New Charter bonds continue to trade well; McDermott gains on asbestos verdict

By Paul Deckelman and Paul Harris

New York, Jan. 9 - Charter Communications' newly issued bonds continued to trade well on Wednesday, a day after the upsized issue made its debut. A favorable verdict for a unit of McDermott International in an asbestos-related legal case pushed the bonds of its J. Ray McDermott unit higher - and will be closely scrutinized by investors with holdings in other asbestos-challenged companies.

Charter's 10% senior notes due 2011, to which the company added $300 million at Tuesday's pricing, and its 9 5/8% senior notes due 2009, to which it added $350 million, opened trading around par bid/101 offered, up slightly from their closing levels Tuesday, before dropping back to close essentially unchanged on the session, bid around 99.5-par. The notes had priced earlier Tuesday at 99.299 and 99.301, respectively.

"It was still up marginally, with the market trying to digest the paper," a trading source said, "but it ended up being a pretty good deal for investors - not exactly a blowout, but a good deal."

The St. Louis-based cable-TV giant's new $250 million (proceeds) zero-coupon/12 1/8% discount notes due 2012 "is the security that everyone liked in the deal," he said, up about a point-and-a-half from Tuesday's 55.493 pricing.

A trader at another desk quoted the new Charters up about half a point on the session, and said that while there had been "a lot of two-way flow," there was "nothing earth-shattering" in its movements.

The other new deal which made its debut this week, Paxson Communications Inc.'s zero-coupon/12¼% senior subordinated discount notes due 2009, were quoted at around 62 bid, up half a point on the session and essentially little changed from Monday's pricing at 62.132.

Among already established issues on Wednesday, J. Ray McDermott's 9 3/8% notes due 2002 were quoted up two points to 94 bid. At another desk, the bonds were seen going home at 95.5 bid/97.5 offered, up three points on the session, after a federal judge in New Orleans granted motions filed by J. Ray's corporate parent, McDermott International, and another of the latter's units, Babcock & Wilcox, seeking summary judgment against a group of London underwriters and dismissed a declaratory judgment action filed by the insurers in connection with asbestos liability claims filed against B&W. The ruling essentially means that the insurers, including the famous Lloyd's of London, remain on the hook for claims within the level of Babcok & Wilcox's coverage. The insurers had been seeking to void their asbestos-liability coverage agreement. McDermott hailed the ruling by U.S. District Judge Sarah Vance of the Eastern District of Louisiana, since it means there will be insurance coverage available to cover the asbestos-liability claims which drove Babcock & Wilcox into bankruptcy in February of 2000.

The ruling is likely to be closely studied by other companies which have already sought Chapter 11 protection due to a flood of asbestos claims, or which are not in Chapter 11 but which could potentially find themselves under attack from claimants. The former category includes such high yield bond issuers as building materials makers Owens Corning and Armstrong World, chemicals maker W.R. Grace and auto parts maker Federal-Mogul Corp.

Among companies in the latter category is Halliburton Co., the giant Dallas-based oilfield service and construction company. Its nominally investment-grade rated bonds have been trading like junk bonds in recent weeks, pushed down from near-par levels and quoted off some desks in dollar-terms rather than on a spread basis on investor worry over a string of recent asbestos-liability verdicts against its Dresser Industries unit. Those worries have gotten so strong that the company was forced to issue a statement last week in which it attacked what it called "spurious" rumors that it was contemplating a bankruptcy foiling due to its asbestos woes, and said it had no plans for such a filing.

Halliburton's 6% notes due 2006 have most recently eased to around 91 bid, while its 5 5/8% paper due 2008 was recently heard offered at 81. A junk trader opined that while Halliburton retains its high-grade status for the moment, "they're coming our way - it's just a matter of time. The downgrade could be days away, or could come at any time - but it's inevitable."

No activity was seen in the bonds Wednesday in reaction to the McDermott verdict - which could serve as a precedent in ensuring that most asbestos-related claim costs are passed on to the insurers, rather than borne by the defendant companies themselves. On the equity side, however, Halliburton shares jumped $1.14, or 10.37%, to $12.13 on the New York Stock Exchange, with analysts attributing the rise to the McDermott news. Volume of 30 million shares was more than triple the average daily turnover. McDermott shares, meantime, were up 90 cents, or 7.20%, to $13.40.

Elsewhere, Gaylord Container Corp.'s bonds slid, as the market digested Tuesday's announcements by the company and by its investment-grade-rated rival, Temple-Inland Inc., to the effect that the planned merger between the two was off, due to the failure to satisfy the minimum participation conditions contained in Temple-Inland's tender offer for Gaylord's bond debt. Only about $112 million face amount of Gaylord's three issues of junk bonds had been delivered by the time the tender offer was allowed to expire, well under the 90% participation required for it to be a success.

Gaylord's 9 3/8% and 9¾% senior notes due 2007, which had been hovering around the 85 level at which they were to have been taken out, had the tender offer succeeded and the merger gone through, instead fell 7.5 points, to the 78 mark. Its 9 7/8% senior subordinated notes due 2008, which had hung in around the 37 takeout level, were seen down 10 points, at 27 bid, a market observer said.

One might think that Conseco Inc.'s debt would have been down on Wednesday, as the Carmel, Ind.-based insurer's debt ratings were downgraded by Moody's Investors Service, which dropped its bonds to B2 from B1 previously. But one would be wrong, a trader said. The ratings agency said its action "reflects the continued uncertainty of the company's financial flexibility that, according to Moody's analysis, is already reflected in the market value of Conseco's debt securities. This uncertainty has been heightened by the fragility of the current economic environment, which has weakened the profitability outlook of Conseco's annuity business and its consumer finance operations."

The trader, however, quoted Conseco's bonds up about two to three points on the session, declaring that "the downgrade shouldn't be a surprise to anybody. The charge they took shouldn't be a surprise to anybody." In disputing negative comments released last week by a Salomon Smith Barney equity analyst, Colin Devine, Conseco said last week that its 2001 earnings will fall short of previous estimates of 72 cents a share because of higher provisions for loan losses.

At another desk, Conseco's 8½% notes were seen up a point to 73 bid, while its 10¾% paper likewise gained a point to 46.

Kmart Corp. bonds were seen continuing a rebound which began last Thursday; the Troy, Mich.-based discount retailing giant's paper was seen up two to three points across the board, with its 8¼% paper closing at 58 bid, up two points, and its 7¾% notes up three points at 62. Kmart's 8 3/8% notes due 2004 firmed to 77 bid, up a point.

A trader estimated that Kmart had tacked on about three points, noting that "all the retailers seemed firmer. They say that if an economy is coming out of a recession, the retailer is usually the first indicator."

Kmart paper had taken a nosedive last week after Prudential Securities equity analyst Wayne Hood blasted the company in a research report and warned that it might have to file for bankruptcy if its cash-flow generation did not improve within the next six months or so, but the debt, and eventually, the shares, bounced back from those lows since then on market feeling that a bankruptcy filling might not be in the company's shopping cart just yet.

But another trader, while noting Kmart's early strength Wednesday, saw them showing weakness late in the session, with the 8 3/8% notes having come down off peak levels around 80 to close at 78.

The trader saw some activity in Levi Strauss paper, with the blue jean maker's 11 5/8% notes and its 6.80% paper both up a point to 89 bid and 92, respectively.

Apart from some trading in specific, story-driven names, however, he saw a high yield market that was dull and suffering from a little sense of an anticlimax, now that the long-awaited Charter megadeal is out of the way. "Right now," he asserted, "there's just no enthusiasm."

As the candle went out on Wednesday's quiet session in the high yield primary market - no pricings and no new deals announced - Prospect News had heard no price talk on the four deals expected to price Friday: AMC Entertainment's $150 million, Interface Inc.'s $175 million, Rural Cellular's $300 million, and Xerox's $500 million in dollars and euros.

Along the back channel, however, there was word that AMC was being talked at 10¼%-10½%, and that Xerox price talk was beginning to circulate in the 10¼% area. However calls to various syndicate banks on the two different deals brought the same responses: no official price talk has emerged.

Neuberger Berman High Yield Fund manager Robert Franklin told Prospect News on Wednesday that he was looking at two particular deals on the forward calendar: Interface Inc.'s $175 million of eight-year senior notes, expected to price Friday, and Coinmach Corp.'s $400 million of eight-year senior notes, set to price next week.

"Interface does commercial carpeting," Franklin said. "They've been around for a while. They have decent ratings. The fundamentals are not great, for the ratings. But neither is the economy right now.

"Coinmach is another company that's been around for a while," he added. "It's a fairly decent cashflow generator."

One syndicate official who spoke with Prospect News on Wednesday said that the execution of those two deals, Interface and Coinmach, would also be of considerable interest to sell-siders.

"Interface does the square carpets that you see when you walk into a commercial building," the official explained. "They've got about a third of that market, so they're dominant.

"It's a company that's been impacted by what's going on with the economy, so people are looking at that credit in terms of next year, because as the economy starts to improve companies like Interface should perform very strongly.

"If you think we're on our way out of the recession, now is a good time to start to look at companies that you think are going to perform strongly as we start to move out."

End

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