Xerox zooms on refinancing news; three deals price, fourth shelved

By Paul Deckelman and Paul A. Harris

New York, June 21- Xerox Corp. bonds were solidly higher Friday after the copier king finalized its long-awaited $7 billion credit revolver rollover, while WorldCom Inc. debt continued to slide on market concerns that the telecom giant might not be able to do likewise.

In primary market activity, observers needed to look closely to find the good news in this or any other capital market.

The final day in the busy week of June 17 opened with AMG Data Services' report of a $504.3 million outflow from high-yield mutual funds for the week ending June 19, according to people who watch the figures.

And although four deals were expected to price on Friday, terms eventually emerged on only two of them - Herbalife and Buffet's, Inc. Spartan Stores closed up shop on its offering.

And one new offering came aboard the forward calendar as Yum! Brands, Inc. (formerly known as Tricon Global) announced it was bringing $350 million.

The $504.3 million outflow for the week to June 19 was the second straight outflow reported by AMG, according to market sources. An outflow of $292 million had been reported for the week ending June 12.

One sell-side official counseled that one means of understanding present circumstances in the high-yield market was to gaze into the past.

"Look back to your reports from last June and I think you'll find a mirror image of what's going on here," the sell-side official advised.

"This time a lot of pressure is coming from cable. Last year there was a lot from telecom.

"There's a lot of pressure on the secondary all across the board right now," this official added. "There's a lot of supply. And the equity markets continue to disappoint."

These comments were made to Prospect News a full five hours prior to the close of the Friday session during which the Dow Jones Industrial Average dropped just under 178 points to close out the week at 9254.

Terms emerged on two deals Friday.

Buffet's downsized its offering of eight-year senior subordinated notes (B3/B) to $230 million from $260 million and priced them discounted to 96.181 for a yield of 12%, wide of the 11¼% area price talk.

According to market sources the Eagan, Minn.-based buffet-style restaurant company upsized its credit facility by the same amount that it decreased the bond deal - $30 million - in order to achieve the same net financing of $515 million.

Meanwhile, only part of Herbalife's bond deal priced Friday, as European investors could not see eye-to-eye with the Los Angeles-based personal care products company in terms of interest rates.

The company upsized its dollar tranche to $165 million from $150 million and priced the eight-year senior subordinated notes (B3/B) at 98.716 to yield 12%. Price talk was 11%-11¼%.

However Herbalife took a powder on the identically structured €100 million tranche. According to an informed source the company did not care for the interest rate required to bring some of the European investors aboard. Those on the eastern side of the Atlantic who wanted to play Herbalife were rolled up into the upsized dollar tranche.

UBS Warburg ran the books.

Although some market observers anticipated hearing terms Friday on Atlanta long term health care provider Mariner Health Care, Inc.'s $150 million of eight-year senior subordinated notes (B3/B-) via joint bookrunners Goldman Sachs & Co. and UBS Warburg, late in the session Mariner was heard to be Monday's business.

All told the week of June 17 saw 10 dollar denominated tranches price for a total of $1.953 billion.

A new off-the-shelf deal from Yum! hit the road Friday. The Louisville fast food restaurant company, which owns Pizza Hut, KFC and Long John Silver's, will show up at the take-out window with $350 million of 10-year senior notes (Ba1/BB) sometime during the week of June 24 via joint bookrunners Salomon Smith Barney and JP Morgan.

And price talk of 7½%-7¾% was heard Friday on L-3 Communications Holdings, Inc. offering of $750 million of senior subordinated notes due 2012 (Ba3/B+ existing), which are expected to price Tuesday.

The L-3 deal is the largest of 11 offerings set to price during the week of June 24, for anticipated business totaling $2.885 billion.

In the secondary market, Xerox "was the bond du jour," a trader declared, after the Stamford, Conn.-based copier and office machines giant successfully renegotiated its $7 billion credit revolver, which was scheduled to expire on June 30. Uncertainty over whether the company would be able to get all of its ducks lined up in a row had weighed for weeks on its shares and bonds, although both had been firming of late as it became more evident that Xerox would be able to cinch a deal with its bankers.

The trader said that the bonds "just raced up" on the news that the revolver had been renewed, quoting Xerox's benchmark 5½% notes due 2003 as having pushed up to 94 bid/95 offered from prior levels around 90 bid/92 offered.

Meantime, Xerox shares jumped $1.12 (14.27%) in New York Stock Exchange dealings, to close at $8.97. Volume of 12.4 million shares was almost three times normal.

But Standard & Poor's, while affirming Xerox's BB- credit rating and taking the name off CreditWatch with negative implications, kept the company's longer-term outlook negative, and it lowered the senior unsecured debt rating a notch to B+ from BB- previously, citing "a material amount of secured debt" (including security granted under the new credit facility, and on- and off-balance sheet loans secured by finance and trade receivables) which is ahead of the unsecured bond debt in the capital structure.

The sometimes troubled Xerox "had to pay a pound of flesh to get this done," the trader opined, noting that under terms of the renegotiated agreement, Xerox repaid $2.8 billion of the revolver in cash, while extending the maturity date for the remaining $4.2 billion. "That immediate payment took a big chunk of cash," he noted. "I think these guys had basically drawn down the revolver, so that's where they got the cash, and they just gave it back."

The remaining $4.2 billion portion consists of three term loans totaling $2.7 billion, and a $1.5 billion revolving line of credit. While the credit revolver portion and $2 billion of the term loans have a maturity of April 2005, the first term loan of $700 million must be completely repaid by its final maturity this September. After that payment, he said, cash on hand might be as low as under $1 billion. For a company the size of Xerox "it's not enough that you can ignore the operating results going out to 2004."

The fact that the maturity on the other $2 billion of term loans and $1.5 billion of credit revolver availability is 2005, he said, "is probably why you saw the short stuff - the '03 and the '04 paper - rocket up like that," while the longer paper was less moved, given that longer-term questions remain about the company's overall viability. Xerox has been trying to turn itself around since October 2000, shedding certain non-core assets and restating some of its results under prodding from the Securities and Exchange Commission, which looked into accounting irregularities. Xerox is scheduled to deliver its 2001 annual figures on June 30; those results had been delayed Xerox adjusted to its new accounting methodologies as a result of past problems.

S&P said that the continued negative outlook "reflects the need for Xerox to achieve material improvement in non-financing EBITDA in 2002 and non-financing cash flow over the intermediate term." EBITDA - earnings before interest, taxes, depreciation and amortization - is considered the key bond market measure of a company's cash flow generation capacity and its potential debt service ability.

Another trader, who also saw Xerox's short bonds like the '03s jump four or five points Friday declared that the advance would "probably be short-lived. Nonetheless it was up a lot," although he also noted that not a lot of people were in the market to react to the developments.

Elsewhere, credit facility angst continues to weigh on the bonds of WorldCom; one market source called them "off a bit," pegging the Clinton, Miss.-based telecommer's benchmark 7½% notes due 2011 at 42.5 bid, down from 44 on Thursday, while elsewhere, the bonds were termed "moderately weaker."

A trader said that WorldCom - whose debt was cut two notches late Thursday by Moody's Investors Service, which brought the senior unsecured bond rating down to B1 from Ba2 previously, while Fitch Ratings dropped its bonds to B from BB - "was weaker right out of the gate" Friday. He saw the longer debt slip backwards, with the 8¼% notes due 2031 dropping to 38.5 bid/40 offered from prior levels around 40 bid/42 offered, "and then short end started to collapse." WorldCom's 7 7/8% notes due 2003, which had finished Thursday at 78 bid/80 offered, were seen Friday around 75 bid/77 offered.

WorldCom bonds have been steadily eroding since the company acknowledged a week ago Friday that it might not be able to finalize its much needed $5 billion of bank financing by its initial June 30 target, telling investors and analysts on a conference call that this might not take place until July. While WorldCom sought to put the best possible face on the situation, declaring that it was more important to get the right terms for the company than to adhere to an arbitrary deadline, the apparent time frame revision has some investors eyeing the company a bit nervously.

"There must be some sort of doubt creeping in about their ability to get this $5 billion of bank financing done in a timely manner or to their liking," the trader said, "because the short end, while it hasn't caught up with the long stuff [in terms of price levels], it's fallen more than the long stuff."

Also in the telecom sector, Moody's Investors Service changed its outlook for the entire U.S.wireless industry to negative, put most of the junk-rated U.S. wireless operators on review for a possible downgrade, and changed its outlook for two of the larger players in the arena - AT&T Wireless and telecom junk bellwether Nextel Communications Inc. - to negative.

Moody's thus falls into line with S&P, which recently warned of hard times ahead in the wireless field.

But the Moody's screed "came out at mid afternoon, when most everybody was gone," a trader pointed out. "You'll probably see some response Monday," although he said that the market is already well aware of the difficulties the wireless companies are going through, characterizing the Moody's caution as "a little bit late. Where have you been? The damage [to the sector] has already been done.

Given the late timing of the Moody's announcement panning the outlook for the wireless industry in general and Nextel in particular, he saw Nextel's main issue, the 9 3/8% notes due 2009, as essentially unchanged at 60.5 bid/61.5 offered.

At another desk, AT&T Wireless's bonds were seen having improved on the day, given a boost by S&P's announcement late Thursday affirming AT&T's wireless operation's long-term debt at BBB. Many in the market had been expected a ratings agency downgrade," a market source noted, particularly since J.P. Morgan had predicted such a downgrade in a research note earlier in the week. When it didn't happen, he said, the bonds firmed, the bid level on its 8¾% bonds due 2031 narrowing to 520 basis points over the comparable Treasury issue from 600 bps a day earlier; AWE's 7 7/8% notes due 2011 narrowed to 510 bps from 570 bps, while its 8½% notes due 2010 narrowed to 510 bps from 585 bps Thursday. Those levels had been recorded before the late-day release of the Moody's warning.

A trader saw Adelphia Communications Corp.'s bonds weaker on the session and "far weaker" - as much as three to four points - over the previous several days, noting news reports and market scuttlebutt that the troubled Coudersport, Pa.-based cable TV operator might finally file for Chapter 11 by Monday. Adelphia officials refused to either confirm or deny the possibility. Speculation that Adelphia would file has been in the market for weeks, although observers said the filing was being delayed only so that the company could finish lining up debtor-in-possession financing.

The trader saw Adelphia's 10¼% notes due 2011 at 50 bid/52 offered and its 10 7/8% notes due 2010 at 49 bid/51 offered. Adelphia's 9 7/8% notes due 2007 were quoted at 51 bid, while its Arahova Communications Inc. 8 3/8% notes due 2007 lost two points, to 42 bid.

Outside of the communications area, Rite Aid Corp. bonds were seen about half a point to a point better, its 7 1/8% notes due 2007 up a half to 68.5 bid Friday, after the Camp Hill, Pa.-based drugstore chain operator announced that it had settled with the SEC, which had been investigating Rite-Aid's accounting practices. Under the terms of the settlement, Rite Aid did not have to admit to any wrongdoing and didn't have to pay a fine. However three former executives of the company were indicted for allegedly cooking the books and artificially inflating the drugstore chain's profits by $1.6 billion, while a current executive there was accused of lying to a grand jury.

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