Level 3 gains on financing plans; Calpine climbs; Jacobs hits the road

By Paul Deckelman and Paul A. Harris

New York, May 30 - Level 3 Communications Inc.'s bonds were seen firmer Tuesday after the Broomfield, Colo.-based telecommunications company announced plans to sell new stock and issue convertible debt - and use a major portion of the anticipated proceeds to take out its nearest maturity, bonds coming due in 2008.

Primus Telecommunications Group Inc.'s notes were also seen firmer on financing developments involving a potential exchange offer for its existing notes, and the possible issue of new notes that would sold to the holders of existing bonds.

In the automotive arena, Exide Technologies' bonds were seen several points better, though nobody could offer any definitive positive news about the Alpharetta, Ga.-based maker of vehicle batteries and other energy storage systems.

And Calpine Corp.'s bond were seen to have firmed smartly, at least two to three points across the board, again with no real news out there to explain the move.

Overall a senior high-yield syndicate official marked junk off ¼ to ½ point on Tuesday.

Post-Memorial Day primary market activity was meantime seen little different from what new-dealers were seeing last week, as things wound down before the three-day holiday break. About the only real news coming out of the sector were roadshow details on Colorado-based gaming operator Jacobs Entertainment Inc.'s planned issue of eight-year notes.

Back among established names, Level 3's bonds were better on the news that the company will issue 125 million shares of new stock, raising over $600 million, and $150 million of new convertible notes, and will use at least some of those proceeds to redeem its closest-in bond debt, the 9 1/8% notes and 10½% notes due 2008.

A trader saw the 9 1/8s at par bid, 100.5 offered, up a point on the day, although he saw a longer company issue, the 12¼% notes due 2013, also stronger, up 1¼ point at 108 bid, 108.75 offered.

Level 3 "was one of the bigger names" Tuesday, another trader said. He saw the 101/2s at 101.5 bid, 102.5 offered, and also saw the 10¾% notes due 2011 up a point at 104 bid, 105 offered.

A market source at another desk saw a more restrained rise, in the ¼ point to ½ point range, with the 9 1/8s at 99.75, the 101/2s at 100.5, the 103/4s at 104.75 and the 121/4s at 107.

However, the source did see a sizable gain for yet another issue of 2008 notes, the 11s, which were up nearly two points at 103.5.

While Level 3's bonds were firmer, the company's equity holders were not thrilled with the prospect of further dilution of their shares via the new stock and, potentially down the road, by the possible conversion of the new convertible notes it will be issuing. Its Nasdaq-traded shares fell 39 cents (7.39%) to $4.89. Volume of 35 million shares was about 20% heavier than usual.

Primus mostly higher

Also on the telecom front, the source saw Primus Telecom Group's 12¾% notes due 2009 at 79 bid, up from 77.5 earlier, although the McLean, Va.-based company's 8% notes due 2014 were little changed at 68.5 bid.

Another trader who follows the latter bonds called their ½ point rise to 68 bid, 69 offered "nothing major. Perhaps they were up a touch. It was a non-event."

However, yet a third trader said "we saw movement in the name. They were all up" at least a point, except the 8s, which he saw steady at 68 bid, 70 offered. He meantime saw the 123/4s better at 79 bid, 80 offered, and pegged Primus' 3¾% convertible notes due 2010 at 50 bid, 52 offered, also higher.

Primus said that it is in talks with some bondholders about a possible transaction that would see Primus offer new notes, exchangable into common stock at an exchange rate that would be a premium over the stock price at the time the definitive agreements are executed. It would offer some of the new notes in exchange for the existing notes at a discount to their face value, and would offer to sell the rest to the existing noteholders for cash and use the proceeds for general corporate purposes. Primus was supposed to have held its annual meeting Tuesday, but adjourned it till June 20 so it can proceed with the talks.

Sirius higher on settlement

Among other communications and media names, Sirius Satellite Radio Inc.'s 9 5/8% notes due 2013 were seen up a point, at 94.75 bid, 95.25 offered, a trader said, on the Friday-afternoon news that the New York-based satellite radio broadcaster had settled its ongoing dispute with CBS over Sirius' hiring of radio bad boy Howard Stern away from the CBS-owned Infinity broadcasting group.

The Eye Network had sued the upstart satellite broadcaster for $500 million, complaining that, while he was still employed by Infinity through last fall, the self-proclaimed "King of All Media" had improperly used the airwaves of Infinity-owned stations such as his New York flagship outlet, WXRK-FM, to promote his new Sirius show, which began in January, and to trash his then-employer, Infinity. But rather than go to trial and risk having to cough up half a billion dollars, Sirius settled the suit by paying CBS a mere $2 million - and to boot, gains the right to air Stern's old Infinity shows on its "Howard 100" and "Howard 101" channels.

Separately, Lehman Brothers upgraded Sirius' shares, saying that their recent downturn, in sympathy with the fall in Sirius rival XM Satellite Radio Holdings Inc.'s shares, was overdone and unjustified.

The latter company's bonds, however, got no sector sympathy boost Tuesday from its competitor's good news. A trader saw the Washington-based company's 9¾% notes due 2014 down ¾ point at 93 bid, 93.5 offered. And that was even before the company's late-session regulatory filing indicating that it was suspending shipments of certain radio models because of concerns from the Federal Communications Commission. The models in question contain small transmitters that broadcast the XM satellite signal to unused frequencies on conventional FM radios. Among the models is the XM SKYFi2 made by Delphi Corp.

Delphi, GM, Ford little moved

There seemed to be no immediate impact from that news on the latter company's bonds. The bankrupt Troy, Mich.-based automotive electronics manufacturer's 6.55% notes due 2006 were up ¼ point at 80.25 bid, 81.25 offered, while its 7 1/8% notes due 2029 were also ¼ point higher, a trader said, at 79 bid, 80 offered.

There likewise didn't seem to be much movement in the bonds of Delphi's former corporate parent, General Motors Corp. and its General Motors Acceptance Corp. financial arm. The former's benchmark 8 3/8% notes due 2033 were down ½ point, the trader said, at 75.75 bid, 76.75 offered, while GMAC's 8% notes due 2031 were ¼ point lower at 94 bid, 94.5 offered.

GM arch-rival Ford Motor Co.'s 7.45% notes due 2031 were half a point lower at 72.5 bid, 73, offered, while its Ford Motor Credit Co. financing unit 's 7% notes due 2013 were also off a half, at 86.25 bid, 86.75 offered.

Across the whole automotive sector - which had firmed smartly last week on investor hopes that better times may lie ahead for GM, which could in turn help Delphi, which is seeking its erstwhile parent's help in trying to modify its costly labor agreements - things were relatively restrained, with most issues a quarter-to-half point lower.

Exide jumps

The exception was Exide Technologies, whose 10½% notes due 2013 were seen around 85 bid, 87 offered, up at least three to four points on the session. However, traders were at a loss to explain the rise in the bonds, or in the company's Nasdaq-traded shares, which were meantime up 35 cents (8.29%) to $4.57 on volume of 824,000, more than twice the usual turnover.

Calpine rises

Also moving up, though for no reason that anyone could specifically point to, were Calpine's bonds. A trader saw the bankrupt San Jose, Calif.-based electric power producer's notes up three points across the board, with its 8½% notes due 2011 at 43.5 bid, 44.5 offered.

"There was speculation about some sort of rule change [within the bankruptcy proceedings] that may impact them in a positive light," he opined, although he also noted it was speculation and in light trading.

At another shop, a trader saw the Calpine Canada Energy Finance II ULC 8½% notes due 2008 up five points at 63 bid, 65 offered, and saw the parent's 7¾% notes due 2009 at 62 bid, 64 offered, well up from 56 bid, 58 offered. He saw its 4¾% converts due 2023 three points better at 40 bid, 42 offered, but had no insight as to what was driving the rise.

Calpine's nearly worthless Pink Sheets-traded shares were seen up two cents (5.88%) to 27 cents on volume of 4.3 million shares, somewhat heavier than usual.

Avondale steady despite closing

Also among distressed-debt names, Avondale Mills Inc.'s 10 ¼% notes due 2013 were seen unchanged at 87.5 bid - the same level to which those bonds had jumped last week from prior levels in the 60s, on news of a big insurance settlement that would be paid to the Monroe, Ga.-based textile company, arising out of a railroad accident and resulting chemical spill that caused great operational damage to one of its plants and threw the company into a financial tailspin.

The company on Tuesday announced that it would cease its operations and liquidate in order to maximize value for its creditors and shareholders, but does not plan to file for any form of bankruptcy protection. It also told Prospect News that it plans to repay its creditors, including its bondholders, using proceeds from the liquidation and from the $215 million insurance settlement (see related story elsewhere in this issue).

Marsh, Albertson's little moved

Back among the non-distressed names, merger and acquisition developments involving two supermarket companies were seen having little real impact on their bonds.

Marsh Supermarkets Inc.'s 8 7/8% notes due 2007 were seen continuing to trade around the 98.5 bid level they have recently held, even though the Indianapolis-based supermarket operator announced that it had received an unsolicited takeover offer from an investor group that is about 23% better than an earlier offer made by another buyer that Marsh has already accepted. The new offer is worth $107.8 million in cash, considerably more than the first buyer's $88 million bid.

A trader who saw the bonds at 99 bid, par offered, unchanged on the day, said they're "already trading right around their expected takeout levels."

And he saw Albertson's Inc.'s 8% notes due 2031 a little easier, offered at 93 without a bid, versus 93 bid, 94 offered previously, after the Boise, Ida.- based supermarket giant - one of the top three U.S. operators - announced that its shareholders and those of its acquirer, SuperValu Inc., had okayed the deal.

Another trader saw Albertson's 6.95% notes due 2009 off ¼ point at 100.5 bid, 101.25 offered, while its 8.35% notes due 2010 were unchanged at 104.375 bid, 104.75 offered. SuperValu's 7 7/8% notes due 2009 were down ¼ point at 103.5 bid, 104 offered, while its 7½% notes due 2012 were ½ point down at 100.25 bid, 100.75 offered.

Jacobs launches $210 million

The primary market produced only a modicum of news, as one sell-side source asserted that eyes are presently trained upon the stock market, which took a nose dive on Tuesday, with the Dow Jones Industrial Average dropping by more than 1.6%.

News of one roadshow start was heard.

Jacobs Entertainment Inc. will begin a roadshow on Wednesday for its $210 million offering of eight-year senior notes (B3/B-), which is expected to price late next week.

Credit Suisse and CIBC World Markets are joint bookrunners for the Golden, Colo.-based gaming company's debt refinancing deal.

The liquidity picture

Thus far in 2006 the liquidity picture of the high-yield asset class - particularly with respect to mutual funds - has been a negative one.

Late last week a source told Prospect News that AMG Data Services reported a $345.6 million outflow from high-yield mutual funds for the week to May 24.

One source said that that outflow takes the year-to-date fund flows to negative $2,248.2 million for funds that report on a weekly basis. However, the source added, among funds that report on a monthly basis year-to-date flows remain in the black at $1,775.7 million.

Hence year-to-date aggregate flows, tabulating both the weekly and monthly reporters to AMG, ended the most recent week at negative $472.5 million, according to the market source.

Mixed picture for institutional liquidity

In spite of continued negative news on the mutual fund-front, sources have maintained throughout 2006 that institutional investors - hedge funds, pension funds and insurance funds - remain flush with cash.

On Tuesday, however, a source from a hedge fund gave a qualified affirmation of that picture.

The hedge fund source said that presently the liquidity picture is a mixed one.

Institutional investors who have a long-term time horizon are in good shape whereas those managing "short-term capital" have to be careful.

At present this source's fund is focused on the private placement market as opposed to Rule 144A deals, which the investor characterized as a "more public" pool of deals.

"The private placement market is healthy," the source said. "There is a lot of deal flow. A lot of acquisition finance is getting done. A lot of money is looking for places to go and there is a lot of opportunities for that money."

By contrast those who are presently focused on the Rule 144A junk bond market at the present time tend to have month-to-month or quarter-to-quarter liquidity.

"They are going to be reluctant to put money to work unless it's at a really good yield," the source said.

The hedge fund source said that funds which are doing the large, direct placement deals have "capital lockups" because the assets require a longer holding period.

The recent volatility in the high-yield market stems from funds that do not have locked up money being very cautious in deploying capital, which has created a lot of turnover in portfolios as opposed to more buy-and-hold strategies, the source said.

The hedge fund source added, however, that because of the strong liquidity picture among the longer-term funds, "i.e. the people with the lockups," there will be a good support base for high yield "at some level," if the market sells off heavily.

"I think there is going to be a good floor if there is a big sell-off," the source said.

"People will still get hurt. But I don't foresee a big meltdown like we had in 1998."

Searching for special situations

When Prospect News asked if junk bond investors were presently being well-paid for the risks they are taking, the source said that the run-of-the-mill highly liquid names are not paying well because they are not providing "the coupon returns that will buy you out of the major downdrafts in the market.

"People that hold those names, by definition, don't have a stable capital base because they are more month-to-month or quarter-to-quarter liquidity," the source added.

This source's fund, therefore, is presently focused on "more esoteric private placement situations."

Investing in Foster Wheeler

As an example, this source's fund recently purchased "a very large block" of the high-yield bonds of Clinton, N.J.-based engineering, construction and project development company Foster Wheeler, Ltd.

Later the hedge fund converted those bonds into common stock which the company sold to the fund at a discount.

"We bought the bonds when they were very busted, in a prior restructuring [the company] did two years ago," the hedge fund source said.

"At that time the common stock was probably in the low $30 range. Now it's in the high $40 range.

"We knew that the company needed to equitize some of their debt so that they could get better credit lines and bonding facilities for their large construction projects," the source added.

"We turned our debt into equity. They gave us a discount on the stock, and were able to get better credit terms from their bank, which in turn caused the stock price to go up.

"We had to hold it a little while, and the stock went up and down and all over the place in the interim.

"But at the end of the day we made a lot of money on it."

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