Nortel notes fall as company axes CEO, CFO; Giant prices 10-year deal

By Paul Deckelman and Paul A. Harris

New York, April 28 - Nortel Networks Corp. surprised the financial community Wednesday as it abruptly fired chief executive officer Frank Dunn and two other senior executives and said it would delay first-quarter results which had been scheduled for release Thursday amid indications that accounting problems the company disclosed last fall are more serious than initially thought. That caused its bonds to fall and prompted Standard & Poor's to cut the Brampton, Ont. -based telecommunications equipment maker's ratings by a notch.

In primary market activity, Giant Industries Inc. priced an offering of 10-year notes and Sea Containers Ltd. brought a downsized 10-year offering safely to port, while Nextel Partners Inc. announced plans for a Rule 144A sale of new junk bonds to fund its tender offer for its 11% senior notes due 2010.

Nortel was clearly the big mover on what for most market players was an otherwise lackluster session, with stocks and Treasuries both moving lower on market concerns about potentially higher interest rates.

"The market was quiet," a trader quipped, "unless you owned Nortel bonds."

Nortel's 6 1/8% notes due 2006 were heard to have fallen to par bid from prior levels around 102.25 on the news, while Nortel's New York Stock Exchange-traded shares swooned $1.59 (28.19%) to $4.05 on volume of 310 million shares, about six times the usual turnover.

Nortel abruptly announced Wednesday morning before the market opened that Dunn had been terminated "for cause" along with the chief financial officer Douglas Beatty and the company controller Michael Gollogly, both of whom had been placed on paid leave of absence by Nortel last month in the wake of the company's independent internal review of its accounting practices. Four other Nortel executives, who were not identified in the company announcement, were meanwhile placed on paid leave of absence pending further developments in the review.

Dunn, the CEO since 2001, was replaced in that position by William Owens, a Nortel director who formerly was chairman and CEO of Teledesic LLC, a satellite communications operator; before that, Owens, a retired U.S. Navy admiral, had been the vice chairman of the Joint Chiefs of Staff and commanded the Sixth Fleet during Operation Desert Storm.

Beatty and Gollogly were replaced on a permanent basis by, respectively, William Kerr as CFO and MaryAnne Pahapill as controller; Kerr and Pahapill had been filling those posts on an interim basis anyway ever since Beatty and Gollogly had been placed on leave in mid-March.

The new management team will have its hands full trying to restore investor confidence in the company, which was dented last October when Nortel announced that it would it would restate results from 2000 to the first half of 2003 and which was further shaken in March when Beatty and Gollogly were put on leave and the independent committee began probing the company's accounting.

The full extent of the accounting problems has yet to be determined - but Nortel said Wednesday that would now widen its investigation to cover the whole of 2003.

The company also said that it would restate results for the first half of 2003 to show a net loss, versus the previously announced profit for that period, and it said that $732 million profit for all of 2003 that it reported in January - an unaudited figure - would likely be cut in half.

It said that it will need to restate the financial results reported in each of its quarterly periods of 2003 and for earlier periods, including 2002 and 2001. Accordingly, it is also delaying first-quarter 2004 results.

The major ratings agencies weighed in on Nortel's situation, with Standard & Poor's announcing that it was cutting Nortel's corporate credit rating and other long-term ratings to B- from B previously, although the implications were revised to developing from negative. The ratings agency warned further delays in reporting financial results necessitated by the widened accounting investigation and the need for further restatements could heighten the possibility that the company's creditors could declare Nortel in noncompliance with the terms of its bond indentures and other borrowing agreements and take action to force the company to pay up, although Nortel said that so far it has had no indication that it is in any danger of such an acceleration taking place.

Moody's Investors Service meantime changed the direction of its review of Nortel's ratings and those of its subsidiaries to "possible downgrade" from "direction uncertain."

The ratings agency said that the change in the direction of the possible outcome of its ratings review was spurred by the company's announcement of the executive shakeup; it warned that "Moody's now expects that it will take some time to re-establish confidence in both Nortel's financial reporting and its leadership. Moody's therefore no longer expects there is any potential to resolve this review with an upgrade."

Lucent Technologies Inc.'s bonds, which generally move in tandem with those of its corporate rival, Nortel, were likewise lower, "in sympathy," a trader said, quoting the Murray Hill, N.J.-based telecom equipment maker's 7 ¼% notes due 2006 down a point-and-a-half at 103.5 bid, 104.5 offered.

Oregon Steel rises on earnings

Elsewhere, Oregon Steel Mills Inc.'s bonds were solidly higher after the Portland, Ore.-based steel mill operator released better first-quarter numbers. A trader quoted the company's 10% notes due 2009 at 104 bid, 105 offered, well up from 101 bid, 102 offered previously.

The company reported first quarter net income of $7.5 million (28 cents per share), compared with a net loss of $9 million (34 cents per share of red ink) in the year-ago quarter. Net income, before a non-cash charge of $7 million, was $14.5 million, a company record, while EBITDA was $32.9 million.

Dynegy, AES little moved

Other companies reporting earnings results Wednesday included power companies Dynegy Inc. and AES Corp., both of which characterized their first-quarter numbers as "strong," but neither was seen to have moved very much. A market source quoted Dynegy's 8¾% notes due 2012 at 95.25 bid and 9 7/8% notes due 2010 at 109 bid, both unchanged on the session, while AES' 8½% notes due 2007 were a quarter point higher at 102.5 bid, and its 8¾% notes due 2008 were unchanged at 104.5.

Cincinnati Bell Inc. - whose bonds slid about two or three points earlier in the week, also had fairly decent numbers out, but the bonds remained around the lower levels to which they had previously eased, the Ohio-based telecom operator's 7 ¼% notes due 2013 at 97.25 bid, and its 8 3/8% notes due 2014 at 95.75.

Colorado-based telecommer Level 3 Communications Inc. "bounced back a little [Wednesday] from its recent massacre," a trader said, seeing the company's 9 1/8% notes due 2008 at 73 bid, up two points from Tuesday's finish, although the bonds are still well down from the levels in the low-to-mid-80s that they held only a week ago, before the multi-session retreat began.

Regal down, Milacron up on tenders

Regal Cinemas Corp.'s 9 3/8% senior subordinated notes due 2012 were being quoted down two points to around 117 bid from prior levels above 119, after the Knoxville, Tenn.-based movie theater operator announced that it had set the consideration for its pending tender offer for those bonds at $1,169.05 per $1,000 principal amount, plus accrued interest, although noteholders tendering their bonds and delivering consents by the April 27 consent deadline stand to receive an additional $20 per $1,000 as a consent payment (see "Tenders and Redemptions" elsewhere in this issue for full details).

Also among issues being tendered for, a trader said he was seeing Milacron Inc.'s bonds "up, of course, since the tender was announced," quoting them as having moved up to 100.5 bid, 101.5 offered from prior levels 97.5 bid, 99 offered. "I guess people are starting to think there's not much risk in that deal."

The Cincinnati-based provider of plastics-processing technologies and industrial fluids on Tuesday announced that it was tendering for the euro-denominated 7 5/8% bonds due 2005 issued by the company's Milacron Capital Holdings BV subsidiary.

Two deals price

In the primary two deals priced during Wednesday's session - a session in which, sources noted, both the Dow Jones Industrial Average and the S&P 500 index each dropped well in excess of 1.25%.

Nevertheless Scottsdale, Ariz. refiner Giant Industries Inc. sold $150 million in a deal that came on top of price talk. And Sea Containers Ltd. completed a transaction that was heard round about the market to be having difficulty.

Hedge funds still seen active

"Transactions continue to get done pretty well overall," commented one sell-side official after Wednesday's session came to a close.

"People seem to have dollars to spend in this market, which, given the fact that we continue to see outflow numbers, is interesting," the source added.

As with other high yield observers who have spoken to Prospect News in recent weeks, this official acknowledged hearing rumors of hedge fund activity in high yield.

Giant, Sea Containers complete deals

Giant Industries Inc. sold $150 million of 8% 10-year senior subordinated notes (B3/B-) at 98.311 to yield 8¼%, on top of the 8¼% area price talk.

Banc of America Securities ran the books for the debt refinancing deal.

Also Sea Containers Ltd. priced a downsized $103 million of 10 ½% eight-year senior notes (B3/B) at 97.369 to yield 11%.

The sale, led by Citigroup, generated $100.3 million of proceeds.

When the new Giant Industries' 8% senior subordinated notes due 2014 were freed for secondary dealings, they had "a pretty good break," a trader said, quoting the bonds as having firmed to 99.75 bid, par offered from their 98.311 issue price earlier in the session.

Amscan Holdings Inc's 8¾% senior subordinated notes due 2014, which had priced on Tuesday at par and which had then firmed on the break later Tuesday to about 101.25 bid, 101.75 offered, got a quarter of a point better, to 101.5 bid, 102 offered.

But the trader saw "nothing" doing with Emmis Operating Co.'s 6 7/8% senior subs due 2012, which priced at par on Tuesday and ended Wednesday at par bid, 100.25 offered.

Calendar continues to build

News of three roadshow starts was heard during the mid-week session.

Lazy Days' R.V. Center Inc. of Tampa, Fla., started a roadshow Wednesday for an offering of $155 million of eight-year senior notes (B3/B-), expected to price on May 4.

Deutsche Bank Securities has the books on the acquisition financing deal.

An April 29-30 roadshow is set to run for Preem Petroleum AB's offering of €125 million of 10-year senior subordinated notes, which are expected to price Tuesday May 4 via Deutsche Bank Securities.

The prospective issuer, a wholly owned subsidiary of Stockholm, Sweden-based Preem Holdings AB, will use the money to refinance debt and fund capital expenditures.

And a roadshow will start Friday in New York City for ONO Finance's offering of €300 million of 10-year senior notes.

A May 3-7 European roadshow is set to follow, with pricing expected to take place on May 7.

BNP Paribas and Morgan Stanley have the physical books on the debt refinancing deal from the Madrid, Spain-based cable, telephone and internet company.

Prospect News also learned Wednesday that Nextel Partners, Inc. will bring a new junk bond offering as part of the financing to fund a tender offer announced Wednesday for $356.95 million of the company's 11% senior notes due 2010.

Morgan Stanley and JP Morgan will lead both the bond and bank parts of the financing.

And Revlon Consumer Products Corp. will sell $400 million of seven-year new senior unsecured notes via Citigroup in a deal that will be marketed via a roadshow.

The New York City-based cosmetics firm will use the proceeds to refinance debt.

Price talk on Seneca, Valmont

Price talk is 7¼%-7½% on an upsized $300 million offering of eight-year senior notes (B2/BB-) from Seneca Gaming Corp. The deal, which was increased from $225 million, is expected to price on Thursday afternoon.

Merrill Lynch & Co. and Banc of America Securities are joint bookrunners.

Price talk of 7%-7¼% emerged Wednesday on Valmont Industries Inc.'s planned $150 million of 10-year senior subordinated notes (Ba3/B+), expected to price on Thursday via Credit Suisse First Boston.

Finally on Wednesday TUI AG, a Hanover, Germany-based travel industry company, is now considering a €500-€625 million range for the amount of non-rated bullet notes that it intends to sell on Friday.

On Tuesday market sources told Prospect News that the deal had upsized to €500 million from €350 million.

Price talk on the seven-year notes, via The Royal Bank of Scotland, Commerz and WestLB, is 6 5/8%-6 7/8%.

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