Wireless weakens after Moody's slam; WorldCom off on Grubman warning

By Paul Deckelman and Paul A. Harris

New York, June 24 - Wireless telecommunications issues were seen trading at lower levels Monday, as the market digested a sobering warning about the sector from Moody's Investors Service. Meantime, WorldCom Inc. - which, ironically, is aiming to get out from under its unprofitable wireless operations - continued to retreat, its investors stung by a bearish assessment of the company's prospects by Salomon Smith Barney equity analyst Jack Grubman, heretofore thought to be one of WorldCom's biggest advocates.

In primary market activity, the week of June 24 got off to a timid start, Monday, as the Mariner Health Care deal was postponed.

The wireless sector was reeling Monday in the wake of Moody's Friday afternoon message changing the outlook for U.S. wireless industry to negative, placing a majority of non-investment grade U.S. wireless operators on review for possible downgrades and changing the outlook for two large players - AT&T Wireless and Nextel Communications Inc. - to negative.

Traders on Friday had noted that the message came too late that day to have much impact, with many market participants having already called it a day and gotten an early start on the first official weekend of summer. The unhappy news was therefore waiting for them when they arrived at their desks on Monday morning.

Moody's noted recent announcements of likely slower growth in new-subscriber numbers from Sprint PCS - up till now the fastest-growing major wireless provider - and two of its affiliates, Airgate PCS and Alamosa PCS, calling the Sprint warning for that reason "particularly troubling."

Moody's cautioned that having the fastest-growing carrier issue such a warning is a sign "that the market for wireless service in the US has decelerated sooner and more sharply than we have anticipated. Consequently, it appears that the market may be more mature than previously thought. Moreover, the market is moving closer to a 'zero sum' game, where one carrier's growth comes largely at the expense of other carriers. This decelerating growth comes at a time when carrier's are investing heavily to upgrade their networks such that even the large investment grade carriers are net users of cash and are not yet generating positive returns."

Moody's said that with continued strong growth and decent demand from new services "critical" to all of the carriers, "the risk profile of all wireless carriers has increased," with the situation even "more acute" for non-investment grade carriers with weaker capital structures.

Nextel - which Moody's acknowledged would be "less directly affected by accelerated maturity of the wireless marketplace because of its differentiated service offering targeted at the business market" - might still suffer, the ratings agency said, as other large carriers look to gain market share by poaching on the Reston, Va.-based Number 5 U.S. wireless carrier's market niche. Its bonds - essentially unchanged on Friday, with the Moody's warning too late to affect trading - were being quoted down at least a point or two, with the benchmark 9 3/8% senior notes due 2009 falling to 58 bid from prior levels in the 59-60 area.

Investment-grade operator AT&T Wireless - whose Baa2/BBB bonds had actually firmed smartly on Friday on investor relief that Standard & Poor's did not downgrade its debt, as some in the analyst community had forecast, but rather affirmed it at current levels - gave most, if not all of it back on Monday as Moody's aired its concerns about the wireless business in general and AT&T Wireless' outlook in particular.

"All of its paper got hit," said one market-watcher, who quoted the company's 8¾% bonds due 2031 - which on Friday had tightened about 80 basis points to bid levels about 510 to 520 basis points over the comparable Treasury issue - as having widened back out to about 565 basis points over. He saw its 7 7/8% notes due 2011, which had tightened about 60 bps Friday to 510 bps over, as having widened back out to closing levels around 575 bps over the governments.

AT&T Wireless affiliate Triton PCS "was down a lot," a market source said, pegging its 9 3/8% notes due 2011 as having retreated to 66 bid from Friday's close around 72. Those bonds had been trading in the lower 80s, until recently, but fell sharply last week, to the low 60s, on investor concern over wireless industry problems, before coming part of the way back late in the week but before the Moody's warning about the sector.

And the source quoted the bonds of communication antenna tower operator Crown Castle International as several points lower, likely on spillover from the erosion of the wireless credits, who lease transmitter antenna space on towers built and/or operated by companies like Crown Castle and such rivals as American Tower Corp., Pinnacle Holdings and SBA Communications. He saw Crown Castle's 9 3/8% notes due 2011 dipping to 66 bid from prior levels around 69, and speculated that its peers would likely also be down a few points. At another desk, in fact, American Tower's 9 3/8% notes due 2009 were being quoted down four points to 53 bid.

Things were not much better elsewhere in the telecom world. WorldCom - whose bonds and shares have been steadily sliding southward for over a week on investor worries about whether it will be able to secure $5 billion of new financing, after the company acknowledged that it might not be able to do so by its original June 30 target daeadline - continued to falter on Monday.

A trader quoted its 7½% notes due 2011 - which had been trading at over 50 cents on the dollar earlier in the month before starting to erode on the funding concerns - as having opened around 42 bid/43 offered. Then, he said "the bids got hit," and took the bonds progressively lower, until they bottomed in the 39.5 area before "the Nasdaq and the Dow turned later in the day and some buyers came in" and lifted the WorldCom bonds off their lows to end at 40 bid/41 offered.

The shorter paper "continues to weaken," he added, quoting its 7 7/8% notes due 2003 as having pushed down to 68.5 bid/70 offered from prior levels around 75.5 bid/77.5 offered.

"Clearly, there is convergence going on," he said, "as the short paper continues to come down and approach the price levels of the longer paper.

WorldCom investors got further jitters when Salomon Smith Barney equity analyst Jack Grubman - heretofore one of the biggest bulls about WorldCom - cut his recommendation on the shares to "underpferform " from "neutral," warning that the troubled Clinton, Miss.-based telecom giant's need to recapitalize is more urgent and its long-term access to funds from its credit facilities less than previously assumed - meaning it might now be far more likely to have to restructure its debt, which in turn would dilute its already almost-worthless shares.

Those shares fell 31 cents (25.41%) Monday on the Nasdaq to 91 cents on volume of 219 million shares, more than double the usual handle.

Adelphia Communications Corp. Bonds were also weaker on the day, its 10¼% notes due 2011 dropping about two points to 47.5 bid/48.5 offered. The troubled Coudersport, Pa.-based cabler did not, however, file for Chapter 11 by the close Monday, as had been widely expected.

On the upside, Service Corp. International "was better," a trader said, although he had seen no news on the Houston-based deathcare giant to explain the rise. He saw Service Corp.'s 7 7/8% notes due 2013 at 91.5 bid/92.5 offered and its 7.70% notes due 2009 at 95.5 bid/96.5 offered, both "up a couple of points" on the day.

In the primary, before hearing of Mariner's retreat, Monday, one sell-side source who spoke to Prospect News characterized this part of the high-yield world as a "binary market."

"Good credits are still getting done fairly reasonably," the source said. "Last week you had executions in the mid-eights, but the things that weren't getting done were 11%-plus or 12%-plus."

Indeed, as this source points out, Encore Acquisitions priced its deal during the week of June 17 to yield 8 3/8%, within its price talk of 8½% area, and Kronos International's offering yielded 8 7/8%, within the 8¾%-9% talk. And of the two deals that were postponed, Copamex had been out with price talk of 12½%-12¾%, while Spartan Stores was talked at 11%-11¼%.

Encore and Kronos, both of which priced within talk, turn out to be exceptions to the rule in the present market, however. Of 19 dollar-denominated high yield transactions tracked by Prospect News between June 13 and June 21, 12 of them, or approximately 68%, priced wide of their price talk.

Here is a capsule run-down:

The deals that priced within talk during the specified time interval include:

--Advanced Medical Optics, Inc. (yield 9½%, price talk 9½% area)

--Methanex Corp. (yield 8¾%, price talk 8 5/8%-8 7/8%)

--The Big Food Group, plc (yield 9¾%, price talk 9¾%-10%)

--Encore Acquisition Co. (yield 8 3/8%, price talk 8½% area)

--Kronos International (yield 8 7/8%, price talk 8¾%-9%)

--Stone Container Corp. (yield 8 3/8%, price talk 8 3/8%-8½%), and

--Extendicare Health Services, Inc. (yield 9.545%, price talk 9½%-9¾%).

Those that priced wide of their price talk during that same period include:

--Metaldyne (yield 11%, price talk 9¾%-10%)

--AmeriCredit Corp. (yield 9½%, price talk 9%-9¼%)

--Fleming (yield 9¼%, price talk 8 7/8%-9 1/8%)

--Burns Philp (yield 9¾%, price talk 9%-9¼%)

--Technical Olympic eight-year senior notes (yield 9%, price talk 8½%-8¾%)

--Technical Olympic 10-year senior subordinated notes (yield 10 3/8%, price talk 75 basis points area over the yield of the seniors)

--Vertis, Inc. (yield 11.03%, price talk 10¼%-10½%)

--Corporacion Durango (yield 14¾%, price talk 14¼%-14½%)

--Riviera Holdings Corp. (yield 11.289%, price talk 11%-11¼%)

--PCA International, Inc. (yield 12¼%, price talk 11¾%-12%)

--Buffet's, Inc. (yield 12%, price talk 11¼% area), and

--Herbalife International, Inc. (yield 12%, price talk 11%-11¼%).

Hence Prospect News inquired of the sell-side source whether 68% was an inordinate percentage of deals to price wide of talk.

The response was "Not really."

The source opened by stating that four of the past seven reported high-yield mutual fund flows have been negative. News from the equity markets has also been negative, the source pointed out.

"It's not surprising that things are widening out a little bit."

The sell-sider also said that the quality of some of the recent deals might be called into question. Some were buy-outs, some were deals to pay dividends, some deals for highly leveraged credits.

"Some of them had one or two specific things about the credit that made them maybe not as desirable as the deals that were coming early in the year," the official said.

The recent build-up in the forward calendar, upon which various sources have commented in these pages during recent weeks, is not exactly notable in an historic context, this sell-sider said. However, the source added, the manner in which it took place might have set the stage for some comparatively difficult transactions.

"When things were going gangbusters two months ago people decided the market was great and they came," the source commented. "But by the time they got to the market things backed up."

Finally Prospect News inquired of this sell-side source whether the cash-heavy, supply-starved circumstances that according to some had created a buyer's market in March through mid-May may have given way to the dynamics of a seller's market at present.

The official allowed that this is conceivably the case.

"You've definitely seen prices backing up and covenants getting reworked," the sell-sider said. "Those would be signs to me that the advantage, at least for the moment, is more on the buyer's side."

In a market where 68% of deals are pricing wide of price talk, while others such as Copamex and Spartan Stores are being postponed, it is perhaps not surprising that issuance has slowed.

According to a Monday report from Moody's the surprise is that it has not slowed further than it has.

June issuance, according to Moody's, is "at roughly $3.6 billion, rated speculative grade issuance...just over half that of last month's totals."

The Moody's report adds that a slowdown in speculative grade issuance would seem logical with total returns generally on their way down and spreads and yields climbing steadily higher.

"In some ways it is actually surprising that speculative grade issuance has not slowed further," the report stated. "Median yields for newly issued Ba rated bonds have seen little change in spreads, with May's median spread standing at 436, while June's spread has actually fallen slightly to 431 basis points. However, when compared to May, junk bond spreads for newly issued B rated bonds have climbed more than 100 basis points, from the 426 median basis point spread to treasuries in May, to a 528 median spread thus far in June."

Noting that junk bonds do not presently seem to be suffering the same level of negative investor sentiment as is the case with equities, the report noted that "the absence of a severe decline in high-yield issuance levels seems to indicate that widespread panic on the part of investors has yet to materialize."

With regard to Monday's news in the high yield primary, late in the session Prospect News learned that Atlanta long-term health care provider Mariner Health Care, Inc. had cited market conditions as it postponed its offering of $150 million of eight-year senior subordinated notes (B3/B-), via joint bookrunners Goldman Sachs & Co. and UBS Warburg. Price talk was 10 1/8%-10 3/8%.

Price talk of 11%-11¼% emerged Monday on Lyondell Chemical Co.'s $275 million of senior secured notes due July 1, 2012 (BB), which are set to price Wednesday morning via joint bookrunners Salomon Smith Barney, JPMorgan, Banc of America Securities and Credit Suisse First Boston.

And official price talk is 9% area on the Chumash Casino and Resort Enterprise offering of $150 million of eight-year senior notes (Ba3), set to price Tuesday afternoon via Banc of America Securities.

In addition to the Chumash Casino deal, Tuesday also figures to see the pricing of L-3 Communications Holdings, Inc. $750 million of 10-year senior subordinated notes (Ba3/B+ existing), via Lehman Brothers and Banc of America Securities, joint books. Price talk on L-3 is 7½%-7¾%.

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