Levi gyrates on tax probe news; Charter keeps gaining; Williams, Ipsco market deals

By Paul Deckelman and Paul A. Harris

New York, June 2 - Levi Strauss & Co. bonds gyrated wildly Monday, after the San Francisco-based apparel maker was reported to have hired an outside counsel to probe allegations of tax and accounting irregularities - reportedly because its previous investigation was flawed. Also in secondary dealings, Charter Communications bonds continued to firm. And several TV station owners firmed after the FCC eased restrictions limiting ownership of media properties.

Primary-side dealings were relatively quiet - at least by the standards of recent weeks.

Two relatively small transactions priced during Monday's session and two deals came aboard to take their places on the new issuance calendar, including details on a $500 million seven-year off-the-shelf offering from Tulsa-based Williams Companies.

Meanwhile on Monday one buy-side source who spoke to Prospect News on background said that in spite of two consecutive weeks of outflows from high-yield mutual funds (following 12 consecutive inflows), in spite of three deals pulled during the post-Memorial Day week and in spite of a recently seen tendency for some junk bonds to price at the wide end of price talk, the high yield market still seems to have some room left to run.

"Two months ago everything you looked at was reasonable," the source recalled during Monday's interview. "There were decent companies taking advantage of a good market. Then it cleared out, and you were still getting a billion of inflows. Everybody was sure the underwriters would figure out something for investors to do with their money.

"They did a lot of figuring out alright," added the buy-sider. "But they weren't necessarily the most wonderful deals in the world. And I would say 80% of the deals have been fairly easy to pass on, on a pure credit perspective.

"The bottom line is that the same thing that drove the inflows, which is the lack of yield alternatives, is going to keep on existing for quite a period of time. And the economy at some point will actually get stronger.

"These two outflows are a pause. No one can stand getting 2% or 3% on their money."

While other buy-side sources have complained recently about junk bond deals pricing with yields that are too low, this source told Prospect News on Monday that yields could indeed tighten further.

"I think yield will drive the high yield market for a couple of years," the buy-side official observed. "And that's why it may get surprisingly-tight. Who knows what the yield curve will do? But I think the technical underpinnings of high yield demand will not just stop.

"And definitely there is room for tightening," the source added. "The question becomes, 'How is the tightening going to occur?' because the yield curve is very low and will start coming back when interest rates move up, which will happen eventually.

"People are all focused on nominal thinking: they insist they would never buy a high-yield bond with a six-handle. But what are they going to do? Historically single-Bs have gotten to 400 [basis points] off many times. It was the average for a long time.

"We're not there yet. Are we going to get there because the curve is moving up or because prices are tightening down? I suppose it will be some of each.

"But in a recovering economy, with all credits getting better, there is no reason why we shouldn't get to surprisingly tight levels."

During Monday's primary market session two relatively modest-sized transactions were completed by the investment banks.

Sequa Corp., a New York, N.Y.-based manufacturer of aerospace, propulsion, metal coating, specialty chemicals and other products, priced a $100 million add-on to its 8 7/8% notes due April 1, 2008 (B1/BB-) at 102.5 to yield 8.23%, according to market sources.

Proceeds from the Rule 144A deal will be used for general corporate purposes.

The original $200 million priced at par in late March, 2001, with Bear Stearns running the books. The identity of the bookrunner of Monday's deal was not available. But Sequa walked away from Monday's transaction with a better interest rate.

Also on Monday Burns Philp Capital Pty Ltd. and Burns Philp Capital (U.S.) Inc., a Sydney, Australia-based baking supplies firm, priced $100 million of senior notes due Nov. 15, 2010, in a quick to market transaction.

The notes priced at par to yield 9½%. Price talk on the deal from Credit Suisse First Boston was 9¼%-9½%.

The roadshow began Monday for Williams Companies' previously announced $500 million of seven-year senior notes (existing ratings Caa1/B+), with pricing expected on Thursday or Friday.

Lehman Brothers, Citigroup, JP Morgan and Banc of America Securities are joint bookrunners on the Tulsa-based natural gas company's off-the-shelf deal.

Meanwhile, the roadshow starts Tuesday for Ipsco Inc.'s $150 million of 10-year senior notes (Ba3/BB+), which are expected to price on June 13.

UBS Warburg and RBC are joint bookrunners for the Canadian-based steel producer's new deal.

Finally on Monday price talk of 7¾%-8% emerged on Esterline Technologies Corp.'s $150 million of 10-year senior subordinated notes (B+), which are expected to price late Wednesday via Wachovia Securities.

Meanwhile junk market attention shifted back to the secondary arena for the first time in nearly two weeks.

Levi Strauss was "really bouncing around," a trader said, while another exclaimed that the bonds "got mowed in the morning" before finally stabilizing, bouncing off their lows and finishing down only about a point or so on the day.

The blue jeans maker's 11 5/8% notes due 2008 - which had gone home on Friday quoted at 85.75 bid - plummeted as low as around 78-79 in early dealings Monday.

But that brought in buyers "hoping to buy the bonds on the cheap," the first trader said, and after the initial panic selling subsided, the bonds began moving back up from their lows - to 80, then 82 bid/84 offered, 82.5 bid, 83.5 bid/84.5 offered, and finally to late-day levels at 84 bid/86 offered, down not quite two points on the session, but well up from the day's lows. Levi's 12¼% notes due 2012 were also swinging back and forth before coming to rest at 81.5 bid, down some two points on the session.

The Wall Street Journal reported that Levi - accused in a lawsuit brought in April by two former executives of having filed false financial statements since 1997 - has for the second time hired an outside counsel to investigate the allegations, after concluding that its earlier inquiry was neither as independent nor as thorough as the company had claimed.

Levi has denied the allegations and tried to turn the tables on its accusers by countersuing the pair last month, accusing them of stealing company documents.

Besides the suit and countersuit, Levi's tax deductions are under scrutiny by the Internal Revenue Service, the paper said, and the Securities and Exchange Commission has launched its own informal probe.

Elsewhere, WestPoint Stevens Inc. debt was seen several points firmer after the Georgia-based textile maker - as had long been expected - dropped the other shoe and sought Chapter 11 protection from its junk bond holders and other creditors.

WestPoint's 7 7/8% notes due 2005 and 2008 were seen having opened at 19 bid and having moved up to levels around 22 bid/25 offered by day's end.

Charter Communications - whose bonds had firmed smartly over the last several sessions last week on speculation that the company and its lenders were making progress in implementing principal owner Paul Allen's planned $300 million investment commitment - was once again up on Monday.

Charter's 8 5/8% notes due 2009 were seen having risen to 73 bids/73.5 offered from Friday's levels at 72.25 bid/73 offered.

At another desk, the St. Louis-based cable TV operator's 10¾% notes were seen having risen two points to 75 bid/76 offered.

On Monday, it was meanwhile announced that the Number-One U.S. cabler, Comcast Corp., had agreed to another 30-day delay in exercising a $725 million put option which would require Allen to buy back its stake in a partnership with Charter which the Philadelphia-based cable giant inherited when it acquired AT & T Broadband last year. Allen is continuing to negotiate with Comcast on the possible transfer of some Charter properties to Comcast as part of the smaller cable company's efforts to shed non-strategic assets and return to financial health.

Also in the cable sphere, bond investors didn't seem overly impressed with Cablevision's announcement that it plans to spin off its Rainbow DBS satellite broadcast operation and Clearview Cinemas business to its shareholders, in order to concentrate on its core cable TV and entertainment businesses. While the Long Island, N.Y.-based cabler's shares jumped $2.43 (12.55%) to $21.79 in busy New York Stock Exchange dealings of 8.3 million shares, almost four times the norm, a trader saw the 8 1/8% notes due 2009 of its CSC Holdings unit unchanged at 103 bid/104 offered, while at another desk, the CSC 7 5/8% notes due 2011 were down a point, at 100.5 bid. Cablevision's 8 1/8% notes due 2009 were heard two points easier at 103.

Among over the air broadcast operators, a trader saw "everything jump about a point or so" after the Federal Communications Commission voted 3-2 to relax some of the regulations limiting the number of TV stations one owner can own - with investors apparently feeling that such companies could become acquisition targets in the wake of the liberalized rules.

Chief among the relaxed rules was a rise to 45% as the maximum national TV-home audience penetration any one owner can have, from the previous 35%; the commission also voted that a company could own two stations in most markets, as long as they are not both in the top four in ratings. And a company could own three stations in a very large market where there are 18 stations, such as Los Angeles. The FCC also liberalized restrictions on one company owning a TV station and a radio station or newspaper in a given market.

The trader said that Allbritton Communications' 7¾% notes were a point higher, at 104 bid/105 offered, and were up solidly from their levels at 101.5 bid./102.5 offered just a few days ago.

He quoted Young Broadcasting as having moved up to 104.75 bid from 103.25 bid/104.5 offered on Friday on "better buyers."

And while the new LIN TV 6½% notes were unchanged at 100.25 bid/101.5 offered, its 8% notes were a point better, at 107.5 bid/108.5 offered.

But the trader acknowledged that while investors took the bonds higher Monday in response to the FCC news on the feeling that companies such as Allbritton, Young, and LIN were potential acquisition targets, along with peers such as Paxson Communications, Granite Broadcasting and Sinclair Broadcasting, nothing is likely to happen on the acquisition front for a while - a view shared by the analyst community as well.

The analysts said that the commission's move came as no surprise to the market, with Hutch Pegler of Fleet Securities in Boston describing the ruling as "widely anticipated. I don't think anybody was really surprised about who said what, when the respective commissioners made their speeches. From a market expectations perspective, I think this was very much in line with what people were expecting."

Pegler and other analysts such as Philip Olesen of UBS Warburg don't think there's going to be any quick moves by the media giants to gobble up the smaller players.

For one thing, Olesen notes, the new rules "are likely to face some degree of legal scrutiny, as various interests try to argue their cases in court. So I'm not sure we'll see an immediate round of transactions."

For another, "a lot of those [larger] companies have already taken a look at a lot of those targets. Many of the larger players have not been constrained by the existing rules. So the new rules don't necessarily have a meaningful impact if you weren't really bumping up against the old rules.

The UBS analyst thinks that the real key in determining whether the major networks and other big broadcast fish will start snapping up the smaller fish "will be valuations. I think some of the large-cap media guys think the current prices out there are too high. So if the new rules lead to further run-ups in the security prices, I'm not sure that it would necessarily be met with a big round of consolidation activity."

The valuations, Olesen asserted, "have to make sense, regardless of what the rules are. If the valuation doesn't make sense - the valuation doesn't make sense. "

But he still adds that "undoubtedly, there will clearly be increased speculation that many of those companies may have become more attractive candidates under the new rules than they were under the previous rules."

Fleet's Pegler said "you may not necessarily see the floodgates opening on massive consolidation right away." Instead, he explained, there may be other kinds of transactions, such as swaps, with companies trading broadcasting properties in specific markets.

"But when there is activity - whether in the form of an outright acquisition or a swap - I think one thing it will do is verify asset values."

The analyst noted that "a number of credits are trading at a much lower relative yield than would be expected, given their leverage and some of their other financial statistics. I think this will validate asset values."

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