Telecoms up but Level 3 still at low end of tender range; Polaroid off

By Paul A. Harris and Peter Heap

New York, Oct. 10 - Telecommunications names and Polaroid Corp. provided the main interest in a quiet session in both secondary trading and new issues for the high-yield bond market Wednesday.

Telecom issues generally managed gains of about a point or so, drifting higher after the big losses in recent weeks. But a revision to Level 3 Communications, Inc.'s offer to buy back its debt failed to spark much reaction.

Polaroid Corp.'s bonds were sharply lower even thought they have little further to fall after the Wall Street Journal reported that the company could file for Chapter 11 bankruptcy protection. The newspaper said the action could have been as soon as Wednesday although by late in the day there was no announcement.

Meanwhile the primary market seemed to have drifted into the horse latitudes, with all hands eyeing the sheets and shrouds, looking for a trace of wind that might bring a whisper of momentum.

Although there is talk about the high-yield market looking attractive at current levels and syndicate officials have been hoping for some more activity after three deals priced last week, the uncertainty that has kept many players on the sidelines appeared to be continuing.

One trader characterized the session as "exceedingly quiet."

But he added there was one positive aspect to what activity did take place: "The majority of trading was dealer to customer, which was good" since it indicates real investor interest.

Telecom was the center of most attention, with credits rising modestly after the huge recent declines, paralleling a rise in equity prices.

Level 3 Communications, Inc.'s debt was slightly higher. Its 11% notes were quoted at 35.5 bid, 0.5 to 0.75 point better on the session, while its 9 1/8% notes were seen by one trader at 35, up a point and at 33.5 bid, up two points by a second.

Level 3 amended its dutch auction tender for its debt Tuesday, raising the total it is prepared to buy to $2.86 billion principal amount from $1.5 billion previously and reducing the price ranges at which it is taking offers.

However, even with these modest gains, the notes are still trading near or below the minimum level at which the company is offering to buy them.

For example, the price range at which Level 3 will accept offers for the 11% notes is 38 to 48 while it is accepting the 9 1/8s at 35 to 45.

One trader noted the tender has failed to put a floor under the debt - even though the company is offering "a ton of money" in the whole operation.

Elsewhere in telecom, Metromedia Fiber Network, Inc.'s two series of 10% notes gained a point - the 2008 and 2009 maturities are currently trading on top of each other - going home at 23, one trader said.

Nextel's 9 3/8s added around a point, he said, with a block trading late in the day at 65 and 65.5.

However one trader noted that the lack of conviction in the market was illustrated by the airline sector. After rallying last week, these bonds have done little since and were "virtually dead" on Wednesday.

On the downside, Polaroid's debt fell even though the company's bonds were already trading at highly distressed levels and quoted flat, that is, without accrued interest.

Quotes varied, but one trader had the debt down six or seven points to six bid, eight offer, while another saw them at four bid, seven offer, down about two points on the offer side and four points on the bid side - although he scoffed at the possibility anyone would actually want to buy these securities.

Prices this low indicate little expectation that bondholders will receive much through the Chapter 11 process.

"I think the market is thinking the banks are going to get paid and the bondholders won't - and if the bondholders do get anything it's pennies on the dollar," the trader said.

"We have had a lot of customers asking, 'What should we do with these bonds?' Our answer is 'Sell 'em.'"

In the new issue area, this week's total of one new pricing announced remained unchanged even though three pricings in the week of Oct. 1 - Terra, Fleming and Luscar Coal - prompted some spirited talk among bankers that the market appeared to be getting underway after the arid month of September. That one deal is Alaris Medical Systems' $150 million of senior secured notes via UBS Warburg and Bear Stearns & Co., scheduled to price Thursday afternoon.

One syndicate official admitted that high-quality issuers could possibly be finding more advantageous financing elsewhere than using junk bonds to raise capital.

"The problem is that some of those issuers have gone for other forms - mainly the bank," the source said. "As the yield curve has steepened significantly, it has made bank debt more attractive, versus longer-term fixed rate debt.

"That's a challenge we're confronting: clients are just choosing to ride on the short end of the curve right now, and benefit from these lower rates."

The syndicate official noted a preponderance of higher quality credits in the primary market of 2001. And for those companies not desperate for capital, he said, time is an ally.

"Double-B's have been over 50% of new issuance this year," the source commented. "Typically that's only 25% of the new issuance. To a certain extent the double-B guys are going to say 'Why is the market so great? Why am I going to come now?'

"But I think the smart ones are coming now," the source said, adding: "Unfortunately I don't know of anyone out there, right now, waiting to jump in."

End

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