Level 3, Williams lead telecom sector lower; Beazer bonds steady on Crossman buy

By Paul Deckelman and Paul Harris

New York, Jan. 30 - Telecommunications issues got bopped across the board for a second consecutive session Wednesday, led downward by Level 3 Communications, which saw its bonds suffer a two-notch ratings downgrade to weak junk levels, and by Williams Communications Group, tarred by its former corporate parent's problems.

In the generally quiet primary market, Graphics Packaging International unbundled a new high yield deal for $250 million of notes, and price talk was heard on upcoming offerings from Solectron Corp., and The Scotts Co.

Back in secondary trading, Level 3 Communications' benchmark 9 1/8% senior notes due 2008, which had eased about a point or so on Tuesday to close around the 46 bid level, were quoted during the day at bid levels as low as 35 before finally closing out the session bid in the 39-41 region, down about five or six points on the day.

The catalyst was Standard & Poor's downgrade of the Broomfield, Colo.-based long-haul telecom carrier's bonds by two notches, with the rating on its senior unsecured debt going down to CCC- from CCC+ previously, and its corporate credit by one notch. The ratings service expressed concern about Level 3's operating losses and debt levels, and said the ratings could be downgraded again.

The ratings downgrade was "a pretty big cut actually," a trader observed, adding though that "it was no big surprise. They've got too much debt, so it happens."

The ratings downgrade came a day after Level 3 reported a fourth-quarter net loss of $3.3 billion ($8.54 a share) - sharply wider than the year-ago loss of $552 million ($1.50 a share). While the company blamed most of the loss on charges of more than $3.2 billion due to losses linked to job cuts and the sale of its Asian assets, and actually posted a smaller-than-expected operating loss of $475 million ($1.24 a share) - Wall Streeters were looking for about $1.68 a share of red ink - Level 3 also warned that customer cancellations and service disconnections in the first half of 2002 are likely to continue at levels similar to those experienced during the second half of 2001, and said that if that current rate of sales and cancellations were to continue, the company would be in violation of revenue requirement covenants on its credit line.

Level 3 shares fell 95 cents, or 24.05% in Nasdaq trading, to $3. Volume of 23.5 million shares was more than four times the usual daily turnover. The shares were downgraded Wednesday by Credit Lyonnais to "reduce" from "hold" and by Kaufman Bros. To "accumulate" from "strong buy".

Meanwhile, the trader saw Williams Communications off "oh, it had to be another four, five, six points. With Williams Cos. stock getting hammered today, I know that their bonds were wider, and Williams Communications did not look good."

Long-distance carrier Williams Communications fell for a second consecutive session after its former corporate parent, pipeline operator and energy trader The Williams Cos. Inc., both based in Tulsa, Okla., said it would delay its fourth-quarter earnings data until it evaluates its financial obligations to the money-losing telecom unit, which was successfully spun off last year. The former parent could be on the hook for as much as $2.2 billion in debt obligations related to the telecom operator - $1.4 billion in outstanding debt and a $750 million lease deal covering assets.

"Williams and Level 3 just exploded," another trader lamented. "It was really ugly."

He saw Level 3's benchmark issue down about seven points on the session, at 39.5 bid/40.5 offered, and quoted Williams Communications' 10 7/8% notes going home at bid levels as low as 31.75 to 32.5, and said trades may have printed as low as 30 bid during the session, "although not on huge size." He noted that the Williams bonds had been falling steadily, closing at 40 bid/41 offered on Monday and 36 bid/38 offered Tuesday.

The slide in Williams Communications bonds and shares (the latter ended down two cents, or 1.49%, at $1.32, on New York Stock Exchange volume of 18.6 million, more than triple the usual activity) came despite renewed efforts by the former parent company to soothe the financial markets and minimize its possible problems. On Wednesday, Williams Cos. called the doubled-digit percentage drop in its shares Tuesday an "overreaction," and said it would meet with the ratings agencies on Thursday to refine plans to strengthen its balance sheet. Williams Cos. shares lost 78 cents (4.15%) in NYSE trading Wednesday, to end at $18, on volume of 31 million shares, more than seven times the usual. Its A3/BBB+ bonds "widened out 40 to 50 basis points over the last two sessions, one market observer said.

Since Williams Communications is now an independent company, and it looks like its former parent may even get stuck with responsibility for a good portion of its debt, the troubles of Williams Cos., in theory, "really doesn't mean a lot to us," the junk trader said , "but it didn't matter" Wednesday.

"It's just that after Global Crossing, everybody (in the junk market) is in a bad mood," he explained. "Between Global Crossing (which sought Chapter 11 protection from its junk bond holders and other creditors Monday) and 'Enron-itis', it's just across the board. It's all telecom, it's Mirant, its Calpine, it's Dynegy. It's just ugly."

The only bright spot for the market in recent days, he continued "has been Conseco," whose bonds have recently been firming on news that the Carmel, Ind.-based insurer has been buying back large chunks of its 2002 maturity debt and has now cobbled together a package of asset sales and other adjustments which could give it as much as another $800 million to continue buying back debt with. "Everything else has been treading water, or if you're in energy (down on soft prices for power, crude oil and natural gas) or telecom, just getting shellacked. Not a pretty picture."

He further said that junk marketeers are watching what he calls "Enron-itis" - the investor angst over companies which either operate in the same energy generation/trading area as the bankrupt Houston-based energy trading giant, or companies which potentially could have accounting problems - "hope that it's isolated to just a few companies and not endemic to the whole system."

The troubles of high yield long-distance bellwethers Williams and Level 3 slopped over to other parts of the sector, including wireless, where Nextel Communications' 9 3/8% notes were quoted trading as low as 71.5 bid from prior levels in the mid 70s.

"Everything wireless crashed" along with the other telecom names, a trader said.

AirGatePCS's zero-coupon notes due 2009 dropped to 69 bid from 72, after the Sprint PCS affiliate cautioned that it expected to only add 38,000 to 45,000 net new customers in the second quarter - well below analysts' estimates around 60,000.

Outside of telecom, Beazer Homes debt was seen unchanged on the news that the Atlanta-based homebuilder will buy Crossman Communities Inc., for about $493.4 million in cash and stock in a deal that would create the sixth-largest U.S. homebuilder.

Beazer's bonds have recently been bid as high as 104, a trader said, "but you never can find them." He said Beazer "is not taking on too much debt" (about $120 million) to complete the $603 million deal, "so it shouldn't be burdensome to them. The bonds should hang right in there."

From the primary perspective, Robert Franklin, portfolio manager of the Neuberger Berman High Yield Fund told Prospect News Wednesday that with regard to the 10 deals currently on the forward calendar he is not shopping very hard.

"I might nibble," said Franklin. "I might look. But I'm not going to jump into anything.

"It's too skittish a market right now, frankly," he added. "The new issues aren't trading that well."

One sell-side source told Prospect News on Wednesday that despite the fact that high yield holds the most promise, currently, for companies that need or wish to finance, the issuers do not presently seem disposed to step forward.

"In a situation like we're in, in the economy, those companies that need money should be hitting my market. Rates are relatively cheap, for lesser high yield issuers, right now - to get money in the low-to-mid nines for your typical single-B company.

"You've got to take that money if you can.

"It's a combination of a lot of things," this source added. "It's one of those things where Murphy is around: 'If it can go wrong it will.'

"A lot of people are saying that they cut back on capex because of the downturn, so they don't need as much cash as they normally would. I've heard all the excuses from CEOs and CFOs.

"In light of how we rebounded from Sept. 11, I'm not seeing the financings of opportunity come at the volume we anticipated they would, before Christmas."

One new deal did emerge Wednesday. Graphic Packaging International Corp. is coming with $250 million 10-year senior subordinated notes, via joint bookrunners Credit Suisse First Boston and Morgan Stanley. The roadshow starts Monday, and the deal is expected to price during the week of Feb. 11, according to syndicate source.

Price talk came out Wednesday on Solectron Corp. $500 million seven-year senior notes via Goldman Sachs & Co. The offering is expected to yield 9¾%-10% with pricing scheduled for Friday.

And price talk of 8% area was heard on The Scotts Co.'s $70 million add-on to 8 5/8% senior subordinated notes due Jan. 15, 2009, via J.P. Morgan. That deal is also expected to price Friday.

On Thursday the market anticipates hearing terms emerge on TSI Telecommunications, Inc.'s $245 million 10-year notes via Lehman Brothers. Price talk of a yield in the 12% area came out Tuesday.

End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.