Level 3 bonds fall on weak quarterly numbers; National Mentor prices 8-year deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 27 - Level 3 Communications Inc. bonds tumbled sharply in initial dealings Wednesday, after the Broomfield, Colo.-based fiber optic network operator came out with unfavorable third-quarter results. However, junk players had second thoughts, and lifted the company's bonds off their lows, so they ended dealings only modestly below levels those bonds had risen to Monday.

The primary market saw one deal price during the mid-week session - a $150 million issue from National Mentor Group Inc. which came at the tight end of talk.

And the first roadshow announcement of the week was heard as K&F Industries said it would start the rounds on Friday with $365 million of new bonds.

Treasury fall could kindle jitters

One senior sell-side official, noting a fall in the 10-year Treasury price during the Wednesday session, told Prospect News that the move could cause high yield investors to rethink lower tier credits in the new issue market, particularly in light of the tight pricing seen recently on some of those deals.

"We saw a big downward move in Treasury prices today," the investment banker said. "The yield on the 10-year is up five basis points.

"I think that will kindle some nervousness about spreads. People are going to wake up and see that the triple-C names don't represent the best value in terms of risk and reward."

Having said that, the source said the laws of supply and demand continue to favor issuers at present.

"October is a big coupon-clipping month," the source said. "So even though you're not seeing big inflows to the high-yield mutual funds the market is being driven by investors clipping coupons and needing to put the cash back to work, as well as by hedge funds and other alternative investors."

The banker also said that right now the junk bond market seems to be shrugging off potentially toxic headline news, and pointed to the stories involving New York Attorney General Eliot Spitzer's pursuit of insurance companies that have allegedly been rigging bids with independent brokers.

"I think that both the high-yield and the high-grade markets got spooked by Spitzer," the sell-sider said. "But they seem to have come back in over the past couple of days.

"If you look at the credit default market, a lot of those insurance names have come back in pretty strongly.

"This market seems to have the ability to absorb bad news and quickly come back together."

National Mentor at tight end of talk

The only deal to price during Wednesday's session came from National Mentor, a Boston-based services provider for people with developmental disabilities.

The company sold $150 million of eight-year senior subordinated notes (B3/B-) at par to yield 9 5/8%, at the tight end of the 9 5/8% to 9 7/8% price talk.

Banc of America Securities, JP Morgan and UBS Investment Bank ran the books for the debt refinancing/stock redemption deal.

K&F to hit the road

New York City-based aircraft parts manufacturer K&F Industries announced the first roadshow start to be heard in the week leading up to the U.S. presidential elections.

An Oct. 29 to Nov. 8 roadshow is set to run for K&F Acquisition Inc.'s $365 million of 10-year senior subordinated notes.

Lehman Brothers and Goldman Sachs will be joint bookrunners for the acquisition financing.

Elsewhere, Stats ChipPAC Ltd. announced in a press release that it plans to sell $165 million of eight-year senior notes, with proceeds to refinance debt.

And Ultrapetrol (Bahamas) Ltd. also announced in a Wednesday press release that it intends to make an offering of 10-year first preferred ship mortgage notes, also to refinance debt.

Superpages Canada downsizes

Also on Wednesday, the stage was set for most of the transactions remaining on the forward calendar as business to be completed by the end of this, the last week of October 2004.

Advertising Directory Solutions Holdings (Superpages Canada) decreased to $170 million from $210 million its offering of eight-year fixed-rate senior notes (Caa1/B-), while increasing its second lien term loan by $80 million.

Price talk remains 9¼% to 9½% on the offering that is expected to price on Thursday, via JP Morgan, Banc of America Securities, Deutsche Bank Securities and Merrill Lynch & Co.

Elsewhere price talk of 9¼% to 9½% emerged Wednesday on Ready Mixed Concrete Co.'s $150 million of eight-year non-call-four senior subordinated notes (Caa1/CCC+), expected to price on Thursday via JP Morgan.

And price talk is 9%-9¼% on Imco Recycling Escrow Inc.'s $125 million of 10-year senior notes (B3/B-), expected to price on Friday morning via Deutsche Bank Securities and Citigroup.

National Mentor up in trading

When the new National Mentor 9 5/8% senior subordinated notes due 2012 were freed for secondary dealings, "they got a lot better on the break," moving smartly up to 102.375 bid, 102.875 offered from their par issue price.

A trader also saw the new Dobson Communications Corp. 8 3/8% notes due 2011 at 101.375, up from their par issue price. However, the new Dobson 9 7/8% notes due 2012, which had also come at par, were heard offered at 99.5 bid.

The new floating rate notes due 2011, which also came at par during the Tuesday pricing, moved up to 101.25 bid, 102.25 offered.

Level 3 drops, bounces

Back among the secondary names, Level 3's bonds initially fell in response to its third-quarter numbers, but later bounced off the lows.

A trader saw the company's benchmark 9 1/8% notes due 2008 fall from Tuesday's closing levels in the lower 80s to as low as 77 bid, 79 offered before coming back up to close out the session around 80 bid.

"The bonds went on a ride," he said, and when the earnings came out, people hit bids. "Later on, however, "they realized that the numbers were not so bad and the bonds came back up."

He quoted Level 3's 10¾% notes due 2008 at 86.25, adding "they didn't move much."

Level 3's bonds had risen about three points Tuesday on a report in The Wall Street Journal that cable-TV giant Comcast Corp. has started to select vendors for its coming push into the phone business. The WSJ, citing unidentified sources, said Level 3 and Sprint Corp. are two likely early winners, as Comcast - the nation's largest cable operator - is expected to buy space on their long-distance networks for the launch of its Voice-over-Internet Protocol (VoIP) phone service.

But on Wednesday, after release of the numbers - which showed a net loss in the latest quarter of $171 million (25 cents a share), down from the prior year's $247 million loss (38 cents a share), but which also showed revenue down 3.9% to $840 million from the previous year's $874 million - Level 3 "gave back a lot," another trader said.

He saw the 9 1/8s fall all the way to 78.5 bid, 79.5 offered from Tuesday's 84.5 bid, 85.5 offered, before reversing course and ending only a bit down from their opening levels.

He also saw the company's 10 1/8% senior notes due 2008 drop as low as 85.5 bid from 89.5 bid, 90.5 offered before the earnings data.

A market source at another desk saw Level 3 "all up [Tuesday] and all down [Wednesday]."

He saw the 10¾% notes end the day at 87.25, down from 89.5, and saw most of the company's other bonds fall to the 78-79 area, with the exception of the 11% notes due 2008, which he saw get a low as 81.5 bid, down from prior levels at 86.75.

Level 3 cut its forecast for free cash flow for the year to negative $280 million to $310 million, worse than its prior estimate of negative $200 million to $250 million.

The company cited an expected pickup in capital spending, as well as expenses related to acquisitions.

Vertis gains on earnings

A market observer saw the bonds of Vertis Inc. better after the Baltimore-based provider of targeted advertising, media and marketing services announced a swing into the black in the third quarter, with net income of $14.3 million, a sharp turnaround from a net loss of $24 million in the third quarter of 2003.

He quoted Vertis' 10 7/8% notes due 2009 up three points at 108.75 while the 13% notes due 2009 were four points better at 103.25.

B/E mixed

The bonds of B/E Aerospace Corp. were pretty much a mixed bag, even as the Wellington, Fla.-based provider of aircraft interiors announced better third-quarter results, announced plans to call its 9½% notes due 2008, and forecast a return to quarterly profitability in the fourth quarter and positive full-year results for 2005 and 2006 (see related story elsewhere in this issue).

A source quoted B/E's 91/2s at 103.25, down a quarter point. Its 8½% notes due 2010 were unchanged at 109, while its 8% notes due 2008 were a quarter point better at par.

Amkor Technology Inc., whose bonds were being quoted firmer Tuesday, even as the West Chester, Pa.-based high-tech manufacturer reported third quarter red ink of $22.3 million (13 cents a share) versus its year earlier profit of $15.8 million (nine cents a share), reversed course, and headed down Wednesday. Its 7¾% notes due 2013 lost a point to close at 86.

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