McLeod bonds up on restructuring plan; Enron continues post-Chapter 11 rebound

By Paul Deckelman and Paul A. Harris

New York, Dec. 4 - Bonds of McLeodUSA Inc. firmed smartly Tuesday, after the telecommunications company laid out the details of a planned restructuring that will involve swapping most of its debt for cash and equity in the revamped company. Enron Corp. bonds meanwhile improved for a second straight session following the company's Chapter 11 filing.

In the primary market, two deals priced, with Ingles Markets Inc. responding to strong demand with an upsizing of its offering to $250 million from $200 million. Also setting terms in the session was Horizon PCS, which sold $175 million of notes.

McLeodUSA's bonds "moved up a lot," said a market source, quoting the debt up around nine points across the board. He saw the Cedar Rapids, Iowa-based telecom operator's 8 1/8% notes due 2009 jumping to 23.5 bid from prior levels around 14 and its zero-coupon notes due 2007 ending at 24.5 bid, up from Monday's 15.5.

"All of the issues looked like they were pretty-well bid for today," ventured a trader, who saw its 11 3/8% notes due 2009, "one of the more liquid of the four tranches that we see," around the 23-25 bid level. "Bonds traded into the bid and then were lifted, so there was some activity there." He saw the company's other issues "pretty much trading on top of each other between a point to a half a point, so they were pretty much bid for around the 21.5-22.5 bid level."

Activity was brisk, with the FIPS market tracking service showing about $95 million of both the 8 1/8% and the 11 3/8% notes turning over, easily the most active issue on the session.

McLeod announced late Monday that it would undertake a comprehensive recapitalization and financial restructuring plan, which includes an exchange offer for its $2.935 billion of outstanding bond debt. McLeod plans to offer the bondholders at least $560 million of cash, plus about 14% of the new common stock of the revamped company, in return for at least 95% of the bonds. The company, which will get a sizable investment from the private equity firm of Forstmann, Little & Co., indicated that it may pursue its restructuring via a pre-packaged Chapter 11 filing.

But while the bondholders seemed pleased with the plan, which lifted its distressed bonds into the mid-20s, Moody's Investors Service cut the rating on its bonds several notches to Ca from B3. The ratings agency cited McLeod's "relatively tight liquidity," as well as its assessment that the bondholders will get a "low recovery value" from the debt swap. Shareholders, who will retain just 30% of the company's new equity, also withheld their applause, as McLeod's shares fell 11 cents, or 21.15%, to 41 cents on the Nasdaq. Turnover of 54 million shares was more than four times the usual daily volume.

Telecom bonds "are volatile," a trader said, noting that even as McLeod was up eight points or more, GT Group Telecom's bonds were on the slide, trading into a 14 bid; last week, the bonds had been seen in the lower 20s.

Williams Communications Group Inc.'s 10 7/8% notes hung around the 45-47 area, a trader said, while Level 3 Communications Inc.'s 9 1/8% notes due 2007 stayed around 50-52.

Outside of the telecommunications constellation, Enron bonds, which on Monday had bounced off their lows following the battered Houston-based energy company's weekend Chapter 11 filing, were up for another session, ending about three points higher, at 24 bid. Those bonds, which not so very long ago were investment-grade rated and traded at the spread equivalent of around par value, last week plummeted from the mid 50s down to the teens after would-be acquirer Dynegy Inc. pulled out of its prospective merger with Enron and the major ratings services cut its bonds down to weak junk levels.

The long-awaited weekend Chapter 11 filing with the U.S. Bankruptcy Court for the Southern District of New York could be said to have brought with it a certain sense of closure - perhaps even relief of sorts - marking as it does the culmination of a most difficult phase for the company and the beginning of a new process, during which Enron will be protected from the slings and arrows of outraged creditors, customers, suppliers and partners while it tries to get its act together.

That sense that the company has a shot at turning things around helped to likewise boost its shares on the New York Stock Exchange Tuesday, more than doubling their value to 87 cents from Monday's close at 40 cents. Volume of 294 million shares was nearly 10 times the usual 30-million share daily

handle.

Equity analyst John Olsen, director of research for the Houston securities firm Sanders Morris Harris, told the Associated Press that the embattled energy trader could emerge from one of the biggest Chapter 11 reorganizations ever with a second life as a smaller trader with different management and a supporting bank as a partner.

"The trading company did not bring Enron down. The energy outsourcing and pipelines did not cause Chapter 11. It was an egregious and overly aggressive financing strategy that blew up in their faces and everyone else's," Olsen said in holding out hope for Enron's revival.

The process of piecemeal downsizing and restructuring the company moved forward Tuesday with the news that British utility Centrica PLC had agreed to acquire the energy customer business and certain assets of Enron Direct Ltd., a European subsidiary of Enron, for $137 million in cash.

Another primarily European-based property which might soon be on the auction block is Enron's water-supply subsidiary, Azurix, which now exists chiefly as a European operation, having sold off its North American businesses recently.

Even as its corporate parent's bonds firmed for a second consecutive session Tuesday, Azurix's 10 3/8% and 10¾% bonds moved in tandem, rising 4.5 points to 65.5. Those bonds, which had been trading in the mid-80s before the collapse of the Enron acquisition talks and the resulting slide in its bonds, had dipped into the upper 50s late last week before turning back upward over the past two sessions on the prospect that the company might be sold as part of a restructuring and thus distance itself from the whole Enron debacle.

Elsewhere, the mystery behind Monday's sudden surge in activity in Conseco Inc.'s 9% notes due 2006 was unraveled, as a trader noted that the bonds had fallen sharply in heavy trading Monday as word spread through the market that The Wall Street Journal had reported - erroneously as it turned out - that the troubled Carmel, Ind.-based insurer had filed for Chapter 11 protection earlier this year. The bonds and shares "hit the Street pretty hard Monday morning and everybody backed away from them."

After the Dow Jones News Service ran a mid-afternoon retraction and clarification, "everybody said 'that's why those bonds fell out of bed'" and there was some bounce off the lows; by the end of the trading session Monday, the FIPS market tracking service noted that an incredible $2 billion-plus of the 9% bonds had changed hands, at one point dipping as low as 38 bid, well down from recent levels in the upper 40s, before ending offered around 44. On the stock side, the shares, which had ended above $4.20 on Friday, touched as low as $3.77 before ending at $3.90. In Tuesday's bond activity, the trader said, "Conseco pretty much stayed where they were (at the end of Monday's trading), "sort of languishing in that mid-40ish range, not up a hell of a lot" on delayed response to the retraction. He saw the 9s going home bid around 45-47. Conseco shares meanwhile ended down 2 cents at $3.88.

The trader otherwise saw some demand for long-end Kmart Corp. paper, quoting its 8¼% and 8 3/8% long-dated debt as trading in the 73-76 range, down from around 85-86 earlier this year.

Despite the bad publicity which Kmart recently got when Standard & Poor's dropped its bonds a notch to BB - which caused the Troy, Mich.-based discount retailing giant's bonds to soften all the way across the maturity curve - "there was some interest today in the long end. People think it's relatively cheap, down about 10 points from where it was about three months ago, and some people still believe in it and see it as a good value."

He said the long paper didn't trade in size, but the interest "was nice to see" anyhow.

Also on the upside, he said, was Friendly Ice Cream's 10½% senior notes due 2007. He had seen the notes dip about four or five points to bid levels around 68-70 after the Wilbraham, Mass.-based ice cream maker and restaurant chain operator said that it had been unable to complete its refinancing plan as scheduled, and that its pending tender offer for the bonds has been "undersubscribed," with just $3.242 million of the bonds tendered to date. But Friendly also announced that it had extended the tender offer and modified the terms, and would continue trying to line up new financing, although it is now seeking a smaller amount. "There was a little runup in the bonds" from Monday's lows, the trader said, "and they were once again trading in the 73-76 range," not far from their pre-news levels.

Bethlehem Steel Corp.'s 10 3/8% notes were seen up nearly two points at 6.5 bid, on news that the bankrupt steel giant, industry leader U.S. Steel and several other unidentified steel companies were in talks about consolidating the fractured American steel industry - negotiations which could produce a streamlined super-company. U.S. Steel and Bethlehem both said Tuesday that the right kind of consolidation could revive the sagging industry - if the federal government gives the steelers some sort of help in paying their enormous "legacy costs" - i.e., pension and benefit costs for the retired steelworkers who had been employed back in the days when the U.S.-based steelers dominated the world industry and had far larger

workforces.

U.S. Steel's 10¾% notes were quoted down a point at 98; the 10¾% and 11 3/8% bonds of Wheeling Steel, a possible participant in the consolidation, were unchanged at 10. Well-run and financially more secure AK Steel's 9 1/8% and 7 7/8% notes were unchanged at 104.5 and par, respectively.

Among new issues, Ingles Markets Inc.'s bonds "moved up quite a bit," a trader said, trading as high as 101.5 bid/102 offered when they were freed for secondary dealings; they came in a little toward the end of the session to close at 101 bid/101.5 offered.

In the secondary, there was much talk about one figure penciled into the margins of notepads on the desks of sell-siders: $2.1 billion. That's the amount of new issuance that priced during the week of Nov. 26, several syndicate officials told Prospect News, Monday and Tuesday.

"That's the largest issuance since Mid-August, on a weekly basis," one official stated.

"Last week you saw an equal amount of deals going across the credit spectrum," the official added. "You saw an equal amount of four-B's, and single-B's.

"So a lot of investors are focusing on single-B's, where earlier in the year they were focusing on high quality, four-B rated companies. They're looking down the credit spectrum, now."

Late in Tuesday's session terms emerged on Horizon PCS' offering of $175 million of 10-year notes (Caa1/CCC) via Credit Suisse First Boston. They priced to yield 13¾% at the high end of talk of 13½%-13¾%.

Much earlier in Tuesday's session Ingles Markets Inc. priced an upsized offering of $250 million of 10-year notes via Merrill Lynch & Co. and Banc of America. The deal, increased from $200 million, yielded 9%, in line talk of a yield in the 9% area although that talk had already been lowered from an initially discussed 9%-9¼%.

One official on the Ingles deal syndicate commented that it was "multiple times oversubscribed."

The official pointed to the Ingles deal, and to another food-sector offering, Smithfield Foods, Inc.'s $300 million deal which priced Oct. 17, and conjectured that the performance of both bodes well for A&P's sale of $225 million 10-year notes via Lehman Brothers, now on the road and set to price Dec. 17.

Also in Tuesday's primary, price talk of 8.25%-8.375% emerged on Stone Energy Corp.'s planned $200 million of 10-year notes. That deal, which comes via Merrill Lynch & Co., had been scheduled to price Friday. But sources told Prospect News that pricing has been moved up to Wednesday.

Although Findexa's €145 million of 10-year notes via Salomon Smith Barney was expected Tuesday, late in the session terms had not emerged and one source said it would price early Wednesday morning in London.

One addition to the calendar surfaced Tuesday: Rent-A-Center, Inc. will sell a $100 million add-on to its 11% senior subordinate notes due Aug. 15, 2008 (B1/B existing) via J.P. Morgan. The deal will take to the road Dec. 6-12, with pricing Dec. 12, a syndicate source said.

End

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