Paramount Resources prices upsized deal; Lucent up after earnings; Tenet falls on company warning

By Paul Deckelman and Paul A. Harris

New York, Oct. 22 - Paramount Resources Ltd. sold an upsized issue of $175 million seven-year notes Wednesday in the only new deal of a relatively quiet new issue session, high yield market sources said.

In the secondary arena, bonds and shares of Lucent Technologies Inc. firmed after the Murray Hill, N.J.-based telecommunications equipment manufacturer reported its first quarterly profit in three years.

Favorable earnings were also the driver behind a gain in American Airlines corporate parent AMR Corp.'s bonds. On the downside, Tenet Healthcare Corp. bonds slid after the Santa-Barbara, Calif.-based hospital operator warned that third-quarter earnings would come in well below both analysts' consensus expectations and its own prior guidance, and warned that it is likely to violate a credit-line covenant.

Calgary, Alberta natural gas company Paramount Resources upsized its new seven-year notes issue (B2/B) to $175 from $150 million, and priced the paper at par to yield 7 7/8%. The deal, with UBS Investment Bank leading, came at the tight end of the 7 7/8%-8 1/8% price talk.

Meanwhile price talk of 8%-8¼% was heard on Genesis HealthCare Corp.'s upcoming $200 million of 10-year senior subordinated notes (B3/B-). Lehman Brothers, Credit Suisse First Boston and UBS Investment Bank are running the books for the offering from the Kennett Square, Pa. provider of healthcare services to the elderly, which is expected to price on Thursday.

And price talk is 9¾%-10% on Keystone Automotive Operations, Inc.'s planned $175 million of 10-year senior subordinated notes (B3/B-), also expected to price on Thursday via Banc of America Securities and UBS Investment Bank.

Although no roadshow starts were announced during the midweek session a source told Prospect News that Pittsburgh, Pa.-based General Nutrition Cos., Inc. was preparing to attempt to pep up the accounts with a new offering of as yet-unspecified size and maturity.

The vitamin company will also obtain a new credit facility. Lehman Brothers and JP Morgan are heard to be leading both bonds and bank loan, with proceeds slated to help support the LBO by Apollo Management LP from Royal Numico NV.

With no roadshow starts announced Wednesday, one market source pointed to last Monday's pricing of a drive-by deal from Hovnanian Enterprises Inc., which sold an upsized issue of $215 million of 6½% senior notes due 2014 (Ba2/BB) at par.

"Anybody big and on the run like Hovnanian can price $500 million-plus quickly and easily, in this market," said the source. "And they can expect to price it fairly tight."

One senior sell-side official who has lately been crunching funds flows numbers based on information published by AMG Data Services told Prospect News on Wednesday that, although it still has some way yet to run, 2003 has already seen a record amount of cash flow into the asset class.

The source gave a year-to-date (through Oct. 15) figure of $23.8 billion of inflows based on information that was supplied by funds that report to AMG on a monthly rather than a weekly basis.

By comparison, previous years saw:

* $11.5 billion in 2002;

* $9.8 billion in 2001;

* $10.5 billion outflow in 2000;

* $1 billion in 1999;

* $15.5 billion in 1998;

* $18.6 billion in 1997;

* $13.4 billion in 1996.

"Certainly we have a record year, here, with time still remaining," the official commented.

When Prospect News asked this sell-sider whether cash could be expected to continue to flow in with such momentum in 2004, the official said that such an expectation would be a lofty one, indeed.

"I'm not that aggressive of a thinker to speculate that 2004 will top 2003, because this has been such a remarkable year," said the official.

"With merger and acquisition activity having been relatively low over the past couple of years, what we have seen during that time is a slug of refinancings.

"In 2004 1999-vintage paper will be hitting its five-year call period. So you will still probably have some refinancing going on. We have been speaking to several companies which have higher-coupon debt about potential strategies for calling next year. So you will still have refinancings going on.

"But I think the challenge of 2004, not just in high yield but in all fixed-income markets, will hinge on the question 'How much more debt is there left to refinance?'

"If M&A activity shows signs of improving then I can see substantial liquidity continuing to come into the market to finance them," concluded the sell-sider. "In that case investors will see the asset class as continuing to be vibrant."

The official projects that the high yield market in 2004 should be able to sustain new issue volume of somewhere between $75 billion and $100 billion.

Year-to-date issuance for 2003 is $109.3 billion, according to Prospect News data.

One X-factor, the source cautioned, is the possible change in the interest rate scenario. With the Federal Reserve now holding rates at their lowest levels since Eisenhower was president, fixed income remains in the limelight.

But that could change.

"You can paint scenarios in which people fall out of love with fixed income," said the official. "However, you've got a lot of insurance companies and pension funds, aside from the mutual funds, that continue to invest in the asset class because they need incremental yield wherever they can get it. And so they will continue to allocate dollars to high yield. That should help to keep things going.

"But how will the average investor feel if he sees his quarterly statement and his asset values have gone down? That could be some real sticker shock.

"It all depends on the magnitude of the move in interest rates. If they move up less than 100 basis points it shouldn't have much of an impact. If there is more than a 100 basis point move that could start to have an impact."

When the new Paramount Resources 7 5/8% senior notes due 2010 were freed for secondary trading, they firmed slightly to around 100.5 bid from their par issue price before easing from that peak level to end around 100.375 bid, 100.625 offered.

But the new 12% senior notes due 2010 issued Tuesday by Inn of the Mountain Gods Resort & Casino remained around the same lofty 104 bid, 105 offered level to which they had moved after pricing earlier Tuesday at par.

Also in that gaming sector, Las Vegas gaming operator Mandalay Resort Group's 7 5/8% notes due 2013 were quoted up nearly a point on the day at 104.75, while a trader saw Trump Atlantic City Funding's 11¼% first mortgage bonds due 2006 "doing better despite the bad news out of Atlantic City," referring to last week's monthly win data from the New Jersey Casino Control Commission showing that established Atlantic City operators, including Trump A.C.'s corporate parent, Trump Hotels & Casino Resorts Inc., showed a 12% drop in gross revenues in September, with most of that being siphoned off to the glitzy new Borgata mega-resort that Boyd Gaming Corp. and MGM Mirage opened in Atlantic City in July.

The trader quoted the A.C's at 76.25 bid, 77.25 offered, up marginally from Tuesday's 76 bid, 77 offered but solidly improved from lows around 73 bid, 74 offered seen last week in the immediate wake of the Casino Control Commission report. "They're still moving up in the face of that," he said.

But one of the biggest winners Wednesday was Lucent, whose benchmark 7¼% notes due 2006 were nearly a point better at 98 bid, while its 6.45% bonds due 2029 were quoted having risen to 72.5 from prior levels at 70.75.

At another desk, a trader declared that Lucent had indeed "done very well" on the day, and saw an even more pronounced move upward in the company's longer-term bonds, which he saw up two points at 73.5 bid, 74.5 offered.

Lucent shares, meantime, jumped 33 cents (13.47%) to $2.78, on very busy New York Stock Exchange dealings of 210.8 million shares, about five times the average daily turnover.

Lucent boomed after it reported that in the fiscal fourth quarter ended Sept. 30, it earned $99 million (two cents a share), an improvement from its fiscal third-quarter loss of $254 million (seven cents a share), and a very sharp turnaround from its year-earlier loss of $2.81 billion (84 cents a share).

Even excluding one-time gains and losses, Lucent managed to break even on a per-share basis in the latest quarter, beating Wall Street's expectations that it would lose four cents a share, excluding the special items.

Looking ahead, Lucent said that its restructuring effort - which saw a bloated 100,000-plus work force slashed to about one-third of its original size - had essentially been completed.

And it said that with the telecom industry to which it sells networking equipment appearing to show signs of finally stabilizing after a severe shakeout over the past two or three years, and with Lucent moving to broaden its sales in areas like services, government contracts and sales to telecom operators outside the U.S., chairman and chief executive officer Patricia Russo predicted the company would likely return to "sustained profitability" some time in 2004.

"While I have learned not to call a bottom, the worst seems to be behind us," Russo said on the company's earnings conference call.

Noting the quarter was the first profitable one since March 2000, Russo added that the results were the achievement not of one quarter but several quarters work by Lucent.

Also on the earnings front, airline issues - which have recently shown renewed strength on the wings of profitable earnings reports from the like of Northwest Airlines Corp. and Continental Airlines Inc., and a smaller-than-expected quarterly loss by Delta Air Lines Inc. - continued to gain altitude Wednesday, driven skyward by AMR's report that it had net earnings of $1 million in the third quarter - not a lot of money for a corporation worth billions of dollars, but certainly an improvement over the $924 million net loss ($5.93 a share) it showed in the year-ago quarter. AMR boasted operating earnings of $165 million in the latest quarter, versus a $1.3 billion operating loss a year ago.

Excluding government payments and certain other unusual items, the Fort Worth, Texas-based Number-One U.S. airline company reported operating earnings of $141 million and a net loss, ex-items of $23 million, or 15 cents a share - still better than the comparable year-earlier net loss of $741 million ($4.76 a share).

AMR, in its news release announcing the figures, hailed the success so far of its turnaround plan - although its executives, such as president and chief executive officer Gerald Arpey, said on a conference call that there was still much cost-cutting ahead of the airline. They cautioned that business travel traffic remained soft even in the third quarter - historically the strongest period of the year for the airline industry - and warned that a more difficult financial environment lay ahead in the coming months due to a seasonal decrease in travel.

But AMR also said that it had $3.3 billion in cash and short-term investments easily convertible to cash on hand at the end of the quarter - a cushion which should help it ride out any rocky times.

While AMR shareholders chose to see the half-empty glass, taking the company's stock down $1.24 (8.32%) to $13.66 on NYSE volume of 14.7 million shares, more than double the norm, bondholders seemed more sanguine, perhaps encouraged by Standard & Poor's revision of the company's outlook to stable from negative previously. The ratings agency, which rates AMR's bonds B- , cited its "dramatically better" net earnings versus a year ago, and "much improved" operating results and increased liquidity.

AMR's 9% notes due 2012 were quoted late in the day around 82.75 bid.83.75 offered.

A trader called the AMR bonds "definitely stronger," and said that this was helping other airline issues as well. For instance, he said, Delta's 6.65% notes due 2004 were at 99 bid, par offered, and "people were looking for it."

Another trader saw Delta's 7.70% notes due 2005 a point better at 93.5 bid, 94.5 and Continental's 8% notes due 2005 holding steady around 96 bid, 97 offered. Northwest's 7 7/8% notes due 2006 were nearly a point better at 81.75.

Back on solid ground, Werner Holding Co. Inc. - whose 10% senior subordinated notes due 2007 had tumbled from levels above par down to the lower 60s in a span of two days in the wake of Friday's announcement by the Greenville, Pa.-based steel ladder manufacturer that its biggest customer, Home Depot, will stop purchasing stepladders from Werner and is also reviewing its purchases of extension ladders - was able to climb up a rung or two from Tuesday's lows to around the 74 bid, 75 offered level.

The company's bank debt was also heard to have rebounded to 94 from Tuesday's 91, apparently on speculation that the situation might not be so bad for Werner, since it still supplies 100% of Home Depot competitor Lowe's metal ladders - and Lowe's might take some market share from Home Depot if the latter home improvement products retail chain cuts out the Werner ladders, extension and step, altogether.

On the downside, hospital operator Tenet Healthcare bonds initially swooned after the company warned that its earnings would come in well below levels analysts have been looking for and its own prior guidance, dragged down by bad debts racked up by uninsured patients - although it declined to actually predict whether it will show a loss for the third quarter.

Tenet had previously forecast per-share earnings from continuing operations of 40 cents to 50 cents for the second half of 2003, or 80 cents to $1 for the 12 months ending June 2004.

And the company cautioned that it likely to violate a debt-to-EBITDA condition of its $1.5 billion credit line, although it is in compliance on its other financial covenants.

Tenet's 7 3/8% notes due 2013, which had been recently trading around 101 bid, 102 offered, dropped as low as 95 bid after its announcement, although by the end of the session, it had recovered some of its lost ground, to close at 98.75 bid, 99.75 offered. Its 5% notes due 2007, which had been trading above 96 bid, fell to 94 bid, 96 offered by day's end, although this too was several points above the intraday low.

Tenet's NYSE -traded shares plummeted $1.82 (11.82%) to $13.58, on volume of nearly 15.5 million shares, about five times the usual turnover.

Mediacom LLC's bonds were off for a second consecutive session; its 9½% notes due 2013, which had lost more than a point on Tuesday, were down another two points on Wednesday to close at 94. There was no fresh negative news seen out on the Middletown, N.Y.-based cable operator to explain the erosion, market participants said.

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