Lucent, Nortel continue rise; Wynn finally prices; Sinclair downsizes add-on

By Paul Deckelman

New York, Oct. 25 - Lucent Technologies Inc. bonds and those of rival telecommunications equipment maker Nortel Networks Corp. continued their week-long firming trend on Friday, propelled by not-so-bad numbers, news that giant Baby Bell operator SBC Corp. is still buying telecom gear and big contracts from overseas buyers.

Charter Communications Holdings bonds managed to eke out a small bounce after having fallen all week, even after the company announced preliminary third-quarter revenue and cash flow projections that are well below its previous guidance.

In the primary market, Wynn Resorts Ltd.'s long-anticipated junk bond deal finally priced, after having been held up awaiting completion of the gaming company's initial public equity offering.

Meantime, Sinclair Broadcast Group Inc. priced a $125 million add-on deal to its existing 8% senior subordinated notes via a Deutsche Bank Securities Inc.-led underwriting group.

Wynn Resorts finally got its IPO done, and that cleared the way for its eight-year junk bond deal, which saw the principal amount upsized to $370 million from $365 million previously. Originally, Wynn had planned to sell $340 million of bonds with a coupon somewhere around 11% through its Wynn Las Vegas LLC and Wynn Capital Corp. units, but it was forced to steeply discount the bonds to give investors the kind of yield they wanted, and it upsized the issue in order to come away with the original proceeds figure.

The second mortgage notes due 2010 finally came to market with a 12% coupon and priced at 92.793 to yield 13.5%, somewhat outside of earlier pre-deal market price talk of an 11½% coupon pricing to yield somewhere around 12.75% to 13%. Total gross proceeds were $343.334 million.

The deal was brought to market via an underwriting consortium led by joint book-running managers Deutsche Bank Securities, Bank of America Securities, Bear Stearns & Co. and Dresdner Kleinwort Wasserstein.

The bonds "did price 50 basis points wide of talk," a syndicate source acknowledged. "Investors are really looking for yield - and in this type of market they have the upper hand."

Still, the source said, the company's ability to sell the deal to debt investors was never in doubt. "There was stronger demand for the bonds than there was for the IPO. They [the bookrunners] already had a fairly good book, good demand for the bonds, and we were just waiting for the IPO to price."

The bonds had been expected to come to market earlier in the week, but Las Vegas-based Wynn - which will use the bond deal proceeds, along with the proceeds of the IPO and more than $1 billion of bank facility borrowing to build its glitzy new Le Reve hotel and casino resort on the Las Vegas Strip - was forced to tinker repeatedly with the stock offering, ultimately having to price the stock at $13 per share, way below the $21 to $23 originally envisioned.

To achieve the planned $450 million in equity proceeds, Wynn was ultimately forced to substantially upsize the stock offering to 34.62 million shares from the 20.5 million originally proposed, with company chairman and CEO Steve Wynn and his business partner, Japanese gaming equipment tycoon Kazuo Okada, stepping in to collectively buy more than 11.1 million shares at the issue price, to both encourage other investors to step up to the plate and to prevent massive dilution of their own stakes in the company.

Even with the participation of Steve Wynn, regarded as the gambling capital's golden boy because of his roles in establishing the successful Mirage and Bellagio mega-casinos on the Strip during the 1980s and the 1990s, the prospective equity investors had balked at committing their capital to a project that would not see any financial returns until April 2005 at the earliest. That's when the lavish 2,700-room hotel and attached giant casino is scheduled to open for business on the site of the old Desert Inn, one of Vegas' pioneer gaming palaces.

With the overall IPO market considered ice-cold anyway, Wynn faced a tough sell, and was finally forced to alter the terms in order to get the equity deal done. Once that had fallen into place, however, the bond deal was easy; while Wynn was forced to fatten the coupon and thus give investors a little extra "vig" to get the deal done, there was never any doubt that it would come down, once the IPO had been completed.

The new Wynn bonds were freed for secondary dealings late in the session; a trader saw them easing to closing levels around 92 bid/93 offered, off about three-quarters of a point from the 92.793 issue price.

The other new bond deal of the day, Sinclair Broadcast's senior subordinated notes due 2012, priced at pre-deal market price talk of 100.5 to yield 7.907%. Their terms are identical to the terms of the existing $300 million of 8% notes which were sold in March

Sinclair, a Baltimore-based television station group owner, downsized the Rule 144A add-on deal from the $150 million it had originally announced on Thursday; a high yield syndicate source said that the company had chosen to do the remaining financing via a revolving credit facility. "It's just cheaper money," another source agreed.

Sinclair's existing bonds essentially hung in around prior levels, although its 8¾% notes due 2011 were quoted half a point higher, at 104.5 bid. The existing 8% notes due 2012 were quoted at the same 100.5 bid issue price at which the new bonds appeared. Sinclair's 9% notes due 2007 - which are to be redeemed with the net proceeds of the new bond deal plus other cash on hand - were unchanged around their call price in the 104.65 area.

With the much-anticipated Wynn deal and the quickly shopped Sinclair offering now in the books, a high-yield primary market source opined that not a whole lot else was cooking in the new-deal arena.

'"We're all just waiting for QwestDex next Wednesday or Thursday," he declared, referring to the $1.05 billion two-part leviathan being brought to market by Dex Media East LLC, the financing arm of the new company being created by the $7 billion-plus leveraged buyout of Qwest Communications International's telephone directory business.

"A billion dollars of paper will either make or break the market," he said. "The issue is where the deal comes."

Meanwhile there was little reaction to the news that high yield mutual funds had notched their second consecutive inflow in as many weeks, as $425.2 million more came into the funds than left them in the week ended Wednesday, according to statistics released by AMG Data Services. In the prior week, inflows of $206.7 million were seen. The funds flow numbers are considered by many to be a reliable barometer of overall junk market liquidity trends.

The two weeks of sizable inflows go a long way toward countering the loss from the funds of more than $1.5 billion over the prior three weeks, although there is still some distance to go on that score.

However, the year-to-date funds flow figures remain solidly positive, with a total net cumulative inflow of $3.996 billion according to a Prospect News analysis of the AMG numbers. Inflows have now been seen in 24 of the 43 weeks since the beginning of the year.

Back in the secondary market, "Nortel continues to trade up," a trader said, quoting the Brampton, Ont.-based telecom equipment maker's 6% notes due 2003 as having pushed up to offered levels around 90, up from 75 just two days earlier.

"They were grinding all the way up" Friday, he said, "mid-80s, mid-80s, mid-80s - and then, BOOM."

He also quoted Nortel's 6 1/8% notes due 2006, which had started the week at 39.5 bid/40.5 offered, as having closed Friday at 48 bid/50 offered. "There's movement there," he observed, "on the piggy back of Lucent and the news with the Baby Bells."

Lucent's bonds have also been gaining. The trader quoted its 7¼% notes due 2006 as going home at 47 bid/49 offered, up from about 41.5 bid at the start of the week.

Another trader quoted the Lucent bonds at 49 bid and the Nortel's in "a 48-50 context," both up a couple of points on the session. "They continue to trade near each other. That's scary," he said, explaining that he had always thought Nortel the weaker of the two.

Nortel and Lucent - rival telecom suppliers who have been radically downsizing in the face of sagging telecom industry demand for new equipment and whose bonds have recently been trading virtually in tandem at steeply distressed levels, even as their shares have also both dipped under $1 - both figured in a big announcement early in the week by China Unicom, that country's Number-Two mobile wireless provider. It will buy $1.2 billion of telecom gear from Western suppliers, including $280 million from Nortel and over $400 million from Murray Hill, N.J.-based Lucent.

The two telecom suppliers also got a boost later in the week when SBC Communications, the country's second-largest provider of regional and local phone service, indicated on a conference call that it would hold its fourth quarter capital spending at previously indicated levels around $2.5 billion, about $1 billion more than third-quarter capex. That could translate to additional telephone equipment purchases from suppliers Nortel and Lucent worth hundreds of millions of dollars to those companies.

Lucent on Wednesday also reported that it had narrowed its fiscal fourth quarter loss to $2.81 billion (84 cents a share) from $8.8 billion ($2.59 a share) a year earlier, and said it expects its loss in the current fiscal first quarter to be sequentially smaller than the fourth-quarter deficit. It also reported a smaller net loss for the fiscal year as a whole, versus the year before.

Also in the telecom sphere, a trader said that WorldCom Inc. was "a mover once again," with its bonds closing out the week bid around 16.75-17, up from around 14 at the beginning of the week, while its MCI long distance unit's bonds likewise jumped to 40 bid/42 offered from levels earlier in the week at 33 bid/34 offered.

The trader said that although he himself did not attach much importance to the numbers, investors apparently liked the July and August financial figures that the troubled Clinton, Miss.-based telecom giant reported to the bankruptcy court overseeing its Chapter 11 reorganization.

While the company continued to lose tons of money, its cash flow numbers were cited by several traders as giving some degree of hope to debt investors that WorldCom might be able to turn things around with the help of the court reorganization and become viable. Skeptics noted, however, that it was one thing to post a month or two of seemingly favorable numbers, and a whole different matter to show sustained viability over time.

Charter Communications debt managed to edge its way up after having fallen all week in the wake of the company's having put its chief operating officer on leave pending the results of a grand jury investigation. Those concerns had battered its bonds, such as its benchmark 8 5/8% notes due 2009, down as low as 38 bid, a 15-point loss on the week.

And on Friday, Charter appeared to throw more fuel in the fire when it released preliminary third-quarter revenue, cash flow and subscriber projections ahead of the Nov. 5 release of its quarterly results. Charter said that its revenues would be up 12.6% from a year earlier, to around $1.047 billion.

On Oct. 1, Charter had previously lowered its revenue guidance to a 13% increase year-over-year. It had also previously predicted a 13.7% rise in EBITDA - but now said that EBITDA would grow just 8.7% from a year ago to $457 million. Charter also admitted Friday that while it had added a total of 216,000 revenue generating units (i.e. subscribers) in the quarter, the growth had come in its digital and high-speed data customers, and it had lost 85,000 basic cable customers.

But even with that seemingly negative news, Charter shares jumped 31 cents (32.98%) to $1.25 on Nasdaq volume of almost 37 million shares, five times the norm. The sharp rise came late in the day, apparently spurred by the news that technology entrepreneur and pro sports team owner Mark Cuban had accumulated a 5.3% stake in the troubled St. Louis-based cable operator, which was disclosed in a filing with the Securities and Exchange Commission.

Cuban told Bloomberg News on Friday that "when Charter stock and bonds started trading like it was going out of business, I increased my buying significantly."

A bond trader mentioned the Cuban news as the only positive thing that he could think of to push Charter's stock [and, in turn, its bonds] higher Friday. "There was a little bit of volatility" in Charter, he said, quoting the 8 5/8% notes as having opened Friday at Thursday's close around 38 but then having risen to 40.5 bid/42 offered.

Charter "was back up," agreed a market observer, who quoted its 9.92% notes as having firmed to 30.5 bid from prior levels around 28.

Even with that bounce in the shares and the bonds Friday, though, Charter remains a company in trouble.

"The company's new preliminary results for the third quarter were disappointing, based on lower subscriber numbers, but especially based on lower margins, given the EBITDA performance, " asserted Aryeh Bourkoff, head of high yield telecom and cable research at UBS Warburg.

"The company's results related to digital and data were actually quite encouraging. However, the basic subscriber churn [turnover] continues to be a problem for the company, as Charter loses subscribers to the satellite companies like Echostar and DirectTV," he said.

Bourkoff said that Charter spent capital during the third quarter on marketing initiatives to try to hold on to its basic cable customers - but without success, leaving it both minus those customers and out the money it had spent trying to keep them, leading to reduced EBITDA margins. They tried and failed to retain the subscriber base" through various promotions.

He said that "our view is that EBITDA margins were much weaker than expectations, given the higher costs associated with trying to retain its subscriber base, as well as higher levels of bad debt." He said that while the whole cable industry has been affected by the competition from the satellites, "Charter has an overall weaker subscriber base in terms of quality," and faces more competition in markets such as its St. Louis home base, Los Angeles and Birmingham, Ala.

Beyond the financial problems, Charter also has credibility problems, both because of its financial projections which haven't panned out and investor nervousness over the ongoing federal grand jury probe of some of Charter's accounting and subscriber numbers. The latter came into focus earlier in the week when Charter first cryptically announced that COO David Barford had been put on leave - and only hours later, after its shares and bonds plummeted, did it acknowledge that this was connected with the grand jury investigation.

"There's no question about it that Charter's credibility has been diminished in the market," the UBS analyst warned. "The question for Charter now is not whether they will make every number put out there, but what will the company do to fix its balance sheet and restore credibility in the market.

"Charter's issues are now ones of credibility and viability."

Bourkoff said that UBS, which downgraded Charter's bonds in July from a buy to a hold, "remain[s] cautious on the company's bonds today, given the risk of further erosion in its fundamental performance and the uncertainties surrounding the company's risk of restructuring."

He also said that it was unlikely that Charter's principal owner, billionaire Paul Allen, would ride to the rescue any time in the near term to buy a large amount of Charter's sagging shares or bonds in order to give encouragement to nervous shareholders.

"Our view has been that Paul Allen would potentially get involved in the capital structure fix, but would not do anything in the near term, given the company's liquidity profile, which is still sound," Bourkoff said. "So a Paul Allen catalyst is not an event we foresee in the near term."

Apart from a few names which saw volatility in the market Friday, such as Charter, and a few other pockets of activity here and there - a trader noted, for instance, that Northwest Air Lines "continues to get better," with its 2004 notes rising to 66.25, and Tyco also "feels a little better," its 5 7/8% notes going from an offered level at 87 to 88 bid/91 offered - market participants didn't see much else to talk about.

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