Telecoms range bound as stock slide dominates interest; funds show another outflow

By Paul Deckelman and Paul A. Harris

New York, July 19 - The beleaguered telecommunications bonds pretty much stayed within a narrow range on Friday, even through there was quite a volume of activity in troubled WorldCom Inc. But market attention was once again focused on the stumbling stock market, which imparted a generally negative tone to the proceedings in junkbondland. Among the notable losers Friday were United Airlines, on poor results, and Charter Communications Holdings, on the possibility of accounting problems, while Beverley Enterprises dropped after announcing it would increase its reserves against lawsuits.

UAL reported a second-quarter net of $341 million ($6.08 per share). Even though the Chicago-based Number-2 U.S. air carrier's loss in the latest quarter was actually less than the year-ago net deficit of $365 million ($6.87 a share), the net figures don't tell the whole story. Excluding one-time items, the operating loss widened to $392 million ($6.99 per share), from $292 million ($5.50 a share) a year earlier. Analysts had been looking for UAL to lose anywhere from $6 to $8.09 a share.

Even more ominous than the actual figures, UAL warned that said it expects a "significant" loss in the third quarter - which includes the vitally important summer travel season - and for the full year as well, blaming a slowing in post-Sept. 11 air travel recovery. CEO Jack Creighton said in a statement that the month-over month improvements the airline had seen so far this year "have stalled,"

While UAL has about $2.7 billion of cash on hand, it cautioned that its cash burn rate is likely to rise in both the third and fourth quarters. Also in the liquidity picture, United expressed concern during a conference call about its prospects for refinancing $900 million in loans coming due in the fourth quarter, having already tapped out most of the private capital sources from whom it has been borrowing this year.

Those unfriendly financial skies caused the airline's shares to nosedive earthward, losing $1.48 (19.65%) on the New York Stock Exchange on Friday to close at $6.05. The bonds likewise lost altitude, with United's 10.67% notes due 2004 quoted as low as 45 bid, well down from prior levels in the lower 60s.

Also on the downside from that airline sector, Continental Airlines Inc.'s 8% notes due 2005 finished four points lower, at 82. Earlier in the week, Houston based Continental, the Number-5 air carrier, reported a sizable revenue drop and loss for the quarter. Northwest Airlines' 9 7/8% notes due 2007 were two points lower at 87, although Delta Airlines' 7.7% notes due 2005 were seen a point higher, at 88 bid. Collectively, the major U.S. airlines reported a loss for the quarter of $1.4 billion, as the slower economy and lingering terrorism fears continue to keep passengers off the planes.

Back on terra firma, Charter Communications' debt "softened up a little bit", in the ords of a trader, who pegged the St. Louis-based cable giant's 8 5/8% notes due 2009 down about two points, to 62 bid/63 offered. At another desk, there were seen a point-and-a-half lower, at 63 bid.

The trader attributed the weakness to market talk that Charter may be the latest major company to manifest some accounting problems - an idea raised in a Merrill Lynch research note issued Thursday, downgrading Charter's stock. Merrill analyst Jessica Reif Cohen, in lowering Charter's near-term equity rating to "neutral" from "strong buy" (although she kept "strong buy" as a long-term rating) cited investor worry over what unpleasant surprises may be in store when Charter files its upcoming quarterly results.

In the wake of the accounting debacle which ruined a Charter rival, the now-bankrupt Adelphia Communications Corp. - accused of concealing billions of dollars of fishy off-balance-sheet dealings - Charter promised to release more details about its accounting procedures. Cohen cautioned that "while investors are likely to appreciate the more detailed filing,since they have been clamoring for more transparency, investors might not be reassured by what they uncover," citing Charter's more aggressive capitalization policy, which she said might cause investors to regard all of its numbers more warily. The analyst noted Charter's industry-leading EBITDA margins and high ratio of capital expenditures per basic subscriber.

Charter's decline, the trader said "is not like a 10-pointer, but it's definitely not a positive."

Also in the communications sphere, WorldCom bonds were quoted about a point lower all around, and while a distressed-debt trader said he saw "heavy volume" in the troubled Clinton, Miss.-based long-distance giant's benchmark 7½% notes due 2011, he said that the 12.5 bid/13.5 offered level WorldCom's bonds were languishing at represented "not a lot of change." Referring to the market speculation that WorldCom was only hours away Friday from a bankruptcy filing - Friday's Wall Street Journal said the filing could come as soon as the weekend, moving the apparent timetable up from Thursday's market consensus of a filing by Monday - the trader said "it seems like it's discounted" and already figured into the price levels.

Another trader said WorldCom is "dead in the water now," with every issue holding in at that 12-to-14 context. "No one's dying to buy and no one's dying to sell now. I think that all of the ugliness is gone - there's not anyone out there who needs to sell $20 million to get out of their portfolio and there's no one who needs to cover any shorts any more. It's just really slow."

He saw Qwest Communications International "grinding up [Friday] a little bit - not any big change from [Thursday] but there was a stronger bid to open the morning. Long paper was up about a point or two initially, but not many trades took place, and that kind of died. It became an offering-fest, with bids two or three points back, making the market wider." At another desk, Qwest was seen to have done "nothing to speak of," while at a third, it was actually observed to be "drifting lower." Qwest's NYSE-traded shares were down 25 cents (9.12%) to $2.49, and the trader called the easing of the bonds late in the day "obviously equity driven," quoting the Denver-based regional Bell operating company's 7¾% bonds due 2031 going home quoted around 44 bid.

Outside of the communications area, Conseco Inc. - whose shares and bonds had been struggling all week following last Friday's cut in the financial-strength ratings of the Carmel, Ind.-based financial services concern's insurance unit by the A.M. Best ratings service - staged a sharp rally Friday, after it announced that it had signed a purchase agreement to sell its variable annuity business to inviva inc., a holding company that owns The American Life Insurance Co. of New York. Under the agreement inviva would acquire Conseco Variable Insurance Co., one of the 12 companies that comprise the Conseco Insurance Group. Terms of the agreement were not disclosed.

News of that deal caused A.M. Best to announce that it had revised the under review implications for Conseco Variable Insurance's B++ (Very Good) financial strength rating to positive from negative.

News of the deal shot Conseco stock - which had actually dipped below $1 a share on Thursday - up to $1.28, a 26-cent (25.49%) jump on the session. "That's big, when you consider the stock was trading at a dollar [Thursday] a trader said. He quoted Conseco's 10¾% notes due 2009 as having zoomed to about 30 bid from closing levels around 20 Thursday. At another desk, an observer saw those bonds up a more modest five points or so, but pegged them at 32 bid, while locating Conseco's 8½% notes due 2002 at the same 65 bid level as Thursday. Conseco's 9% notes due 2008 were six points better at 32.

Back on the downside, Fort Smith, Ark.-based nursing home operator Beverly Enterprises Inc.'s bonds and shares swooned Friday, after the company said it would add $43.3 million to reserves for patient care lawsuits and report a quarterly loss. Beverley's 9 5/8% notes due 2009 ended at 95.5, down more than six points on the day, while its shares dropped $2.75 (40.15%) to $4.10.

Meanwhile the high yield primary market suffered an utter scarcity of news Friday and most of what it did hear was anything but encouraging.

The weekly high yield mutual fund-flow numbers issued by AMG Data Services showed a $242 million outflow in the week ended July 17 - the sixth straight week in which more money has left those funds than has come into them. That followed the previous week's $149.8 million outflow, counting only funds which report on a weekly basis and excluding distributions.

The numbers are regarded by many in the market as a useful gauge of overall market liquidity trends. Year-to-date, the funds still show a net inflow of $3.885 billion, according to a Prospect News analysis of the AMG data. But that's down from $4.127 billion in the week ended July 10, and well down from the peak cumulative inflow of $5.65 billion, seen in mid-May.

And front-page newspaper headlines prompted Prospect News to inquire of ConAgra whether the leveraged buyout of its beef, pork and lamb operations, to be funded by Swift & Co.'s pending transaction for $400 million of new speculative-grade issuance, is still on track following news that ConAgra will recall 18.6 million pounds of bacteria-contaminated beef.

The answer from the company was that it doesn't expect any impact on the $400 million of seven-year senior notes (B1/B+) via Salomon Smith Barney and JP Morgan (see related story in this issue).

One sell-sider who spoke Friday with Prospect News had no difficulty whatsoever calling attention to the dark clouds that have lately closed in over the US capital markets.

Look close enough however, this source added, and you can just make out a silver lining, as far as the high yield primary is concerned.

"We've recognized that the high-yield market is not a place to be issuing bonds into," said this official from an investment bank.

"Yet it's interesting to see the calendar continuing to grow.

"We've had six consecutive mutual fund outflows, and we had that incredibly hostile week of July 4," the source continued, referring to the downsized, wide-of-talk transactions by Dave & Busters, Plains Exploration & Production Co., LP, and Solutia, Inc. heading into the Independence Day holiday.

"Things have fundamentally gotten worse since July 4," the sell-sider commented, "And yet companies are still trying to get deals done."

Nevertheless, this official added, two deals that priced in the post-July 4 high yield primary, Oregon Steel Mills, Inc. and Berry Plastics Corp., provide a ray of hope.

Oregon Steel Mills priced a slightly upsized $305 million of seven-year first mortgage notes (B1/BB-) to yield 10¼% on July 10, at the tight end of the 10¼%-10½%. And Berry Plastics priced $250 million of 10-year senior subordinated notes (B3/B-) at 10¾% on July 17 within the 10½%-10¾% price talk.

"Oregon Steel was the most encouraging news we have seen because it came on the back of that incredibly bad week of July 4," the sell-sider said. "So this week to actually see Berry Plastics get done was another strong indicator.

"There's still a lot of accounts that still have portions of their funds sitting in cash. And some of them still are willing to put that cash to work. But at the same time there's just an overall lack of confidence in the capital markets right now."

The Prospect News high yield forward calendar contains six dollar-denominated deals totaling $1.185 billion that are expected to price during the week of July 22.

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