Level 3 zooms on Buffett investment news; Swift slates $400 million deal

By Paul Deckelman and Paul A. Harris

New York, July 8 - News that an investment group that includes legendary investment guru Warren Buffett plans to buy $500 million of Level 3 Communications Inc. convertible debt sent the high-yield telecommunications operator's bonds and shares soaring on Monday, and produced a better tone overall tone in the badly battered telecom sector.

In primary market activity, meatpacker Swift & Co. was heard by syndicate sources Monday to be hoping to bring home the bacon with a $400 million bond deal the proceeds of which are slated to fund its purchase of assets from food processing giant ConAgra.

News that an investment group that includes Buffett's Berkshire Hathaway Inc. will invest $500 million in Level 3 electrified a high-yield secondary market which has recently been battered by all kinds of bad news, much of it coming out of such telecom companies as WorldCom, Inc., Qwest Communications International, both under investigation for alleged accounting irregularities, and the bankrupt Global Crossing Holdings Ltd.

Level 3's benchmark 9 1/8% senior notes due 2008, which had recently fallen as low as the lower 30s, bounded off of those lows on news of the big cash infusion to close at bid levels in the 50-51 area. Its 11¼% notes due 2010 showed the same kind of bounce, to also finish at around 50. Level 3's Nasdaq-traded shares, meantime, jumped $1.47 (50.87%) in Monday's dealings to close at $4.36. Volume of 32 million shares was about 13 times the usual turnover.

Even though Berkshire Hathaway is only going to purchase $100 million of the 9% convertible bonds due 2012 - Longleaf Partners Funds will buy the lion's share of the debt ($300 million), with Legg Mason Funds Management buying the remaining $100 million - having such a public endorsement from as respected a market figure as Buffett is seen by observers as worth its weight in gold in an investment climate where the telecoms have recently been largely shunned.

The investment is all the more striking because the 73-year-old "Oracle of Omaha" has historically been notoriously skeptical of investing in high tech telecom and Internet companies, sitting out the whole go-go telecom bubble of the late 1990s to instead put his money into more prosaic areas like candy, ice cream and beverage companies and insurance companies. In hindsight, that proved to be a wise decision, as the bubble eventually burst, with many of the once-high-flying start-up telecommers forced to either restructure through the bankruptcy courts or in some cases go out of business completely - while Berkshire Hathaway continues to make money hand over fist with its roster of low-tech holdings.

But Buffett said of Broomfield Colo.-based Level 3 - hurt by the same industry dynamics that have decimated so many of its rivals but still in better financial shape, in relative terms - that "liquid resources and strong financial backing are scare financial assets in today's telecommunications world. Level 3 has both."

Level 3 chief executive officer James Crowe has said that he plans to make a sizable acquisition in the battered industry soon, although he has not revealed who or what it might be. With a plethora of telecommers such as Global Crossing and Williams Communications Group Inc. currently restructuring in bankruptcy and others, like WorldCom and Qwest seen clearly in trouble and possible sellers of valuable assets, a relatively more financially stable player like Level 3 is seen in a good position to pick up valuable properties at near-fire-sale prices - especially now that it will be armed with a new $500 million war chest. Level 3 has already been doing something along those lines; in December, it bought $55 million of the Internet-access assets of McLeodUSA Inc. before the latter company filed for bankruptcy.

News of the investment deal clearly made Level 3 "the hot bond of today," a trader said, quoting the 9 1/8s pushing up to 52 bid from the mid 30s. "It was up big - and kind of pushed up the telecom market in general." He saw such other telecom issuers as AT&T and Sprint Corp. (both still nominally investment-grade credits which have recently traded at junk-like price and yield levels as the industry woes have deepened) better by at least a point each from recent levels. "Telecom was definitely a little better today," he declared.

Level 3 "did very, very well," another trader agreed, pegging the bonds up nearly 18 points on the session to the 51-52 area. "They were running up all day long. It was definitely the most widely traded name around here."

The trader saw some of that good feeling carrying over into trading in another junk telecom bellwether credit, Nextel Communications Inc. He saw Nextel's benchmark 9 3/8% senior notes due 2009 up about three points on the session, to 52 bid/53 offered.

"But those were the only two names in which there was any real activity," he added. While other things were being quoted at higher levels, he said, trading activity was sparse. "There were some bids out there on a lot of names that there had been no bids in over the last week or so, but it was really quiet other than those few names" (i.e. Level 3 and Nextel).

A trader said Level 3 "obviously" was the dominant name of the day, with its 18-point rise. With Level 3's bonds having fallen so far in recent sessions just on investor angst over telecom's troubles rather than any specific negative issues about Level 3 itself, "a lot of shorts had to get covered, I guess."

The trader opined that "this is certainly a positive. I don't think he [Buffett] is going to invest just $500 million. I'm sure there's going to be more." Indeed, Monday's Wall Street Journal, quoting "people familiar with the matter," reported that each of the three investors - Berkshire Hathaway, Legg Mason and Longleaf Partners - "have indicated to Level 3 that they would be willing to increase their investment further."

He saw EchoStar DBS paper trading a little better Monday, lifted by the Level 3 news. He quoted its 9 3/8% notes firming to 90.5 bid from prior levels around 89.

The Level 3 news clearly monopolized the attention of the secondary market, and not much attention was paid to the latest chapter in the continuing WorldCom saga, which saw ousted CEO Bernard J. Ebbers and fired chief financial officer Scott Sullivan appear before a congressional investigating committee scrutinizing the alleged financial chicanery that led to the stricken Clinton, Miss.-based long-distance giant being forced to re-state billions of dollars of expenditures, wiping out profits and cash-flow going back at least as far as last year - and maybe even beyond that. But whatever the probers hoped to learn from Ebbers and Sullivan they went home empty-handed, as both ex-executives refused to answer questions, citing their constitutional protection against being forced to give incriminating testimony.

A trader said that "everyone in the Street has pretty much been watching [WorldCom] and following it - but I don't think anything has really been happening in their debt."

Activity-wise, he continued, "it wasn't much. I think people wanted to hear out these whole committee hearings and see if anything new or different came out - but since most of the company guys seemed to be pleading the Fifth [Amendment], I don't think it was anything new or different, and I don't think [Salomon Smith Barney telecom analyst Jack] Grubman," who also testified, "added or took away from anything that we already knew. "

While he projected that psychologically, "things will be weaker because by pleading the Fifth, they didn't add anything" he said the hearings likely would have little real impact on WorldCom's already badly distressed bonds.

Another trader agreed that the hearings "would not make a bit of difference" to the behavior of WorldCom's debt. He quoted it unchanged to "a little firmer" on the session, the parent company's senior bonds holding steady in the 15-16 bid range, its MCI unit's paper staying around 42 bid/44 offered, and its Intermedia Communications Inc. bonds bid in the 27-29 area.

"There's a significant amount of tangible assets still underlying all the bonds," he explained. "Even if they had to file, they could still work out of Chapter 11. If anyone wants to cherry-pick the assets, [WorldCom] could get a lot of money for them."

Away from the telecom sphere, a trader said "everyone seemed to be just getting acclimated to getting back in the office" after an abbreviated trading week which saw a full market close this past Thursday for Independence day sandwiched between early closes on Wednesday and Friday, and with typically low pre-holiday activity levels during last Monday and Tuesday's ostensibly full sessions.

He said that the market had "looked really ugly" heading into July 4, between fears of terrorist attacks, the current accounting-issue-driven market weakness and people hitting wide bids in an atypically thin market. Monday, he said, "we've started to see some bounce," at least in terms of the kind of prices being quoted around.

Still, he added, away from Level 3, which was "definitely the big mover, there were a lot of numbers quoted - but not a lot of trades happening."

In the primary, some details were heard on one new deal and none priced as activity resumed Monday.

However, price talk was heard on a euro deal from Carmeuse Lime, as well as on the dollar-denominated offering from Oregon Steel Mills, Inc.

And Prospect News heard that there is considerable high yield interest in the split-rated Medco Health Solutions, Inc.'s $1 billion deal.

One sell-side source told Prospect News Monday that the high-yield primary, which has suffered four straight weeks of outflows from high-yield mutual funds, has definitely become a buyer's market.

"Part of it's that the equity market is going down," the source said adding that bonds to some degree take their cue from the equity markets.

"Subordinated bonds in particular are a residual claim after somebody else gets the dough, and are kind of like equity," the sell side official added. "So when the equity market dumps their cushion - when the equity beneath them starts to shrink - holders of subordinated bonds get afraid of heights."

Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, also made reference to the downturn in the equity market and to the high-profile corporate accounting scandals as reasons why whatever buy-side cash that remains on the sidelines might remain there for the time being.

"The lack of confidence in anything that companies are disclosing has caused a fleeing from risky assets," Difley said, "And high yield is obviously a riskier asset class.

"If you're just sitting on 5% or 10% cash you probably want to hold some for potential redemptions because that's the way it's been going lately," he added.

"The volatility has been extreme over the last several weeks. Why do you want to buy into that volatility - particularly into some of the more volatile sectors?

"Some people may be thinking about more conservative bonds in more stable, less volatile sectors. But some will just wait it out."

Difley said he believe the new issuance market remains open for the right credit. "It's going to take some time for people to regain their confidence in light of these recent disclosures," he added. "People are just nervous wondering what's the next shoe to drop."

Asked what would be required to rekindle some modicum of confidence among investors Difley allowed that government regulators may have a role to play, but at the end of the day the buy-side needs to have some reassurance that corporate executives will operate with integrity.

"I think there is a role for the regulatory bodies," he said. "But the way our accounting system is constructed there has been the ability for some people to maybe be more aggressive than others. At the end of the day it comes back to management: are they being honest, forthright and use reasonable estimates when they come up with their accounting numbers?

"You have to put pressure on management, too."

In Monday's primary market activity, price talk of 10¼%-10½% was heard on Oregon Steel Mills' upcoming $300 million of seven-year first mortgage notes (B1/BB-) which are expected to price Friday via Goldman Sachs & Co.

Asked why the Portland-based specialty- and commodity steel producer was in the high yield market at present, Oregon Steel Mills director of investor relations Vicki Tagliafico told Prospect News "Our existing $228 million (of 11% first mortgage notes) expire in June 2003 and the call premium expired on June 15, 2002. We just saw an opportunity to do the refinancing now because who knows what will happen a year from now."

Price talk of 9¾%-10% was heard Monday on the Carmeuse Lime's €250 million of 10-year senior secured notes (Ba3/BB-). BNP Paribas is running the deal, which is expected to price Thursday.

And in the wake of Monday's news that Medco included as revenue over the past three years $14.1 billion in co-payments that are actually pharmacies' share of prescription expenses, price guidance of 350-375 basis points over Treasuries emerged on Medco's planned $1 billion of five- and 10-year notes (Ba1/BBB+) via Goldman Sachs and Salomon Smith Barney.

A syndicate source told Prospect News on Monday that there is considerable interest among high yield accounts in this deal, which will be traded off of the investment grade desk. An investor conference call is scheduled for 1:30 pm ET Tuesday.

Finally on Monday Prospect News learned that Swift & Co. will bring $400 million via Salomon Smith Barney and JP Morgan, to fund the acquisition of a 54% stake in ConAgra's beef and pork operations by Dallas venture capital firm Hicks, Muse, Tate & Furst. The acquisition is set to close in early August, informed sources said (see related story in this issue).

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