Lucent off on downgrade, probe news; OM Group steadies, Levi gains

By Paul Deckelman and Paul A. Harris

New York, Nov. 1 - The strong recent upturn in the bonds of telecommunications equipment makers Lucent Technologies Inc. and Nortel Networks Corp. ground to a screeching halt on Friday, as the debt of both companies reeled from ratings downgrades. Lucent, meantime, was also impacted by a Wall Street Journal report that the pending federal probe of the company's accounting practices is likely to be a lot wider than Lucent has so far let on, and could reach all the way back into the mid-90s.

Elsewhere, OM Group Inc. - whose bonds and shares had been getting badly kicked around for most of the week, firmed off its lows and actually gained several points. Also on the upside, Levi Strauss & Co. debt continued to firm, aided by the company's announcement that it will soon begin selling its new bargain priced Signature line of jeans at Wal-Mart as well as by the news that it expects to have a refinancing plan for next year's debt maturities in place during the first quarter.

Meanwhile the new Dex East Media bonds continue to entice investors, with traders noting that both tranches pushed above 103 bid on Friday. The $975 million two-part mega-deal had priced at par on Wednesday and then firmed smartly to above the 102 level. On Thursday, they continued to hang in north of 102, and on Friday, the 9 7/8% senior notes due 2009 and the 12 1/8% senior subordinated notes due 2012 were being quoted at 103.25 bid/103.75 offered.

One trader said, however, that while the Dex bonds were indeed at their stratospheric levels Friday, activity was restrained and "not much was happening there."

Lucent bonds were being quoted down as much as five or six points from previous levels, with its benchmark 7¼% notes due 2006 pegged at a wide 46 bid/49 offered at one desk. "There definitely was some fallout" from the bad news there, a trader said.

At another desk, a trader saw the 71/4s down about four points from prior bid levels at 51, and he quoted Lucent's 2029 bonds at 39 bid, down from prior bid levels around 40-42.

Lucent - whose bonds had been steadily falling earlier in the year as the Murray Hill, N.J.-based equipment maker's finances eroded in tandem with the downturn in the whole telecom industry, but had recently been moving up - was downgraded Friday by Moody's Investors Service, which cut the rating on its senior unsecured debt two notches to Caa1 from B2, with a negative outlook, meaning another downgrade is possible.

The ratings agency said that the downgrade "reflects the severity of the decline in Lucent's revenue base, the magnitude of its current and prospective cash burn rate, lack of clarity regarding the nature and timing of a rebound in revenue and the reduced liquidity sources following the cancellation of the $1.5 billion bank facility and $500 million accounts receivable securitization vehicle."

Moody's acknowledged Lucent's status as a leading vendor to the telecom sector, and its for-now relatively strong liquidity position, with a "substantial" $4.4 billion cash cushion in place and a materially reduced cost structure. But the ratings agency said that while it expects telecom spending to "eventually" rebound as wireline traffic, particularly data, and wireless traffic continue to grow, it believes that most wireline and wireless telecom carriers "will continue to cut back on capital expenditures in 2003 to absorb some of the excess capacity and to focus on their own cash flow" - which would be bad news for Lucent. While it said that the company's cash position provides "significant support of the cash burn for at least the next twelve months," Moody's expects that even with the reduced cost structure, the continuing cash consumption will "erode Lucent's formidable cash base to $1 billion. "

On top of that, Lucent is now parrying media reports that its accounting is, or will soon be under broader Securities and Exchange Commission scrutiny. On Thursday, USA Today reported that the SEC, which has been looking at some aspects of Lucent's book keeping, plans to within days send the company a "Wells Notice," which it sends to companies against whom it plans to file civil charges. Lucent said that it had not yet received any such notice from the regulatory agency, and that it had already voluntarily disclosed the accounting practices said to be under investigation a year ago. The financial markets were not much fazed by the USA Today news - but on Friday, the Wall Street Journal said that the troubled company faces a broader probe, covering possible earnings manipulations dating as far back as the mid-1990s.

In December 2000, Lucent, under prodding by the SEC, announced that it would revise the previous quarter's financial results, reducing revenue by $679 million for the three months ended Sept. 30, 2000, and widening its losses by $259 million. Lucent has insisted that this is the extent of its accounting problems.

But citing people close to the ongoing investigation ,the paper reported that the SEC is looking into results before then - and is also trying to determine whether any current or former Lucent board members-including Treasury Secretary Paul O'Neill - may have been aware of any accounting violations at the company as they were going on.

Lucent officials said they had no knowledge of the probe being widened and continued to insist that all of this is old news. This time, though, Wall Street seemed nervous at the prospect that there might be something more to Lucent's problems than has already been disclosed; besides the bonds retreating, Lucent's shares were down 9 cents (7.32%) to $1.14 on New York Stock Exchange volume of 79.7 million shares, nearly double the norm.

Nortel Networks - Lucent's Canadian rival, whose shares and bonds have recently moved more or less in tandem with those of its American neighbor - was also on the receiving end of a Moody's downgrade Friday, as the ratings agency lowered Nortel's senior secured debt rating three notches to B3 from Ba3 previously, with a negative outlook.

Brampton, Ont.-based Nortel suffers from the same negative telecom industry dynamics that have proven to be Lucent's undoing and Moody's cited similar concerns of too-high cash burn rates at a time of too-low sales.

But investors didn't seem overly worried; Nortel's 6 1/8% notes due 2006 were quoted down a point at 47 bid while its shares were off a penny (0.81%) to $1.22 on NYSE volume of 33 million shares, about one-and-a-half times the usual.

Elsewhere, OM Group - whose shares and bonds had been getting crushed ever since Tuesday, when the Cleveland-based specialty chemicals maker reported a big third-quarter loss and warned that prospects did not look good for any improvement in the fourth period - seemed to break out of its three-session slump on Friday.

Its 9¼% notes due 2011 - which had traded in the upper 80s on Monday but which had since careened down to the upper 30s by late Thursday - were seen trading in the mid 40s on Friday. A trader quoted them as having been offered around 40 in the morning - but then as having moved as high as 45 bid near the end of the session. Its NYSE shares - which has swooned a whopping $22, or 70%, on Tuesday and which had continued to lose ground Wednesday and Thursday with smaller -though still double-digit - percentage losses Wednesday and Thursday, seemed to have stabilized Friday, losing just 4 cents (0.62%) to close at $6.45.

Levi Strauss bonds have recently been firming and people have been wondering why, giving all kinds of explanations ranging from CBO buying to optimism that the West Coast dock workers' labor dispute would be settled soon (agreement on one key issue in the dispute was, in fact, announced Friday). They continue to appreciate and now it seems the reason is that by next year the struggling apparel maker expects to have a new refinancing plan in place and expects to be tapping into the huge market for lower-priced jeans via the world's biggest store chain.

As reported in Friday's edition of Prospect News High Yield Daily, the San Francisco-based jeans maker, facing over a billion dollars of debt maturities next year - a $650 million revolver, a $150 million term loan and $350 million of 6.80% notes due in November, 2003 - is in talks with its lenders on refinancing that debt, and it expressed optimism that it would be able to successfully refinance those obligations.

On the operations front, Levi announced late Wednesday that it would begin selling a new lower-priced Signature line of jeans in 4,000 Wal-Mart Corp. stores by next July. Analysts have said that Levi - which has traditionally sold its jeans through more upscale department stores - would have to go to the discount mass marketers with lower-priced merchandise if it is to have any chance of reviving its sales. Six years ago, sales hit $7.1 billion; this year, they will come in at $4 billion. The new jeans will sell for between $23 and $26, versus the usual $30-to-$35 price range for Levi's flagship jeans brand. Besides Wal-Mart, Levis hopes to sell its lower-priced line in other large discounters. Besides jeans, Levis plans to sell corduroy pants shirts and jackets under the Signature label.

Levi's 6.80% notes, which opened the week trading 95.5 bid/96.5 offered, closed on Friday at 97.5 bid, 98.5 offered. Its 11 5/8% notes firmed two points to 97.75 bid/98.75 offered, while its 7% notes were a deuce better at 84.5 bid/85.5 offered.

A trader saw United Air Lines bonds suddenly gain altitude on Friday, its 10.67% notes due 2004 pushing up to 24 bid from 21.5 bid/23 offered, trading flat, or without accrued interest. He cited market talk that the troubled Chicago-based Number-Two U.S. air carrier had made the scheduled Nov. 1 interest payment on those bonds. He also quoted UAL's 9 1/8% notes due 2012 as having improved to 19 bid/23 offered from 15.5 bid/17.5 offered. "The paper caught a bid today," he said

UAL, considered the financially weakest of the Big Five U.S. carriers (the others are American, Delta, Northwest and Continental) has said on a number of occasions since the summer that unless it could get a federal loan guarantee for $2 billion it is seeking to borrow, it would likely be forced into bankruptcy, the way smaller rival US Air Group was earlier this year.

Payment of the bond coupon flies in the face of conventional wisdom that says a company heading for Chapter 11 looks to conserve its cash for the reorganization rather than dole it out to the bondholders.

"Maybe they're trying to see what they're going to get in concessions [from their employees; the airline is asking $5.8 billion in wage cuts over five years], or to see what they can get out of the [federal] loan guarantee board," the trader opined.

But he added, "who knows? I think they're just buying some time. Everyone I've talked to thinks that they still will eventually file."

UAL shares ended Friday up 8 cents (3.53%) to $2.56.

All remained quiet Friday on the primary market scene as no deals priced and none were announced.

Two deals are slated price during the week of Nov. 4, Owens-Brockway Glass Container Inc.'s $300 million of 10-year senior secured notes (B2/BB/BB) via Salomon Smith Barney, Banc of America Securities and Deutsche Bank Securities Inc., a drive-by set to price Tuesday, and Constar International Inc.'s $200 million of 10-year senior subordinated notes (B3/B) via Salomon and Deutsche, which is set to price Thursday.

"I think we've seen roughly $1.4 billion this week if you count the Tyumen Oil deal," one sell-side source told Prospect News on Friday. "Certainly Dex has been the biggest deal since Jefferson Smurfit did that two-part deal back in late September.

"That's definitely a positive event for the market," the source added. "I also think everyone was just waiting to see how Dex cleared the market and it looks like it did reasonably well."

The sell-side official also pointed to the news heard in the market last Thursday that AMG Data Services had reported an inflow to high-yield mutual funds of $683.76 million for the week ending Oct. 30, and said that it likewise bodes well for the junk market.

"The funds flow seems to be temporarily opening the window," the source said. "I think that's why Owens jumped in Thursday with that drive-by.

"We've finished another week with the equity markets up which is very positive for the high-yield market as well," the sell-sider added.

"The traders are seeing some decent support across secondary levels, and certainly the funds flows into the mutual funds help to bolster that.

"I think short of a catastrophic event in the equity markets - certainly everyone's going to be watching the Fed next - we're alright for now."

This sell-side source became the second investment bank official who spoke with Prospect News during the week of Oct. 28 to cast a shadow of doubt on rumored new issuance from Bell Canada, which was said to be poised to follow QwestDex into the market.

"We're not tracking a deal from them right now," the source said.

"We're not sure what the senior sub bridge is going to bridge to. We've heard that there may be a chance that it's not going to bridge to high yield."

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