Primus Telecom bonds slide on results; PanAmSat prices $1 billion offering

By Paul Deckelman and Paul A. Harris

New York, July 30- Primus Telecommunications Group bonds were heard by junk market traders to have slid badly Friday, after the McLean, Va.-based telecom operator reported a second-quarter loss - a sharp deterioration from its year-ago profit.

On the upside, bonds of California utility giant Edison International's Edison Mission unit were solidly higher, after the parent company announced plans to sell 13 power generating facilities around the world to British utilities operator International Power plc, with proceeds expected to be used to pare down Edison's debt load.

In the primary market, PanAmSat Corp. was flying high after the Wilton, Conn.-based communications satellite operator's $1.01 billion issue of new 10-year bond successfully lifted off - the single dollar-denominated issue that priced during Friday's session.

The Wilton, Conn.-satellite communications firm's sale of 10-year notes (B1/B+) was part of the sale of the company to affiliates of Kohlberg Kravis Roberts & Co., The Carlyle Group and Providence Equity Partners, Inc.

Earlier in Friday's session a market source told Prospect News that talk had widened to 9% area from 8¼%-8½%, and that the deal was up against a choppy junk market made even less happy by the news that high-yield mutual funds were reported on Thursday to have undergone a $358 million weekly outflow.

And the new PanAmSat notes due 2014 came right on top of the revised talk, pricing at par to yield 9%.

Credit Suisse First Boston and Citigroup ran the books.

A market source told Prospect News that in addition to widened price talk the deal had also undergone covenant restructuring.

Fallen angels fatten supply

One sell-side official told Prospect News on Friday that not only is the weekly outflow reported Thursday creating waves, but a hefty new supply of "fallen angel" bonds from AT&T Corp. are likely also preying upon the minds of investors.

AT&T's debt was downgraded to Ba1 from Baa2 on Thursday by Moody's Investors Service, impacting $10.2 billion of the telecommunications firm's bonds.

"That's the first fallen angel we've had in a while and it brings an extra $10 billion into the market," said the sell-sider.

"It's funny when you look at the numbers," the official commented. "AT&T had $65 billion of debt a couple of years ago. They reduced the debt, but sold a lot of cable assets along the way.

"That's a huge reduction in debt," said the source. "So the downgrade to junk seems a little severe. But I guess long distance is not long for this world, in terms of a viable business.

"AT&T sold the good stuff and was left with the assets no one wants."

Hungary's Invitel sells €142 million

Elsewhere in the universe of speculative-grade bondson Friday, Hungary's Magyar Telecom BV, a financing subsidiary of Invitel, sold €142 million of 10¾% eight-year senior notes (Caa1/B-) at 98.682 to yield 11%.

The debt refinancing deal, via Credit Suisse First Boston and BNP Paribas, came at the wide end of the 10¾%-11% price talk.

The Rule 144A/Regulation S issue was marketed to both high-yield and emerging markets accounts, according to a source close to the deal.

After terms emerged on Friday the source said that the Magyar Telecom book had in excess of 70 accounts and was about 2.5 times oversubscribed

"That's a landmark for the telco sector!" the source said, adding that Invitel was the first triple-C euro-denominated telecom deal to price in at least two years.

Stanadyne to kick off $3 billion week

The week of Aug. 2 promises a comparatively crowded field with regard to the new issue market, especially given that it is moving into the waning days of summer - a time when investor attention can be difficult to come by.

In all, 11 issuers are expected to attempt to raise $3.37 billion by the time the market closes on Friday.

First out of the gate figures to be Windsor, Conn. engine components and fuel systems company Stanadyne Corp.

Price talk of the 9¾% area emerged Friday on the company's planned $160 million of 10-year senior subordinated notes (Caa1/B), via Goldman Sachs, which are expected to price on Monday.

PanAmSat up in trading

When the new PanAmSat 9% senior notes due 2014 were freed for secondary dealings, they were heard to have firmed to around 101 bid, 101.25 offered, up from their par issue price earlier in the session.

Primus plunges

Back among the established issues, Primus was clearly the big loser, with its shares getting massacred and its bonds roundly clobbered in response to the earnings data.

Primus announced after the close on Thursday that in the second-quarter ended June 30 it lost $15 million (17 cents a share) versus its year-ago profit of $20 million (21 cents a share). Wall Street was truly shocked - analysts had been looking for about 10 cents a share of earnings.

In the latest quarter, Primus had $16 million in net losses from foreign currency transactions and the sale of assets, which was partially offset by a gain on early retirement of debt. Year-ago results included $22 million in net gains from foreign currency transactions and the early retirement of debt, partially offset by a loss on the sale of assets.

The picture was not all bad - on an adjusted basis, net for the most recent quarter was $1 million (one cent a share) versus an adjusted loss a year ago of $2 million (four cents a share)

The company also reported that revenues for the quarter totaled $332 million, up 4% from $320 million in the year-ago period, though down 5% sequentially from $348 million in the first quarter of this year.

Likewise, adjusted EBITDA was $37 million for the second quarter, up 7% over the second quarter of 2003 - but down sequentially from $44 million in the prior quarter, reflecting weaker foreign currencies, increased sales, general and administrative spending and lower net revenue.

But investors didn't seem to want to look for the silver lining in Primus' report; its Nasdaq-traded shares lost fully half of their value, tumbling $1.70 (50.75%) to end at $1.65. Volume of 33 million shares was about 33 times the average turnover.

Bond players were equally dismayed with the results. Primus' 8% notes due 2014 were seen to have swooned to 68 bid, a 15-point drop from prior levels, while at one shop, its 12¾% notes due 2009 were estimated to have fallen some 32 points on the day to around the 76 bid level.

However, at another desk, a source said the 123/4s were down "only" 24 points on the day to 84 bid, from prior levels around 108. He also pegged the 8% notes really down just 10 points, to around 72 bid from 82.5 bid previously.

Primus said that its operating results in the second quarter "reflect increased competition from product bundling in virtually all of the company's markets, together with continued competitive pricing pressures. In addition, wireline long distance usage continued to decline due to increased use of cellular phones and internet services."

Chairman and chief executive officer K. Paul Singh noted in the company statement announcing the results that during the first experienced pricing pressure on its core long distance and dial-up internet service provider products. In the second quarter, he continued, "this competitive challenge became more intense when major incumbent carriers in our markets used long-distance offerings as a 'loss leader' to encourage customers to subscribe to their bundled local, cellular and broadband services."

Looking ahead, Singh was forced to acknowledge that in light of existing competitive pressures and company expectations that meaningful revenues from new initiatives it is taking will not materialize until 2005, Primus now expects sequential revenue, on a constant currency basis, to be roughly flat in the third quarter, followed by a positive inflection in the fourth quarter of 2004, a downward revision from previous projections.

It said that adjusted EBITDA will be in the $29 million to $31 million range in the third quarter, with a positive inflection in the fourth quarter. Capital expenditures for the full year 2004 are expected to be in the range of $40 million to $45 million. Free cash flow for the last half of the year is expected to be in the range of $5 million to $10 million, and Primus expects a full-year adjusted net loss of around $6 million to $9 million.

Junk desks prepare for AT&T

Elsewhere, a trader said the big story at his shop involved another - and considerably better known - telecom name, AT&T Corp.

The once-virtually indestructible telecom monolith's bonds were cut to junk status -Ba1 - Thursday by Moody's Investors' Service, which cited "relentless competition" that will cause the phone company's sales and profits to fall more steeply than Moody's had originally expected. That caused its bonds - still trading on a spread-versus Treasuries basis like other investment grade companies - to have widened out about 20 basis points.

By Friday, some of those bonds were beginning to be quoted in dollars, even though they were still being handled - for the moment - by the high-grade desks at various shops or, at worse, the crossover traders.

"It's not something that I'm trading," a junk trader remarked, noting that the crossover guy at his company still had it, "but junk desks are definitely getting geared up to take that one on," even though for now, it still has its BBB rating from Standard & Poor's intact.

"Everybody [in junkbondland] is trying to figure out coupon step-ups and all that stuff."

For instance, Ma Bell's 8.05% notes due 2011 and 8¾% bonds both have indenture clauses that call for their coupons to step up by 50 bps in the event of a downgrade to junk, starting with the next coupon date, which for both of these issues is in November.

Even though Telephone bonds have historically traded on spread probably since the days of Alexander Graham Bell, the trader noted Friday that its 7¾% notes due 2007, for instance, were being quoted in a 104-104.25 context, well down from 106 before the downgrade news. He saw "lots of trades" in the issue. Everyone, he added, "seemed to be pretty much focused on AT&T" on Friday.

Edison Mission rises

Most of Edison International's bonds now trade at investment grade level, following the Rosemead, Calif.-based utility's successful restructuring after the 2000-2001 California power crunch, but some subsidiary debt does not; the trader quoted the company's Edison Mission 13½% notes due 2008 "up a couple of points" to 118.5 bid, on news that Edison had agreed to sell 13 power plants in located in nine countries - from Europe to Asia and Australia, as well as Puerto Rico - to International Power in a $5.4 billion deal. U.K.-based International Power will pay $2.2 billion in cash, which Edison is expected to use for debt reduction. It will also assume another $3.4 billion of existing debt.

Another trader saw the Edison Mission's 9 7/8% notes due 2011 quoted up some six points at 112.75 bid. Its 10% notes due 2008 were at 113.5 bid, up five points on the session.

Friendly down

Back on the downside, Friendly Ice Cream Corp.'s 8 3/8% notes due 2012 melted down about two and a half points to 96.25 bid after the Willbraham, Mass.-based ice cream producer and ice cream parlor operator reported a net loss for the three months ended June 27 of $1.3 million (17 cents per share) versus year-ago net income of $3.1 million (41 cents a share).

Of more interest to bond investors, the company's EBDIT declined some 30.5% to $11 million, even though analysts had been looking for a small increase in the cash-flow measure for the quarter.

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