Charter down on Moody's cut, restructuring talk; satellite radio gains; Levi Strauss prices add-on

By Paul Deckelman and Paul A. Harris

New York, Jan. 15 - Charter Communications Holdings LLC bonds were on the slide on Wednesday, driven lower by a Moody's Investors Service downgrade and a report that the company had hired Lazard Freres to advise it on a financial restructuring. On the upside, the bonds of Sirius Satellite Radio Inc. jumped, and those of competitor XM Satellite Radio Holdings Inc. also firmed, as each of the satellite broadcasters moved a step closer to completing previously announced financial restructuring strategies.

In the primary sphere, having gorged themselves on Levi Strauss & Co. junk bonds during the run up to the holidays, high-yield investors found that they could still fit into the credit story of the San Francisco apparel maker which priced an add-on Wednesday spot on to the 103 area price talk.

And the new issuance calendar grew by two deals, Wednesday, as Freeport McMoRan Copper & Gold Inc. announced a new offering with the roadshow getting under way Thursday and Hurricane Hydrocarbons said it would be taking its deal on the road in the week of Jan. 27

Meanwhile a buy-side source selected a flavor for the junk bond deals currently positioned on the forward calendar to price during the remainder of the Jan. 13 week, as well as the following week. During a Wednesday conversation with Prospect News, this investor labeled them collectively "vanilla."

"They will all do fine," the high-yield investor commented, speaking on background.

"A lot of money has come in," the buy-sider added. "The new issue calendar is building. For the most part the issuers are companies that have been around. You don't see a lot of new, off-the-run names coming through."

As to the steady, almost uninterrupted stream of cash that has been flowing into high-yield mutual funds, capped off last week by an inflow of $1.025 billion which Bear Stearns reported as being the ninth biggest, this investor set forth circumstances which could turn off the valve, or get the flow moving the other way.

"Last year's theme was 'integrity' and the utility sector," said the buy-side source. "The year before that it was the telecom sector that cracked. I don't know what the theme is going to be this year but you certainly don't expect to see a whole lot of great earnings reports anytime soon.

"Therefore one could expect to see some money coming out when people realize that."

However this investor did not profess the belief that a possible U.S. war with Iraq would likely cause a major disruption in the market.

"My guess is that unless the war goes really bad we're all going to continue to function because we've been through this before," said the buy-sider. "We went through the first Gulf War and we went through Afghanistan.

"If anything it could be that geopolitical events are holding things back and once things get going the market will rally."

The moderate pace of Tuesday's primary market carried over into Wednesday as one deal priced and two hopped onto the forward calendar.

Levi Strauss priced a $100 million principal amount add-on to the $425 million 12¼% senior notes due Dec. 15, 2012 (B3/BB-) that it priced last Nov. 26. That deal that was upsized from $300 million. The Rule 144A add-on, via Salomon Smith Barney and Banc of America Securities, priced at 103, spot on to the 103 area price talk.

Earlier in the week the San Francisco apparel maker did another add-on, announcing in a press release that it had agreed to sell $50 million of the 12¼% senior notes to AIG Global Investment Corp.

Meanwhile Wednesday the market learned that New Orleans-based Freeport McMoRan Copper & Gold would begin roadshowing $250 million of senior notes due 2010 (B3/B) Thursday in London, figuring to price the Rule 144A/Regulation S deal on Jan. 24 via JP Morgan, Merrill Lynch & Co. and UBS Warburg.

And an emerging markets source told Prospect News that Hurricane Hydrocarbons, an integrated oil company active in the Republic of Kazakhstan, would begin roadshowing a minimum of $100 million of senior notes with an intermediate maturity of either five or seven years during the week of Jan. 27. The deal, via bookrunner JP Morgan, will likely price around Feb. 3.

Also on Wednesday price talk of 9% area emerged on American Media Inc.'s upcoming $150 million of senior subordinated notes due 2011 (B2/B-). The deal is expected to price this week, via JP Morgan.

And price talk of 10¾%-11% was heard Wednesday on Remington Arms Co. Inc.'s $175 million of senior notes, also due 2011, and also B2/B-. The notes, via bookrunner Credit Suisse First Boston, are expected to price Friday.

With Levi having successfully sold its add-on deal, a trader quoted the apparel maker's existing 11 5/8% notes due 2008 as having backtracked to 101.5 bid/102.5 offered, down from 104 bid/105 offered on Monday, when news of the latest add-ons first began to circulate around the market.

"They piled more debt on and that's a negative after a while," he observed.

Charter Communications has had its own share of negatives lately, and it got one more on Wednesday, when Moody's cut its senior unsecured bonds four notches to Ca from prior levels at B3 for Holdings, which is the issuer of record for most of the junk bond debt, and two notches from Caa2 for parent Charter Communications Inc.

The ratings agency cited "the growing probability of expected credit losses which Moody's believes will be sustained in connection with an increasingly likely debt restructuring over the near-to-intermediate term. The timing and specific nature of the event(s) that will ultimately precipitate such a restructuring remain somewhat less certain than Moody's expectation that it will be necessary."

Moody's said that over the past several months, Charter's operating performance "has been weak relative to even revised expectations, and has lagged that of its peer group in several regards but most notably in the areas of net subscriber losses and cash flow growth. Basic subscriber losses, driven partly by tighter credit standards and less aggressive promotional activity but also by sharp rate hikes and mainly by market share erosion to competing DBS [i.e. satellite TV] service providers, have mounted to meaningful levels. This subscriber churn has now led to a significant amount of lost revenue and cash flow, which has been difficult to replace."

A trader quoted the St. Louis-based cabler's benchmark 8 5/8% notes due 2009 as having dipped as low as 44.75 bid, before finishing around 46.5, which called down around two or three points on the session and down six points over dealings both Wednesday and Tuesday, when he said there had been talk in the market that the company had hired a law firm or advisor to advise it on restructuring.

Sure enough, on Wednesday, the broadcasting industry trade publication Broadcasting & Cable reported on its website that Charter had hired investment banker Lazard Freres to help it restructure its more than $20 million of outstanding bond and bank debt obligations.

Charter was quoted in news accounts as saying that the report of the Lazard Freres hire ""is all based on speculation."

The trader noted that the decline in the bonds of Charter - which a year ago had seemed to be one of the strongest and most promising of the junk bond credits - was reminiscent of the downfall of rival cable operator Adelphia Communications Corp., now currently mired in bankruptcy after revelations of massive accounting irregularities and alleged improper borrowing from the company by the now-ousted Rigas family controlled management.

"Look at where Adelphia is trading," he said, "44, 45, 46, right near where Charter is trading. I would think they [Charter] deserve the same levels."

Besides the operational problems cited by Moody's, Charter is also wrestling with its own potential book-cooking fiasco; a federal grand jury in St. Louis is investigating aspects of the company's accounting, including the methods it uses to compile its subscriber numbers - a key measure of cable industry company performance. Two senior executives - then-chief financial officer Kent D. Kalkwarf and then-chief operating officer David Barford - were sacked by the company in late December, with Charter specifically linking those firings to the ongoing investigation.

Another trader also saw the 8 5/8s having fallen to closing levels around 45.5 bid/46.5 offered from 49 bid/51 offered on Tuesday, but saw a surprising sign of residual strength in some of the company's other issues, quoting its 10¾% notes as having fallen from prior levels around 49 bid/51 offered, but going home bid at 45.5 without any offerings - a possible indicator that nobody is looking to dump the credit.

"By the end of the day, they were all pretty much bid without [offerings]," he said, with the two issues of 11¾% notes, due 2010 and 2011, going out bid at 32 and 28, respectively.

He speculated that "people's thoughts are now on restructuring - they're thinking 'the worst is behind us, and let's move on.'"

Charter stockholders, meantime, were not feeling very confident Wednesday; the company's Nasdaq-traded shares fell 19 cents (12.84%) to $1.29 on volume of 36.3 million shares, about triple the norm.

The prospect of a coming restructuring apparently is welcomed by both the shareholders and the bondholders of rival satellite radio broadcasters Sirius and XM.

Sirius' 15% notes were heard to have jumped to 43 bid from prior levels around 30, while its 14½% notes likewise zoomed to 45 bid from 33 earlier. Its shares were also on the upside, firming by nine cents (7.03%) to $1.37, on very heavy Nasdaq volume of 40.6 million shares - an almost 16-fold increase in activity levels.

New York-based Sirius announced that the Federal Communications Commission has approved the company's application to transfer control of its operating licenses in connection with its recapitalization.

Sirius is in the midst of efforts to swap almost $700 million in debt and all of its $525 million preferred stock for common stock, a transaction which it says it is hoping to complete this quarter. With a sizable equity stake to be issued to its creditors, FCC approval for the license transfer was a necessary step.

Sirius competitor XM, meantime, said that General Motors and an investor group which are together providing the Washington, D.C. based broadcaster with a $450 million credit infusion, had approved lowering the minimum participation threshold on the company's pending offer to exchange new debt, cash and equity warrants for its 14% senior secured notes due 2010 to 75% from the originally outlined 90%, making it more likely that the bondholders would approve the exchange offer, a key component to the recapitalization.

XM's shares were up 46 cents (12.64%) in Nasdaq dealings Wednesday to $4.10 on volume of 14.7 million, nearly seven times the usual turnover.

Its 14% notes, meantime, were quoted two points better, at 63 bid/64 offered.

Outside of the communications area, Fleming Cos. Inc., whose bonds collapsed some 10 points on Tuesday after the Dallas-based wholesale grocery distributor warned that its earnings and EBITDA for the fourth quarter would likely come in at levels well under those projected by analysts, were down another couple of points Wednesday.

Fleming's 10 5/8% subordinated notes due 2007 were four points lower Wednesday, at 55 bid/57 offered, while its 10 1/8% senior notes due 2008 were two points down, at 76.5 bid/78.5 offered.

Fleming shares, which had swooned 22.70% on Tuesday, lost another 69 cents (13.69%) on Wednesday to end at $4.35, on NYSE volume of 2.9 million, about four times the usual.

The bonds of Fleming's largest customer, Kmart Corp. - which had firmed several points on Tuesday after the bankrupt Troy, Mich.-based discount retailing giant announced a list of 326 store closings and plans to cut as many as 37,000 jobs as it tries to downsize itself to manageable levels and emerge from Chapter 11 - continued to push upward, its 9 3/8% notes due 2006 a point better at 19.5 bid/20.5 offered.

And Continental Airlines' 8% notes due 2005 gained two points of altitude to close at 65 bid/66 offered, after the Houston-based air carrier reported a net loss of $109 million ($1.67 per share) for the fourth quarter - well down from a loss of $149 million ($2.58 per share), a year earlier, and down as well from the $1.99 per share loss Wall Street analysts had been looking for. Continental shares were up 20 cents (2.25%) to $9.10 on the NYSE, on volume of 2.3 million shares, about double the usual handle.

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