Pegasus bonds bounce around after mixed ruling; Owens Corning loans up on progress report

By Paul Deckelman and Sara Rosenberg

New York, June 10 - Pegasus Satellite Communications Inc. bonds were bouncing around crazily Thursday, as investors awaited a crucial court ruling. After the judge, in fact, issued his half-a-loaf decision - thwarting Pegasus' efforts to stop corporate rival DirecTV Group Inc. from trying to poach on Pegasus' territory, but also ordering that DirecTV cannot use Pegasus' subscriber data to try to woo away its1.1 million customers - the bonds initially fell but then recovered some of their losses.

Elsewhere, Owens Corning's bank debt was firmer Thursday, as the bankrupt Toledo, Ohio-based insulation maker claimed that it was making progress on getting the holders of that debt to sign onto a reorganization proposal that the company's other creditors have all endorsed.

And asbestos debt investors pondered the import of statements from Capitol Hill that appeared to throw cold water on prospects for any kind of congressional approval of an asbestos claims payment scheme any time soon.

Bala Cynwyd, Pa.-based satellite television programming distributor Pegasus's senior bonds, such as its 12 3/8% and 9¾% notes due 2006, had been falling over the previous two sessions, declining to around the 48 level by Wednesday from recent highs in the mid 50s. On Thursday, a trader saw them decline from that early 48 level to as low as 41 bid right after the court ruling came out and then turn back up slightly to end at 43 bid, 44 offered - off the low but still down five points on the session.

He saw Pegasus' 13½% notes due 2007, which had recently fallen to around 15 bid from prior levels around 19-20, head further downward Thursday before settling in around 9 bid, 11 offered.

Another trader pegged Pegasus' 11¼% notes due 2010 at 44 bid, 45 offered, down from 46 bid, 47 offered and observed that "those things are just trading at asset value anyway."

At another desk, the seniors, like the 93/4s, the 9 5/8% notes due 2005 and 12½% notes due 2007 were all seen having fallen to a going-home price of 44 bid from prior levels at 46.5. The 12 3/8s were seen having stayed right at 46, while the 131/2s were observed unchanged at 15 and the company's 12¾% subordinated notes due 2007 were unchanged at 10.

Pegasus has been locked in a multi-faceted legal dispute with DirecTV, whose satellite programming Pegasus distributes to its predominantly rural customer base. Pegasus and El Segundo, Calif.-based DirectTV have feuded over the value of the Pegasus subscribers to DirecTV.

In late May, after a court socked Pegasus with a $62.5 million judgment, including interest costs, arising out of a breach-of contract suit, DirecTV and the National Rural Telecommunications Cooperative - a group of program distributors serving rural areas, with Pegasus as its largest member - announced an end to NRTC's and Pegasus' exclusive rights to distribute DirecTV's programming in their respective territories, effective Aug. 31.

Pegasus denounced this as a high-handed attempt by DirecTV to steal its customers, claiming DirecTV and NRTC had no right to unilaterally terminate Pegasus' rights. It sought Chapter 11 protection in a June 2 filing to preserve its rights to exclusively distribute DirecTV. The latter company fought back by trying to go over Pegasus' head and directly approaching potential customers in markets Pegasus serves - and the U.S. Bankruptcy Court in Portland, Me. rejected Pegasus' attempt to keep DirecTV from doing so but also put curbs on how DirecTV can accomplish this. (See related story elsewhere in this issue for details). Both sides were claiming a victory following the judge's order.

While Pegasus' bonds and the bank debt of an affiliate, Pegasus Media & Communications Inc., have gyrated in response to the twists and turns of the company's bankruptcy saga, the New York Stock Exchange-traded shares of parent Pegasus Communications Corp. have lately been pushed up by aggressive buying on the part of a Charlottesville, Va.-based hedge fund, Peninsula Capital Advisors, and continue to hover above $17. Wall Street observers believe Peninsula is gambling that the assets of parent Pegasus Communications, including two satellite licenses that can be used for transmitting digital signals and another license to provide terrestrial communications services, can be shielded from the bankruptcy proceeding and be potentially lucrative goodies for Peninsula to have, now that it is accumulating a majority stake. Pegasus Communications did not file for Chapter 11 along with Pegasus Satellite Communications and Pegasus Media & Communications.

Owens Corning loans gain

Owens Corning's bank debt headed higher as the company revealed that it is making headway in reaching an agreement with its bank debt holders, the lone holdouts among the company's creditors as Owens Corning tries to move its reorganization proposal along.

The paper was quoted at 77 bid, 79 offered, said a trader, who had placed the paper previously at 75.5 bid, 77.5 offered. A different trader, however, had seen the paper at 76 bid, 77 offered on Wednesday.

Owens Corning, which has been in Chapter 11 since Oct. 5, 2000, said that it has resolved all issues with its bank group, except for two matters - substantive consolidation and asbestos claim valuation (see related story elsewhere in this issue).

Bank debt holders, unlike the company's other creditors, have guaranties from the company's subsidiaries and, if these are enforceable, they would get a better recovery. But Owens Corning concluded that its subsidiaries were really one business and they should all be consolidated as one entity.

Furthermore, bank holders want an asbestos claims bar date so the company can get a sense as to how many claims there actually are. Owens Corning, however, is relying on its database of asbestos claims, suits and settlements over decades.

There has been a swirl of news this week regarding Owens Corning's reorganization plan, including an announcement that an agreement in principle has been reached with asbestos creditors and the official representatives of pre-petition bondholders and trade creditors - essentially all of the creditors save the bank debt holders - under which all holders of bonds, bank debt and senior trade debt would receive a recovery equal to 38.5% of their claims upon the company's successful emergence from Chapter 11.

It was also revealed earlier in the week that the U.S. trustee filed a document with the federal bankruptcy court in Wilmington, Del. saying that the process of Owens Corning's reorganization should be investigated by an examiner so as to determine whether anything improper had occurred.

A motion to appoint an examiner had already been put forward by Credit Suisse First Boston and others holding pre-Chapter 11 bank debt. They contend that the judge formerly hearing the case, Alfred Wolin, and his advisors, favored the asbestos claimants' attorneys, and charged that the company had developed a plan reflecting that bias.

Wolin was subsequently removed from hearing the company's case and those of several other asbestos-linked companies over the objections of some of the companies themselves and their asbestos claimants but with the support of many non-asbestos claimant creditors. The 71-year-old jurist subsequently announced his retirement from the bench, despite moves to restore him.

In Thursday's dealings, a trader quoted Owens Corning's bonds at 45 bid, 46 offered, well up from 42 bid, 43 offered earlier in the week.

Speculation about action in Congress

Another trader said the bonds had shown some volatility in the wake of market speculation about the possibility that Congress might still somehow do something concrete about the asbestos problem, quoting them as having firmed as high as 48 bid, 50 offered during the session, before coming off those highs to end at 45 bid, 47 offered, up from around 44 bid previously.

He likewise saw Armstrong World Industries Inc.'s bonds push up to 61 bid, 63 offered from Wednesday's levels around 56 bid, 58 offered, before backpedaling and closing at 58 bid, 60 offered.

"All sorts of rumors propelled the [asbestos] bonds up," the trader said. Then [Senate Minority Leader Tom] Daschle's statement knocked them back down off their highs."

Rumors had swept the financial markets Thursday that Washington lawmakers had reached a deal on setting up a payment mechanism for asbestos claims - but later in the day, the Senate leadership said no such deal had been reached - and they weren't even close to one

Daschle (D.-S.D.), who leads the Democratic contingent, issued a statement that flatly declared "contrary to market rumors, there has been no deal reached on the issue of asbestos."

While Daschle held out the prospect that he, Senate majority leader Bill Frist (R.-Tenn.) and other Hill leaders would continue to talk "and remain hopeful that a bipartisan solution could be achieved," clearly there was nothing new to report.

An aide to Frist was meantime quoted in news reports as having said that while her boss "would love to see a deal on asbestos, we don't have one as of yet."

Amy Call, a Frist spokeswoman told Reuters that while staff-level discussions on the issue continued, an accord was not close.

Shares and bonds of asbestos-related companies had recently been firming up in anticipation that the Senate - which failed to take action on a proposed $124 billion claims mechanism earlier this spring, might revive the idea. Insurers and the defendant asbestos companies themselves would have financed the claimants' fund, which would have paid set amounts to victims of asbestos-related diseases, while ending their right to sue. Critics of the proposal said that the amount was inadequate, given that the number of claims was expected to grow in the future as more medical problems surfaced among people who had worked with asbestos or were otherwise exposed to it in past decades.

Investors in asbestos companies have been hoping for several years that some sort of overall mechanism could be worked out to handle the flood of claims that has sent dozens of companies into bankruptcy over the past few years - even including some which never or sold any asbestos products themselves but which bought other companies that had asbestos lurking in their distant corporate pasts.

It is estimated that companies have paid an estimated $70 billion on some 730,000 asbestos personal injury claims - with tens of thousands of additional claims still to be settled.

After the Senate initiative ran aground last month, a federal judge attempted unsuccessfully to mediate a solution in talks involving the defendant companies' insurers, labor representatives and congressional leaders. Frist and Daschle said that time they would keep talking, which gave the markets hope that some kind of deal would be reached. In the past two weeks, the Wall Street grapevine has buzzed with talk that the Republicans might propose a larger claimant's fund, in the $150 billion range, but nothing came of it.

That didn't keep the financial markets from going to town anyway, pushing Armstrong World Industries' bonds as high as 56-57 bid from prior levels around 50, while Owens Corning's bonds had firmed to around the mid 40s from prior levels around 39-40.

Equity investors also got in on the act, with shares of W.R. Grace & Co. and USG Corp. in particular lately firming on expectations that a deal might be near. Some rumors said that the two sides had agreed on the size of the planned clams fund, or were close to agreement, which would be a huge step forward.

On Thursday, Chicago-based sheetrock maker USG's NYSE- traded shares were up as much as 14% on hopes of Congressional action before Daschle's statement and other Capitol Hill comments knocked them off that peak and down to a gain of just 59 cents (3.69%) to $16.60 on volume of about 3.7 million shares, five times the norm. Columbia, Md.-based chemical maker Grace's NYSE shares ended up 16 cents (3.36%) at $4.89, off their peak at $5.20.

USG's 8½% notes due 2005 were unchanged at 106, while its defaulted 9¼% notes due 2001 were steady at 102.

Leap loans gain yet again

Away from asbestos, Leap Wireless International Inc.'s bank debt once again moved higher, this time closing the day quoted at 121 bid, 123 offered, according to a trader. On Wednesday, the paper had been quoted at 120 bid, 122 offered - and was said to be way too high even at those levels by some market participants.

The debt had closed last week at around 110, bringing the week's tally to an approximately 11 point rise.

Since starting the rally at the beginning of the week, most people have been citing new valuations as the primary driver behind the surge.

Some have also pointed to high valuations of a comparable credit, MetroPCS, which recently announced plans to go public, as an impetus behind the rally.

Overall, the belief is that there is great equity value behind the San Diego -based telecom provider's name.

And since bank debt holders will receive debt and equity in consideration for their positions as part of the Chapter 11 reorganization plan, the more equity value people attribute to the company, the better the bank debt trades.

RCN firms

Also in the communications sphere, RCN Corp.'s notes were seen firmer after the bankrupt Princeton, N.J.-based telecom operator got court approval for its planned exit facility (see related story elsewhere in this issue).

Its 10% notes due 2007 and 11% notes due 2008 were both seen having firmed to 54 bid from prior levels around 52. The company's other issues were also seen having firmed about two points to levels around the mid-50s.

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