WorldCom off as S&P drops ratings; Qwest firms on CEO shakeup

By Paul Deckelman and Paul A. Harris

New York, June 17 - WorldCom Inc. bonds and shares were lower Monday, as Standard & Poor's dropped the telecom giant's ratings two notches on its delays in finalizing a much-needed $5 billion credit line, refinancing worries and concerns about demand for long distance. On the upside, Qwest Communications International Inc. was up several points after the troubled telecommunications operator replaced its chief executive officer over the weekend.

In primaryside dealings, the wheels of fortune went into motion on two new junk bond offerings from gaming credits, as Chumash Casino and Resort launched its roadshow and Wynn Las Vegas disclosed a pending second mortgage notes offering in an SEC filing.

Meanwhile terms emerged on Vertis, Inc., another deal that priced with a yield that was wider than price talk.

Of the nine high yield tranches that priced between Thursday June 13 and Monday, seven priced wide of their talk

To quickly run down the Thursday-Friday action, the wide-pricing deals included Metaldyne (yield 11%/ price talk 9¾%-10%), AmeriCredit Corp. (yield 9½%, price talk 9%-9¼%), Fleming (yield 9¼%, price talk 8 7/8%-9 1/8%); Burns Philp (yield 9¾%, price talk 9%-9¼%) Technical Olympic's eight-year senior notes (yield 9%, price talk 8½%-8¾%) and 10-year senior subordinated notes (yield 10 3/8%, price talk 75 basis points area over the seniors).

Add to the list Vertis, Inc., which priced $250 million of seven-year senior notes (B2/B-) at 99.0 on Monday to yield 11.03% via joint bookrunners Deutsche Bank Securities Inc. and JP Morgan.

Price talk on Vertis was for a yield of 10¼%-10½%.

The market also heard terms Monday on the H&E Equipment Services mezzanine tranche, news of which surfaced when the company restructured its offering earlier in June. Instead of $275 million 10-year senior secured second priority notes, H&E priced $200 million on June 3 and added a second junior tranche.

That mezzanine tranche of $53 million of 11-year senior subordinated notes priced at 94.356 to yield 13½% via Credit Suisse First Boston.

New business surfaced as Chumash Casino and Resort Enterprise hit the road with $150 million of eight-year senior notes via Banc of America Securities. A syndicate source told Prospect News that the Santa Ynez gaming company will use the proceeds to address capacity issues having to do with parking. The roadshow wraps up on June 26.

Capital expenditures also appear to be the motivating force bringing Wynn Las Vegas into the market with $350 million of second mortgage notes. In a filing with the Securities and Exchange Commission outlining its IPO the company made reference to the pending bond deal, although no maturity or bookrunners were mentioned. The notes will be callable and will contain an equity clawback, according to the filing.

Proceeds will be used to help finance development and construction of the issuer's Le Rêve project.

Revisions in the maturity and call structure of Spartan Stores, Inc.'s new Rule 144A senior subordinated notes emerged along with the 11%-11¼% price talk, Monday.

The maturity was reduced to seven years from 10 years and the call protection to four years from five. Lehman is running the books on Spartan's deal, which is expected to price Wednesday.

Finally on Wednesday, price talk of 8¾%-9% was issued on the eurobond deal from Kronos International, Inc. Its €270 million of seven-year senior secured notes (BB-/BB) are also expected to price Wednesday, via Deutsche Bank Securities.

In secondary activity, WorldCom's benchmark 7½% notes due 2011, which had opened around Friday's closing levels of 50 bid/51 offered pushed down to about 48 bid/49 offered, and a trader noted that its bonds were about two points lower all across the board. WorldCom shares fell 14.5 cents (9.09%) in Nasdaq dealings, to end at $1.45. Volume was an active 147 million shares, over 50 million more than usual.

WorldCom was on the receiving end of a two-notch ratings downgrade by S& P, while lowered the Clinton, Miss.-based long-distance carrier's senior unsecured bond rating to B+ from BB previously. The rating remains on CreditWatch with negative implications.

S&P cited WorldCom's anticipated delay in obtaining its $5 billion bank facility, which company officials revealed during Friday's webcast of the company's annual meeting. WorldCom sought at that time to downplay the notion that a failure to close on the $5 billion financing by the end of June - the target it had previously set - should be interpreted as a setback, contending instead that it was more important to take a little more time in order to hammer out more favorable terms that would help WorldCom down the line.

But besides the delay, the ratings agency warned that WorldCom faced "increased refinancing risk associated with large debt maturities commencing in 2003, and the continued weak environment for long-distance services. In addition, the company's confirmation that it will further cut capital spending by $1 billion in 2003 and reduce its workforce by 20% could negatively impact future growth prospects."

S&P credit analyst Rosemarie Kalinowski also cautioned that "even if the bank loan is successfully negotiated, we are concerned about WorldCom's asset valuation in relation to its total debt outstanding, as the demand for long-distance voice and data services continues to be impacted by a slow economic recovery, technology substitution, and competition." She added that "moreover, because of WorldCom's debt load [estimated at about $30 billion] and excess long-haul capacity in the market, the potential of being acquired by a financially stronger entity is limited in the near term."

Putting the best possible face on the downgrade, WorldCom asserted in a statement that the downgrade "has absolutely no impact on WorldCom's credit facility negotiations, our operations or our customers."

WorldCom senior vice president and treasurer Susan Mayer continued in the statement that WorldCom's negotiations with its banks on the new credit facility " continue to go well. Our lead banks are supportive and, in fact, have committed about $450 million of new money to the deal, which means the company only needs to raise about $300 million from other banks to reach the expected $5 billion level."

Mayer further said that since the company has "plenty of cash on hand and no debt maturing over the next six months," it is in no hurry to ink a deal just for the sake of meeting an arbitrary deadline "It is much more important that WorldCom secure the best terms possible rather than just rush to get a deal done," the WorldCom statement concluded.

S&P's downgrade of WorldCom was its second downgrade of a major telecom player in as many sessions, following on the heels of Friday's one-notch cut in Sprint Corp.'s ratings which dropped the latter's bonds from BBB to BBB-. That caused Sprint's bonds to widen out on Friday, and to take with its bonds of a number of junk-rated PCS affiliates and other wireless communications companies.

In a conference call with investors Monday on which Friday's Sprint downgrade was discussed, S&P analyst Kalinowski said the agency's outlook for the whole wireless sector had become increasingly negative in recent weeks, and said S&P was reviewing the entire wireless business, owing to its more negative outlook on the sector. The S&P analyst warned that she did not see the prospect for wireless companies "improving anytime soon, not in the next 18 to 24 months. I don't see any positives on the horizon."

Sprint's bonds, which had fallen Friday, were seen Monday continuing at those lower levels to which they had fallen Friday, with the 8 3/8% notes due 2012 at 94, its 8 ¾% notes due 2032 at 89.75 bid, and its 7 1/8% notes due 2006 at 92.375 bid. Sprint shares were off 65 cents (5.63%) to $11.10 on the New York Stock Exchange, while the tracking stock of its Sprint PCS Group wireless operation was off 30 cents (6.82%) to $4.10.

Nextel Communications Inc., whose bonds had pushed lower on Friday along with the rest of the wireless and PCS operators, were heard to have bounced back, although in fairly light dealings, to bid levels around 63.5-64 for its benchmark 9 3/8% senior notes due 2009. A trader said the No. 5 U.S. wireless carrier's debt was up about a point to a point-and-a-half on the session.

Also higher was Qwest Communications paper, in line with the Denver-based telecommer's shares, which zoomed 85 cents (20.48%) in NYSE dealings to close at $5, on volume of 22.7 million shares, more than double the usual turnover. The stock got its boost on the news that the outspoken and charismatic Joseph P. Nacchio was out as CEO, to be replaced by Richard Notebaert, lately the chief executive of Tellelabs Inc., but before that the chief executive at Ameritech Inc. - the "Baby Bell" regional Bell operating company that covers the Midwest, now a part of SBC Communications Inc.

Given that Qwest's strongest suit is its own RBOC operations in the Western part of the U.S. - Qwest bought Rocky Mountain states "Baby Bell" U.S. West in 2000 - the choice of an experienced RBOC manager was seen by the financial markets as a reassuring, back-to-basics move by a company which seemed to have lost its way, as evidenced by the more than 92% plunge in its stock price since the summer of 2000, when it neared $58. Notebaert has a reputation as a tough, no-nonsense manager - the right man to be in charge at a time when Qwest is in the midst of trying to sell assets to cut its bloated $26 billion debt load and to fend off regulatory inquiries into the company's accounting practices.

Nacchio was the latest in a growing line of once high-flying "superstar CEOs" who've recently been forced to resign under pressure from restive stock and bondholders and nervous boards of directors as their companies' shares have tanked and the companies have tried to keep from choking on their massive debt loads - a list which has included such varied names as Bernie Ebbers at WorldCom, John J. Rigas at Adelphia Communications Corp., and, from outside the communications world, Tyco International Corp.'s Dennis Kozlowski, currently under indictment, and Charles C. Conway of Kmart Corp, currently in Chapter 11.

A trader quoted Qwest's 7¾% notes due 2008 at 83.5 bid/84.5 offered, up from 82 bid/83 offered on Friday. Its 7¾% notes due 2031 firmed to 71 bid from 69, while its 7.90% notes due 2010 were two points better, at 80 bid.

Cable names, which have recently been badly beaten up on troubles related to Adelphia's slide toward bankruptcy, were seen improved on Monday, although overall trading was relatively light. A trader quoted Charter Communications Inc.'s 8 3/8% notes at 77.5 bid/78.5 offered, up a pair from Friday, while its 8 5/8% notes due 2009 were also two points higher, at 78.25. Cablevision unit CSC Holdings Inc.'s 8 1/8% notes due 2009 were a point better at 92, while Adelphia's 10 7/8% notes due 2011 firmed to 52 bid/53 offered from 49.5 bid/50.5 offered Friday, and its 9 7/8% notes due 2007 were two-and-a-half points better at 50. Adelphia's Century Communications unit's 8 7/8% notes due 2007, which had crashed into the mid-30s recently as the company filed for bankruptcy, started the week almost four points better at 42.

Adelphia's bonds have firmed somewhat over the past week even as bankruptcy loomed, observers said, apparently on the theory that a structured, orderly restructuring under the protection of the courts would be of more benefit to creditors than a willy-nilly firesale of valuable assets in a futile race ti stay out of Chapter 11.

The troubled Coudersport, Pa.-based cabler seemed to move another step toward a filing late Monday, when it announced that it had missed a $51.3 million interest payment on its 10¼% notes due 2009 and failed to pay $4.19 million in interest its Arahova Communications Inc. unit's 8 3/8% notes due 2007.

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