Global Crossing crosses over into bankruptcy, bonds trade in single digits

By Paul Deckelman and Paul Harris

New York, Jan. 28 - For the second time in as many weeks, high yield secondary players came back from their weekends Monday to find a once high-flying major name now lodged in the bankruptcy courts, as Global Crossing Holdings Ltd. and its corporate parent, Global Crossing Ltd., filed for Chapter 11 protection from the holders of its more than $3.8 billion of junk bonds and other creditors via a filing with the U.S. Bankruptcy Court in Manhattan.

The Hamilton, Bermuda-based international telecommunications network operator's Chapter 11 case is believed to be the fourth largest in U.S. corporate history (behind only Enron Corp., which filed Dec. 2, Texaco Inc. and Financial Corp. of America), and the largest ever in a battered telecom industry which has already seen a number of large filings in the past year, such as Winstar Communications Inc., PSINet Inc. and Exodus Communications Inc.

And just like last week's Chapter 11 filing by beleaguered retailer Kmart Corp., the Global Crossing bankruptcy announcement surprised exactly no one. In fact, the only surprise may have been that things took as long as they did to reach this point.

"It was a pretty quiet day overall," a trader said, saying he had seen not much activity in Global Crossing, despite its fall having been the story du jour.

"I don't think the filing was any big surprise to anyone. The bonds have all been trading in at similar dollar prices, in that same high single-digit/low double-digit region."

"All the bonds did (Monday) was account for their coupons," said a distressed-debt trader, who saw Global Crossing bonds that had been trading in the 6-to-7 bid range with accrued interest go to about 9 bid, but trading flat, or without accrued interest. He saw bonds which had been around 5.5-6 bid, trading with interest pre-filing, now around 9.75-10 bid trading flat, "depending on the accrued interest." Traders say the changeover from trading with accrued interest to trading flat effectively amounts to the loss of several additional points beyond the nominal change in the bond's price. Another trader also pegged the bonds in that same 8.5-9 flat neighborhood.

A year ago, most Global Crossing debt traded at or near par, and the company was seen as one of the few remaining bright lights in a once golden telecom sector which had already begun to head south en masse. Likewise, its shares - which had traded at lofty levels around $61 back in early 2000, were still hovering around $23.75 a year ago; in Monday's dealings on the New York Stock Exchange, before dealings were halted for news dissemination after only 8,000 shares had changed hands - was down 21 cents, or 41.18%, to just 30 cents.

What happened?

Global Crossing, says Rich Rolnick, head of global high yield telecom research at BNP Paribas Securities, "was and still is a start-up telecommunications company that was cobbled together" through acquisitions, and which was attempting to compete in selling global undersea and North American terrestial fiber network capacity with such giants as WorldCom, Cable & Wireless, Sprint and Verizon, as well as such rivals as Tyco's TyCom arm, 360networks - "now in liquidation and selling cheap capacity, " he notes - and Level 3 Communications Inc.

He says investors - as well as the ratings agencies and others in the financial community - fooled themselves into thinking that Global Crossing was stronger than it was. "They looked at what's deemed as adjusted cash flow - basically asset sales, of dark fiber (i.e., unused network capacity) - and those are non-recurring, one- time in nature. And when the company reported third-quarter sales, it was disastrous, it fell right off the cliff."

The bottom dropped out on the company's earnings and its bond and stock prices, Rolnick opines, largely because "no companies had been buying capacity for the last six months, in terms of dark fiber, because they have to light it and it costs a lot of money. There's a capacity glut out there, and I don't see it easing any time soon." Global Crossing, he says "has to rely on network services revenue and they're in a transformation mode - to service large enterprise customers. So basically, the cash flow that supported such high valuations a year and two years ago is no longer there. Those were one-time and non-recurring in nature."

Where that leaves Global Crossing, he says, is facing possibly tough, contentious bankruptcy negotiations between its bankruptcy holders and bank debt holders over issues that include where the roughly $1 billion of bank credit that Global Crossing drew down weeks before the filing ranks in the capital structure - ahead of the bonds, as bank debt usually is in such a scenario, or "no greater than pari passu with the bonds, since the argument could be made (and probably will be made by bondholders seeking a leg up) that the company was insolvent for most of the entire year, even while they were drawing down the bank debt."

With Global Crossing's bonds already trading in the high single-digits (except for a brief spike about two weeks ago when it appeared Cable & Wireless might step forward as a buyer or equity investor) "I'm sure the bondholders will be asking for a package in the mid-teens to high teens area. It could be any form of debt, cash and equity, any of those combinations, and I'm sure they're negotiating with the bank group, which will also be impaired. I'm sure the bank group will get more debt and cash, as opposed to equity. The equity will flow down to the bonds and the preferreds."

On the other hand, the analyst cautions, hearing the Global Crossing bonds quoted offered at the 8.5 level, with trading volatile, and the bank debt down in the 30s, "it's very possible the bonds may face a cramdown in a pre-packaged Chapter 11 (i.e., the bankruptcy judge imposes a settlement if the parties can't reach accord) - so let the buyer beware!"

Rolnick adds that Global Crossing's Chapter 11 isn't the first big telecom restructuring and likewise won't be the last.

"It's very difficult to restructure out of court. Level 3" - which bought back a major chunk of debt at a discount last year - "still has a lot of debt out. You can't buy back all of your debt for cash, or you're left with no cash. The bottom line is there's going to be more and more pre-packaged bankruptcy filings this year, most likely, the likes of Level 3, or Williams Communications Group Inc., with the help of SBC Communications (part owner), which maybe can put in some equity." Metromedia Fiber is also in "a precarious situation" and is likely to restructure , possibly if Verizon or Sprint do an equity investment, Rolnick said.

He noted that XO Communications Inc. already did so with the help of Forstmann, Little, and now McLeodUSA Inc., which is selling its directory unit to Yell Holdings, is in the process, also with the help of Forstmann, Little.

"You'd have to be foolish to believe that current telecom bonds are not trading as though there's going to be a restructuring. Level 3 bonds are in the high 40s. Williams bonds are in the low 40s. Metromedia bonds are in the mid-30s. If you're holding onto your telecom bonds, you have to believe that there is going to be a restructuring, but that package will be worth more than what those bonds are trading for today - either a package of new debt, cash or equity, or the company reorganizes some other way.

"I think a lot of this has already been built into these bond prices. You just have to look at each individual company to see if prospects are good going forward, even in a restructured state," BNP Paribas' Rolnick concluded.

Traders said there did not appear to be any fallout from the Global Crossing bankruptcy filing in other high yield telecom issues Monday.

Elsewhere, traders said that the market is trying to digest the slew of recently sold new debt.

The new Xerox Corp. 9¾% notes due 2009 "are now well below issue price," a sell-side source noted. The bonds were quoted at 94 bid, up about 2.5 points on the session after Xerox posted a surprise fourth-quarter operating profit and said it was confident of a profit for the full year 2002 due to a streamline and cost-cutting efforts, though still below their 95.167 issue price .

Meantime, the source said, Rural Cellular's recently sold bond "had dropped five points, to 95 from par, where it was priced. It's kind of back up to 98, but still below water."

The source further said that the new PanAmSat Corp. notes, which priced at par Friday "is kind of struggling in the secondary market." He said the new bonds "are kind of weak, right around par to 100.25."

Meanwhile, with only a few days left in January, sell-side officials were also revising down their issuance targets for the month.

One official said that his bank came into the month anticipating $8 billion of new issuance and conceded that such a total now seems improbable.

"We thought it would be a bang-up month for new issuance," the official said. "It looks now as though it will fall short of what we expected."

This official said that prior to January's conclusion, at the end of Thursday's session, it appears probable that two deals, Coventry Health Care's $175 million via Salomon Smith Barney (price talk 8¼% area) and TSI Telecommunications, Inc.'s $245 million via Lehman Brothers, will price.

Add that $420 million to the $5.85 billion US dollar-denominated business that has priced thus far in 2002 according to Prospect News data, and the total comes to $6.27 billion.

"It's slower than people were expecting," another sell-side official confirmed.

Asked to gauge how notable last week's reported $266.37 million outflow from high yield is, this official expressed the opinion that it was not a big deal.

"The earnings reports haven't been too negative, but they haven't been positive either," the official said. "I think people are just content to sit on the sidelines as they dissect all the information that's being announced.

"For the most part I don't think we're going to be tightening. I think spreads have come down, and they are just going to be hovering at these levels. One week will be up, one week will be down."

This sell-side source also expressed that belief that as in January, so too in February. New issuance, the source said, will probably continue to emerge at the pace seen thus far in 2002: a trickle.

"That's what we've seen the past couple of weeks, and I think it will continue," the official said. "Underwriters are looking for transactions, but investors are only willing to buy certain things."

However, if volume has been disappointing, this sell-sider insisted that execution on most of the deals that have priced thus far in January has been anything but disappointing.

"These deals are still getting done extremely tight," the source commented. "PanAmSat got done at 81/2. You had a Capital One crossover deal get done right around 8 7/8%. U.S. Oncology was around 9 5/8%.

"These are very successful offerings. You're looking at anywhere from 300 to 450 (basis points) over for single-B rated credits. That's just phenomenal."

This source also stated that one need not turn back the calendar all that far to see an altogether less-favorable set of market dynamics.

"If you're looking for data points, look what happened at the end of June (2001)," the official said. "Money was coming in pretty significantly at the beginning of June, and then at the end the underwriters just jammed the calendar full of new issues. And all the deals back then were getting priced wide of talk, or pulled, or downsized."

Hence, this sell-sider concluded, although new issuance may not be roaring in at rates some had anticipated late last year, things could be worse.

Terms emerged Monday on Azteca Holdings SA de CV's offering of $150 million 1.5-year senior secured notes (B3/B-), which priced at 99.353 to yield 11%, via Bear Stearns & Co.

And two new deals surfaced Monday: Wilmington, Del.-based carbon products company UCAR International, Inc. will hit the road with $250 million of 10-year senior notes (B2/B-) starting Tuesday. The deal, via joint bookrunners Credit Suisse First Boston and J.P. Morgan, is set to price in the middle of the week of Feb. 4, according to a syndicate source.

And news emerged of an offering from German-based plastic specialty packaging manufacturer Klöckner Pentaplast GmbH. The company will sell €180 million senior notes via Deutsche Banc Alex. Brown and Credit Suisse First Boston to help fund its purchase by Cinven. A company spokesman said those notes are already on the road.

Terms on the above-mentioned Coventry Health Care deal are expected to emerge Tuesday.

Also on Tuesday, price talk will likely emerge by noon on TSI Telecommunications, according to a syndicate source.

Price talk on Jacobs Entertainment, Inc.'s $120 of seven-year notes (B2/B) via CIBC World Markets is expected to emerge sometime Wednesday, according to a source from that syndicate.

End

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