Conseco tightens on S&P vote of confidence; Kmart up on plans to downsize; new Mail-Wells trade up

By Paul Deckelman and Paul Harris

New York, March 8 - Conseco Inc. bonds ended the week Friday continuing the firming trend they had shown in the latter part of Thursday's dealings, given a boost by Standard & Poor's removal of the embattled insurer's Conseco Finance unit from CreditWatch with negative implications, and the ratings agency's assessment that Conseco had raised enough cash through asset sales to meet its debt obligations this year.

In the primary market, Mail-Well Corp. upsized its offering of 10-year notes, with the new bonds heard trading well once they were freed for secondary activity.

Mail-Well increased its deal to $350 million of senior subordinated notes (B1/BB) from a planned $300 million and priced the offering via Credit Suisse First Boston at par to yield 9 5/8%, "through talk" of 9¾%-10%.

In secondary trading, Mail-Well's notes were quoted as having firmed to bid levels around 102, well up from their par issue price.

Several sell-side officials who spoke Friday with Prospect News commented that Mail-Well's deal lent further evidence that the high yield market is presently "hot."

One of these officials, in fact, commented that it could be too hot.

"This market I think is getting to the point of being irrational," the official said. "That print from Mail-Well looked exceptionally tight.

"And Sinclair is the lowest B2/B ever," this official continued. "That's nuts. What's the risk-adjusted return on that? Is the bond going to trade at 8% for the next two years, or three years, at par?

"Yes, there's a good chance they might get acquired. But there's just as good a chance that after they go through this asset sale that people are pricing into their deal they may re-lever and do another deal, and buy a bunch of new assets."

Diane Keefe, portfolio manager of the Pax World High Yield Fund, also expressed the belief that high yield is presently a hot market.

As evidence, Keefe pointed to the Entercom deal that priced on Feb. 27.

"I liked Entercom," she said. "But not at 7 5/8%. That was incredible.

"The thing is that when people see the kind of downside volatility that you saw in February they want a port in the storm. And that credit does represent a port in the storm. But having been in high yield for over a decade I hesitate to have a seven-handle yield on any high-yield bond."

Keefe also added hers to the list of voices on both the buy and sell sides who have told Prospect News that hedge funds have been active in the high yield, and have recently increased the market's volatility.

"Absolutely," she said. "And the sell-side firms also. It's not that I'm blaming them, but when the buy-side sees their portfolios in the bellwethers, like Charter and Nextel, going down and down, we feel like we've already made our plays. And we don't want to just necessarily double down in these names where we might already be overweighted. So you have the buy-side sitting on their hands.

"Basically any bid that ends up coming out gets shorted-to pretty quickly. So a lot of us were sitting on our hands saying, 'This does not makes sense but we have to wait for it to come around.'

"So we weren't selling into it but it was painful."

Taking a look at the forward calendar, Keefe commented that the socially conscious Pax World Fund would refrain from playing Resorts International, Magnum Hunter and Joy Global.

One deal in which the portfolio manager did express and interest was Entravision Communications Corp.'s $200 million via UBS Warburg.

"I actually have owned TeleVisa in the past; and TV Azteca - I bought their 2003 maturity. But I sold that when it started trading with an 8½% yield. It's still TV Azteca and it's holding company paper. I think there's a price you own stuff at and there's a price at which you need to sell it.

"So with Entravision, I don't know what the price talk is going to be but I think it will have a decent yield attached to it because when you adjust it for the new properties that they're buying I think the leverage is a little over five times. And the reason there's a spread between the dollars per rating point that you get for the Hispanic market is that still, on average, the Hispanic market is lower than the Anglo average income. But that spread between the two segments of the population is narrowing because the Hispanic community is improving their economic position, and the population is growing tremendously.

"So I think it's a good part of the economy to be involved with.

"And with Univision bonds trading in the investment grade world with a seven-handle yield and Televisa having been able to achieve a 30-year bond at 8½% there's not a lot of opportunities to play it.

"So it will be a matter of price. But I do like the deal."

A new deal was announced Friday from aaiPharma, Inc., which will use proceeds from the $175 million of eight-year senior subordinated notes via Banc of America Securities to acquire pain relievers Darvon and Darvocet from Eli Lilly.

As the week of March 11 gets underway, $2.34 billion is expected to price in the high yield market, of a total of $2.515 presently parked on the forward calendar.

In secondary dealings Friday, Conseco remained in the spotlight for a third consecutive day. The S&P announcement served to build on the positive momentum seen at the end of Thursday's session, when investors were apparently reassured - or at least appeased - by CEO Gary Wendt's memo explaining the circumstances of Wednesday's sudden departure of Chuck Chokel as chief financial officer of the Carmel, Ind.-based insurer. The company's bonds and shares, which had plunged early Thursday on market uncertainty, recovered most of those losses after Wendt, seeking to spike market buzz that Chokel jumped ship because of the company's problems, asserted that the CFO had instead been summarily fired because he was not up to the job.

The bonds rose further Friday as S&P affirmed its B- rating on a number of certificate issues which had been guaranteed by Conseco's troubled Conseco Finance Corp. unit, and removed the company from CreditWatch.

"The revision in the CreditWatch status reflects Conseco Finance Corp.'s and its parent's success in raising a significant amount of cash through asset sales and other measures to redeem at full face value all rated unsecured debt of the finance company coming due this year," the S&P announcement said.

That stands in stark contrast to the warning Wednesday from Moody's Investors Service that Conseco would have to present clear evidence to its independent auditors of its cash-generation plans for 2002, has only a small margin of error should its plans not proceed on schedule and could face at least a two-notch ratings downgrade if the auditors don't release an unqualified opinion on the company's 2001 results. Wednesday's red flag caused the stock and bonds to drop.

Conseco "tightened significantly" Friday, a trader said, quoting its 6.40% notes due 2003, which had bounced off their lows Thursday to end bid in the 80-81 area, as having pushed up to 82 bid/84 offered. Other Conseco issues on the upside, he said, included its Conseco Finance 6½% notes coming due this September, at 99.25 bid/99.75 offered; the parent company's 8½% notes maturing in October, at 93 bid/94 offered; its 9% notes due 2006, at 57 bid/59 offered, and its 8.70% trust preferred certificates due 2009, ending at 30 bid/32 offered, all up at least a point or more on the day.

Another gainer was Kmart Corp., which "had a nice little run" during the session, a trader said, after the Troy, Mich.-based discount retailing giant, currently reorganizing under Chapter 11, announced plans to close 284 of its 2,114 stores, about 13% of the total, and cut 22,000 jobs, about 9% of its workforce of approximately 250,000 persons. Analysts and other observers had been saying for quite some time that the company would have to shed unprofitable stores or those with burdensome lease arrangements - the bankruptcy process allows such leases to be broken - if it hopes to survive and continue competing against industry leader Wal-Mart Stores Inc. and hard-charging rival Target Corp. With many analysts having predicted before Kmart's Jan. 22 bankruptcy filing that Kmart might have to close as many as 700 stores, about one-third of its total, in order to straighten itself out, further store closings and job cuts are expected.

The struggling store chain anticipates that the sales generated from going-out-of-business sales at the affected outlets and related cost savings will enhance its cash flow by approximately $550 million in 2002 and approximately $45 million annually after that. In addition, the closing of these locations is expected to improve the company's EBITDA - earnings before interest, taxes depreciation and amortization, a key measure of cash-flow generation capability and potential ability to service debt - by approximately $31 million annually. As a result of these store closings, Kmart expects to record a charge in the range of $1.1 billion to $1.3 billion.

Kmart debt "hasn't been trading a hell of a lot in the past month" following the filing with the U.S. Bankruptcy Court in Chicago, the trader said, but was on the rise after Friday's announcement, with its long-term paper having risen to 43 bid/44 offered after having held around 41 bid/43 offered "for the longest time." Its intermediate paper, which had "languished" at around a 43 offered level with no bids, moved up to 43 bid/45 offered, "so there was a little life there. Nobody traded too much today, but I think maybe on Monday." Other traders also saw the bonds up around a point across the board.

Among better-off retailers, one trader said, "paper continues to tighten," mentioning J.C. Penney, Saks and Dillard's Department Stores as examples. Penney's 7.60% notes due 2007, for instance, were seen hanging in around 94.75 bid, after the Plano, Tex.-based retailer reported during the week that same-store sales for February were up a hefty 12.5%.

A distressed-debt trader reported that Williams Communications Group Inc.'s senior bonds continue heading upward, quoting them at bid levels around 19-20, up from 16-17 bid Thursday and well up from recent levels around 14. He cited the week's news that the Tulsa, Okla.-based long-haul telecom provider's former corporate parent, Williams Companies Inc., said it would make the scheduled interest payments on Williams Communications' $1.4 billion of WCG Note Trust 8.25% senior notes due 2004 in order to keep the whole issue from defaulting and coming immediately due.

"I don't know why the Williams Communications bonds went up on that news, but they did - you'd think the other Williams (Companies) would be the ones going up." He suggested that part of the rise in the Williams Communications debt might be due to short-covering.

Elsewhere in distressed territory, he said, Global Crossing's bonds "just hung in" at levels around 3.5 to 4 cents on the dollar, apparently receiving no Kmart-like lift from the news that the Hamilton, Bermuda-based international fiber optic network operator - like Kmart also currently in Chapter 11 - plans to cut up to 1,600 jobs, sell 71 properties and take other measures to raise money and cut costs. Global Crossing, which sought protection from its junk bond holders and other creditors in January, expects to have just 6,000 employees by the end of this month, down from 15,000 at the beginning of 2001. Global Crossing said the job cuts and other downsizing measures will save $600 million.

And several traders queried saw no bond price activity in another distressed telecom credit, XO Communications - the former NEXTLINK - which has become the object of a tug of war between billionaire financiers Ted Forstmann and Carl Icahn. Forstmann's investment vehicle, Forstmann, Little, was urging bondholders to approve a deal under which the buyout firm and Telefonos de Mexico would invest $800 million in the company, wipe out most of the debt, probably through a pre-packaged Chapter 11 filing, and take a combined 88% equity stake. Icahn and some of the other bondholders have objected to the arrangement as inadequate.

While a trader, noting Icahn's colorful record as a high-profile corporate raider dating back at least to the 1980s, dismissed his move as "a classic greenmail ploy," late in the day on Friday, Reuters, quoting sources close to the situation, was reporting that Icahn's position had carried the day and that the other bondholders had rejected Forstmann's plan and would soon submit their own plan that gives them 100% of the telecom company. XO's debt, meantime, remained stuck in the same 10-12 area that it's held "for the longest time," in the words of one market source. "They never move."

The source saw Buckeye Technologies bonds down "pretty big," quoting the Memphis, Tenn.-based specialty cellulose and other absorbent products maker's 8% notes at 76 bid, down around 10 points from recent levels, although no fresh negative news was seen out on the company. Its 8.5% notes due 2005 were seen around 84.5 bid.

A trader noted that inflows to high yield mutual funds in the week ended Wednesday totaled a whopping $1.11 billion, marking the third consecutive week in which more money came into the funds than left them, following the previous week's inflow of $46.6 million and the $129.9 million inflow in the week before that.

"We thought that this week's number would be a big one," he continued, "but obviously nobody was expecting over $1.1 billion."

With inflows having now been recorded in seven weeks out of 10 so far this year, $2.479 billion more has entered the funds than has left them. The weekly statistics, compiled by AMG Data Services, are seen by many market participants as a reliable indicator of overall liquidity trends in the nearly $600 billion junk bond market.

The fund flow numbers "symbolizes what's been going on in the past week," the trader said, with money coming into the secondary market in the absence of a lot of new supply and pushing some issues up despite a lack of fresh news. "You watched the gaming sector move up, you watched the telecom move up, pretty much everything across the board. It was a strong week, and some paper was difficult to come by."

He noted, for instance, that MGM Mirage's 9¾% notes due 2007 had moved as high as bid levels around 109-110, before finally starting to come off those peaks. "Today they were offered at 109.25, with a 108-ish bid." He predicted that the issue, having moved about as high as current economic fundamentals would justify, would likely soften up in the coming weeks.

"I think everybody who's afraid to sell this paper into strength because they think it's going to go higher, is going to be kicking themselves in a week or two, when everything softens up a point or two, and it would have been a great opportunity to short the paper. But who knows," he opined, tongue at least partly in cheek in noting the runup in the debt of the Las Vegas-based gaming company's, "it's all a crapshoot."

In other sectors, he said, it was the same thing - "names like Nextel, like Calpine, like AES got crushed, and then moved (back) up so fast that people didn't know which way to jump, whether to sell, or buy or jump in, and that's the problem." Nextel bonds were seen up a point across the board Friday, with its 9 3/8% notes due 2009 at 68.5 bid. Calpine was also firmer, its senior bonds quoted up three-quarters of a point, to around 80 bid.

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