AT&T Canada firms on coming transfer of equity to bondholders; Rite Aid eases on FTC probe

By Paul Deckelman and Paul A. Harris

New York, Oct. 15 - AT&T Canada Inc. bonds were firmer Tuesday on the news that corporate parent AT&T Corp. will transfer control of the troubled company to the bondholders and give them C$200 million ($126 million) as well. On the downside, Rite Aid Corp. bonds retreated late in the session after it announced that the Federal Trade Commission was looking into its consumer privacy and advertising practices.

Otherwise, traders said, the first day back after the Columbus Day holiday break (which saw an abbreviated trading session on Friday and a bond market close on Monday) was uneventful, with junk bonds generally finishing firmer but no huge rush by high yield players to follow in the wake of the stock market upturn, which continued for a fourth consecutive day.

AT&T Canada's bonds were being quoted at one desk a point higher on the bid side at 13 bid/15 offered from last week's levels at 12 bid/13 offered.

At another desk they were seen having firmed about two points on the session, to 14 bid/15 offered. A trader said that all of the company's bonds, such as its 7.65% notes due 2006 and 7.58% notes due 2005 trade on top of one another [i.e. trade at the same levels regardless of coupon or maturity, as is frequently the case with deeply distressed issues].

AT&T had paid about $1.2 billion in 1999 for a 31% percent stake in Canadian local phone service provider MetroNet Communications Corp., and then combined it with its AT&T Canada long-distance unit in hopes of creating an integrated telecommunications powerhouse north of the border. That ambitious dream never really materialized as AT&T overestimated the demand for the company's services as well as ran into trouble with Canadian regulators. At the time of the initial purchase, it had made a commitment to buy out the remaining 69% of the company by 2003 - at price levels reflecting the boom in telecom stocks which was then taking place. Since then, AT&T shares - as well as those of AT&T Canada and the rest of the once high-flying telecom universe - have fallen far from those lofty levels but Ma Bell was still stuck with buying out the remainder of the company at those 1999 price levels, a $3.4 billion transaction which the U.S. phone giant completed last week.

While AT&T kept its promise to the AT&T Canada shareholders, it had originally indicated earlier this year that it would not be obligated to stand behind the company's debt, which sent those bonds reeling down from near-par to levels in the lower teens.

But now, under terms of an agreement with AT&T Canada's bondholders announced Tuesday, AT&T will shed the money-losing venture by handing over its ownership in the company to erase the C$4.5 billion which its troubled Canadian stepchild owes its bondholders, as well as the additional cash payment. The restructuring will take place under the Companies Creditors Arrangement Act, the Canadian equivalent of Chapter 11 protection. The game plan calls for AT&T Canada to emerge from its restructuring debt-free, with a cash cushion at the closing of approximately $100 million and what the company called "the strongest balance sheet of any Canadian telecom company."

The restructured AT&T Canada and its erstwhile parent are expected to enter into agreements under which AT&T Canada will market AT&T services in Canada, in return for which AT&T will regain at least 7% ownership, which could increase to up to 10% after five years.

Elsewhere on the telecommunications front, Nextel Communications Inc. - whose benchmark 9 3/8% notes due 2009 had swooned as low as 74 last week from prior levels around 80 on criticism of the company's financial reporting by J.P. Morgan, only to bounce later in the week to end in the upper 70s - were once again pushing upward on Tuesday. Those bonds, which had gone home quoted around 77-78 bid on Friday, were seen at levels as high as 80.5 bid during the day Tuesday, before coming off of those highs to close around 79¼ bid/80¼ offered.

There was no fresh news seen on the Reston, Va.-based wireless operator, which last week put out a news release defending its reporting practices and saying the J.P. Morgan criticisms (that Nextel did not adequately address the possibility of bad debts and underestimated subscriber churn) were based on faulty valuations.

Nextel has been one of the relative handful of high yield telecom companies that have so far managed to avoid the financial meltdown which has claimed so many junk telecom names. Besides strength in its bonds, the company's bank debt was reported up on Tuesday, with a source citing expectations that third-quarter results would be favorable; in the second quarter, Nextel surprised Wall Street by actually posting its first quarterly profit, since analysts had expected yet another loss.

Nextel shares meanwhile rose $1.18 (14.71%) to $9.20 in busy Nasdaq dealings of 42.7 million shares, well up from the recent 30-million-share average turnover.

Another telecom name hitting the upside Tuesday, a trader said, was troubled WorldCom Inc.'s MCI long distance unit. "Believe it or not, you saw some good bids on the long MCI/WorldCom paper," he exclaimed, quoting it as having moved up to 30 bid/33 offered from prior levels around 27 bid/29 offered, "whether it was a couple of buyers or [carryover from] the equity market, or whatever. That stuff had kind of fallen into the void" following the bankruptcy filing in July of beleaguered Clinton, Miss.-based telecom giant WorldCom, but on Tuesday, "there was involvement there." He called the three point jump in the telecommer's deeply distressed paper "a pretty big move."

Outside of the telecom sphere, a trader said Allegheny Energy' Inc.'s bonds "had come in some" from the levels they held last week. He quoted the Hagerstown, Md. utility's 7¾% notes due 2005 as being offered at 73, versus bid levels late last week around 74. But he said some of the paper of the company's Monongahela Power subsidiary "is still well bid for," such as its 7.36% notes due 2010, at 74.5 bid/76.5 offered.

Allegheny's bonds were downgraded to junk status last week amid liquidity concerns after the company said it had defaulted on some key credit agreements.

Rite Aid "at the end of the day shook up their paper," a trader said, after the Camp Hill, Pa.-based drugstore chain operator said that it is being investigated by the FTC over its consumer privacy and advertising practices. However, Rite Aid added that it has not been accused of any wrongdoing and is fully cooperating with the federal probe. It said the investigation is not expected to have any material impact on the company.

Even so, the trader said, Rite Aid's debt "was offered a point cheaper than where they opened. Not that it's indicative that there will be no bids [when trading resumes Wednesday], but late in the day, the news pushed them down."

He quoted Rite Aid's 7 5/8% notes due 2005 offered at 74 and its 7 1/8% notes due 2007 offered at 64, both in a point from earlier levels. He saw its 6 7/8% notes due 2013 as "the big mover," quoted at a wide 48 bid/54 offered, well down from 54 bid/58 offered previously, but cautioned that the issue "is so illiquid that a little bit of news skews the market."

Delta Airlines shares jumped $1.59 (21.20%) to $9.09 on busy New York Stock Exchange dealings of 4.8 million shares, more than double the usual, after the Atlanta-based No. 3 U.S. airline carrier posted a $326 million third-quarter net loss. That was 20% wider than a year ago, but on a per-share basis, the $1.75 deficit came in under the $1.86 per-share of red ink Wall Street had been expecting.

Still, Delta said it would have to cut costs, and it expects to eliminate its 18 MD-11 aircraft by 2004 and replace them with smaller planes, trimming its capacity somewhat. It will also defer delivery of 29 planes it has on order from Boeing. The moves should result in capital expenditure savings of $1.3 billion. Delta also expects to lay off an unspecified additional number of flight attendants beyond the 1,500 jobs it said recently that it would eliminate.

But while the less-than-expected loss and the planned belt tightening were greeted with equity market enthusiasm, junk traders saw little response in the carrier's debt. A market source quoted its 8.30% bonds due 2029 at 45 bid, "the same as they had been Thursday and Friday."

With Halloween still more than a fortnight hence, one primary market source might have been invoking the macabre Tuesday, describing the session as "eerily quiet."

No news was heard and only two deals are on the road, sources advised, adding that those two are parceled out one apiece, this week and next.

With the Dow Jones Industrial Average surging toward an eventual Tuesday close at 8256 - representing a 4.8% rise - one sell-side source used a maritime metaphor while relating to Prospect News that all the action was in the secondary market as the four-day Oct. 14 week got underway.

The secondary, this source said, could be likened to a dolphin riding at the bows of an equity market that appeared to be under full sail on Tuesday.

However, the official continued, whatever headway the secondary might make surfing the bow-wave of Tuesday's surging equity prices, the primary market won't necessarily enjoy the same fair winds.

"There's two deals on the road now," the source said, "the Wynn deal and the Nevada Power deal."

In addition to those the official estimated that there are approximately $10 billion of deals that could come were the market to "stabilize."

Half of those are LBO/acquisition financing deals, such as the offerings from Ball Corp., Legrand SA, Burger King and the anticipated new issuance to fund the yellow pages LBOs.

"Everyone's waiting for QwestDex," the official said referring to an anticipated offering of approximately $1 billion of notes as the first stage of the Qwest Communications directories LBO sponsored by Carlyle Group and Welch, Carson, Anderson & Stowe. The deal will come via Banc of America Securities, Deutsche Bank Securities Inc., JP Morgan, Lehman Brothers and Wachovia Securities, Inc. This official is one of several sources whom have advised Prospect News that the QwestDex launch appears imminent.

In addition to Qwest, directories deals are also anticipated from BCE Inc. and Sprint Communications Company, according to this and other sell-side sources.

"They will be coming," the official said, adding that the directories deals could appear in the present quarter or the next.

As to how well the directories deals might fare, this official said that it is plausible that when they come the buy-side will be at the helm.

"The problem is all of the supply," the official said. "We're possibly talking about $3 billion of bonds coming in a very short period - all within the same sector, each with credit pros and cons - and no one is going to take a full allocation in any of these deals."

Why, this source asked rhetorically, would an investor take a full position in one such credit when two others are coming down the pike?

"It's going to be a game of 'hide-and-seek' and 'wait-it-out'," the source said adding that the directories deals will probably get done, but at "pretty wide levels."

The official also mentioned the anticipated $500 million of new issuance to fund the Burger King LBO.

"They postponed their bank meeting twice, which means either that there is something wrong with the credit or they're waiting for the high yield market to stabilize a little bit," the official said, adding that everybody prefers synchronization of the bond and bank deals.

Having run these scenarios this source commented that while equities were certainly riding fair winds on Tuesday high-yield investors were likely to be more interested in seeing the equity markets stabilize.

"I don't think anyone believes that there isn't going to be another earnings mess taking the market down 200 points, sometime in the next 10 days," the official said, adding that if equities stabilize and show some upward trajectory that is real and fundamental - "buying not hedges covering shorts" - there is a chance for the deals now seated in the forward calendar waiting room to begin lining up for transaction.

Asked how the recent reported outflows from high-yield mutual funds (including the $176 million outflow reported for the week ending Oct. 9, Bear Stearns & Co. estimated that $1.6 billion had gone out over three successive weeks) might impact the market this source said that the buy-side is currently roosting on 9% cash, "as high as it's been in a long time."

With regard to the two deals this source mentioned above, Nevada Power Co. is expected to price $250 million of general and refunding mortgage notes series E due 2009 (Ba2/BB) via Lehman Brothers late this week. The roadshow on the Las Vegas-based public utility's Rule 144A deal is expected to conclude on Thursday.

As Tuesday's "eerily quiet" session concluded Nevada Power Co. was the only deal expected to price during the week of Oct. 14.

The only other deal on the road is the offering of $340 million of eight-year second mortgage notes (CCC+) from Wynn Las Vegas LLC and Wynn Las Vegas Capital Corp. via Deutsche Bank Securities, Banc of America Securities, Bear Stearns and Dresdner Kleinwort Wasserstein. The roadshow on that public offering is expected to end Oct. 22.

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