Qwest bonds climb on directory unit deal; Charter off as Moody's revises outlook

By Paul Deckelman and Paul A. Harris

New York, Aug. 20 - Qwest Communications International Inc. bonds were firmer Tuesday after the embattled telecommunications company announced that it had agreed to sell its QwestDex telephone directors unit for $7.05 billion. Wireless issues were also on the upside on news reports that VoiceStream Wireless and Cingular Wireless were holding preliminary merger talks. Charter Communications Inc. debt eased after Moody's Investors Service revised its outlook on the company to negative and Standard & Poor's followed with a two-notch ratings downgrade.

With primary market activity described as essentially shut down for the remainder of August - although some information about future deals emerged Tuesday - secondary dealings were not much busier. "This is a big vacation week for people in our business," a trader declared. "Not a whole lot is really going on."

There was some buzz on the news that Qwest had agreed to sell QwestDex to an alliance of the buyout firms Carlyle Group Inc. and Welsh, Carson, Anderson & Stowe. There had previously been speculation that Qwest might instead sell just a portion of the directories unit to a rival alliance headed by Thomas H. Lee Partners; the thinking was that this sale, covering QwestDex's operations in 10 states where regulators were not expected to raise serious objections to a deal, would be likely to gain regulatory approval and close quickly, giving cash-hungry Qwest fast access to the anticipated $3 billion-plus of proceeds.

By opting instead for the Carlyle/Welsh Carson offer, Qwest, a Denver-based regional Bell operating company, runs the risk that regulators in some of the states which it serves could hold the deal up, although the ultimate $7 billion-plus payout is much, much larger than that offered by the Thomas Lee-led group. The deal is scheduled to close in two stages, with the $2.75 billion first stage, involving the sale of QwestDex operations in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota, expected to close in the fourth quarter. The second phase, which includes Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, is for $4.30 billion and is expected to close in 2003.

Qwest expects to use the proceeds from the sale to partly pay down its $26 billion debt load and for other company funding requirements.

Qwest shares and bonds had been rising over the past several sessions, in anticipation that the company might be nearing a deal to sell the QwestDex unit. Sale of the unit was seen as crucial to Qwest being able to meet its short-term debt needs, including over $4.5 billion maturing next year.

News that agreement had finally been reached shot the company's shares up 71 cents (31.70%) in New York Stock Exchange trading Tuesday, to $2.95. Some 60 million shares changed hands, nearly four times the usual turnover.

On the bond side also, investors seemed to endorse the deal; Qwest Capital Funding's 7¼% notes due 2011, for instance were seen three points higher, at 56 bid.

A trader quoted Qwest operating company paper up about five points across the board, with issues such as its 7.20% bonds due 2026 and 7½% bonds due 2026 having pushed up to around 73 bid/76 offered.

He saw its longer-dated holding company paper, as having been offered 10 points higher, although he said that he hadn't seen any actual trades in those issues.

In the shorter issues, he saw Qwest's 6 7/8% notes due 2005, which had recently been offered in the upper 50s, initially offered at prices in the lower 70s, before dropping back to offered levels in the 63-66 range.

And the trader saw "nothing dramatic" in Qwest's most valuable bonds, the short-dated operating paper, even though the QwestDex deal would seem to provide the company with the funds it can use to repay those bonds when the time comes.

He quoted its 6 3/8% notes due 2002 as having quietly firmed to 95 bid from 92, and its 7 5/8% notes due 2003 hanging in at a 92-94 context, but took pains to point out that "it's not at or near par" - a possible indicator that some in the market are still skeptical about the deal.

Qwest is already under investigation by the Securities and Exchange Commission and federal prosecutors in Denver for alleged accounting irregularities; the sale of QwestDex requires additional regulatory scrutiny in each of the 14 states where Qwest currently operates.

While investors seemed to like the QwestDex news, since it would appear to solve Qwest's short-term liquidity needs, pushing the possibility of a crunch off for another day, analysts were less enthused; they noted that while the cash proceeds would keep the wolves from Qwest's door for a while - by some estimates, perhaps as long as through 2005 - Qwest would be a financially weaker company without the approximately $1 billion of annual revenue it pulls in from Qwest Dex. They also noted that in several of the states in which its phone service operates, Qwest has been subsidizing a portion of consumer rates with revenues from Qwest Dex - and even though the unit has been sold, the company still has the legal obligation to get that money from somewhere else and continue the consumer subsidy.

Elsewhere, news that VoiceStream Wireless has proposed a merger with Cingular Wireless, which could give industry leader Verizon Corp. a run for its money as the largest U.S. wireless carrier if it were to go through, gave a bit of a consolidation sentiment boost to the junk wireless sector, although not to the bonds of VoiceStream, which was acquired last year by Deutsche Telekom.

Traders said they saw no sign of VoiceStream's remaining outstanding bonds, such as its 10¾% notes due 2009, its 11½% notes due 2009 and its 11 7/8% notes due 2009.

High yield benchmark wireless operator Nextel Communications Inc.'s bonds - which have recently been on a strengthening trend anyway - were stronger. Its zero-coupon notes due 2008 were seen a point higher at 67 bid, while its 9 3/8% notes due 2008 were at 71 bid.

Charter Communications bonds were easier, after Moody's lowered its outlook for the company to negative from stable, citing "the growing likelihood that the company's ratings may come under some downward pressure over the forward rating horizon, particularly if the current federal grand jury investigation reveals accounting irregularities of either a magnitude or nature to which we are presently unaware."

Moody's currently rates Charter's bonds at B3. The announcement referred to the recent revelation that a federal grand jury in St. Louis had subpoenaed documents relating to some of Charter's business practices.

S&P, meantime, in cutting Charter's corporate credit to B+ late in the day Tuesday from BB previously, also cited the investigation as well as its concern that "potentially slower cash flow growth may make it difficult for the company to achieve Standard & Poor's expected financial profile improvement."

Charter's 8 5/8% notes due 2009 lost more than three points to close at 56.5 bid, while its 10¾% notes due 2009 were a point lower, at 60. Its shares were off 14 cents (5.98%) to end at $2.20.

Although hard news remained hard to come by in the high yield primary market Tuesday, sources said that the $2.75 billion first stage of financing for the $7.05 billion QwestDex acquisition, from Qwest Communications, will involve substantial new junk issuance which is likely to come in October.

No timing was heard, meanwhile, from Wynn Resorts which furnished more details on its public high-yield offering to finance the $2.4 billion resort and casino known as Le Rêve, "The Dream," on the site of the former Desert Inn, in Las Vegas.

Late in Tuesday's session the market began hearing more about debt financing for the two-stage LBO of the QwestDex yellow pages operation from Qwest Communications.

The size of the deal - which the sponsors claim to be the largest LBO since 1989 - is $7.05 billion. The opening $2.75 billion piece, sources added, will involve a substantial chunk of notes in addition to the credit facility announced in a Tuesday press release. And market sources said that October now appears as a likely time for the first QwestDex deal to show up in the high yield primary market.

The equity sponsors are the Carlyle Group and Welch, Carson, Anderson & Stowe.

Banc of America Securities, Deutsche Banc Securities, JP Morgan, Lehman Brothers and Wachovia Securities are the underwriters (see related story on page one).

In the wake of news of QwestDex, one sell-side source told Prospect News that in the face of the wailing and gnashing of teeth currently heard throughout the capital markets there is reason to be upbeat about the prospects going forward for the high yield.

The reason, this official explained, is that there is a spate of acquisition financing deals out on the horizon. The companies on the selling side of the transactions need the money and they need it sooner than later.

"If you combine Europe and the U.S. it's huge," the official said. "You've got QwestDex. You've got Burger King. You've got Dave & Busters coming back. It's all sponsored stuff, all acquisition finance stuff.

In addition to the above mentioned issuers, this sell-sider said new deals are anticipated from euro-land issuers including Coral Group plc, Brake Brothers plc and Legrand SA.

"It's a pretty heavy calendar if you think about it," the source added, "All single-B stuff and all stuff that needs to close by the end of the year because the guys selling the assets need the money.

"I think it's going to be interesting to see all of it move through the pipe."

Meanwhile Ali Balali, chief of high yield research at Banc of America Securities, pointed to the roughly $2.5 billion that has flowed out of high-yield mutual funds for the past 10 consecutive weeks and told Prospect News that volatility in the capital markets - particularly the equity market - seems to be "sidelining" both the buy- and sell-sides.

"I think the big question is 'Is there liquidity in the market?'

"Are investors willing to step up and extend capital? With 10 straight weeks of outflows surpassing $2 billion people may be a little bit hesitant at this point."

Attributing the volatility to "knee-jerk reactions" on the part of investors (especially equity investors) to trace amounts of negative news, Balali said that this volatility must dissipate in order for the high-yield market to reopen in such a way that issuers can be confident that their deals will get done at reasonable levels.

"As the equity investors beat these companies up, reacting to the slightest amount of news, I think the credit markets react as well," Balali said. "Now you see convergence between the equity and bond markets. They're moving in tandem.

"I don't see a clear end to it next week. People want to see earnings improve. They want to get a better handle on where the economy's going, and I think it's going to take a while - at least until the end of this quarter."

Finally on Tuesday Wynn Las Vegas, LLC/Wynn Las Vegas Capital Corp. registered with the Securities and Exchange Commission its public offering of $350 million of eight-year second mortgage notes, naming Deutsche Bank Securities, Banc of America Securities, Bear Stearns and Dresdner Kleinwort Wasserstein as joint bookrunners.

Proceeds from the notes will be used to design, construct, develop, equip and open Le Rêve ("The Dream"), a $2.4 billion resort and casino, on the site of the former Desert Inn, in Las Vegas.

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