Level 3 higher on improved guidance; little movement on GM news; Unity Media plans €1.35 billion deal

By Paul Deckelman and Paul A. Harris

New York, March 28 - Level 3 Communications Inc. was once again the focus of high yield secondary market attention as the Broomfield, Colo.-based telecommunications company issued improved earnings guidance.

Elsewhere, traders saw not much reaction in the bonds of General Motors Corp. or its General Motors Acceptance Corp. financing arm despite the news out of Detroit in the morning portion of the session that GM was eliminating several hundred salaried positions - and the disclosure near the close that GM had filed its 2005 10-K annual report with the Securities and Exchange Commission, taking into account some previously announced cash-flow recalculations to correct accounting errors related to GMAC's residential mortgage operations.

However, also included in the 10-K was the warning that although GM is trying to sell a controlling stake in GMAC, as well as exploring possible strategic and structural changes in ResCap - GMAC's residential mortgage business - "we are uncertain at this time if any transaction with respect to GMAC or ResCap will occur or, if any transaction were to occur, on what terms." Traders said this new element of uncertainty might be reflected in the movement of GMAC or GM bonds on Wednesday.

In the face of falling stock prices and a sell-off in the U.S. Treasury market a source marked high-yield "basically unchanged" late on Tuesday.

Another market source, this one a high-yield syndicate official, said that in spite of the Federal Open Market Committee's assertion that "some further policy firming may be needed" - made as it bumped the Fed Funds rate by 25 basis points to 4.75% on Tuesday - the high-yield calendar is expected to begin building.

In the primary market, little was seen going on. Price talk emerged on upcoming issues from the Saskatchewan Wheat Pool Inc. and German cable operator Unity Media.

Among new deals which priced Monday and began secondary dealings, traders saw Hanover Compressor Co.'s 7½% senior notes due 2013 at 100.25 bid, 100.75 offered, up from the Houston-based natural gas compression business' Monday issue price at par.

Meantime, KB Homes' new 7¼% senior notes due 2018, which priced at 99.701 on Monday, were being quoted on a spread over Treasuries basis at a tight 260 basis points bid, 257 basis points, about unchanged from their 258 bps spread at their pricing.

Level 3 strong

Back among the already established issues, Level 3's bonds "just went freakin' ape-shit," a trader declared, quoting the company's 12 7/8% notes due 2010 as having firmed smartly to 101.5 bid, 102.5 offered from Monday's levels at around 99 bid, par offered.

He saw its 10¾% senior notes due 2011 at 101 bid, 102 offered, also up from around 99.5 bid, 100.5 offered on Monday.

Its holding company 9 1/8% notes due 2008, on the other hand, went nowhere, he said, owing to the fact that they will soon be callable at around the same par level where the issue - Level 3's onetime benchmarks - currently trades. "That's not going to move at all," he said.

Another trader saw the 103/4s at 101.5 bid, 102.5 offered, which he called up two points on the session, noting that the bonds "might have moved up late in the day."

He saw the company's 11% notes due 2008 at 101 bid, 102 offered, and the 9 1/8s at par bid, 101 offered. He said the latter bonds had been offered Monday at 100.25, while the 11s had been offered at 101.25.

Level 3's bonds continued their recent pattern of strength on Tuesday after the company said it expects to meet or exceed first-quarter and full-year projections, based on stronger results in its communications business.

It upped its estimate of quarterly OIBDA - operating income before depreciation and amortization - to a range of $140 million to $150 million, versus earlier guidance of $105 million to $125 million. It also increased its full-year operating income estimate to a $600 million-$650 million range from a $550 million-$600 million range previously.

Last week, Level 3's bonds had firmed solidly after Bear Stearns & Co. equity analyst Steven Randall changed in his recommendation in the company's shares to "outperform" from "underperform" previously.

"We expect an improved operating environment and the impact of consolidation will benefit Level 3 over the next several years," Randall wrote in a research note Thursday.

"In 2006, we expect price declines to continue to moderate while traffic volumes increase" on Level 3's 23,000-mile long fiber optic broadband backbone network, "with the potential to accelerate in 2007 and beyond as the internet is increasingly used to transport voice, data and video."

The analyst also upped his fiscal 2006 EBITDA estimate to $583 million from $575 million.

Level 3's shares were meantime up 71 cents (15.88%) to $5.18 in Nasdaq dealings. Volume of 135.4 million was almost 10 times the usual activity level.

Sea Container rebounds

Also on the upside, a trader said, was Sea Containers Ltd., whose bonds absolutely got killed on Friday and continued to slide on Monday after the Bermuda-based maritime transportation company revealed that it was in talks with its lenders on covenant relief and was getting out of the ferry business altogether, taking earnings charges in connection with that move.

Sea Containers "seemed to run in the buyers," he said, quoting the company's 10¾% notes due 2006 at 96 bid, 97 offered, up a point on the session, while its 7 7/8% notes due 2008 were at 90 bid, 91 offered, up half a point.

That rise coincided with a bounceback in the company's New York Stock Exchange-traded shares, which also sank on Friday and again on Monday before rising Tuesday by 44 cents (6.66%) to $7.05. Volume of 398,000 shares was almost four times the norm.

Sea Containers - which runs ferry and railroad services in many countries as well as a maritime cargo container leasing business, from whence it derives its name - had said in November that it would seek to restructure its under-performing ferry operations and would seek buyers for the business. However, its said last week that it would exit the business completely, and take about a $500 million charge against its fiscal fourth-quarter earnings related to its departure from the ferry field, and to an impairment of its container business.

That charge - which is much higher than the $138 million impairment which had been previously expected from the ferry operations' restructuring - will in turn reduce the company's net worth by $475 million, putting it in violation of net-worth requirements under its credit facility covenants.

Sea Containers said Friday that it would delay filing its 2005 financial reports while it seeks covenant amendments or waivers from its bankers. It also needs the extra time to restate its results for the first three quarters of last year, to correct its accounting for the sale of shares in its former Orient-Express Hotels investment, reducing the sale gain it recorded.

GM steady ahead of 10-K filing

General Motors - which stunned the financial markets recently with the revelation that it too would have to delay filing its year- end report while it restated some previously reported results due to the discovery of accounting glitches related to GMAC's earnings - made good on the promise that it made at that time to have the annual report in before the end of the month.

However, the announcement that the 10-K had been filed came pretty much too late in the session to affect trading. Traders saw GM's benchmark 8 3/8% notes due 2033 holding steady to perhaps slightly lower at around the 74-74.5 area, while GMAC's 8% notes due 2031 hung in at around 93 bid, 94 offered.

Since the revisions had already been announced and were expected, "this may be nothing," one said.

The accounting problems - having to do with the way some cash flow items at GMAC's Residential Capital Corp. mortgage unit were recorded from 2003 through 2005 - do not affect the consolidated income statements for GM, GMAC or ResCap, their balance sheets or their net cash flows for any of the reporting periods in question. Nor do they affect cash flows reported for GM's struggling automotive operations.

News reports quoted analysts as saying the revisions meant little in the grand scheme of things, except for showing that GM is trying to clean up any problems that could conceivably delay or derail its efforts to sell a 51% stake in GMAC, in hopes of generating between $11 billion and $13 billion in cash proceeds from such a sale, as well as paving the way for GMAC's currently high junk credit ratings to perhaps get back to investment grade, which would greatly lower its financing costs.

However, GM cautiously broached the possibility that the sale of a controlling interest in GMAC might not even take place, saying in its 10-K that it is "uncertain at this time if any transaction with respect to GMAC or ResCap will occur," or on what terms.

While boilerplate warnings about all of the things that could possibly go wrong at a company are routinely included in the language of 10-Q and 10-K reports filed with the SEC - so that company officers and directors can later tell angry shareholders that warnings of possible future problems were out there in the filings for anyone who wanted to spend the time and effort to read them - GM's admission that the GMAC deal might not take place, or might take place on less favorable terms than investors are hoping for - adds new uncertainty to an already uncertain process that has now been dragging on since October.

GM also warned in the 10-K that "even if a third party acquires a controlling interest in GMAC, or if a transaction is completed with respect to ResCap, there is the possibility that these initiatives will not delink GMAC's credit rating from GM's credit rating or maintain ResCap's credit rating at investment grade.

"Failure to execute a GMAC strategic transaction will place further pressure on both GM's and GMAC's credit profiles, potentially resulting in further downgrades with GMAC's credit ratings explicitly re-linked to those of GM. Moreover, any reduction in the automotive finance capacity of GMAC could materially adversely affect GM's business to the extent that third party financing is not available to fund GM's automotive sales," GM warned.

"I don't think we'll get a really good idea" what all of this means "until the morning," when the equity and debt markets will be fully able to react to the GM news, said another trader - the shares were halted before the close and never reopened, for instance. However, he did see GM's 8 3/8% bonds at 73.75 bid, 74.75 offered after the news, which he called down a point. He saw GMAC's 8s at 92.5 bid, 93.5 offered, post-news, which he called down ¾ point. "They're widening them out a little bit," he said of the late sellers, "just trying to cover their butts."

Host Marriott dips on change to sale

Outside of the automotive area, the trader saw the bonds of Host Marriot Corp. and Starwood Hotels & Resorts Worldwide Inc. each off about ¼ point after Host Marriott said it would not acquire three hotels out of a group of 38 that it had previously agreed to buy from Starwood in a cash, stock and assumed-debt deal worth nearly $4 billion.

Starwood's 7 3/8% notes due 2015 were at 108.5 bid, 109 offered and its 7¾% notes due 2025 were at 102.75 bid, 103.25 offered. Host Marriot's 7 7/8% notes due 2008 were at 100.25 bid, 107.75 offered, and its 7 1/8% notes due 2013 were at 102.75 bid, 103.25 offered.

Unity Media talks €1.35 billion

No issues were priced during the Tuesday primary market session.

German cable TV company Unity Media talked its €1.35 billion offering of seven-year senior secured floating-rate notes (B3/B) at three-month Euribor plus 300 basis points.

Although the company had contemplated a dollar-denominated tranche as part of the offering, the bonds are now expected to be issued in a single euro-denominated tranche, according to market sources.

The debt refinancing deal, which is being led by Citigroup, Deutsche Bank Securities and Goldman Sachs, is expected to price on Wednesday.

Unity Media was formed by the 2005 merger of Iesy Hessen GmbH & Co. and ISH NRW GmbH.

Also on Tuesday, Saskatchewan Wheat Pool Inc. talked its C$100 million offering of seven-year senior unsecured notes at 8% area.

TD Securities has the books for the notes offering that was downsized from C$150 million, with the company shifting C$50 million of proceeds to a common share bought deal.

Dominion Bond Rating Service assigns its B rating to the notes. Standard & Poor's also rates the notes at B.

Also expected to price in the remaining three sessions of the final week of March 2006 are Festival Fun Park' $150 million offering of eight-year senior notes (B2/B) via JP Morgan, French Lick Resorts and Casinos LLC's $270 million of first mortgage notes in two parts (B3/B-) led by Merrill Lynch, and Wood Resources LLC's $75 million seven-year senior secured floating-rate notes (B3/B-) underwritten by Jefferies & Co.

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