Lucent, Fleming continue fall; Williams up on pipeline sale; yellow is fall's primary color

By Paul Deckelman and Paul A. Harris

New York, Sept. 17 - Lucent Technologies Inc.'s bonds and those of Flemings Cos. continued to head south on Tuesday, each extending losing streaks that began last week, while Williams Cos. was headed in the opposite direction, buoyed by news of another asset sale by the pipeline operator.

In the primary sphere, the casual observer might justifiably wonder whether the high-yield market suffered a bipolar episode Tuesday as price talk emerged on the two deals expected to price during the week of Sept. 16:

Talk is 7 7/8% on the upcoming deal to be jointly issued by Plains All American Pipeline LP and PAA Finance Corp. while Chukchansi Economic Development Authority price talk has that deal rolling toward transaction at 15¾% - precisely twice the yield at which Plains is being talked.

Meanwhile sources on both the buy- and sell-sides continue to advise Prospect News that fall 2002 could turn out to be the yellow pages season, as cash starved telecoms auction off directory assets.

Two companies, Qwest Communications and Bell Canada have already announced sales of substantial portions of their directories businesses. And Sprint Corp. is in talks to sell its directory business.

All three, sources say, will likely lead to new junk bond issuance.

First up will likely be the QwestDex deal. Approximately $1 billion of notes figure to be part of $2.33 billion of debt financing for the $2.75 billion first stage of the $7.05 billion LBO of Qwest's yellow pages operations, sponsored by the Carlyle Group and Welch, Carson, Anderson & Stowe. Institutions that are reported to be taking part in the deal's financing include Banc of America Securities, Deutsche Banc Securities, JP Morgan, Lehman Brothers and Wachovia Securities.

And sources also say that off ahead in the intermediate future new junk bonds are likely to emerge as New York buyout firm Kohlberg Kravis Roberts & Co. have joined forces with Ontario Teachers Pension Plan Board to buy the telephone directories business of Bell Canada, and related Internet directory assets, for $1.9 billion.

One buy-side source told Prospect News on Tuesday that because of their proximity to the beleaguered telecommunications sector the yellow pages deals are liable to come with quite a pop.

"It's reasonably stable cash flow," the buy-sider commented, "and I think there will always be a market for the printed yellow pages.

"We'll probably look at QwestDex and BCE pretty closely," the source continued, "because I expect they will come with a lot of yield relative to the credit quality, given that it's in telecommunications. A lot of people are trying to keep that exposure to a minimum."

A source on the sell-side, however, insisted that this analysis overlooks an important distinction. Yellow pages operations, after all, are not truly telecommunications plays, the source told Prospect News Tuesday.

"These are viewed as media credits, not telecom," this source asserted. "They are valued as stable, slow-growth media credits. They get levered like them and yield like them."

In either case, sources say the first of the yellow pages deals likely to get through to the investors will be QwestDex, which figures to come in mid-October.

There was almost enough positive news to comprise a pipe dream on Plains All American's $150 million of 10-year senior notes early in Tuesday's session. Price talk of 7 7/8% was heard on the deal that is coming via UBS Warburg and figures to price Wednesday.

Also, Moody's Investors Services upgraded the Houston crude oil transportation and storage company's senior unsecured debt to Ba2 from Ba3 and assigned a Ba2 rating to the new 10-year senior notes. The Standard & Poor's rating on the notes is BB with a positive outlook - and the rating agency has said it will raise Plains All American to investment grade once it is spun off from Plains Resources Inc.

If you multiply the price talk on the Plains All American Pipeline deal by two you will arrive at the yield at which Chukchansi Economic Development Authority's $135 million of seven-year senior notes are being talked: 15¾%.

The non-rated deal, via Dresdner Kleinwort Wasserstein and Banc of America Securities, is said to be coming at a substantial discount, aiming at a coupon of 14½%, according to an informed source.

The issuer, a tribal gaming concern that will use the proceeds to fund the construction of a casino in Coarsegold, Calif., near Yosemite National Park, is putting the first three interest payments ($28.8 million total) in an escrow account.

The source told Prospect News that the deal will price at a substantial discount in order to bring the coupon below the 15% mark.

Chukchansi, the source added, is likely to price Wednesday but could conceivably come as late as Thursday.

Finally on Tuesday Philadelphia-based packaging company Crown Cork & Seal Co. Inc. announced it would increase the size of the proposed IPO of its Constar International, Inc. unit to 16 million shares from 8.8 million and cut the price range to $12 to $15 per share from $14 to $16 each.

The new financing for Constar will also include $200 million of 10-year senior subordinated notes (B3/B) via Salomon Smith Barney.

That registered deal, heard to be in the pipeline prior to mid-summer, is now expected to come sometime during the fourth quarter.

A syndicate source told Prospect News on Tuesday that although no changes in structure have been announced, the precise timing and structure of the deal that Constar will eventually bring remain to be determined.

Back among the established issues, a trader said that the market "started strong, but ended a little weaker" in fairly quiet trading, mirroring the equity market's surrender of its early gains. Analysts said the early stock strength evaporated as market euphoria over Iraq's statement that it would grant United Nations weapons inspectors access to search out weapons of mass destruction was tempered by a later realization that the Iraqi offer was appeared to be booby-trapped with enough conditions and limitations so as to make it essentially meaningless - the White House's contention.

Continued signs of a slower economy and restrained profit growth also played a role, as the benchmark stock indices such as the Dow Jones Industrial Average and the S&P 500 fell to six-week lows.

"Everything in the morning bounced," another trader said. "Futures were up and the market was up on the Iraq news. But everything's kind of back to unchanged" as of the latter part of the day. "We were screaming this morning, a lot of activity. Nextels were trading up to 82. But they're back down to unchanged now on most of the stuff."

Lucent "was just getting beat up," a trader said, quoting the Murray Hill, N.J.-based telecommunications equipment maker's 7¼% notes due 2006 - probably its most widely traded bonds - which a week ago were trading at 68 bid/69 bid - as having fallen to 61 bid/62 offered at the end of Monday's session, and to 58.5 bid on Tuesday. "They keep coming in," [i.e., going down in price].

Lucent last week warned that with business much weaker than analysts had feared, it would likely post a 45 cent-per-share loss during its fiscal fourth quarter, nearly triple what Wall Street had been anticipating, and that more job cuts were likely.

The trader predicted that "they're going to have to file [for Chapter 11 protection]. That company is just a world of hurt. I can't imagine why with their bad situation, they haven't filed yet. They're just a big mess, going south." He added that their bonds were "getting softer each and every day. There are no big bids out there for Lucent paper - it's just bid wanted, bid wanted, bid wanted."

A distressed-debt trader quoted Lucent's debt "down another five or six points," quoting one Lucent bond as offered at 44, down from prior levels around 50.

A market-watcher saw Lucent "down today, yes" with its 7¼% notes due 2006 dipping to 60 bid from 63, while its 5½% notes due 2008 was four points lower, at 54

A trader said "some of the tech stuff is softer [Tuesday]. Solectrons are weaker. Amkor Technologies are weaker. I think that's just spillover from all this bad Lucent news."

Amkor's 10½% notes due 2009 were half a point lower, at 47 bid.

Also on the slide was Fleming paper, which is "is in a meltdown," the distressed-debt trader said. "I saw it offered in the 50s, the low 60s, down another five or six points."

Another trader allowed that Fleming was down, although "in very light trading" from where he sat.

Yet another trader said Fleming - beset by lawsuits from disgruntled investors, poor results from its retail supermarket chain and the bankruptcy of its largest customer, Kmart Corp. - "was getting hammered" in terms of its quotes falling, although he saw no trading taking place, due to lack of any two-sided markets.

He quoted Fleming's 10 1/8% notes offered at 82, with no bids and its 9¼% paper offered at 80, also with no bid; its subordinated 10 5/8% notes were offered at 63 and its 9 7/8% bonds at 55. "I haven't seen a real close bid against any of them," he noted.

While Fleming's 10 1/8% notes "haven't fallen to 75 or so, they're just stalled [at 82 offered] - and those senior notes are down 20 points [from where they had been before the current slide began].

A market source quoted Fleming's 10 1/8% notes due 2008 three points lower at 77 while its 9 7/8% notes due 2012 were four points down at 47 bid.

On the upside, Williams is "firming up, a little firmer," a trader said. One observer at another desk quoted Williams' 7½% and 7¾% notes due 2031 as having pushed up to 64 bid from prior levels around 61, while its 7 1/8% notes due 2011 were a point improved, at 71 bid, "not a heck of a lot of difference" on the session.

The Tulsa, Okla-based energy company said on Monday that it would sell its Central natural gas pipeline for $380 million in cash and $175 million in assumed debt.

Qwest Communications International debt was "kind of unchanged, maybe up a point or two points," a trader said. The Qwest Capital Funding 5 7/8% notes due 2004 were seen a point higher at 75.

A buy-side source said that his shop was "very interested in it. We'll probably be buying some between now and year's end. We like the assets in it - the rural lines. We're trying to pick timing and where in the capital structure, and what kind of exposure we may want to do."

The source noted that Qwest "got off the asset sale in QwestDex for about $7 billion - roughly seven to 7.5 times cash flow, which was low given historical transactions. They had to sell cheap to free up some liquidity."

Also in the communications sphere, a market source saw Charter Communications 8 5/8% notes a point better at 68.25 bid, while its 9.92% notes were up better than a point, at 50 bid.

He saw Cablevision's 10½% notes due 2016 up a point at 80 bid.

A trader meanwhile quoted Cablevision's 7 5/8% notes due 2011 "a little better." Its 8 1/8% notes due 2009 were a point-and-a-half firmer, at 90 bid.

Market reaction was surprisingly restrained to the latest revelations from Tyco International Ltd. of still more lavish spending by ousted chairman and CEO L Dennis Kozlowski and his senior executives, including a $1 million birthday party on the Mediterranean Island of Sardinia for Kozlowski's wife's 40th birthday, and such pricey furnishings for the high-living corporate chief's several plush homes as a $15,000 dog umbrella stand, a $6,300 sewing basket and a $2,200 gilded waste basket, according to a company filing with the Securities and Exchange Commission.

The company's current management - which has taken over since Kozlowski's ouster in July - has sought to distance itself from the foibles of the old regime, replacing key personnel who were linked to Kozlowski, who is currently under indictment.

A trader quoted Tyco's bonds "down slightly, maybe half to three-quarters of a point." He marveled "I don't know how you can spend $2,200 on a garbage can."

Another trader saw the company's medium-to-long-term bonds about a point lower, with its 6 3/8% notes due 2011 dipping to 85 bid/87 offered from 86 bid/89 offered previously, while its 6 3/8% notes due 2006 was a point in the red at 89.75

A market source saw Magellan Healthcare's bonds as "having been up over the last couple of sessions," but said that on Tuesday, its 9% notes were a point lower at 34 bid, while its other issues were unchanged. Moody's cut the healthcare company's senior unsecured rating to Caa1 on Monday from B3 previously.

NRG Energy announced on Monday that it had not made interest payments due Monday on its 8¼% senior notes due 2010, its 8.7% convertible notes due 2005, its NRG South Central Generation 8.962% senior secured bonds due 2016 and 9.479% senior secured bonds due 2024, instead invoking the 30 day grace period as it attempts to come up with a restructuring plan with the debt. That caused Standard & Poor's to drop some of its ratings to either D or CC from CCC previously.

A market source estimated that the NRG bonds were trading around 20 bid, down from bid levels around 22-23 on Monday; some of those bonds had recently been quoted as high as the 25-27 area.

A number of other companies also reported on Monday that they would not be making the scheduled Sept. 15 interest payments on their bonds, including SpectraSite Holdings Inc.; a market observer, however, saw the communications antenna tower operator's 10¾% notes due 2010 at 23 bid and its 12 7/8% notes due 2010 at 16, both unchanged on the session.

Doman Industries' 8¾% notes due 2004 and its 9¼% notes due 2007 were unchanged at 24 bid and 25, respectively.

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