Qwest bonds gyrate on Buffett buzz; Mothers Work sells 8-year bonds

By Paul Deckelman and Paul A. Harris

New York, July 31 - A news report that legendary billionaire investor Warren E. Buffett was buying bonds of the distressed high yield telecommunications operator Qwest Communications International Inc. pushed those bonds up Wednesday, although the gains were small and, according to some market participants, short-lived. Williams Cos. bonds were heard to have popped up on news the energy provider is in talks on a $1 billion secured bank loan and had made a debt payment which came due.

In the primary market, Mothers Work priced a $125 million offering of eight-year bonds.

Among already outstanding issues, Qwest debt got a boost when CNBC reported shortly after 1 p.m. ET that Warren Buffet might be buying the bonds.

CNBC Correspondent David Faber, who specializes in running down market rumors and digging around for scoops, reported that Buffett "may well have spent a great deal more money in recent weeks" than he spent on his recent investment in Level 3 Communications Inc. in buying Qwest bonds.

Faber acknowledged that while Buffet had not returned any calls to confirm the market talk, "sources within the distressed debt community say that Buffett has been for weeks a size buyer of both the operating company and holding company bonds of Qwest."

That caused a frenzy of buying in Qwest stock, which jumped from around the $1.20 level to as high as $1.60 in New York Stock Exchange dealings, before sinking back to end the session at $1.28 - actually down a penny (0.78%). Volume of 34 million shares was more than double the usual.

The Buffett speculation helped to push Qwest's bonds "up a couple of points," a trader said, quoting 7¼% notes due 2011 as having risen to about 40 bid/42 offered from prior levels around 38 bid/39 offered.

But another trader, when informed that CNBC had reported on the possible buying by Buffett, quipped "when the price changes, let me know." He saw the Qwest operating company's long-dated 7¼% bonds due 2025 holding within "the same 67.5 bid/68.5 offered range" the bonds had recently held and its 6 1/8% operating company notes due 2005 likewise unchanged around 77 bid/79 offered. The Denver-based telecommer's holding company paper (which trades at a considerable discount to the operating company paper because it is further removed from the company's assets and thus potentially worth considerably less in any restructuring scenario), "did not change one iota. It really did not have the same effect as what he did with Level 3," whose bonds and shares both appreciated handsomely on news that Buffett was investing $100 million in the company as part of a total $500 million cash infusion with two other investors. "Level 3's bonds shot up 10 or 15 points - but that didn't happen" with Qwest on Wednesday, he said.

At yet another desk, Qwest debt was actually seen off about a half a point, its operating company 7 5/8% notes due 2003 quoted at 83 bid.

Qwest "was up a little, and then it settled back down," said a trader at a distressed-debt house, who quoted the short-dated operating company paper around 85 bid/87 offered and saw the 7¼% bonds at 38.5 bid/40.5 offered.

Should the CNBC story prove to be true, it might serve to explain the rise in Qwest bonds seen in mid-July, even as the company struggled with ratings downgrades and investigations into its accounting by the Securities and Exchange Commission and federal prosecutors. At the time, market players were under the impression that the company's debt was going up mostly because it had been so badly beaten down on the accounting concerns and investor unease over Qwest's big debt load and the overall slowing of the telecom industry.

If Buffett turns out to be the buyer of some of that Qwest debt, it could prove to be a lucrative win-win situation for the canny market guru considered "the Oracle of Omaha" for his savvy stock picks. Should Qwest's new management, under the leadership of recently installed CEO Richard Notebaert, manage to appease federal regulators (Qwest announced this past week that it had improperly accounted for about $1.1 billion in revenues in 1999, 2000 and 2001 and would have to restate its results for those years by as yet-unspecified amounts), complete the sale of QwestDex, its yellow pages unit, and manage to then turn the company around, those bonds, now deeply discounted, could move back up towards par, producing a handsome reward for Buffett.

On the other hand, should Qwest go into bankruptcy, as many other troubled telecom companies have ultimately done (even though management has stoutly asserted it has no such plans to do so), Buffett, as a big bondholder, would be in a good position to pick up a sizable chunk of the restructured company's equity when it would emerge - essentially debt-free - from Chapter 11.

"If he's already bought the paper and there's news out that he's bought it or buying it, it'll move up - and that's a win situation for him too," a trader noted.

Up until July, Buffett had been known for having scrupulously avoided investing in telecommunications and other high-tech companies, most of which crashed and burned after their brief, but exciting rise to the top of the investment world. But he made an exception with Level 3, and may have made another with Qwest, assuming the news report is true. But unlike Level 3, which is relatively financially healthy for a telecom company, Qwest faces a raft of problems - although Buffett has also dabbled in distressed companies here and there, helping Finova Capital emerge from bankruptcy several years ago.

Elsewhere in the telecom sector, Level 3's benchmark 9 1/8% senior notes due 2008 were heard two points better, at 61 bid, while Nextel Communications Inc.'s 9 3/8% senior notes due 2009 were three points better, at 66 bid.

And Charter Communications Inc. bonds remained firm, helped by speculation earlier in the week that cable company's billionaire founder and principal owner, Microsoft Corp. Co-founder Paul Allen, might either take it private, but a big chunk of its debt or both. Charter's benchmark 8 5/8% notes due 2009, which had shot up on Monday and which had continued rising on Tuesday to around the 61 bid/62 offered level, were heard quoted as high as 64 bid on Wednesday, although a trader said the St. Louis-based cable giant's bonds ultimately "gave it all back" to end essentially unchanged.

Williams Cos. bonds were seen by one market observer to have risen about eight points, to the 48 bid area, on news that the Tulsa, Okla.-based pipeline operator and energy trader was in talks with Lehman Brothers on a secured $1 billion bank loan. Dow Jones quoted people familiar with the discussions as saying the talks were in the preliminary stages. The news service also said that Williams also intends to issue about $500 million in preferred stock as part of the new financing deal.

Stock and bond investors have been on pins and needles over the past week or so, after Williams failed to renew a $2 billion unsecured bank facility and said it would work on getting a new $1 billion secured facility.

Williams was also reported Wednesday to have made a $300 million payment on an issue of maturing bond debt.

Williams shares were up 54 cents (22.41%) on Wednesday to end at $2.95 on volume of 35 million, almost six times the usual.

On the downside, Mikohn Gaming Corp.'s 11 7/8% notes due 2008 were seen down 15 points to around the 75 bid level on Tuesday. The Las Vegas-based gaming systems company reported a second-quarter loss of $5.8 million (45 cents per share) versus net income of $1.8 million (16 cents per share) a year earlier.

Meanwhile on the last day of July 2002 the high-yield primary market remained expectedly quiet, according to sell-side sources. Philadelphia maternity wear-maker Mothers Work, Inc. bore $125 million of new eight-year senior notes into the high yield universe. And timing emerged on URS Corp.'s upcoming $250 million of seven-year senior notes, which appear headed for a mid-August pricing.

One sell-side source reiterated what has become something of a "silver-lining" theme that Prospect News has heard from various sell-side officials in the waning days of July: if the combination of sizable consecutive outflows from high yield and volatility in the capital markets had to happen, it's just as well that it happened now.

Not much happens in the high yield new issuance arena this time of year, anyway, according to this official.

"The equity capital market is shut down," this source said. "They think they have one or two deals left for the rest of the summer. Of course they average well over the number of deals that we do. But I think that our market will definitely get hit for a little while. But ultimately I think there are a lot of guys that need to refinance.

"The market's not desperate yet," the source added. "The problem is that people can go out and buy quality paper in the secondary too easily right now, so why go out and pay par for a new issue that isn't necessarily proven?"

This official said that the $1.994 billion that has been reported to have flowed out of the high yield mutual funds over the past seven weeks could conceivably be a cause for concern. Although none of those outflows was history-making in and of itself, the source said, the fact that outflows occurred in succession may have some high yield investors a little "spooked."

"We got hit big time last week," the sell-sider said of the $435 million reported by AMG Data Service to have flowed out of the high yield mutual funds for the week ending July 24. "I'll be interested to see what happens this week."

In Wednesday's primary market activity Mothers Work, Inc. priced $125 million of eight-year senior notes (B3/B+) at 98.719 to yield 11½% via Credit Suisse First Boston. The price talk was for a yield in the 11¼% area. The notes deal came concurrently with an IPO.

A trader said that after having priced earlier in the session at 98.719 the new Mothers Work bonds pushed up to par, although he characterized it as "a small deal, with not much activity." Meantime, the company's outstanding 12 5/8% senior notes due 2005 - which are being tendered for by the company in connection with the new bond issue - were unchanged at par, the same level they've held ever since the company announced the buyback.

Timing emerged Wednesday on URS Corp.'s deal that first appeared on the high-yield radar screen in mid-July. The San Francisco-based engineering and design services provider will start the roadshow Monday on its $250 million of seven-year senior notes (B1/B), via Credit Suisse First Boston. The Rule 144A offering figures to price during the week of Aug. 12.

Finally on Wednesday, price talk of 10¼%-10½% was heard on The Manitowoc Co.'s $175 million of 10-year senior subordinated notes (B2/B+) via Deutsche Bank Securities and Credit Suisse First Boston. It will price Friday, according to syndicate sources.

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