Allegiance bonds jump as XO wins auction; 360, McLeod debt firm in sector sympathy

By Paul Deckelman and Sara Rosenberg

New York, Feb. 13 - Bonds of Allegiance Telecom Inc. were quoted sharply higher Friday - albeit in very thin pre-holiday trading - on news that XO Communications had emerged the winner in a bidding contest for most of the Dallas-based telecommunications competitive local exchange carrier's assets. Bank debt of two other telecom players with Allegiance connections, however limited, was also up on the news.

Allegiance's 11 3/8% notes due 2008 and 12 1/8% notes due 2008, which had closed Thursday at 41 bid, 43 offered, shot as high as 58 bid in early trading Friday before coming off those highs to settling in at 53 bid, 55 offered - still a handsome gain on the session.

Allegiance had sought Chapter 11 protection last May, and had announced in December, that Qwest Communications International Inc. had agreed to buy most of its assets for $300 million in cash and $90 million in new convertible debt with a conversion price of $6.10 per share and a coupon of 1.5%.

That stalking-horse offer essentially established a bidding floor, leaving the door open for other bidders, and XO, a Reston, Va.-based CLEC, came in with a better offer - $311 million in cash plus 45 million shares of stock, worth about $317 million at XO's current price in the $7 per share area.

The parties expect to finalize the definitive agreement within the next several days and submit the agreement to Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York for approval on Feb. 19.

Traders had noted earlier in the week that Allegiance bonds, which had languished for some weeks in the lower 30s, had begun moving up - first to the mid-to-upper 30s and then to bid levels around 41 - on market scuttlebutt that another bidder had appeared on the scene to try to top Qwest's bid. Among the names floated that were floated around junk bond telecom stalwart Level 3 Communications Inc., and Corvis Corp., a telecom equipment manufacturer which got into the operations end of the business when it bought Broadwing Communications last year. Some sources, however, correctly identified the mystery bidder as billionaire investor Carl Icahn, who bought XO out of bankruptcy in 2002, wresting control of the company away from Forstmann Little & Co.

The agreement calls for XO to buy substantially all of the assets of Allegiance Telecom and its subsidiaries, except for Allegiance's customer premises equipment sales and maintenance business operated under the name of Shared Technologies, its managed modem business and certain other Allegiance assets and operations.

XO thus gains control of Allegiance's CLEC network, which offers single-provider telecom services, such as voice, data transmission and Internet, to business customers in 36 large markets throughout the United States, with over 800 colocations. Combined with XO's existing CLEC network - and analysts note that the two companies' respective networks essentially complement each other, with little redundant overlap - it gives Icahn control of the two largest CLECs in the nation, which together could form a stand-alone "super CLEC" with broad enough reach to challenge incumbent regional Bell operating companies such as Qwest, Verizon Communications, BellSouth and SBC Communications in some markets.

While Allegiance's bonds rose sharply on the news, its bank debt was heard essentially unchanged at 99.5.

360networks, McLeodUSA loans gain

However, bank loan traders noted that 360networks Corp. and McLeodUSA Inc. paper both headed higher Friday in sympathy with Allegiance's announcement.

The bank debt of 360networks, a Vancouver, B.C.-based broadband network services provider, traded up to 65 from 60 and Cedar Rapids, Iowa-based telecom services provider McLeod's bank debt traded up to 81.5 from 81, according to a trader.

"They have exposure to Allegiance," the trader explained.

Adelphia steady

Elsewhere, Adelphia Communications Corp.'s bonds "didn't really do much," a market source said, quoting the Denver-based cable operator's several series of bonds as essentially status quo - although he did see the company's 10¼% notes due 2006 dip two points, to 103 bid.

Adelphia's 10¼% notes due 2011 meanwhile held steady at 106.25 bid, its 10 7/8% notes due 2010 were stable at 106.5, its 8 3/8% notes due 2008 stayed at 103.75 bid, while its defaulted 9¼% notes due 2002 remained at 103.5

Adelphia, which filed for Chapter 11 protection last year, had recently been firming, on investor expectations that the company would unveil improvements to its prospective reorganization plan, which at this juncture calls for current shareholders to receive nothing when the company emerges, anticipated sometime in the first half. The judge overseeing the company's restructuring recently turned down efforts by disgruntled shareholders to gain the right to put forward their own plan, which would value the company differently than management's plan.

Revlon pushes higher again

Revlon Inc. bonds - which jumped on Thursday after the troubled New York-based cosmetics company unveiled plans to essentially cut its $1.9 billion debt load in half, mostly through a massive debt-for-equity exchange next month - were heard to have built on those gains, and pushed a little higher, although trading during the half-session preceding Monday's President's Day holiday was very thin.

A market source quoted the Revlon 8 1/8% and 9% senior notes due 2006 as having moved up to 103 bid from prior levels at 102 and 101.5, respectively, while its 8 5/8% notes due 2008 gained a point to 94 bid. At another desk, however, the 8 5/8s were seen a point lower at 91 bid. Revlon's 12% notes due 2005 - which unlike the other three series of bonds, are not part of the prospective debt exchange offer - rose to 107.5 bid from 106.

Winn-Dixie Stores Inc.'s 8 7/8% notes due 2008 - which on Thursday had moved up to bid levels in the 86-87 area from prior levels around 82, on apparent investor sentiment that the recent decline in the Jacksonville, Fla.-based supermarket operator's bonds had been overdone - were heard to have eased to 86 bid from 87.5 on Thursday.

A trader saw United Air Lines' bonds, such as the 9¾% notes due 2021, as having retreated half a point to 14.5 bid, despite the bankrupt airline's announcement that it had successfully launched its "Ted" low-cost airline operation - a business that Chicago-based UAL sees as vital to allow it to compete with low-cost carriers that have taken a big bite out of the business of traditional large network carriers like UAL.

He cited bad news - including the news that a $350 million deal United had to sell some used aircraft to Thailand's national air carrier had fallen through, and news that a federal appeals judge had reinstated a $36 million settlement which the airline has to pay to some of its flight attendants, arising out of sex-discrimination lawsuit.

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