Charter continues to gain on Allen speculation; power names gain on Dynegy boost

By Paul Deckelman and Paul A. Harris

New York, July 30 - Charter Communications Inc. bonds were on the upside for a second straight session Tuesday, continuing to bask in the warm afterglow of speculation that the cable company's billionaire founder and principal owner might take it public. Elsewhere, the badly battered energy and power segment continued to bounce, encouraged by gains in the stock of those companies after sector player Dynegy Inc.'s major corporate backer gave it a big vote of confidence. And news that Sprint Corp. had received a big credit facility commitment sent that company's bonds higher and helped to lift junk-rated wireless names as well.

Charter bonds had firmed on Monday as its stock jumped in the wake of a New York Times story suggesting that billionaire Paul Allen - who already owns 55% of the St. Louis-based cable giant - might be considering taking the company private now that its stock price has been knocked down along with those of other communications companies, or might be considering making a sizable purchase of some of Charter's $17 billion (face value) of outstanding debt, which is also trading at a substantial discount to par these days.

On Tuesday, the rise continued, in the absence of anything suggesting that Allen would not be interested in pursuing such a course.

Charter's beleaguered shares - which are still trading well below the $16 level at which they began the year, even following Monday's 97 cent (36.74%) surge - were up a more modest 21 cents (5.82%) on Tuesday, finishing the day's trading on the New York Stock Exchange at $3.82.

Its bonds - which likewise had risen by as much as five points on Monday - were again firmer on Tuesday. A trader said that Charter "was up a couple of sticks," quoting its benchmark 8 5/8% notes due 2009 up 3½ points, to 61 bid/62 offered.

Charter stock and bonds - like those of all of the other cable companies - had previously been ground down on a combination of investor worry in the wake of the Adelphia Communications Corp. accounting fiasco, concern over the companies' large debt loads and a general sense that the party in the once high-flying cable and telecom spheres might, in fact, be over.

Also in the communications area on Tuesday, Sprint Corp. defused market rumors that it might be facing a liquidity crunch by announcing that it had received commitments for a new $1.5 billion revolving bank credit facility. The Overland Park, Kan. -based long-distance and wireless giant also said that it still expects to be free cash flow break-even for 2002, despite the overall telecommunications industry slowdown. And it projected that it will be able to produce total free cash flow of more than $1 billion in 2003, which it plans to use, along with other funds, to retire $1.4 billion of maturing debt obligations in 2003. By 2004, Sprint predicted, its free cash flow should significantly exceed its $1.2 billion of maturing debt obligations that year.

News of the financing and of Sprint's anticipated ability to manage its sizable debt load pushed its shares up 96 cents (13.15%) to $8.26. Volume of 14 million shares was more than triple the usual. Sprint's investment-grade rated bonds also soared, its 8 3/8% notes due 2012 ending at 76 bid, up more than 10 points on the session.

That kind of good news has recently been a rare commodity in the telecom industry, what with Sprint's somewhat larger rival, WorldCom, having slid into bankruptcy, and major regional operating company Qwest Communications International Inc. under close federal scrutiny and having to restate results for several recent years.

So other players in that same wireless patch took heart, particularly Sprint's junk-rated affiliates that sell its services in smaller local markets around the country. Among these were Alamosa Holdings, (Delaware), whose 12½% notes due 2011 were quoted up four points on the session at 38.5.

But even wireless providers outside the Sprint family were lifted by the good news. AT&T Wireless affiliate Triton PCS's 8¾% notes due 2011 were four points better, at 63, while Nextel Communications Inc.'s benchmark 9 3/8% senior notes due 2009 improved to 65 bid/66 offered, from 62.5 bid/63.5 offered previously. Nextel's zero-coupon/10.65% notes were "up a couple as well," a trader said, quoting them as high as 68 bid/69 offered.

In the power generating and trading sphere, the recently junked Dynegy Inc. reported a second-quarter net loss of $328 million (92 cents a share), quite a comedown from its earnings of $146 million (43 cents a share) a year earlier. The Houston-based energy trader attributed the loss to a $499 million pretax charge for its natural gas marketing business, while also citing weaker commodity prices, and the shrinkage of energy trading activity across the industry.

Dynegy also was forced to slash its 2002 recurring earnings per share target to about 41 cents - well down from a previously expected range of $2.00 to $2.05, based on weaker industry conditions and its restructuring plans.

Even so, Dynegy's shares zoomed 54 cents (45%) in busy NYSE trading to close at $1.74, after multinational energy giant ChevronTexaco Inc., which owns 26.5% of Dynegy, announced that even though it had to take a $531 million write-off on its holding in the company - with a further write-off possible next quarter if the value of its Dynegy investment falls further - "we are encouraged by Dynegy's ongoing efforts to improve liquidity, including its announcement [Monday] to sell Northern Natural Gas Company." Dynegy said on Monday that it would sell the unit to a company controlled by billionaire investor Warren Buffett for $928 million.

Dynegy's bonds were being quoted up about three to four points despite the big net loss, given a leg up by the Texaco statement, the asset sale and the resulting stock gains. Its 8¾% notes due 2012 firmed to 41 bid/43 offered. A trader saw its 8 1/8% notes due 2005 as having improved all the way to 43 bid/45 offered, from Monday's levels around 32 bid/34 offered.

That vote of confidence from its largest shareholder not only gave a boost to Dynegy, in terms of its stock and bond surge, but also translated into gains for such other players as Williams Cos., AES Corp. CMS Energy Corp. and Calpine Corp., all of whose shares gained, and whose bonds were better as well.

"Most of what's going on has been everything that's fallen out of bed in the distressed world," a trader said, with those utility players "fairly active" Tuesday.

He saw Calpine leading the way among the energy junkers, with its 8½% notes due 2011 and 8½% notes due 2008 both up around three points on the session, to end at 48 bid/49 offered and 49 bid/50 offered, respectively.

'That was good to see," he said. "They've been sucked down the drain with the rest of the sector, unfortunately. I never really thought that they should have been trading as low as they were. But they've come back to life."

At another desk, Calpine's 8 5/8% notes due 2010 were seen two points better, at 47.5 bid. Calpine's shares were up 61 cents (15.06%) on the NYSE on Tuesday, to end at $4.66.

The whole energy generation and trading sector "has been getting absolutely slaughtered" of late, he said, and thus was due for a bounceback. Williams Cos., he said, "was taking it on the chin the worst."

In Tuesday's equity market, Williams' NYSE shares rose 42 cents (21.11%) to $2.41, on volume of nearly 40 million shares, over six times the usual traffic. The trader said there was "not much activity" Tuesday in Williams' own holding company paper, which he saw treading water in the low-to-mid-40s (well up from recent levels in the lower 30s) as market players waited to see whether Williams would manage to get a new bank facility that its been negotiating. "The rumor is that they're getting it," he said, "but it's not officially out there yet." But he saw the bonds of its pipeline subsidiary - which have the first claim on the cash-flow from those pipelines - trading "a lot better." He saw the Transcontinental Gas Pipeline 8 7/8% notes due 2012, for instance, hanging in at levels around 82.5 bid/86 offered, "definitely stronger" than recent levels. He opined that it might be a case of "news getting out there before the bank facility is refinanced."

Williams investors apparently shrugged off a Fitch ratings service downgrade of its unsecured debt to B- from BB- previously; the ratings agency cited liquidity concerns and refinancing uncertainty.

Another trader saw Williams' 7 1/8% notes due 2011 hovering in the 45 bid/47 offered area, well up from recent levels around 36 bid/38 offered.

He saw AES Corp.'s 9½% notes at 40 bid/42 offered from 33 bid/35 offered on Monday. "The energy sector," he declared "had a decent pop." Of course, he added, "let's face it - they're coming off prices around $30 - but they were all up five to 10 points. That's where most of the action was."

Outside of the energy names, Xerox Corp.'s 5½% notes due 2003 pushed up to 85 bid/86 offered from 83 bid/84 offered.

On the downside, Beverley Enterprises Inc. reported a loss of $14 million (13 cents per share), after the Fort Smith, Ark.-based nursing home operator increased its reserves against patient care-related lawsuits by $43.3 million. That contrasted with its year-ago profit of $5.6 million (5 cents a share). Beverley's 9 5/8% notes due 2009 lost seven points on the day, to close at 83 bid.

Meanwhile the high yield primary market sat becalmed Tuesday amid continuing volatility in the equity market and news of sliding consumer confidence. Not a breath of news was heard, sell-side sources advised Prospect News.

Pax World High Yield Fund portfolio manager Diane Keefe expressed little if any interest in the new issuance market as she spoke to Prospect News on Tuesday.

"I liked the Gerresheimer Glass deal, but of course it was postponed and I don't know when or if it will be back," said Keefe, whose fund submits credits to social-issue screens.

"I still have a lot of cash and I'm continuing to plow through the secondary market to try to find companies that are not going to deteriorate over the next 12 months and that are priced attractively," Keefe continued, adding that she has bids out on credits that it would not be prudent to disclose at present.

However she did outline the kind of high yield credit she's searching for in the secondary "across industry sectors." Keefe's shopping list includes companies with free cash flow, attractive EBITDA margins, strong operating income and low reliance on the capital markets for financing new business, she said.

When asked how much interest she was taking in the split-rated and fallen angel names, Keefe specified that while she's looking closely she has not been buying.

"I started to look at AOL and then I stopped because I just decided that with the questions about the SEC it's just not worth making a bet," she said. "So I didn't participate in that.

"Last week I was shaking my head when AT&T Wireless bonds went down so much," she added. "I was thinking of buying more. And now they've rallied back almost to where they were. They're up almost 10 points from their lows.

"I just held tight because I know that there is just so much more supply in high yield. It hasn't been downgraded to high yield but it's trading to high yield accounts.

"These companies like Sprint and AT&T Wireless are creating a large technical situation for us. Sprint just got its bank deal done today, so those bonds are up about 10 points. And AT&T Wireless is up along with it."

Asked about the performance of the Pax World High Yield Fund Keefe pointed to the Lipper high yield index which reports returns of negative 8.77% year-to-date, and said that at "just over negative 5%" her fund was outperforming that index by 300-plus basis points.

Keefe said that in certain respects the present circumstances in the capital markets recall for her a previous period of volatility.

"In 1987 I was working in mortgage-backed securities during the crash," she reflected. "I remember being a junior person on a trading desk and the senior person was telling everybody 'Call your clients and tell them to buy long bonds. It's a no-brainer trade.'

With that much instability in the equity market at that point it was clear to that senior guy that the Fed was likely to ease and it did.

"We've also seen a pretty big rally in Treasuries, this time. What I thought was going to be a period where high grades started to sell off more and high yield would start to look better because of an improving default situation has become an attenuated process such that high grade is still looking better for a while on a total return basis."

Keefe cited orders from the Securities and Exchange Commission directing the top executive and finance officers of 947 large companies to certify their financial reports for their most recent quarterly statements by Aug. 14 as a meaningful positive step.

"If we get through Aug. 14 with all of these CEOs signing off and not have too many more landmines blow up, we should be looking better," she said.

"This procedure, from now going forward, is a good thing for the capital markets."

As the market heads into the final day of July 2002 one deal is poised to price: Mothers Work, Inc.'s $125 million of eight-year senior notes (B3/B+) via credit Suisse First Boston. Price talk of 11¼% area was heard Monday on the Philadelphia maternity clothes company's new paper.

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