Adelphia up as Rigas pact seen near; Venetian Casino, Sybron Dental deals price

By Paul Deckelman and Paul A. Harris

New York, May 22 - Adelphia Communications Corp. debt moved higher Wednesday, amid reports that a deal might be near under which its founding Rigas family would relinquish control of its board and transfer assets to the cash-hungry company, both seen as virtual prerequisites for any meaningful debt relief from Adelphia's banks. Standard & Poor's meantime dropped troubled telecommunications operator Qwest Communications International Inc.'s bond ratings to junk - a not-unexpected development.

In the primary sphere, two deals amounting to an even $1 billion priced, including the whopping $850 million second mortgage notes offering from Venetian Casino Resort LLC and Las Vegas Sands, Inc. - the biggest junk bond deal since Owens Brockway priced $1 billion on Jan. 16.

In addition Sybron Dental Specialties, Inc. crowned its deal with one of the tightest-ever yields for a first-time single-B senior subordinated issue.

Venetian Casino Resort's $850 million of eight-year second mortgage notes (Caa1/B-) priced at par to yield 11%, in the middle of the 10 7/8%-11 1/8% price talk.

Prospect News inquired of one sell-side source not on the Venetian syndicate whether this triple-hook deal coming with a yield of 11% represented a good transaction.

"It's a question of which sector you're looking at," the source responded. "Remember Hollywood Entertainment? They shied away from a deal in the 10s I think.

"Sometimes rating doesn't give you a full picture of the predictability of cash flows or which industries are more in favor."

Still, this source said, Venetian appears to have been a success.

"It's a positive data point for the market," the official stated.

Also on Wednesday Sybron Dental Specialties filled its bank debt cavity with a notably tight-pricing $150 million of 10-year senior subordinate notes (B2/B). The notes priced at par to yield 8 1/8%. Price talk was for a yield in the 8¼% area. Credit Suisse First Boston and Lehman Brothers were joint bookrunners.

Several sources on the sell-side noted that Sybron, by pricing at 8 1/8%, ranks among the lowest yielding deals ever for a first-time single-B senior subordinated issues.

Although terms were expected on Trico Marine Services $250 million of 10-year senior notes (B1 expected/B) via joint bookrunners Lehman Brothers and Bear Stearns, no information on the deal was available late in Wednesday's session. Price talk on that deal is 8¾%-9%.

During a conversation with Prospect News on Wednesday Pax World High Yield Fund portfolio manager Diane Keefe said that the low supply of bottom-tier credits in the high-yield primary market thus far in 2002, and the demise of certain planned deals without pricing, is first and foremost a function of memory.

"Portfolio managers have longer memories than underwriters do in terms of the pain of 2000 and 2001," she said, adding that portfolio managers are presently attempting to steer a course around the default hazards dotting the high yield landscape.

"If you look at the S&P and the NASDAQ they're both down year-to-date," Keefe said. "So where is the money going to go?

"If interest rates stay flat or are heading up that means that the other bond markets aren't going to do so well going forward. And the stock markets can't shake off the weak earnings, the high multiples, and the terrorist threats that affect stocks, which are at the bottom of the capital structure.

"So junk is well positioned relative to the other asset classes.

"If you can just clip your coupon this year and not get tagged with the defaults you will be alright," Keefe added.

Keefe, whose Pax World High Yield Fund submits credits to social-issues screens, did not get involved in either Trump or Venetian, the only two triple-hook deals to appear in the high yield primary in recent days.

She told Prospect News that she has taken a close look at Roundy's Supermarkets' $200 million of 10-year notes (B2/B), via Bear Stearns and finds the deal, slated to price on Thursday, to be of interest.

"I'm buying Roundy's," Keefe stated. "The leverage is pretty low. They've got a growing retail supermarket business. They're going to expand their organic business. They seem to be solid operating managers.

"They say they lose some market share to Walmart or Jewel stores, about six months after those stores open but they regain it. They are number one in their markets."

Keefe added that another plus is the club card concept that Roundy's Supermarkets uses, wherein customers scan a card at the checkout and receive discounts.

"We also like it is because it's a combination of supermarket and wholesaler," the Pax Fund portfolio manager said. "They get the margin associated with a distribution business too. And they're less levered than Fleming, and they don't have Kmart risk.

"We sold our Fleming as a result of the whole Kmart affair," she added. "Fleming has actually done a great job of shrugging off the demise of Kmart but we just didn't think it was worth it to take the risk. I think the Fleming senior bonds are trading at 105.5 or something and the leverage is over five times. Leverage on Roundy's is in the fours."

Besides Roundy's, the primary market expects terms to emerge Thursday on TriMas Corp.'s $250 million of 10-year senior subordinated notes (B3/B). The official price talk is for a yield in the 10¼% area, a syndicate source informed Prospect News Tuesday morning. Credit Suisse First Boston, JP Morgan and Wachovia Securities are joint books.

Also in primary action Wednesday, a market source said Tyumen Oil withdrew its previously priced deal ahead of settlement. The Russian petroleum company had priced $500 million of senior unsecured loan participation notes due May 23, 2007 on May 15 to yield 10%.

When the new Venetian Casino bonds were cleared for secondary trading, "they broke well," a trader said, pushing up to bid levels around 102.25 from their par issue price. The Sybron Dental bonds rose from par to 100.75 bid/101.25 offered.

Back among already established issues, "it was all telecoms, WorldCom, Qwest and Adelphia," a trader said, although Adelphia was the only issue in which he saw any real movement. He pegged most Adelphia bonds up at least three or four points on the session and saw its 10¼% notes due 2006 up even more, rising to 78 bid/79 offered from prior levels at 73 bid/74 offered.

"That's how it is, just going back and forth until the next news comes out, then the pressure will be to the downward side," he said, adding that activity in the beleaguered Coudersport, Pa.-based No. 6 U.S. cable TV systems operator was brisk. "The big dealers are swamped with that stuff. Some of them are trading $350 million to $400 million a day."

Another trader said "Adelphia and WorldCom were the bulk of [the day's activity], but it was pretty uneventful," with overall levels of market activity starting to dwindle ahead of Friday's abbreviated pre-holiday session and the Banc of America Securities conference in Las Vegas continuing to occupy the attentions of many buysiders.

He saw "no real followthrough" in WorldCom bonds on Tuesday's news that WorldCom will drop its MCI long distance unit tracking stock, at an annual dividend payment saving of $284 million, even though that caused the stock of the parent unit data and Internet unit to rise 23 cents (16.20%) to $1.65 in very busy Nasdaq trading of 193 million shares, almost triple the norm. The trader quoted WorldCom's benchmark 7½% notes due 2011 unchanged at 46.5 bid/47.5 offered.

Adelphia, meanwhile, "saw a little more action. Right off the bat," he said, Adelphia's 10¼% notes due 2011 traded at 79 bid, up around five points. "Then it did recede a little bit," he said, to end at 78 bid/79 offered, up about four points. "They traded in a five-point range, with the bulk of the activity in the 10 1/4s."

At another desk, Adelphia's 10 7/8% notes due 2010 were up three points on the day at 77.25 bid. Its 9 7/8% notes due 2007, and the 8 7/8% notes due 2007 issued by Adelphia's Arahova Communications Inc. subsidiary were also up three points, at 73 bid and 77 bid, respectively.

Adelphia - whose shares and bonds started to head south in late March, following the disclosure of $2.3 billion of previously hidden off-balance-sheet obligations related to loans extended to partnerships controlled by the family of company founder John J. Rigas - appeared to gain some strength on news reports that the Rigas clan may be near an agreement with the company to give up its controlling position on Adelphia's board and transfer some assets to help offset the $2.3 billion obligations stemming from the off-balance-sheet loans. The Rigas family currently controls five seats on the nine-member board, although the company is reportedly actually being pretty-much run on a day-to-day basis by its recently established special board committee of outside directors, following John Rigas' resignation last week as chairman and chief executive officer and the subsequent resignation of his son, Timothy Rigas, as chief financial officer.

There were also news reports that Adelphia - believed to be strapped for cash - may be close to a deal with lenders to restructure about $8 billion of its $14 billion of debt ($16.3 billion, counting the off-balance-sheet obligations) and to open new lines of credit. However, any such deals are expected to be contingent on the Rigas family yielding control of the company and agreeing to transfer assets back to Adelphia. The company's cash shortage was blamed for its decision last week to not make more than $40 million in interest payments due on May 15, and to instead invoke the 30-day grace period contained in its bonds' indentures. The Wall Street Journal reported that Adelphia is looking to line up about $1 billion of short-term bridge financing to see it through its current liquidity needs, and is also in discussions with several financial and strategic investors, including several leveraged buyout firms and other cable companies.

Also in the communications area, Qwest Communications International's unsecured bonds were cut by Standard & Poor's, from a formerly investment-grade BBB- to a junk level BB.

The ratings agency said that the downgrade of the Denver-based telecom operator's debt "reflects Standard & Poor's assessment that the company's risk profile has increased in the past several quarters, making visibility for performance in 2002 and beyond much more limited."

S&P said that continued weakness in the overall economy and "ongoing competitive threats are expected to pressure both the near-term and longer-term financial and operating performance of the company. Moreover, certain key external factors could constrain Qwest's ability to restore investor confidence and reestablish management credibility," including a series of pending shareholder lawsuits, and a Securities and Exchange Commission probe of several accounting practices.

The downgrade came across the tape late in the day, much too late to affect Wednesday's dealings. But it was hardly a surprise, given the overall weakness in the telecom business, which has spread in recent months from the junk-bond precincts to formerly well-regarded investment-grade names including Qwest and, before its recent downgrade to junk, WorldCom. Indeed, rumors had made the rounds of some quarters of the market on Tuesday that Qwest either had already been downgraded or shortly would be downgraded to junk. That particular bit of scuttlebutt, oddly, focused not on S&P but on Moody's Investors Service (which continues to rate Quest's bonds at Baa3), and thus proved to be both premature in spirit and factually wrong.

On the strength of such speculation that Qwest would be downgraded, even before the S&P downgrade came out, its 7¼% notes due 2011 traded lower Wednesday, falling to 72.5 bid/73.5 offered, down about five points from recent levels. However, other Qwest debt was not seen affected; in fact, its 7¾% notes due 2031 actually firmed slightly to 72. A market observer opined that "[Thursday's] market would show a real kick" from the downgrade news. It's almost guaranteed that this is going to be colored dramatically [Thursday]. You're going to see a further plummeting of Qwest bonds."

It was considered almost a certainty that Qwest will see further selling on Thursday, as some investment-grade portfolios require that any bonds held continue to carry high grade ratings from both major agencies.

Also on the receiving end of a downgrade Wednesday was Nextel Communications Inc., whose bonds were dropped two notches, to B3 from B1 previously, by Moody's. The ratings agency said that its action "reflects Moody's revised opinion of the company's creditworthiness in the face of a wireless marketplace that is growing more slowly than anticipated and likely to become even more competitive as the six large national wireless carriers look to take or at least defend their market shares, combined with the company's reduced financial flexibility as its cash debt service requirements materially increase in the coming years."

Moody's further cautioned that the ratings also reflect "the uncertainty regarding Nextel's ability to compete over the long term against larger companies that have investment grade balance sheets, and utilize more traditional technologies and spectrum."

The Reston, Va.-based wireless carrier's benchmark 9 3/8% notes due 2009, which had closed on Wednesday at 67.5 bid/68 offered, "immediately after the downgrade" traded as low as 64 bid, a trader said, before climbing partly out of that hole to end the day at 66 bid/67 offered, up two points from their session low, but still a point-and-a-half down on the downgrade news.

Outside of the communications area, Trump Hotels & Casino Resorts Inc. was the beneficiary of ratings agency action, as S&P upped the Atlantic City, N.J.-based gaming company's bonds to CCC from CC previously, citing the company's recent payment of interest on its 15½% notes due 2006 and its Trump Atlantic City Associates' 11¼% first mortgage notes due 2006. S&P also took note of the " positive operating momentum at the [company's] Indiana riverboat, whose cash flow primarily services this obligation" (the 15½% notes), its plans to refinance Trump's Castle Associates' 11¾% notes due 2003, as well as "the expectation that the company will continue to meet debt service obligations given improved operating performance by [Trump A.C.'s] two properties, Trump Taj Mahal and Trump Plaza."

The Trump A.C. bonds, recently seen as high as 81 bid before falling into the mid-70s following the company's cancellation of its planned $470 million two-part offering of new bonds, were seen up two points at 78 bid, while the Castle bonds - which were to have been taken out with a portion of the proceeds from the new bonds - were a point better, at 86.

CMS Energy Corp.'s paper was seen solidly higher, which one market watcher called "surprising, since I didn't see anything that it would cause it to go up." If anything, recent news about the company has been negative, with CMS admitting that $4.4 billion - most of the electricity trading revenues it booked for the previous two years - was due to bogus "round-trip" trades with other producers, which bring no economic benefit to either party but which artificially inflate their trading volume statistics.

The source quoted the Dearborn, Mich.-based independent power producer's 8.90% notes "significantly" higher at 101.5 bid/102.5 offered, versus their recent levels at 97.5 bid. Its 9 7/8% notes due 2007 jumped to 101.5 bid from prior levels in the mid-90s. Elsewhere, CMS's 7½% notes due 2009 were seen almost four points higher at 90.5 bid.

On the downside, Gap Inc.'s 6.90% notes due 2007 lost two points to close at 89 bid/91, following the surprise announcement late Tuesday that Millard Drexler would resign as president and CEO of the San Francisco-based apparel retailer. The company's shares likewise fell $2.45 (15.31%) in active New York Stock Exchange dealings, to $13.55.

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