Adelphia gets a reprieve, sort of; Qwest again a real junker; three deals slate

By Paul Deckelman and Paul A. Harris

New York, May 30 - Adelphia Communications Corp. won an eleventh-hour stay of execution Thursday, as the beleaguered cable TV system operator's banks agreed to hold off on demanding immediate repayment of $7 billion - though only for a week, giving the company additional time to try to sell assets, solicit investment capital and convince the banks that it is still a viable concern. Elsewhere, Qwest Communications International Inc. - formerly a junk bonder before its acquisition of the better-rated Baby Bell US WEST pulled it into investment-grade territory - returned to its former status, as Moody's Investors Service downgraded its bonds to Ba2.

In the primary, after Wednesday's yawner, the market sparked to life with three new deals taking their places on the forward calendar.

Prospect News learned that CS Ships will lift anchor in mid-June to market to investors, steaming toward a transaction late that month. Also JLG Industries will reach for $150 million with a 10-year deal, with the roadshow starting Monday. And Kansas City Southern Railway will start marketing a $150 million seven-year deal Tuesday.

Meanwhile Prospect News heard that the buy-side will continue to exercise caution on fears the downgrades-to-upgrades picture may get slightly worse before it gets better.

Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, said during a Thursday interview that the firm's high yield accounts are presently running between 20%-25% BBB names.

"There's this demand for yield but there is still this level of uncertainty about taking credit risk," Gaffney said. "And investors are just trying to hide in the top tiers, no matter what the sector is." (see related story in this issue)

When Prospect News informed one of its sell-side sources that Loomis Sayles was running 20%-25% high grades in its high yield accounts the official conceded that from a certain perspective it seems to make sense.

"When you see some of the yields in high-grade land for telecom and power, it's not hard to see why high yield guys are buying selected high-grade names," this investment bank official commented.

"However the size is somewhat surprising. That may be a testament to the dearth of supply in the high-yield market."

The potential supply of new high-yield debt increased Thursday by $550 million as three issuers were heard to be in the primary market with junk bond deals.

McConnellsburg, Pa.-based JLG Industries, Inc., which manufactures lifting, digging and reaching equipment, will start roadshowing $150 million of new 10-year senior subordinated notes (BB+) on Monday, according to a syndicate source. Wachovia Securities and Credit Suisse First Boston are joint bookrunners.

Meanwhile, the roadshow starts Tuesday on Kansas City Southern Railway Corp.'s $150 million of seven-year senior bullets (existing ratings Ba2/BB-) via Morgan Stanley.

And in a deal not scheduled to set sail until mid-June London-based CP Ships, Ltd. intends to price $250 million of 10-year senior notes (BB+) by late June, according to a syndicate source. Salomon Smith Barney and Morgan Stanley are joint bookrunners on that deal.

Meanwhile price talk of 11% area emerged Thursday on H&E Equipment Service, Inc.'s $275 million of 10-year senior secured notes (B3/B), which are expected to price Friday via joint bookrunners Credit Suisse First Boston and Banc of America Securities.

The market also anticipates hearing terms Friday on Asbury Automotive Group, Inc.'s $200 million of 10-year senior subordinated notes (B3/B) via Goldman Sachs & Co. Price talk of 9 1/8%-9 3/8% was heard Wednesday.

And finally, although Wyndham International, Inc., the Dallas-based upscale hotelier was expected to complete its transaction of $750 million of six-year senior secured notes (Caa1/B-) on Friday, a syndicate source told Prospect News late in Thursday's session that Wyndham is now expected to price Tuesday and that price talk on the deal is anticipated Friday.

Adelphia Communications was hoping for a waiver from its lenders that would keep it from going into default on some $7 billion of bank debt due to its failure to file a timely annual report. A 30-day grace period, invoked when Adelphia failed to file due to the tangled state of its finances, was scheduled to expire Thursday, which would have left the troubled Coudersport, Pa.-based cabler in violation of reporting covenants in its bank facilities. That in turn would have left it vulnerable to demands from the bankers that it immediately pay up, which could have meant the company might be pushed into bankruptcy, although many analysts said the banks would be loathe to do so.

Late in the session, Adelphia's 10 7/8% notes were being quoted at 75 bid and its 10¼% notes as high as 77 bid, up as much as four to five points, on anticipation that Adelphia would be able to buy itself some extra time before the lenders lowered the boom.

The analysts and optimistic investors proved right - at least for the moment. Late in the day, word came across the tape that the bankers had agreed to hold off for a week, buying time for Adelphia as it seeks to appease its lenders, encourage possible equity investment in the cash-hungry company or sell assets to raise funds. A possible sale of Adelphia's Los Angeles-area operations to rival cable operator Charter Communications for more than $3 billion was seen as the most likely possibility on the latter front, although newly appointed Adelphia director Leonard Tow cautioned against a hasty sale. Tow - named to the board to replace one of the Rigas family members ousted from control of the company last week - said in a filing that Adelphia was in "advanced " talks to wrap up a sale by Friday evening and he contended that no action should be taken until such a deal could be discussed at a board meeting scheduled for Saturday.

In the meantime, the 20-plus bank coalition, led by Bank of America and Citigroup, chose not to immediately enforce the reporting covenant breach, although one bond trader said there really hadn't been much chance that they would.

"The banks are not stupid," he declared. "They don't want to close in on them right now," since throwing Adelphia into immediate bankruptcy would create a giant legal and financial mess that would not help protect their investment in the company. "They really had no choice."

He said the waiver extension, which had been widely anticipated by the market, "didn't really do much for the bonds," coming as it did well after most of the day's trading had wrapped up.

"This is such a damn jigsaw puzzle - putting the balance sheet of this company back together - it looks like it's taking people longer to figure out what's going on," another trader said. "The banks said 'Alright, we'll give you another week' - because they don't understand it either."

In March, Adelphia had thrown its stock and bond investors into turmoil with the revelation that it had as much as $2.3 billion of off-balance sheet liabilities due to company guarantees on loans extended to members of the founding Rigas family (a sum later raised to $3.1 billion, including hundreds of millions of dollars of direct advances by Adelphia to the Rigases for a variety of non-Adelphia related investments). Those disclosures have prompted ratings downgrades, shareholder lawsuits, probes by the SEC and two federal grand juries and the ouster of former chairman and chief executive officer John J. Rigas and a number of his family members from both the board and from their executive positions.

"You always want to see a company continue as an ongoing concern, out of bankruptcy, rather than [messing] around trying to sell off assets piecemeal," the trader said in explaining the banks' probable reluctance to immediately foreclose on Adelphia rather than give it additional time. He quoted Adelphia's 9¼% notes coming due later this year offered at 77 and its 9 7/8% notes due 2005 at 74, although he allowed that there was "not a lot of action" in the credit so late in the day.

Also in focus for junk market players Thursday, the trader said, was Qwest, whose $26 billion of debt was dropped to junk levels by Moody's, with the bonds going down two notches to Ba2 from Baa3 previously.

The ratings agency said the downgrade reflects Moody's concerns about: "1) the company's weak and still unresolved liquidity situation; 2) material cash drain at its long distance operating subsidiary, Qwest Communications Corporation ("QCC"); and 3) slowing growth in [Qwest's] ILEC [incumbent local exchange carrier - i.e. the US WEST Baby Bell local phone operations in 14 Western states]."

It also cited worries about the company's high leverage relative to expected free cash flow generating capacity, even with planned asset sales, such as the sale of its Yellow Pages unit, and uncertainties associated with the ongoing SEC investigation of Qwest's accounting practices.

The Moody's move completes Qwest's fall back into junkbondland (it originally was a high yield issuer until it bought the better-rated US West about two years ago). Standard & Poor's last week cut its bonds from BBB- to BB.

The trader opined that at least as far as Qwest's shorter-dated operating company paper, the cut to junk "was kind of baked in," coming as it did on the heels of the earlier S&P downgrade. "There were not a lot of sellers coming out of the woodwork on the news, just some odd-lot guys wanting to spit it out," with Qwest's operating company paper maturing in 2002 still holding in at bid levels at or above 98.

Besides the fact that the downgrade was expected, he noted that the company was "claiming that there were no rating triggers" on any of its other debt (such as the one on Qwest rival WorldCom Inc.'s $2 billion accounts receivable-based facility, which forced WorldCom to renegotiate a new accounts-receivable-based facility after its $32 billion of debt was cut to junk earlier in the month) and it said that the downgrade would not materially impact its operations, "so they got that out of the way."

The trader said that the parent holding company's Qwest Capital Funding paper - which he noted is one level further away from Qwest's assets than the operating unit paper - weakened a bit on the downgrade news. He quoted it down about a point to a point-and-a-half on the news, with the 7½% notes due 2011 ending at 74 bid/75 offered, and its 7¼% notes due 2008 easing to 78 bid/79 offered from prior levels around 79.5. Those issues had been trading at or above 90 bid just about three months ago, before the company got his with questions about its accounting practices and investor jitters over the deteriorating finances of heretofore "safe" investment-grade telecom giants like Qwest and WorldCom.

Qwest is currently in the process of trying to raise cash by selling assets, including its Yellow Pages unit, which CEO Joseph P. Nacchio has estimated could fetch between $8 billion and $10 billion. Thursday's New York Times reported that several potential buyers have made offers of at least $8.5 billion - or even more. "They've got that going for them, as far as short-term liquidity," the trader concluded.

Another trader saw Qwest paper down a point or so at the most on the downgrade news, calling it "not a big deal" in light of the previous S&P downgrade to junk. He saw the holding company paper softer than the operating company paper due to its relative subordination; the holding company paper was down about two points, he said, and the operating company bonds off about a point.

While acknowledging that Qwest has "a lot of moving parts" and would be in a "precarious" situation until it managed to lock up its asset sales and shed its non-core operations, like the Yellow Pages operation, he said that the dip in Qwest on the Moody's downgrade was not-unexpected and just "a knee-jerk reaction."

Elsewhere, he noted, there was little or no continuing secondary market activity in recently priced new deals. "Most of it, we haven't even really seen. A lot of these deals were priced to sell and got put away" after they came to market.

At another desk, a trader agreed that "the paper comes, and then kind of gets stale and stalls."

He noted that Roundy's Supermarkets' new $225 million of 8 7/8% senior subordinated notes due 2012, which priced a week ago at par, initially ran up as high as 102 bid, "and now they're stuck in that same 101 to 102 level, with not much activity.

"That's the way a lot of the new-issue stuff has been lately," he added, with, for instance, Silgan Holdings Inc.'s $200 million of 9% senior subordinated add-on notes due 2009, which priced a month ago at 103 "trading at the 104 level and then just dying there, with not much happening.

"Anything that's popped in the past week or so, has made its run, and there's no volatility right now. So we're seeing not a heck of a lot of activity."

High yield players Friday will meanwhile be watching the mutual fund-flow numbers released every week by AMG Data Services, to see whether last week's $479.7 million outflow - the biggest one-week drop since mid-February - was just a fluke or the beginning of an unwelcome trend.

The fund flow numbers are seen by many as a reliable proxy for overall high yield market liquidity trends, and while one large outflow shouldn't be too troubling, against the backdrop over $5 billion in net inflows to the junk funds since the start of the year, a repeat performance could get some players wondering whether the easy liquidity which has fueled a strong new-issue surge and a robust non-telecom secondary over the first five months of the year might be coming to an end. As of last week, more money had come into the funds than had left them in 16 out of the 21 weeks since the start of the year.

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