Centennial jumps on AT&T buyout news; Nortel slides, autos down in shortened session; primary calm

By Paul Deckelman and Paul A. Harris

New York, Nov. 10 - Centennial Communications Corp. shot up smartly on Monday on the news that AT&T has agreed to buy the Wall, N.J.-based rural telephone operator for $944 million. However, NRG Energy Inc.'s bonds were lower as that company said thanks - but no thanks - to an unsolicited takeover bid from Exelon Corp.

Outside of the M&A sphere, Nortel Networks Corp., Clear Channel Communications and Six Flags Inc. were among the credits driven lower by bad quarterly numbers.

Automotive names like General Motors Corp. and the latter's 49% owned GMAC LLC continued to spin their wheels amid mounting market anxiety about whether the once-mighty carmaker(s) will be able to survive in the current depressed market environment.

However, whatever market moves there were came on light volume, as many participants called it a day by mid-afternoon ahead of Tuesday's Veterans Day holiday, with the fixed-income markets slated for an all-day close.

New-deal activity, meantime, remained in limbo.

Market indicators mostly lower

The widely followed CDX High Yield 11 index of junk bond performance, which had edged up by 1/16 point on Friday, gained 3/16 point on Monday, a trader said, quoting it at 80½ bid, 81 offered. The KDP High Yield Daily Index meantime fell by 19 basis points to 54.15, although its yield tightened by 1 bp to 15.6%.

In the broader market, advancing issues trailed decliners by a nearly five-to-three margin. Overall market activity, reflected in dollar volumes, fell about 25% from Friday's pace.

"From a volume standpoint," a trader said, "Tuesday was a non-event - but there were some movers." However, he cautioned that "a lot of firms were on half-staff today, so there was not as much support, or follow-through," as there might otherwise have been, for any of the movers.

"It's like pulling teeth to get anything done," a second trader said, noting that "among the [senior] fixed-income guys, unless you had to be in today, you know the session is going to end earlier, so you put your subordinates in and extend your weekend."

Another trader characterized the market as "very quiet," and despite numerical results Tuesday, "it had a firmer tone in the morning. People are getting a little more comfortable that hopefully banks will lend, and they're looking for [credits] that don't have to come to market. So, that stuff was definitely getting a little more traction."

That having been said, however, he added the caveat that "it's a nervous market - just an overall nervous and defensive market."

Such a situation is not without its advantages - he noted that with the kind of levels at which even the bonds of "good companies" are trading now, "we could look back on this in another year and say that this was the opportunity of a lifetime" to buy good-quality credits on the cheap and at attractive yields. "Everything is 19% or 20%."

But one of the realities of the current market, he continued, was that "a lot of bids are getting cracked - unfairly - because that's the only things the hedge funds could see a bid in when they have to sell."

Adding to pressure on the market is investor uncertainty about just what's safe and profitable to get into now and what's not. "What kind of bonds would you invest in now?" he asked, rhetorically. "Would you buy [companies with great exposure to] commodities? Would you buy AK Steel Corp.?" which recently announced an anticipated fourth-quarter shipment slowdown and likely lower operating profits." That's what everybody is asking themselves."

He said that "I speak to some of the larger hedge funds - and they don't even know what the hell to do. You can't buy retail," which has been getting positively shelled all year with the slowdown in consumer spending. "Do you want to buy commodities? Do you buy oil producers?" whose fortunes are suddenly slipping as the price of a barrel of crude keeps sliding downward.

VeraSun - a cautionary tale, and an opportunity

As an example, he said, "look what happened to VeraSun" Energy Corp., which tumbled into Chapter 11 on the last day of October. "Here's a situation where the government subsidizes the industry - but they made a big bet on hedging [prices for corn, which the company converts into ethanol] and lost."

Now he said, its 9 7/8% senior notes due 2012, which had been trading around 88.5 bid late in the summer, before the bankruptcy filing, "got crushed," diving down to around 42 after the filing, while its 9 3/8% subordinated bonds are worth "about nothing, basically" trading no higher than 4 bid.

Demonstrating what a crazy market it is though, with values to be found by anyone adventurous enough to seek them and lucky enough to find them, he said the senior bonds "are now rallying from the 40s and 50s, to now the 60s, because there are a lot of people [who] think there's value there."

He called the Sioux Falls, S.D., renewable fuels producer a company that "may be worth more dead [i.e., in reorganization] than alive, and there's asset value."

He also saw VeraSun rival Aventine Renewable Energy Holdings Inc.'s 10% notes due 2017 languishing at 22 bid, 25 offered and wondered "why would they be down [there] - isn't that a space you'd want to be in?" especially a new federal administration coming in that's touting the efficacy of "green" energy like ethanol.

Coal holds up

Looking elsewhere in the energy sector, the trader said that by the same token, with the incoming administration having been highly critical of coal on environmental grounds, "based upon what they're saying, coal companies would be under pressure" - however, he noted, the coal names were doing better. "They've held their ground pretty well, and were up again" on Monday.

For instance, Peabody Energy Corp.'s 7 3/8% notes due 2016 "were hanging right in there" at 85.25 bid, 86 offered, "which is very respectable, mostly on better buyers."

Another bond "which hangs in there really well," he said, was Peabody's bellwether issue, its 6 7/8% notes due 2013, holding around 89 bid, 90 offered.

It should be noted that large U.S. producers have a brisk export business to China, and their bonds, and shares, may have been given a lift by Monday's announcement by the Beijing government of a $585.5 billion stimulus package aimed at staving off a recession in the world's most populous nation.

"That's what's going on here now," he opined. "People are trying to figure out what's going to happen with this administration and which bonds are going to do well."

Centennial a real Bell ringer

Among the major movers Monday was Centennial Communications, which a trader said was "certainly the biggest gainer of the day," fueled by the news that telecom giant AT&T is buying the rural phone operator. He saw the company's 10 1/8% notes due 2013 as its most active mover of the session, jumping to a final round-lot trade of 100.5 bid versus 91 last week, for a 9.5-point gain on $7 million traded. He also saw its 10% notes due 2013 up a dozen points at 101 bid versus 89 on Thursday, the last prior round-lot trade.

Even bigger gains were seen in Centennial's 8 1/8% notes due 2014, whose last round-lot price reached 101 versus 84 last week, for a 17-point gain. And its floating-rate notes due 2013 jumped all the way to 98.5 bid from prior levels at 76, a 22-point pickup.

However, the trader noted, volume in the other issues was relatively restrained, around $2 million or $3 million each, or maybe one or two round-lot transactions.

Centennial's New York Stock Exchange-traded shares, which had closed Friday at $3.84, more than doubled on Monday to $7.78, a gain of $3.94, or 102.60%. Volume of 17.6 million shares was 20 times the norm.

The acquisition was announced on Friday night, well after the markets had closed for the week. Dallas-based AT&T will pay $944 million in cash, or $8.50 per share, more than double Centennial's Friday closing stock price. Including debt, AT&T values the deal at $2.8 billion.

The deal needs approval from regulators and Centennial shareholders, although the company's largest holder, New York-based private equity firm Welsh, Carson, Anderson & Stowe, has agreed to vote in favor of the transaction. AT&T is anticipating a closing in next year's second quarter.

Addition of Centennial's 1.1 million wireless customers in small-town areas of the Midwest and Southeast as well as Puerto Rico and the U.S. Virgin Islands will help AT&T as it struggles with rival Verizon Communications Inc. for U.S. wireless supremacy.

NRG says 'no deal'

An M&A deal that isn't looking like it's happening - at least not immediately - is Exelon Corp.'s $6.2 billion offer to acquire NRG Energy, which the latter company rejected Monday.

A trader saw Princeton, N.J.-based power generator NRG's 7¼% notes due 2014 dip to 88 bid from prior levels at 89.25, although he noted that only $1 million of bonds changed hands.

He also saw NRG's 7 3/8% notes due 2016 drop nearly 2 points to 86.25 on volume of about $5 million.

Another trader saw the bonds at 86 bid, 87.5 offered, which he called off 1.5 points.

Chicago-based power producer Exelon last month proposed a deal in which it offered to pay a fixed exchange ratio of 0.485 of an Exelon share for each share of NRG, but the latter company's board on Monday turned thumbs down on the offer, contending that the price "manifestly undervalues" NRG, which also expressed doubt about whether Exelon could line up the financing needed to swing the deal, given the current credit-market environment.

Observers said that a major concern for NRG in any such deal is that it would likely trip the change-of-control covenants in its debt accords, which could leave NRG stuck with having to refinance about $8 billion of debt at a higher cost. NRG executives said on a conference call Monday that their company might have to incur as much as $300 million a year in extra debt-servicing costs.

Numbers knock Nortel, others down

Elsewhere, a trader saw Nortel Networks' floating-rate notes due 2011 last trading around 50 bid on a round-lot basis, down from 53.5, while its 10¾% notes due 2016 fell some 10.5 points to 40.5.

Another market source said the 10½ bonds closed at 42.5 bid, estimating that as a 10.5-point deterioration.

For the third quarter, Nortel posted a loss of $3.41 billion, down from a profit of $27 million the year before. The report included a non-cash charge of $3.21 billion, consisting of a goodwill write-down and deferred tax assets. Revenue declined 14% to $2.32 billion.

"In September, we signaled our view that a slowdown in the market was taking place," Mike Zafirovski, the Toronto-based telecom equipment producer's chief executive, said in a statement. But current economic conditions have hurt the industry, including Nortel and its customers.

As such, the company said that it was looking to cut costs and preserve liquidity. To do this, Nortel has planned to give about 1,300 employees the ax, and several top executives are also planning to vacate their posts. The recent job cut announcement is in addition to a previous cut of 1,200 employees.

Nortel also suspended its dividend on its series 5 and 7 preferred shares.

Other issuers laid low by less-than-great numbers Monday included Six Flags and Clear Channel Communications.

A trader said that he saw "a lot of wide quotes" on Six Flags' bonds, but not many actual round-lot trades. He saw the 9¾% notes due 2013 at 29, down from 32.5, although that previous large trade was the last week in October, and said its 9 1/8% notes due 2014 were at 29, unchanged, and said "neither was active." On an over-the-counter basis, he saw the 93/4s moving in a 13-19 range, while the New York-based theme park company's 12¼% notes due 2016 were in a 42-50 range.

A market source at another desk meantime saw the 93/4s fall to as low as 20, though on only a couple of trades.

Yet another trader saw the 93/4s "down as much as 15 points after the numbers. The numbers were not necessarily positive but didn't appear to be all that bad, however," causing the bonds to bounce off their lows. However, he still saw them down 10 points on the session at 15 bid, 20 offered.

San Antonio-based radio station and billboard company Clear Channel's 6¼% notes due 2011 were seen down as much as 3 points late in the session at 41 bid.

GM, autos continue to spin wheels

Concern about whether U.S. automakers can survive absent a massive bailout by the government - which is by no means a sure thing - hammered down the shares of automotive names such as General Motors, which also saw its shares get cut by several equity analysts - Deutsche Bank lowered its target price to zero and called the shares a sell - causing a more than 20% plunge.

On the bond side of the fence, meantime, a trader saw GM's benchmark 8 3/8% notes due 2033 at 24.75, well down from 28.5 previously - which a trader called "surprising," - but only because "I would have thought that they would be down more" given the high level of investor angst in the wake of last week's news of big declines in October vehicle sales, third-quarter financials and the size of the company's rapidly dwindling cash stockpile.

He also saw GM's 7.2% notes due 2011 down 2 points from Friday's levels, down to 33.375, on volume of $13 million, making it the most active GM issue.

He saw GM's 49%-owned GMAC LLC 8% notes due 2031 at 40.125 bid, down from 41, on volume of $11 million, while Ford Motor Co.'s 7.45% bonds due 2031 were half a point lower on a round-lot basis at 26.5.

Another trader said the GM benchmarks "bounced around in a 24-25 range - maybe there was a lot of activity, but a point lower. He saw the GMAC 8s down a point at 40 bid, 41 offered on "a lotta volume."

A trader saw GMAC's money-losing Residential Capital LLC mortgage unit's 8½% notes due 2010 at 36 bid, 38 offered, "definitely lower" from prices in the 40s last week, when GMAC reported a huge third-quarter loss, with a majority of it attributable to losses at ResCap. GM said Monday in an SEC filing that the problems in the mortgage industry and the huge losses it has racked up raise "substantial doubt about ResCap's ability to continue as a going concern."

Meanwhile, the primary market showed few signs of activity.

PNM remarketing

In what one source referred to as an old high-grade name attempting to remarket notes, PNM Resources, Inc. launched a remarketing of its $100 million of 6 5/8% senior notes due Nov. 16, 2010 (Ba2/BB-/BB) last Friday.

No official price talk was available at Monday's early close; however, a source said that the company and the dealers are attempting to get it done for around 15%.

Citigroup is leading the deal, which is being run off the high-grade desk.

Monday's high-yield primary market session produced no news.

"People continue to be pretty reluctant to look at new issue activity, given what's going on in the secondary," said a senior syndicate source.

"We are trying to pull together a few deals, but unless a company has a need, they shouldn't be in the market right now because it's pretty choppy.

"We're looking at situations where companies have needs, and we're trying to work with investors and construct scenarios that make sense for both companies and investors."

New MGMs holding in

The last deal to price in the junk market was the MGM Mirage $750 million issue of 13% senior secured notes due 2013 (Ba1/BB), which came at 93.132 on Oct. 30 to yield 15%.

Within 48 hours of pricing, those notes hit intraday lows of below 89 on the bid side, market sources said.

However on Monday the new MGM notes were holding in at 92½ bid, 93 offered, according to a source close to the deal, who added that several dealers shorted the deal, which is why the price went down as far as it did.

Elsewhere, with Ashland Inc. continuing to market its $1.75 billion senior secured credit facility (Ba1/BBB-), there could be news on its $750 million of senior unsecured notes (Ba3/BB-) before the end of the week, according to a source familiar with the deal.

Banc of America Securities LLC and Scotia Capital are leading both the bank and bond deals.

Ashland, a Covington, Ky.-based chemical company, is raising money to help fund its acquisition of Hercules Inc. That acquisition becomes effective on Thursday.

Stephanie N. Rotondo contributed to this story.

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