 8.15% notes due 2005 as having moved up to 102.25 bid from 100.5 previously, its 6.90% notes due 2007 at 91.75 bid, up from 90, and its 8.80% notes due 2008 at 102.75 bid from 101.5 bid. The gains followed release of the company's May sales figures, and while same-store sales fell 9% from a year ago, that's less than a drop in excess of 13% that analysts had been anticipating. While overall sales for the company's three divisions - The Gap, Old Navy and Banana Republic - were down 2%, they still exceeded the company's beginning-of-the-month expectations, Gap said in a statement.

The May decline marked the company's 26th straight monthly sales decline, although it projects that it will start to show improvements in the fall.

Tyco International's bonds "got hammered, anywhere from one to two points," the market source noted, in the wake of the rapidly expanding investigation into the financial activities of former CEO Dennis Kozlowski, who resigned his post this week just ahead of his indictment on New York state sales tax evasion charges related to his purchase of rare art work. State prosecutors are now also looking into whether the embattled executive may have used company funds to buy his pricey Manhattan apartment, and whether he got interest-free loans from the beleaguered conglomerate.

Tyco's nominally investment-grade bonds have been quoted in dollars like junk bonds and, in some cases, trading at junk-like levels way below par for several months, with investors confused and chagrined by its strategic flip-flops and its burgeoning debt load.

On Thursday, Tyco's 6 1/8% notes due 2009 dipped to 81 bid from 83, while its 7% bonds due 2028 were four points lower, at 73. Its 6 3/8% notes due 2004 went from 88.5 on Wednesday to 85.5 Thursday, while its 6 ½% notes due 2007 finished at 76 bid, down from 79.

AES Corp. - whose bonds had retreated several points on Wednesday - continued to slide Thursday after Standard & Poor's lowered its BB corporate credit and senior unsecured debt ratings to BB- and cut the B+ rating on the Arlington, Va.-based electric power producer's subordinated debt to B.

AES's 8 3/8% notes due 2007 fell six points to the 48 bid level, while its 9½% notes due 2009 were also down six points, at 70 bid.

"The downgrade is due primarily to the increasingly challenging environment that AES is facing in managing businesses in Latin America," AES credit analyst Scott Taylor wrote in his downgrade message. "Specifically, political instability in Venezuela and Brazil has made refinancing current obligations more challenging than usual, which could limit distributions, and a weakening currency in Venezuela could also weaken dollar-denominated distributions from that country."

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