CIBC's Mally sees QwestDex deal as tonic primary needs

By Paul Deckelman

New York, Oct. 17 - CIBC World Markets Corp.'s head of high yield research, Edward P. Mally, believes that the nearly moribund high-yield primary sector could use a shot in the arm - and that the upcoming billion-dollar-plus mega-deal that will help to finance the $7 billion buyout of Qwest Communications International Inc.'s QwestDex telephone directory business might be just what the doctor ordered.

According to CIBC's count, so far this year, slightly more than $50 million of new junk supply has priced - but at the same time, more than $5 billion of new supply has been postponed or cancelled altogether due to market conditions. "I think that is a significant quantity of issues that have not been priced this year," Mally said.

"Certainly relative to the strongest years for new issuance, that 10% ratio is on the higher side. I would typically expect something in the low single digits in terms of the [percentage] of new issues that are withdrawn."

The CIBC research chief said that what has stilled the primary market right now is "not so much fear on the part of the issuers [that deals will go bad or not meet with a good reception] as it is hesitancy on the part of the investors to accept the deals."

He said that "investors need to have a higher degree of confidence that there will be a sustained reduction in the default rate in the high-yield market, and I think ultimately what the market needs to do is have a large transaction come, price well, be accepted and trade well in order to boost the overall confidence in the health of the high-yield market and the health of the primary market. "

Whether or not something like the long-anticipated QwestDex transaction will be the one "remains to be seen, but in my opinion, it is that type of transaction that could indeed be a big confidence booster in the high-yield market, even if it is a very significant amount of supply."

Mally said that "a large, broadly traded liquid issue can do more to help the high-yield market, both in the primary and the secondary, than say a series of obscure, small-company, one-time issuers coming to the market with deals of $100 million or $150 million in size that won't be broadly followed and [won't] trade with a lot of secondary market liquidity."

The QwestDex deal - like a number of other deals currently sitting on the forward calendar - is being done to finance a leveraged buyout of the company, while several other deals are connected to other forms of merger or spin-off activity.

Mally cautioned that the deals that have had the best reception in the high-yield market "typically have been refinancing deals in recent months; the market has not been as receptive to acquisition finance deals and I think that investors are very perceptive in this, as a reflection of the bank debt market also being less receptive to those types of transactions."

But that is not to say that they won't play at all in the LBO/merger and acquisition/spin-off type deals; while new-issue investors "are increasingly cautious and circumspect about deals," he said, "when they really accept a transaction that has a good business plan, is well structured and trades well, that first round of success will beget additional success."

Given the current market environment, he continued: "I think as much as anything, it's about rebuilding confidence and that confidence is going to begin to be rebuilt by having a company plunge in, and pay a little bit more of an interest rate than they might otherwise under optimal circumstances. But in an effort to get a deal done, the company that's willing to step up and be first may very well be the one that paves the way for others, and presumably would also create an opportunity for that company to come back a second time for a refinancing of some sort, or additional financing as need be."

Mally said that LBO/merger/spin-off issuers seeking to come to the market to borrow money in the current environment had better have well-thought-out business plans. He alluded to the rash of deals brought by start-ups and other kinds of new entities during the heady years of the tech and telecom boom in the late 90s - which later crashed and burned.

"I think as much as anything after the era of the equity-venture-capital bonds, as I like to affectionately call them, where companies came to market with a business plan and didn't have revenues, didn't have EBITDA [and with the expectation of being bought out instead of having to pay off their bonds or refinance several years down the line] - the pain of those transactions, followed by and compounded by the pain of the WorldCom and Adelphia scandals has done a lot to hurt confidence in the market and cause investors to look elsewhere. "

Restoring that market confidence in sinking money into start-ups or new ventures created by buyouts, mergers or spin-offs "will take some time," but he said that it could be helped by a big, well-performing deal, such as QwestDex.

Mally also likes another large deal for a new company that's on the calendar - Wynn Las Vegas LLC's $340 million offering of seven year-notes. While the proceeds of the deal will be used to design and construct the new La Reve casino on the Las Vegas Strip, a new entry into the already crowded and competitive gaming business in the world's Number-One gambling market, it's not as though investors would be making a long-shot bet on a completely unknown quantity.

The ultimate success of the deal, he noted, "remains to be seen." But Mally added that "It's obviously a very high-profile deal by a very well known, very successful gaming entrepreneur," he said, referring to the man behind Wynn Las Vegas - the legendary Vegas and Atlantic City gaming operator Steve Wynn. "I'm sure that deal will catch a lot of attention in the market place. I think that deal being successful could do its part to boost confidence in the market."

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