Conseco retreats on unit shakeup, analyst downgrade; Charter shops $600 million new deal

By Paul Deckelman and Paul Harris

New York, Jan. 4 - Conseco Inc. bonds were in retreat Friday, as its shares slid after the insurer announced an unexpected management change at a key unit and a major investment house flashed the "sell" sign. On the upside, Kmart Corp. debt continued to bounce back from its losses earlier in the week.

In the primary market, Charter Communications Inc. made an official announcement confirming rumors that have been circulating in the primary market since 2002 activity commenced on Jan. 2.

Charter said it will sell a $600 million three-tranche deal - two add-ons and a new issue of 10-year senior notes (B2/B+) - via joint bookrunners Salomon Smith Barney, Banc of America Securities and J.P. Morgan.

Late in Friday's session, one official on the Charter syndicate told Prospect News that tranche sizes had yet to be determined.

The deal is set to price toward the middle of the week of Jan. 7, according to syndicate officials.

At the conclusion of Friday's otherwise quiet primary session, terms had not emerged on Paxson Communications Corp.'s $310 million (proceeds) seven-year zero-coupon offering, being managed by Salomon Smith Barney.

Price talk, which emerged Thursday, is 12¼%, according to one syndicate official who told Prospect News that Paxson had been expected to price Friday.

Just before this newsletter went to press on Friday, however, another syndicate official said that the Paxson offering is now expected to price early in the week of Jan. 7.

"The consent solicitation has been extended until Monday," the official said, attributing the extension to the short amount of time in the original solicitation. "And the deal, which is going very well, will price shortly thereafter."

Proceeds of the new Paxson deal will be used to redeem its 12½% cumulative exchangeable preferred stock which is the subject of the consent solicitation.

Throughout the week of Dec. 31, various sell-siders in conversations with Prospect News anticipated that the forward calendar would build somewhat precipitously during the week of Jan. 7. One or two sell-siders spoke of new issuance for the entire month of January in the $8 billion range. And using that figure as a talking point, in numerous conversations, caused very few syndicate officials to recoil.

The reason, most agreed, is that the buy-side still has plenty of cash - as much as 10%, some sell-siders estimate.

Dave Eshnaur, manager of the Bufallo High Yield Fund, told Prospect News Friday that the estimate was accurate with regard to his position.

"We're slightly above 10%," Eshnaur said. "And I'm going to be pretty slow to put it to work.

"We've been pretty judicious so far, and we're going to maintain that same philosophy."

Pointing out that the expression "conservative high yield fund manager" is something of an oxymoron, Eshnaur nevertheless attributed his own caution to a credit-by-credit analysis of the present high yield primary market, as well as to the near-term prospects of the US economy.

"It's a combination of both," he said.

"First of all, the good credits tend to overprice. And I don't think I'm ready to buy the higher-risk stuff just yet.

"And I think the economy is going to be choppy for the first six months of the year. I think we're going to continue to get mixed signals, which we've done.

"I think in the third quarter, when we get the easy comps, it will look much better."

News that Charter is bringing a sizable new deal to market temporarily pushed the St. Louis-based cable operator's existing bonds down a bit, a trader said, but they bounced back by the end of the day.

"They were a little weaker in the morning on word that they were going to do a new deal, but then came right back to finish unchanged," he said. Charter's 9 5/8% notes due 2009 closed at par bid/101 offered, while its 8 5/8% notes due 2009 ended at 95 bid/96 offered.

Conseco - whose bonds had actually been observed firming several points earlier in the week - careened sharply downward Friday, in tandem with a slide in its stock, following the unexpected resignation Thursday of the president and chief executive officer of its troubled Conseco Finance unit and an equity downgrade by Salomon Smith Barney.

"Conseco paper got hit, down at least two to three points" on the news, a trader said.

The Carmel, Ind.-based insurer's 8 1/8% notes lost four points on the day to close at 74 bid; its 10½% notes likewise dipped four points, to 80 bid, while its 6.40% paper fell to 60 bid, down three points. Bringing up the rear, its 10 7/8% notes due 2008 dipped to 41 bid from prior levels around 45.

On the stock side, Conseco's shares lost 69 cents, or 16.24%, to end NYSE trading at $3.56. Volume of 12.4 million shares was more than double the average turnover.

The slide was triggered when Salomon Smith Barney analyst Colin Devine - a longtime bear on the issue - dropped the shares to "sell" from "underperform," and flatly declared in a research report that "we believe that Conseco shares offer little, if any value." He sets a nominal price target of just $1 a share for the company, warning that Conseco "continues to face myriad credit-quality challenges relating to its subprime consumer finance unit (i.e., Conseco Finance), ongoing weak operating ratios at its life insurance operations and self-acknowledged cash flow deficiencies at its holding company parent."

On top of that, investors pondered the import of Bruce Crittenden's sudden departure as head of the problem-plagued Conseco Finance. The company announced after the markets had closed Thursday that Charles H. (Chuck) Cremens had been named president and CEO of the unit in place of Crittenden, whom it said resigned to pursue other interests.

On the upside, Kmart's short paper "saw a little bit of a rally today," a trader said, noting that some of the negative market sentiment on the Troy, Mich.-based discount giant seems to have cooled down.

He saw Kmart's 8¾% notes due 2004 and 9 3/8% notes due 2006 opening up in the 73 bid/76 offered area, with the former bond moving up to around 77.5 bid by the end of the day and the latter to 76. Kmart's 12½% notes due 2005 firmed to the mid-80s from Thursday levels around 75 bid/77 offered, while the 8 1/8% notes due 2006 - which had traded as low as 60 bid Thursday before recovering some lost ground late in the session and closing in the mid-60s - were "better bid," Friday, fluctuating at levels between 66 and 70.

"There definitely was improvement there, but there may have been some short covering as well, so we'll have to see how it holds in on Monday and Tuesday," the trader opined. "That will be the test. If they trail off again, it means there are more sellers, the short covering is done, and we're going to trade south again."

On the other hand, he said, the revival might prove to be real, helped by analyst statements that Kmart seems for now to have enough money. That, he said, might help the bonds continue to rise.

Kmart's slide had begun Wednesday, after analyst Wayne Hood of Prudential Securities sharply cut his 2001 fourth quarter estimates for the company, predicted a likely full-year loss - a change from his earlier projection of a profit - and warned that unless Kmart's cash-flow generation improved within the next six months or so, it might find itself forced into a possible bankruptcy filing. Both the junk bonds and the shares swooned at the mention of the dreaded B-word.

But on Thursday, while the shares continued to slide, the bonds bounced off their lows and recovered some of their lost ground, as investors began to feel that Kmart probably won't go bankrupt after all. That trend intensified on Friday, both on the debt side and in the stock, which momentarily touched a 30-year low before swinging back up to end trading up 62 cents, or 15.16%, at $4.71 on the new York Stock Exchange. Volume of 40.6 million shares was nearly eight times the average daily turnover of 5.3 million.

Kmart's shares and debt got a boost Friday from less-bearish equity analysts who counterbalanced Hood's assessment and indicated that the possibility of a bankruptcy was remote. Among them were Deborah Weinswig of Bear Stearns and Eric Beder of Ladenburg Thalmann. Also, late Thursday, Standard & Poor's said Kmart does not face any near-term liquidity issues.

The trader meantime saw Fleming Cos. paper "continuing to trade in sympathy" with Kmart, since the Dallas-based food wholesaler has a lucrative long-term contract with Kmart to stock its shelves with grocery items. Fleming had retreated following Hood's screed, since the analyst raised the specter that Kmart might have to chop capital expenditures. The company is in the process of converting as many of its 2,100 stores as it can to an expanded "superstore" format, so as to better compete with larger rival Wal-Mart; disruption of that project would bode ill for Fleming, the prospective supplier for the grocery aisles of the much-larger "superstores". Fleming's 10½% bonds due 2004 , which had eased to around 90 on Hood's bearish comments, were heard offered as high as 97 bid, "a little too high," the trader said, before going out at 93 bid. Its 10 5/8% notes due 2007 fluctuated between 88 and 92 bid.

Nextel Communications Inc. debt continued to firm Friday, carrying forward the strength seen earlier in the week, even in the face of ostensibly unfavorable news coming out of Argentina.

A trader quoted the Reston, Va.-based wireless operator's 9 3/8% notes due 2009 up a point on the session and four points on the week, at 83.75 bid/4.75 offered. At another desk, the benchmark issue was seen trading as high as 85.5 bid, up a point.

Nextel's zero-coupon notes due 2008 were meanwhile up two points on the session, to 74 bid, while its 10 5/8% notes due 2007 rose a point to 82.

Nextel's bonds have risen despite the announcement by its wholly owned NII Holdings Inc. subsidiary - more familiar to the markets as Nextel International - that its Argentine operating subsidiaries failed to make an $8.3 million credit facility principal payment which came due on Dec. 31. That's triggered a default and a cross default, forcing International to enter into forbearance agreements with its senior lenders and vendor credit provider. It further retained the distressed-firm specialists Houlihan Lokey Howard & Zukin Capital as advisor, said it was entering into negotiations with its noteholders and warned that even a bankruptcy filing may be necessary if things don't work out.

None of that appeared to have any impact on parent Nextel Communications, which said it is not a party to the Argentine borrowings. Investors apparently feel that the parent will move to distance itself from its troubled unit, including shutting off the money spigot.

"It's almost akin to what happened to Adelphia Communications Corp.'s bonds when Adelphia essentially cut itself free from Adelphia Business Solutions," last year, the trader said. "Its bonds went up. Investors saw it as a positive, as it was getting rid of a chronic headache."

Also in the telecommunications constellation, Williams Communications Group's 10 7/8% notes closed at 45.5 bid/46.5 offered, up a point on the session and two points on the week. Metromedia Fiber Network Inc.'s 10% notes firmed to 34 bid from 29 previously, on no news.

A trader called Xerox Corp. bonds "moderately weaker," after Moody's Investors Service late Thursday put the Stamford, Conn.-based copier and office machines giant's debt ratings under review for a possible downgrade, including the Ba1 rating on its senior unsecured debt, the Ba2 subordinated debt rating, as well as its Ba3 preferred stock rating.

The ratings agency indicated the step reflects its concern that Xerox - which has already reported five consecutive quarterly losses - might have a hard time improving profits and its balance sheet in 2002.

The trader saw the company's 5½% notes down about half a point to 93.5 bid/94.5 offered. Its Xerox Capital Trust I 8% debentures due 2027 fell to around 59.5 bid from Thursday's levels around 61.

Another trader called Xerox "the same old story. Not that the Moody's downgrade should shock anybody, but it kind of confirmed what everybody was already thinking. He pegged the company's bonds down about "a point or so."

The trader said Halliburton Co. "got crushed," as the Houston-based oilfield services and construction giant - nominally an investment grade credit but recently trading like a junk bond - spent the day denying market rumors that it was on the verge of a bankruptcy filing due to its asbestos-liability exposure.

Halliburton's 6% notes due 2006 were seen around 91 bid, down from recent levels at 93, while the trader saw its 5 5/8% paper due 2008 offered at 81, down from recent bid levels near 84. Halliburton shares fell 69 cents, or 6.3% on the NYSE Friday, to $10.22.

"There is no basis to the spurious rumor that (Halliburton) has filed for bankruptcy, or that such a filing is contemplated," the company said in a statement.

Halliburton is the parent company of Dresser Industries, which is involved in a number of asbestos-liability cases. In December, its shares and bonds fell on news of an unfavorable damage award in a case in the Maryland state courts, which some observers said could herald a slew of such costly verdicts. Over the past year or so, a number of high yield bond issuers have been forced to seek bankruptcy protection under a flood of such cases, including building materials makers Owens Corning and Armstrong World, chemicals maker W.R. Grace and auto parts maker Federal-Mogul Corp.

End

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