Nextel bonds lower as McCaw hedges his bet; Jefferson Smurfit deal details emerge

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - Nextel Communications Inc. bonds were several points lower in an otherwise generally quiet market Tuesday, reflecting a degree of investor angst over large stockholder Craig O. McCaw's reported hedging of some of his Nextel stock - which some in the market interpreted to mean that the billionaire telecommunications pioneer might not be fully confident of the wireless company's prospects. Elsewhere, news of a new pilot at the controls of United Air Lines parent UAL Corp. did not lift the carrier's battered bonds skyward.

In the primary market, detail emerged about Jefferson Smurfit Group plc's upcoming €900 million bond offering, which will hit the road on Monday.

Nextel shares and bonds have been going like gangbusters recently on expectations of wireless industry consolidation, which has been spurred by news reports of talks involving Deutsche Telekom's VoiceStream Wireless unit and, alternately, AT&T Wireless and Cingular Wireless. Nextel has also been helped by its recent report of its first-ever quarterly profit - a rarity among upstart telecom carriers - and its optimistic projections of anticipated subscriber growth.

But the securities fell back on Tuesday, on the strength of a Wall Street Journal report that McCaw - who owns about 66 million Nextel shares, or 8% of the outstanding amount - has hedged about 19 million of those shares with forward-sale contracts. The Journal said information on the hedging contracts was contained in a July 31 filing with the Securities and Exchange Commission.

The forward-sale contracts, enacted through investment vehicles, limit the potential downside to the investor should the stock's price drop, while also limiting any benefit to be gained. Since April, when McCaw began arranging the forward contracts, Nextel shares have gone from the $5-6 range to as low as $2.50 in early July but have recently climbed back above $7. In Nasdaq trading Tuesday, they were off 37 cents (4.86%) to $7.24 on volume of 31.7 million shares, somewhat more than the usual 24 million-share turnover, with most of the movement attributed to the Journal story. While some analysts said the hedges could reflect McCaw's wariness about Nextel's future prospects, others disagreed, noting that he has not sold any of his shares, even when the going got tough. They also noted that McCaw might merely be exercising caution after having suffered some severe setbacks in the telecom industry meltdown, including the recent bankruptcy filing of another one of his holdings, XO Communications (the former NextLink Communications), which McCaw founded but no longer controls.

Nextel itself issued a statement expressing confidence in its continued relationship with McCaw, who holds the second-largest stake in the company after Motorola Inc.'s 14% position, while a spokesman for McCaw expressed similar sentiments.

On the bond side, a trader said, Nextel had "given back" some of its recent gains, which had pushed its benchmark 9 3/8% notes due 2009 as high as bid levels in the 78-79 region last week; he saw those bonds having fallen back to 74.5 bid/75.5 offered Tuesday; at another desk, the 9 3/8s were pegged at 76 bid, down from 78.5 on Friday, while the Reston, Va.-based wireless carrier's zero-coupon/10.65% notes due 2007 dipped to 81.5 bid from 83 on Friday.

The trader said that in general, "the go-gos gave back" some of their recent advances; besides Nextel, he saw Charter Communications Inc. easier, its 8 5/8% notes due 2009 falling back to 67 bid/68 offered from Friday's levels around 70.5 bid/71.5 offered.

Also on the communications front, a trader saw Qwest Communications International Inc. paper better by about a point across the board, quoting the Denver-based regional Bell operating company's 2011 holding company bonds at 54 bid, with the market otherwise "on the quiet side."

He saw United Air Lines' 10.67% notes due 2004 as having "firmed in the morning and then sold off later on, firming as high as 26 bid from prior levels in the lower 20s before giving up some of those gains to end at 23.5 bid/24.5 offered, after the troubled Number-Two U.S. airline carrier - which has warned that it might be forced into bankruptcy later this year - announced the choice of Glen Tilton as chairman and chief executive officer.

Tilton has no experience running an airline - but he's had considerable experience turning a large troubled company around, having done the job at Texaco Inc. (since absorbed into Chevron Texaco Corp.).

Tilton is generally given high marks for his handling of the transition at Texaco and his ability to gain the confidence of skeptical unions who were fearful of job losses - experience which should stand him in good stead at UAL, which is seeking at least $1.5 billion in employee concessions to which the 55% employee-owned air carrier's powerful unions are so far adamantly opposed. UAL has warned that it will have to consider bankruptcy if it can't win substantial cost concessions from the unions as part of an overall plan to cut expenses by $2.5 billion annually and get $1.8 billion of federal loan guarantees.

The UAL unions are scheduled to meet Wednesday in Chicago to discuss the carrier's situation and their own response to the company's call for further wage and benefit concessions on top of those already contained in recently negotiated labor pacts; Tilton said Tuesday that he has already begun talking with union leaders.

Tilton replaces Jack Creighton, a 70-year-old board member who assumed the top spot last on an interim basis as United reeled from the effects of the Sept. 11 terrorist attacks, which saw two UAL planes among the four seized and destroyed with all aboard. The unions had complained that Creighton was only a stop-gap caretaker and indicated they wanted to wait for his permanent replacement, who is Tilton.

UAL shares were up 7 cents (2.44%) to $2.94 Tuesday.

A distressed-debt trader, however, said "the only thing I saw (in UAL after the Tilton news ) was weakness in its bonds." He quoted the 10.67s as having gone from the mid-20s on Friday to 23 on Tuesday (the financial markets were closed Monday for Labor Day). He noted that those bonds had jumped around recently, falling from levels around 45 bid to as low as 12 after United warned of possible bankruptcy. After that, the bonds had pushed back up to 33 bid, helped by a general rise in airline industry bonds last month after several rival carriers - notably American Airlines and Continental Airlines - announced belt-tightening measures, leading investors to believe that the whole industry would follow suit. The bonds had again declined from those recent highs into the 20s, where they stood at the time of the Tilton announcement.

Another trader saw the bonds unchanged to up ½ point, quoting them still in the low 20s; "the new guy" he said "isn't afraid to put them into Chapter 11 if he has to," a contrast to Creighton, who announced when he took over that he was "not coming aboard to preside over a Chapter 11 filing." Nonetheless, UAL was forced to issue the bankruptcy warning on Creighton's watch. Tilton did not directly address the bankruptcy question in his initial statements, but did not make a defiant Creighton-like pledge either.

A market source saw no discernable impact from the United news on the bonds of other air carriers Tuesday. "Nothing major," he said.

Back on the ground, Aquila Inc.'s bonds were lower after Moody's Investors Service lowered the company's ratings to junk levels, citing poor returns from investments outside the Kansas City, Mo.-based, energy generating company's regulated utility business. Moody's dropped its senior unsecured debt to Ba2 from Baa3. Aquila's 7.95% notes due 2011 dipped to 65 bid and its 7% notes due 2004 ended at 70 bid, both down five points on the session.

In the face of plunging equities the high-yield primary market managed to produce news during its first post-Labor Day session, although when the smoke cleared the forward calendar had grown by a mere $100 million.

Atlanta broadcaster Gray Television, Inc. has a public drive-by deal that it figures to price late in the week. Roadshow starts were heard on the LBO financing for Dublin, Ireland-based packager Jefferson Smurfit. And Ball Corp. said its deal to fund the acquisition of Europe's second-leading can-maker could come in the near future.

Meanwhile, as the abbreviated week of Sept. 2 got underway Tuesday Prospect News heard from Merrill Lynch chief high yield strategist Martin Fridson who said that the record-breaking $1,556.2 million inflow to the high yield mutual funds for the week ending Aug. 28, as reported by AMG Data Services, seems to have derived from "market-timers who are likely to go back out in another few weeks as their technical indicators change."

Stating that the inflow could not be officially attributed to accounts that allow market-timer money (and Fridson pointed out that some certainly do not) the Merrill Lynch chief high yield strategist also told Prospect News that some of the funds that took in money are "identified with market-timers" - and noted there was no fundamental news to justify a sudden influx of capital to high yield funds. (see related story in this issue).

One sell-side source, hearing Fridson's comment that market-timer money was behind the record-breaking inflow to the junk bond funds, pointed to the 355-point plunge in the Dow Jones Industrial Average at the close of the first day back from the Labor Day break and said: "Well they didn't time it too well, did they?"

This sell-side source adopted what could be characterized as a polar bear-posture. Warning that as long as the stock market stays weak "the credit market is going to stay tight, especially high yield." the official added "this thing's going to sell off back to 7500. There's no reason for it to go up. Nothing.

"You can talk to the average Joe - I mean everybody I talk to says 'Why would I buy stocks now? There's too much wrong with the world.'"

Nevertheless, the first of the four working days in the Sept. 2 week did see some primary market activity as Gray Television announced plans to price a $100 million add-on to its 9¼% senior subordinated notes due 2011 (existing: B3/B-) on Thursday or Friday via Wachovia Securities, Inc., Banc of America Securities and Deutsche Bank Securities Inc.

In a Tuesday press release the company announced it would use the proceeds from the registered deal to repay a portion of the borrowings under the senior secured credit facility and for general corporate purposes. And a syndicate source said that Gray is acquiring 15 television stations from Benedek Broadcasting.

The market heard more details Tuesday on the deal from MDP Acquisitions plc to help finance the LBO of Jefferson Smurfit. A syndicate source said that the acquisition by Madison Dearborn Partners will involve €900 million equivalent of 10-year senior notes in dollar, sterling and euro tranches, the sizes of which remain to be determined.

The source added that the deal is set to start its U.S. roadshow on Monday and will go to Europe starting Sept. 16. Deutsche Bank Securities and Merrill Lynch are the joint leads, and other investment banks are expected to join the syndicate.

Finally on Tuesday, Ball Corp.'s manager of investor relations Ann Scott told Prospect News that "the near future" is the appropriate way to characterize the company's timing on approximately $300 million of high yield notes to finance its all-debt €900 million acquisition of Schmalbach-Lubesca AG.

The deal, via Lehman Brothers, Banc of America Securities and Deutsche Banc Securities, will close before the end of the year, Scott said (see related story in this issue).

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