Level 3 gains on asset sale; Jean Coutu get Eckerd offers; Amkor off

By Paul Deckelman and Paul A. Harris

New York, July 21 - Level 3 Communications Inc.'s bonds were seen higher Friday, with traders citing the news that the Broomfield, Colo.-based fiber optic telecommunications network operator had sold a subsidiary that was widely considered to not really be a core part of its operations.

Jean Coutu Group Inc.'s bonds were up on news reports indicating that the Longueuil, Quebec-based retailer - which bought some 1,500 Eckerd drugstores in 2004 from J.C. Penney Corp. Inc. - has received expressions of interest in Eckerd from potential buyers.

On the downside, Amkor Technology Inc.'s bonds were seen lower, probably in response to concerns about the health of the industry, including a warning from Standard & Poor's about semiconductor industry weakness - which translates into bad news for companies serving that industry, including Chandler, Ariz.-based Amkor, which provides packaging and testing services.

HCA Corp.'s bonds continued to widen out for a third consecutive session in response to news reports earlier in the week indicating that an attempt to take the Nashville-based hospital operator private via a massive leveraged buyout deal had collapsed.

A trader saw Level 3's bonds "up a little bit on that small asset sale announced last [Thursday] night," with the company's 10¾% notes due 2011 at 104.5 bid, which he called up a point on the session.

A market source at another desk saw the company's 11½% notes due 2010 move up to 101.5 bid, a 1½ point gain, although another market source saw a more conservative gain for the 111/2s, up just ¼ point at 99.75. That source did see the 103/4s up nearly a point on the session at 104.375.

Level 3 announced that it would sell its Software Spectrum business to Insight Enterprises for $287 million in cash. Level 3 bought the software business in 2002, and some observers believed that it was somewhat out of character for the company, which survived the telecom shakeout of the late 1990s and the early part of the present decade and which has grown by gobbling up telecom assets from failed companies. The software deal was seen at the time as a way for Level 3 to lift its revenue numbers and avert a default with its lenders. With Level 3 now on a considerably sounder financial footing, the software operation apparently became superfluous and ripe for a sale.

Indeed, Charles C. Miller III, a Level 3 vice chairman, acknowledged as much in the company's announcement of the sale when he said that its communications business "is presenting numerous investment and growth opportunities. The proceeds from the sale of Software Spectrum will increase Level 3's ability to pursue those opportunities that are more central to our communications business."

Jean Coutu up on sale hope

Elsewhere, Jean Coutu's bonds were seen up a point or more, traders said, helped by news reports that the company had received overtures from retailers and private equity interest in buying part of its far-flung Eckerd empire, the fourth largest drugstore chain in the United States after Walgreen Co., CVS Corp. and Rite Aid Corp. None of the interested parties was identified in the reports, and there was no immediate comment from Eckerd.

Analysts have said that unloading at least part of Eckerd should a buyer come along could be a smart move for Jean Coutu, which has grown exponentially since its start in 1969 as a single pharmacy in Montreal's East End section. They suggest that the Canadian company may have bitten off more than it could chew when it bought Eckerd from Penney, which wanted to get out of the pharmacy business and concentrate on its department stores. The observers noted that Jean Coutu took on more than $2.5 billion of debt to fund that purchase, cutting down on its financial flexibility, and said that Jean Coutu was having trouble integrating Eckerd, which is several times the size of its prior operations in the United States and Canada.

The possibility that it might be able to get out from under at least a part of Eckered pushed Jean Coutu's 8½% notes due 2014 up to 92.75 bid, 93.75 offered, while its 7 5/8% notes due 2012 up to 97.25 bid, 97.75 offered, a gain of anywhere from 1 to 1½ points, a trader said.

Sector peer Rite Aid's 9¼% notes due 2013 were ½ point lower, another trader said, at 96.75 bid, 97.5 offered.

Amkor slips

Among issues trending lower, Amkor's 7¾% notes due 2013 were seen down 1½ points, at 87.5 bid, probably pulled lower by general worries about the whole semiconductor sector including an S&P warning of weakness in the equities of the chip area.

Analyst David Kaplan cut his outlook for the sector to negative from neutral previously, declaring in a research note Friday that "based on recent results and comments from leading semiconductor equipment companies, we now see the start of a cyclical downturn in the semiconductor equipment market as likely in the second half of 2006. We had previously expected a later slowdown, beginning around the start of 2007."

Kaplan noted that one sector company, Teradyne, "recently stated it has seen slower demand since early June." He noted that Amkor was among the companies whose equity is rated a "sell" by S&P.

NewPage down as IPO scrubbed

Another loser was NewPage Corp., whose bonds fell after the Dayton, Ohio-based maker of coated paper said that it was postponing its planned initial public stock offering due to "market conditions."

A market source saw its 10% notes due 2012 modestly lower at 104 bid, down from 104.375 offered earlier, but said the real decline was in its 12% notes due 2013, down about 2 points to 104.5, and its 11.399% notes due 2012, which dropped to 109.5 bid from prior levels at 112.

But another trader saw a more pronounced decline, seeing the 10s having fallen to 102.5 bid, 103.25 offered, down about 2 points from where they stood at mid-week.

HCA keeps dropping

There was further erosion in the bonds of HCA, as the giant hospital operator's widely traded 6½% notes due 2016 "looked a little weaker" Friday after two straight days on the downside on the news of its apparently failed LBO. He said the bonds - which are rated at the top of the junk bond rating scale and are usually quoted on a spread-versus Treasuries basis, widened out to 359 basis points on the bid side, 349 bps on the offered side, from 353/343 on Thursday. Before the news of the failed buyout talks, those bonds had been bid at spread levels nearly 100 basis points tighter than where they are currently.

The trader also saw HCA's 6¼% notes due 2013 at 357/347, wider than Thursday's 350/340.

The Wall Street Journal reported Wednesday morning that the company had been in talks with several private equity firms on a possible buyout, and said that those talks had gotten to the final stages before they foundered.

The paper, citing unidentified sources close to the talks, said that the prospective purchasers included Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch Private Equity, as well as relatives of Senate majority leader Bill Frist - a heart surgeon by training whose father, the late Thomas Frist, and brother, Thomas Frist Jr. founded HCA back in the 1960s.

The Journal said HCA had convened a special board committee to study the buyout bid - but the company's massive debt load, estimated north of $11 billion, made it difficult for lenders and prospective buyers to offer a high enough price. The paper said that the company and its would-be suitors remained about 10% apart when the talks finally ended.

HCA over the past two days has declined to make any comment on the reported buyout talks, or the movements in its shares or bonds. A spokesman for Sen. Frist said the Tennessee Republican owns no HCA shares and declined further comment.

Globix jumps on partnership

Among less widely-followed names, a market source saw Globix Corp.'s 11% notes due 2008 4 points better at 97 bid after the New York-based internet service provider announced plans Thursday for a partnership with smartfundit.com, which provides a unified platform for software funding.

The companies said that they will provide independent software vendors with the opportunity to offer customers a comprehensive end-to-end software delivery service, aided by the world's first independent finance web platform.

Interep higher

Another off-the-run name seen improving was Interep National Radio Sales Inc., whose 10% notes due 2008 were seen having gained 3 points on the session to 86.5 bid.

No news was seen out on the company, other than a filing with the Securities and Exchange Commission by shareholder Southpaw Credit Opportunity Master Fund LP. That amended 13-D filing indicated that Southpaw had raised its stake in the New York-based radio advertising sales company to 487,300 common shares (6.85%) from the 401,300 shares (5.67%) in acknowledged holding in a filing it made back in May.

Primary quiet, Friboi roadshow

The high-yield primary market was close to silent in terms of news Friday as no new deals priced.

The nearest approach to news came from Brazilian beef producer Grupo Friboi (B1/B+), which said it plans to start a roadshow Tuesday in New York for an offering of 10-year dollar-denominated bonds.

Marketing wraps up Thursday and pricing is expected afterwards.

ING and JP Morgan are the lead managers for the Rule 144A and Regulation S transaction.

$1.08 billion week

With no new issuance on Friday, the week came to a close having seen $1.08 billion in four deals. Those offerings came from Mobile Services Group, Inc./Mobile Storage Group, Inc., Penhall International Inc., Digicel Ltd. and NTL Cable plc.

Still outpacing 2005

The July 17 week brought year-to-date high-yield issuance to $72.85 billion of dollar-denominated deals in 211 tranches, well ahead of the $55.07 billion at the same point in 2005, although the number of offerings is lagging behind the 225 at the same point last year.

Loans turn 'sloppy,' junk may benefit

Despite "a couple of strong days" in the past week, secondary prices finished flat compared to seven days earlier, one high yield syndicate official said.

Since the beginning of July, he estimated, the market has widened out by approximately 50 basis points.

Primary volume has been tending to go to the bank loan market recently, the official added, but noted the trend may be poised for a change.

"There's been a ton of new issue activity" in loans, he told Prospect News.

"However the executions there have begun to get sloppy because right now the buy-side is really making the calls. The bond side has just been quiet.

"You are seeing a lot more first and second lien deals as opposed to the typical bond and bank structure.

"It's finally catching up with itself and levels are moving wider. Single-B first liens that before were coming in the high 200s [over Libor] or low 300s are now coming 100 bps wider."

Asked whether this excess supply will drive business back to high yield, the official commented: "I'm not sure the high yield is ready but the next move between bank loan and high yield markets will likely be a pick up in the high yield as some of these deals have trouble in the bank loan market.

"Also a lot of these bank deals are being pitched as 'covenant-light' with the same types of incurrence covenants that bonds have. Once the loan market begins to insist that borrowers accept traditional bank maintenance covenants, issuers will reconsider possibly paying a little more interest to get the flexibility in the covenants that's available in the bond market.

"Investors [in both markets] are now beginning to focus on macro-economic risks that are related to the geo-political turmoil which could impact all companies.

"Investors are just not willing to participate at these risk levels at prices that prevailed three to six months ago."

Coming up

Despite Friday's quiet session and the onset of summer, the forward calendar still has $4.4 billion and €170 million of deals in the market.

Scheduled for the upcoming week are:

• VNU NV with $1.67 billion in dollars and euros, divided into $835 million equivalent senior notes due 2014 (B3/CCC+) and $835 million equivalent proceeds senior subordinated discount notes due 2016 (Caa1/CCC+). Deutsche Bank Securities, JP Morgan, Citigroup, ABN Amro and ING bringing the deal that will be used to help fund a leveraged buyout of the Haarlem, Netherlands-based market research company;

• Phibro Animal Health Corp. with $240 million of senior notes due 2013 (B3/B-) via bookrunner UBS Investment Bank and joint bookrunner Morgan Joseph. Pricing is expected on Tuesday or Wednesday;

• Verso Paper Holdings and Verso Paper Inc. with $900 million, made up of $600 million of second lien senior secured notes due 2014 (B1/B+) in fixed- and floating-rate tranches and $300 million of senior subordinated notes due 2016 (B3/B-). Credit Suisse and Lehman Brothers have the books for the deal that will be used to help fund the acquisition of International Paper Co.'s coated and supercalendered papers business by Apollo Management;

• MxEnergy Holdings Inc. with $200 million of senior floating-rate notes due 2011 (CCC+) via joint bookrunners Deutsche Bank Securities and Morgan Stanley. The roadshow ends Wednesday.

• TFS Acquisition Corp. (Textron Fastening Systems) with $190 million of senior secured notes due 2016 (Caa1/B-) via Credit Suisse to partially fund the acquisition of Textron Inc.'s fastening systems business by Platinum Equity;

• Treofan Germany Gmbh with €170 million of second-lien notes due 2013 (Caa1/CCC+) via joint physical bookrunners Citigroup and JP Morgan;

• H&E Equipment Services Inc. with $250 million of senior notes due 2016 (B3/B+) via joint bookrunners Credit Suisse and UBS Investment Bank, expected to price Friday; and

• U.S. Shipping Partners LP with $200 million of senior notes due 2014 via joint books Lehman Brothers and CIBC World Markets (joint).

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