Nextel bonds rock as earnings roll; Bank Mandiri hitting road with new deal

By Paul Deckelman and Paul A. Harris

New York, July 16 - Nextel Communications Inc. was expected to post considerably better-than-expected earnings and up its full-year guidance - and the Reston, Va.-based No.5 U.S. wireless operator did not disappoint. Investors responded enthusiastically Tuesday, boosting its shares and bonds.

In the primary market, Bank Mandiri was heard by high yield syndicate sources to be getting ready to begin a marketing campaign Thursday for its planned $100-$125 million offering of 10-year notes.

Nextel's debt "obviously traded up," a trader said, after the company released second-quarter earnings results and improved guidance. The benchmark 9 3/8% senior notes due 2009 had firmed Friday to levels around 60 from prior levels in the low 50s on market buzz that Nextel would up its guidance. When that speculation became a reality on Tuesday, the strong rise continued, the notes zooming as high as bid levels in the 72 area before falling back to close around 68-69 bid - still a handsome gain of more than eight points, in active trading. Nextel's zero-coupon notes due 2008 were up more than 10 points, to finish at 66.5 bid.

The bonds of Nextel Partners (which markets Nextel's wireless business phone service in smaller markets) were also firmer on the news, its 11% notes due 2010 quoted at 50 bid, up from 44 recently.

On the equity side, Nextel's Nasdaq-traded shares jumped $1.53 (30.60%) on Tuesday to $6.53, on volume of 91 million shares, about five times normal.

Nextel posted a net profit of $325 million (37 cents a share) in the second quarter versus the year-earlier loss of $426 million (56 cents per share). Analysts were generally expecting Nextel to lose around 24 cents a share.

Besides beating the Street estimates, Nextel posted its first-ever quarterly profit - something which very few of the start-up telecoms which emerged in the wake of the deregulation of the telecommunications industry in the 1990s have actually accomplished.

Nextel attributed the unexpected profit to strong customer demand, as it added 471,000 new customers to end the second quarter with 9.64 million on its subscriber rolls. Nextel has said that it intends to add a total of two million new customers in the fiscal year which ends on Dec. 31.

Besides adding new customers, Nextel was able to keep most of those it already had; customer turnover remained flat at 2.1%, among the lowest in the industry. With average monthly service revenue per customer increasing to $71 in the quarter from $68 previously, total revenue rose to $2.15 billion from $1.72 billion.

Nextel's operating cash flow for its U.S. operations jumped 69% percent to $816 million in the quarter from $483 million a year before and easily beat analysts' expectations, driven by the increased revenues, lower operating costs and a reduction in mobile phone subsidies.

The wireless company also touted its progress in trimming its sizable debt load; Nextel reported that it had reduced its debt and mandatory redeemable preferred stock by $1.1 billion during the quarter by issuing some 61 million shares of common stock and about $295 million in cash, and had also entered into agreements to buy back about $400 million of debt for about $205 million in cash, which are expected to show up as a gain in its third-quarter earnings report. That total $1.5 billion debt reduction will let the company save about $2.5 billion in principal, interest and dividend payments over the next nine years.

Looking ahead to the rest of the year, Nextel predicted during a conference call that it would post profits for both the third and fourth quarter, and it increased its projection for full-year operating cash flow of to at least $3 billion - well up from its earlier forecast calling of $2.5 billion.

Nextel's stronger-than-anticipated showing and hopeful projections going forward gave a definite boost to other players in a wireless industry which has seen some operators recently warn of smaller-than-anticipated net subscriber additions and other signs of a downturn.

The bonds of Nextel Partners - which markets Nextel's wireless business phone service in smaller markets - were firmer on its corporate parent's news, its 11% notes due 2010 quoted at 50 bid, up from 44 recently.

Sprint PCS affiliate Alamosa PCS's 13 5/8% notes due 2011 were quoted at 37 bid, up from their recent levels at 33, while AirGate PCS's zero-coupon/13.5% notes due 2009 were heard a point better at 27. AT&T Wireless affiliate Triton PCS's 9 3/8% notes due 2011 improved to 68.5 bid from 64 previously. Western Wireless, whose 10½% notes due 2006 and 2007 had firmed several points Monday to around 50 bid, held those gains on Tuesday.

Communications antenna operator American Tower Corp.'s 9 3/8% notes due 2009 were also better, up more than two points on the session to close at 57.

Away from the strictly wireless issues, other telecom and communications operators were seen firmer, although a trader cautioned that it wasn't really a broad-based sector rally sparked by Nextel. "This was more of a case-by-case basis," he said. "It wasn't market-moving."

A trader said that Level 3 Communications Inc. "had a pretty good bid to it" and its bellwether 9 1/8% senior notes due 2008 "were hanging in at slightly improved levels around the 58-59 area. Charter Communications Holdings paper was also seen firmer, with its 8 5/8% notes due 2009 pushing as high as 68 bid, up two or three points.

Troubled WorldCom, Inc. continued to officially decline comment on whether it had made over $70 million of interest payments which came due on several issues of bonds Monday. But a person familiar with the situation said that the stricken Clinton, Miss.-based long-distance giant had not made the payment. Presumably the company is preferring to conserve its cash for its upcoming restructuring, in or out of court.

Its bonds - which a trader said had been trading flat, or without accrued interest, ever since the company disclosed $3.9 billion of improperly booked expenses several weeks ago - were seen little changed to slightly weaker on Tuesday, its benchmark 7½% notes due 2011 dipping a point to 14, while the senior bonds of its MCI long-distance unit were half a point lower at 41.5. During the session, the Fitch ratings serve lowered its rating on the company's senior unsecured bond debt to C from CC previously, and the company appeared to edge ever close to the expected Chapter 11 filing.

Reuters reported Tuesday that WorldCom - which last week had said that it expected to get one or perhaps even two bids on $3 billion of funding perhaps as early as this week and said that it would soon decide whether or not it would restructure through the courts - had lined up $2 billion in debtor-in-possession funding it could use to keep operating in the event it went into bankruptcy. The news service said that Citigroup Inc., J.P. Morgan Chase & Co. and General Electric Co.'s GE Capital financing arm would provide the DIP funding, which will be backed by the value of WorldCom's high-speed Internet network and other assets. In the absence of official confirmations or denials from the parties said to be involved, Reuters attributed its information to sources familiar with the situation.

Troubled telecommer Qwest Communications International's bonds were quoted steady to slightly firmer on Tuesday, its Qwest Capital Corp. 5 7/8% notes due 2004 having firmed to 52 bid from recent levels around 47, while its longer-dated 2031 bonds were a point better at 41. A distressed-debt trader saw Qwest as having "moved up pretty well" despite troubles that include a criminal probe and a Securities and Exchange Commission Investigation, quoting its shorter-dated holding company bonds as having firmed four to five points to around the 47 level, while he also saw WorldCom debt mired on "a slow boat to China."

Outside the telecom world, CMS Energy paper was unchanged to somewhat lower after Standard & Poor's cut the Dearborn, Mich.-based power producer's bond ratings to B+ from BB- previously, even as the company completed a $1.3 billion financing package; S&P said the downgrade, which also affects some of its subsidiaries, "reflects the company's use of the stock of subsidiary CMS Enterprises, which includes CMS Panhandle Pipeline, as security in certain bank facilities to obtain longer-term financing to weather its current liquidity position," effectively subordinating existing debt to the new facility.

Its 8 5/8% notes due 2010 were seen down almost two points to 59.5 bid. A trader saw its 9 7/8% notes due 2007 falling back to a wide 77 bid/82 offered from prior levels as good as 80 bid, but said he saw the market "mostly maintaining the status quo." However, he predicted, "obviously, they will probably fade [Wednesday]. We'll see what happens."

No news was heard from the investment banks Tuesday on activity in the high-yield primary market with the exception of an emerging markets credit, Indonesia's Bank Mandiri, which was heard to be set to kick off a global roadshow on Thursday.

Tuesday's news on the economy and the capital markets seemed mixed, rather than all bad. Although the Dow Jones Industrial Average finished Tuesday's session with its seventh consecutive loss, Federal Reserve Chairman Alan Greenspan told the US Senate Banking Committee that the Fed raised its growth forecast for this year to as much as 3.75%, faster than the 2.5% to 3% foreseen in February. "All the evidence we've been able to accumulate in recent weeks suggests that the economy is improving," Greenspan told the legislators.

In a Tuesday conversation with Prospect News Evergreen High Yield Bond Fund portfolio manager Prescott B. Crocker also sounded upbeat. Although the news has been far from good, he conceded, present levels in the secondary market have been enticing him to do some shopping.

"It amazes me that anybody has any money to put into this marketplace because even the best funds are barely positive year-to-date," Crocker said.

"As far as the secondary market is concerned I think all the negative news that's going to hit has hit. Given these yields - and most of these portfolios are going to pay these yields for a while until the stuff goes into restructuring - I think the price is already fully discounted on wireless and telecom, all of it roll-up value.

"It's probably a pretty good time to get in there and invest in it," he said, "Although I'm surprised, given the total returns, that anybody's willing to do it.

"I guess you have to be a basic contrarian."

Crocker also conceded that high-yield mutual funds tend to undergo redemptions at a rate that is somewhat proportional to the fall-off in the equity markets. However, he said, given that redemptions tend to pick up as the stock market falls there remains a significant distinction to be drawn.

"When the stock market turns down redemptions do pick up but generally there are two phases of redemptions. One phase is led by the trader, and everybody has them. They're called market timers and they represent the first level of redemptions.

"The next one is your basic core of investors," he continued. "That generally takes a bigger negative NAV, because you've always got people who are coming in and buying on a yield basis as the NAV goes down and the yield goes up and looks more and more attractive.

"Most of these high yield funds tend to stabilize on NAV decline after the market timers get out because the yield-buyers tend to compensate for those who are getting out."

Prospect News followed up by asking Crocker whether he considered the present high yield market volatile.

"The high yield market this year is really a two-step market," he said, adding that the year began with a positive outlook because of the Fed stimulus.

"Then you had a small step down between Jan. 9 and Feb. 22," Crocker continued. "That was the first of these wireless recalculations, which was basically Nextel going from 95 to 80 and wireless basically going from 9½% up to 12% yield to worst.

"Then you had another big drop at the beginning of June. That was a very severe drop and it took probably eight to 10 percentage points out of most of the high yield funds. And that was also correlated with a big swift drop in the stock market.

"High yield, uncoupled from the stock market, had been providing positive returns while the stock market was experiencing negative returns," Crocker continued. "From June on the stock market has had a very bad re-valuation down. At the same time investors in high yield became focused on risk. Everything in high yield went down, whether it was cable or satellite, on the basis of whether or not there was indeed any real value in the accounting.

"So given the disappointing returns I'm surprised that anybody's buying the stuff. But they still are. And I think right now you've reached a stabilization point. Hopefully they'll start to rally and I think there's a very good case you can make that they will start to rally."

When Prospect News pressed him to spell out his case for the high yield to have "a substantially positive return going into year end," Crocker pointed to the equity markets.

"Behind that is my own feeling that stocks will begin to attract investors at these prices, which is probably median-levels of S&P multiples," he said. "If you say we're really not at a median period of time in terms of inflation, we have no inflation. And if you say we are in a recovery mode as it relates to economies around the world you could well see a stock market rally.

"The thing that keeps you from a stock market rally of any durability is this individual disillusionment with stocks and accounting and the ability to trust businessmen's representations. That's what's holding you back."

When Prospect News last spoke to Crocker in early June he said he was keeping eyes trained on debt securities of AT&T and Sprint.

In the interim, he said, most of the shopping he's done has been carried out in the secondary market, where he's been bargain hunting among the triple-Bs (high grades, Crocker estimates, currently comprise approximately 10% of the portfolio).

"I've been buying relatively close to or through 9%, for six-B companies, and I've been rewarded," he said. "I bought AT&T's 7.30s of 2011 at 83. They're now 87 bid."

Crocker also said he bought ComCast and Cox Cablevision. Although he continues to keep an eye on Sprint he said he would probably hold off until the news improved in the stock market.

Asked what, if anything, he found interesting in the recent primary market or on the present forward calendar Crocker merely responded that the place for a high yield investor to be at present is the aftermarket.

"We've had a modest cash flow and the opportunity is in the secondary market," he said. "The stuff there has much bigger spreads."

Tuesday's only news on the part of a high yielding credit came from the emerging markets. Prospect News learned from market sources that Jakarta, Indonesia-based state-owned Bank Mandiri will start roadshowing a deal for $100-$125 million of lower tier 2 subordinated notes (rated B- by Fitch, outstanding Moody's and S&P senior debt ratings B3/B-) in Asia on Thursday, with a European and US roadshow to follow early in the week of July 22. UBS Warburg is the bookrunner.

One deal is poised to price on Wednesday. Berry Plastics Corp.'s $250 million of senior subordinated notes due 2012 (B3/B-) figures to be transacted Wednesday morning via JP Morgan and Goldman Sachs. Originally announced at $275 million, the company shifted $25 million to its bank loan Monday in what syndicate sources characterized as an interest saving move. Price talk on the LBO deal is 10½%-10¾%.

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