Nextel Intl only moderately off on Moody's cut; steels may bounce on ruling

By Paul Deckelman and Paul A. Harris

New York, Oct. 22 - A three-notch downgrade for Nextel International Inc.'s debt by Moody's Investors Service was largely expected by the market, and resulted in only a relatively small price drop, traders said Monday. A government pronouncement favorable to the steel industry came too late in the session to help beleaguered high yield steelmakers, but could have some impact Tuesday, they noted.

On the primary side of the fence, no offerings were seen to have priced Monday but price talk emerged on prospective new issues for Advance Auto Stores Inc. and Petco Animal Supplies Inc. and Westport Resources Corp. announced a new deal of at least $200 million in size. New-deal players meanwhile evaluated whether, in the wake of the recent turmoil in the financial markets, an environment exists for getting high yield deals done cheaply.

Moody's dropped Nextel International's 12¾% senior notes due 2010, 13% senior discount notes due 2007 and 12¼% senior discount notes due 2008 to Ca from Caa1 previously, warning that "given the current operating environment in its Latin American markets and the state of the capital markets, Nextel International will not be able to generate enough cash to service its debt nor will the company be able to attract additional capital. Consequently, we believe a restructuring of the debt is highly likely."

The ratings downgrade for Nextel Communications Inc.'s wholly owned overseas subsidiary "was no surprise to anyone," a trader said, adding that "it's not quoted very broadly," while another agreed that while parent Nextel is a high yield market mainstay, International's debt normally "doesn't trade around too much anyway."

Nextel International's 12¾% notes were heard quoted a bit lower, at 12 bid versus 13.5 previously, while its zero-coupon/12 1/8s were at 5 bid, "about where they've been for a while," a market source said.

Meanwhile, there was little or no movement seen in parent Nextel's debt, with its 9 3/8% notes due 2009 holding steady around 68 bid and its 9½% notes hanging in at 67.

The lack of activity was typical of what one trader called "the Monday shuffle."

"There was no excitement at all," another said. "Things were pretty light, with not much to tell about."

He noted that late in the session, news hit the tape that the U.S. International Trade Commission ruled that domestic steel producers were being hurt by imports in about half of 33 product lines examined, covering about 80% of the U.S. producers' output. The ITC will make a recommendation within 60 days to President Bush on possible remedies, which could include quotas and tariffs.

The decision was hailed by American steelmakers which had filed the case, as well as by the union that represents thousand of their workers.

The steel credits, which have been reeling since last week's bankruptcy filing by the No. 2 U.S. integrated steel producer, Bethlehem Steel Corp., "got hit earlier in the day. When the news came out, it was too late in the day to have much effect," the trader said, quoting Bethlehem's 10 3/8% notes languishing around 8 bid/12 offered, well down from 13 bid/15 offered, a few days ago. Weirton Steel's 11 3/8% notes due 2004 were at 11 bid/13 offered, down from 13 bid/15 offered.

But he opined that the junk steelers "could see some pop tomorrow (Tuesday)" on the news. They might also be heartened by the smaller-than-expected third-quarter loss posted by industry leader U.S. Steel, which showed a loss of $18 million (22 cents per share) - a deterioration from the adjusted year-ago profit of $25 million (26 cents per share), but far less of a loss than the 42 cent per share deficit analysts had been anticipating.

Elsewhere, United Airlines' 9% notes, which had fallen badly last week after the second-largest U.S. air carrier warned it could eventually be forced out of business, recovered a bit of those losses a trader said, pegging them at 82.5 bid/83.5 offered, although in very light dealings.

News that the Justice Department had decided to object to bankrupt Comdisco Inc.'s effort to sell its disaster data-recovery unit to SunGard Data Systems Inc. had no impact on its bonds, which remained in the 70s - its 6 3/8% notes due 2001 at 76.5, and its 7.62% notes due 2002 and 6 1/8% notes due 2003 at 78. The government cited antitrust concerns, noting that the combination of the two companies units would give SunGard/Comdisco about 60% of the market. The companies, meanwhile, contend that it is especially important that their deal be quickly approved, in view of companies' and government agencies' need for emergency data-recovery services stemming from the Sept. 11 terrorist attacks.

Kaiser Aluminum's 10 7/8% notes due 2006 were quoted around 75 bid, up several points from Friday, but that was just thought to be a case of the bonds having been oversold Friday, when they fell five points.

Lucent Technologies Inc.'s bonds firmed a bit, its 7¼% notes due 2006 at 84 bid and its 5½% notes due 2008 at 74, both up a deuce. U.K. cabler Telewest plc's paper was down by the same amount, its 11¼% notes closing at 79 and its 11% notes easing to 74. Trump Atlantic City Associates' 11¼% first mortgage notes due 2006 lost a point to 63 bid/64 offered "on no real news at all," a trader said.

In the primary a new deal emerged for Westport Resources. It plans to sell $200 million minimum of 10-year notes via bookrunner Credit Suisse First Boston. Pricing is expected the week of Oct. 29.

Price talk emerged for two of the four deals currently scheduled to price this week. Petco Animal Supplies Inc.'s $200 million of 10-years, slated for Tuesday, is talked at 103/4-11% while Advance Auto Stores Inc.'s $150 million add-on, Wednesday's business, is talked in the 12% area,

Louise D. Rieke, manager of the Waddell and Reed High Yield Fund, said that for certain paper, the demand is presently quite high.

"Right now investors are looking for Nirvana," Rieke said. "You have to have something that everyone thinks is recession-resistant, with some upside, and some potential for growth.

"Everyone's sitting on a lot of cash," the Waddell and Reed manager said, adding that she recently heard the current cash position of the high yield funds averages 8%.

"Yields on cash or commercial paper are less than 3%," Rieke said. "If you find a deal that the market likes there are so many buyers out there - the market is so large - that $200 million doesn't satisfy anyone's needs."

Rieke also noted a phenomenon which is rumored to be at play in the high yield primary market, at present: reverse inquiry.

So in part, Rieke said, investors are showing interest when they sense the "Nirvana"-deals. Also, they are buying, she said, because they sense the high yield market is cheap.

One investment banker who spoke Monday with Prospect News agreed and disagreed with this apparent perception, on the part of investors.

"It's hard to say the market's cheap," the banker commented. "If you look at the various indices - some people look at the J.P. Morgan High Yield Index, some people look at Merrill Lynch's, whatever - they suggest that yields are very high. But when you parse through those you see that there a lot of bonds that remain in the index that are trading at distressed levels. And those credits are fundamentally flawed.

"I think if you back out a lot of those bonds, and you look at the on-the-run, very tradable bond - Smithfield's a great example: Smithfield's a deal that priced at 8%, and it's now trading at 102 3/8; so it's now trading at close to 7 5/8 %:. That is exactly the type of paper the market is looking for because it's defensive, it's stable - there's really no hair on it. You're going to find that the on-the-run stuff, like that, trades very tight. That's because people want to hold it. People can't get enough of it.

"I think when you parse through the indices, and back out some of the distressed credits, the market in general is trading close to or through levels it was trading at prior to Sept. 11."

End

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