Pegasus TV swoons on legal hassles; primary side quiet

By Paul Deckelman and Paul A. Harris

New York, Aug. 11 - Bonds and shares of Pegasus Communications Corp. fell sharply on Monday after the nation's largest satellite television broadcaster, DirecTV, announced a settlement of its lawsuit with a group of companies, including Pegasus, that re-sell its service in rural markets - a settlement that would ultimately hand control of those customers back to DirecTV.

While the Pegasus slide livened up what was otherwise a pretty lackluster day on in the secondary market, no such leavening was seen in the primary, where traders said they had seen no new issues price by the end of the session.

Pegasus, a Bala Cynwyd, Pa.-based communications company, distributes satellite TV programming to rural markets across the country. It is a member of the National Rural Television Cooperative, along with a number of industry peers. The NRTC has been locked in a court battle with DirecTV, an arm of Hughes Electronics Corp., which in turn is owned by General Motors Corp.

DirecTV's announcement that it had settled its four-year litigation with NRTC (the settlement calls for NRTC to hand control of those subscribers back over to DirecTV in 2011, with DirecTV paying $150 per head) clipped the wings of Pegasus's Nasdaq-traded shares, which tumbled $13.80 (37.40%) to $23.10 on volume of 4.8 million shares - a whopping 59 times the average daily turnover.

Pegasus's shares rebounded as much as 34% in after-hours dealings after it issued a statement indicating that it was not a party to the NRTC/DirecTV deal, could not have its subscribers taken away without its consent and would continue to pursue its own litigation against DirecTV. However, that statement came after stock and bond trading had wound down for the day.

Traders said that the sharp slide in Pegasus shares helped to also grease the skids under its bonds, although it remains to be seen whether they too will rebound Tuesday in light of the company's defiant rejection of the settlement terms.

One market source estimated the Pegasus bonds down as much as 10 points on the session, pegging the 9 3/8% notes due 2005 and 9¾% notes due 2006 at 82 bid, down 10 points from prior levels, while its 12 3/8% notes due 2006 were quoted at 85 bid, down from 93.5 previously.

A trader said that the news coming across the screen "took everyone by surprise" and said that after that all the bids disappeared.

Another trader opined that he "didn't even want to quote" Pegasus. "Everyone was looking to get out. A true bid side was unavailable - just offers."

The first trader said that except for the Pegasus mess, "nothing was happening. It was kind of like Friday, with not a whole lot of trading going on."

He saw Calpine Corp.'s 8½% notes due 2011, which had opened at 67.25 bid, 68.25 offered, going home up about a point by the end of the session. Levi Strauss & Co. paper was also on the upside, he said, with its 11 5/8% notes at 90.5 bid, 92.5 offered, up half a point.

Oregon Steel Mills Inc. 10% notes due 2009 were seen at 74 bid, down two points on the session, although the trader said the decline was "nothing dramatic."

Another market source suggested that the bonds were just holding steady at lower levels to which they had actually declined on Friday, after Standard & Poor's withdrew its rating on the Portland Ore.-based mini-mill's debt (including the B+ rating on the bonds and its BB- rating on its corporate credit).

The ratings agency said its withdrawal came at the company's request, with Oregon indicating that its decision to end its relationship with S&P was purely fee-related, rather than anything having to do with credit quality, and it would continue to be rated by Moody's Investors Service. The sudden change in its rating status is the latest of several recent potentially market-roiling events at the company, including the July 29 announcement of the abrupt resignation of president and CEO Joseph Corvin.

Also on the downside, he quoted Trump Hotels & Casino Resorts' 11 5/8% notes down a point at a wide 85.5 bid, 88.5 offered.

Another trader saw some positive activity for Allied Waste, whose debt, he said, was up about a point or more across the board, it's 10% notes due 2009 rising to bid levels around 105.625-106 from prior levels at 103.875-104 bid, "up pretty substantially for a short piece of paper."

The Arizona-based waste hauler announced Monday that it seek to amend its existing credit facility to permit the previously announced exchange of its preferred A stock for common stock. The company would have an additional $250 million of term loan borrowing and its Allied Waste North America Inc. would be able to issue an additional $750 million of other senior debt.

Qwest Communications International Inc. was also higher, the trader said, up a point or two across the board. He quoted the Denver-based telecom company's 13½% notes due 2009 two points better at 109.5 bid, 110 offered.

Other upsiders, he said, included a "pretty strong" AES Corp., whose 8 3/8% notes due 2007 firmed to 90 bid from 86.5 on Friday, and Parker Drilling, whose 10 1/8% notes "bounced back" to end slightly above par on investor hopes the company will soon renew its credit facility.

Meanwhile the Aug. 11 week got underway with no transactions reported in the high-yield primary. Nor were any pending launches reported for new deals.

Several e-mail messages addressed to contacts on the buy- and sell-sides of the market ricocheted back with "out of office" responses.

Hence it appeared on Monday that the summer of 2003, now nearly two-thirds gone, has finally gotten underway in the high-yield primary market.

Price talk and timing emerged on two of the deals that sources anticipate being completed by the end of the present week.

Talk is 10¾%-11% on Monitronics International Inc.'s $200 million of seven-year non-call-four senior subordinated notes (B3/B-), via Banc of America Securities.

And the price talk is 10% area on Williams Scotsman Inc.'s $150 million of five-year non-call-three senior secured second lien notes (B2/B+), via Deutsche Bank Securities, Banc of America Securities and CIBC World Markets.

Both deals are expected to price on Wednesday.

And although the details were somewhat sparse, two acquisition financing deals were reportedly poised to take places on the still-crowded new issue calendar on Monday.

Pinnacle Foods Corp. was heard to be bringing a junk bond deal in addition to a new credit facility to help fund the $485 million leveraged buyout of the company by JPMorgan Partners and C. Dean Metropoulos, from Hicks, Muse, Tate & Furst. Deutsche Bank Securities and JP Morgan are bookrunners on the deal that is expected to launch after Labor Day.

And MB Tech, Inc., a Los Angeles-based manufacturer and distributor of satellite components, announced that it will use high-yield non-convertible bonds to finance its acquisition of the U.S. and German operating facilities of Willtek, Inc. (Korea), although no amounts, structure, underwriters or timing were disclosed in the press release.

And sources in the bank loan market said Allied Waste Industries Inc. is looking to sell $750 million of bonds as part of a refinancing plan that also includes a $250 million add-on to its term loan B.

JPMorgan is the lead bank on the bank deal.

In its Aug. 8 edition of the Bond Market Roundup, Citigroup made mention of the crowded new issuance calendar, and alluded to a possible turning of the tides in high yield.

High yield new issuance remained strong in July with over $20 billion coming to market, the report noted.

"The immediate calendar is heavy, and the pipeline of new deals is seasonably high," Citigroup went on to state. "Furthermore, the upgrade/downgrade ratio and watch statistics point to improving fundamentals in the sector.

"Despite the positive recent performance and fundamentals in high-yield several factors portend an end to 2003's extreme outperformance. That is, spreads widened toward the end of the July as high-yield funds experienced late July outflows...a trend appears to be continuing into August.

"Furthermore, in contrast to earlier months, the primary market is now struggling to digest new deals, with deal downsizings, price drops on the break, and choppy aftermarkets."

Meanwhile in Bear Stearns' Aug. 8 edition of High Yield Market Strategy strategist and analyst Mike Taylor makes mention of the recent spate of floating-rate tranches seen in new junk issues.

"This financing may indeed be a reflection of softer demand, but it also ends up providing benefits to both investors and issuers," says Taylor. "For the issuer, floating debt, which may be an assessment that interest rates will remain relatively low for some time (not an unlikely assumption given the Fed's current expressed policy to keep interest rates as low as possible in an economy that shows little meaningful inflationary pressures) allows for a lower blended cost of capital. Conversely, some creditors are betting on higher interest rates, and they have sought less interest-rate sensitivity in a softer market.

"For borrowers who finance on a floating-rate basis (like hedge funds), floating-rate issuance provides a natural hedge. In addition, floating-rate debt, some of which is in secured loans, can mean a higher advance rate and more leverage for a hedge fund that is borrowing capital on margin.

"An equally important factor could be attracting the institutional bank market. Facing higher prepayments on assets following refinancing (much like high yield was earlier this year), many institutional bank investors are forced to allocate assets to higher yielding alternatives to short-term rates. The 'healthier' institutional bank debt market may be providing the incremental demand."

According to data compiled by Prospect News, since March 2003 seven floating rate tranches with a total par amount of $1.525 billion have been priced.

Sources on both the buy- and sell-sides have said that hedge funds that are active on both sides of the leveraged market, bank and bonds, are thought to be active in the recent flurry of floaters. Interest among traditional high yield accounts is low, sources say.

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