Upsized Starwood mega-deal, four other offerings priced; Nextel lower on Moody's downgrade threat

By Paul Deckelman and Paul A. Harris

New York, April 11 - International lodging giant Starwood Hotels & Resorts Worldwide Inc. sold a handsomely upsized two-part split-rated note offering Thursday, syndicate sources reported. Also clattering down the new-deal chute was an upsized bond offering from Swift Energy Co., as well as bond sales by Block Communications Inc., Beazer Homes USA Inc. and Russell Corp. A $200 million offering from PCA International joined the forward calendar.

In secondary dealings, a sharp stock market sell-off sparked by falling earnings at the usually profitable General Electric Co. and news reports of a Securities and Exchange Commission probe of the mighty International Business Machines Corp. had little discernible effect on the high-yield bond market. But a key junk telecommunications issue, Nextel Communications Inc., was in retreat after Moody's Investors Service threatened the No. 5 U.S. wireless communications operator with a possible ratings downgrade.

In total, four high yield offerings for $975 million priced Thursday. And with the upsizing, Starwood added another $1.5 billion to that in an offering that attracted attention from high-yield players even though its split rating would normally ensure an almost exclusively investment-grade audience.

Beazer Homes USA, Inc. priced $350 million of 10-year senior notes (Ba2/BB) at par to yield 8 3/8% via UBS Warburg. The official price talk had been 8 3/8%-8 5/8%.

Early in Thursday's session Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News that he thought he would play Beazer.

"I like the homebuilders' fundamentals," Difley said. "I think for the balance of at least this year you're going to see pretty darn good performance out of the homebuilding sector.

"And Beazer is a solid mid-double-B credit. The yield isn't terrific. But even if you get these bonds to basically stay at par, or where they're issued - which, depending upon what the Treasury market does over the next six to 12 months, is a possibility - you get an 8% or so return. It seems like a reasonable bet."

Beazer, of course, is not the only homebuilder credit to appear before high yield investors recently. There was the Standard Pacific Corp. $150 million drive-by which priced at 99.20 to yield 9 3/8% on April 10 and D.R. Horton, Inc.'s $250 million, which priced on April 4 at 99.171, to yield 8 5/8%.

And presently in the market, scheduled to price Friday, is Champion Homebuilders $150 million of five-year senior notes (B2/B) via Credit Suisse First Boston, with price talk of 11½% area.

Difley expressed the belief that the appearance of these four credits in the space of eight days is not necessarily a coincidence.

"The housing market has been a very resilient part of the economy and the big homebuilders continue to post impressive results," he said. "Fundamentally they're doing very well.

"Low rates and investor demand for homebuilding, given the pretty good fundamentals, is why they're able to tap the markets right now."

The market also heard terms Thursday on Block Communications, Inc.'s upsized deal of $175 million seven-year senior subordinated notes (B2/B-), increased from $150 million. The new notes priced at par to yield 9¼%, "at the tight end" of the 9¼%-9½% price talk, according to a syndicate source. Banc of America Securities ran the deal.

Late in Thursday's session the market heard terms on Russell Corp.'s new eight-year senior notes (B1/BB). That $250 million offering was also upsized, from $200 million. It priced at par to yield 9¼%. Price talk was 9¼%-9½%. J.P. Morgan ran the books.

Also upsized Thursday was Swift Energy's off-the-shelf sale of $200 million 10-year senior subordinated notes (B3/B). The deal, which was launched at $150 million, priced at par, to yield 9 3/8%. Credit Suisse First Boston was bookrunner.

Starwood's split-rated, two-tranche $1.5 billion offering of senior notes (Ba1/BBB-) via Lehman Brothers threatened to steal the thunder Thursday as it upsized from $1 billion. The $500 million 7 3/8% five-year notes priced at 99.685 to yield 7.45% while the $800 million of 7 7/8% 10-year notes priced at 99.483 to yield 7.95%.

Meanwhile, following Wednesday's session in which no new deals emerged, N.C.-based photographic services provider PCA International posed with dealrunner Goldman Sachs & Co. for an announcement of $200 million of new seven-year senior notes. A syndicate source told Prospect News that the notes will come in conjunction with a $50 million senior secured credit facility.

The company intends to use the proceeds to repay $104 million of subordinated notes, and $150 million of bank debt.

When the bonds which priced on Thursday were cleared for secondary dealings, traders said, the new Starwood paper didn't go very far from its issue price (99.685 for the $700 million of 7 3/8% notes due 2007 and 99.483 for the $800 million of 7 7/8% notes due 2012). "Both traded up a little bit, but they both ended kind of straddling [the issue prices], a trader said, quoting both tranches going home at 99.625 bid/par offered.

"There wasn't a heck of a lot of trading in high yield on this," he said. "It's going to be one of those crossover ones."

Another trader, who likewise saw the bonds hanging in around their issue prices, noted that the two tranches initially a "started off trading on spread," like any investment-grade issue, with the 10-years quoted at levels about 275-272 basis points over the comparable Treasuries. By the end of the day, however, he heard them quoted in dollar terms, like a pure junk bond, ending the session at 99.625 bid/99.875 offered.

While acknowledging that most of the interest in the new bonds would come from the ranks of the high grade and crossover investors, he noted that "one of the brokers who covers high yield actually came in, giving me a market when they freed up, so I guess some of the desks are split [in who's handling the mega-deal], but it's mainly crossover-type stuff."

The trader heard that Block Communications' new bonds, which were seen having firmed smartly out of the box had been bid around the 102-102.5 area, well up from their par issue price. "That was a nice pop, I would say, considering the atmosphere that was coming out of the equity markets," he said. "I guess that was nice for a sub [ordinated] note."

Another trader saw the new Blocks trading as high as 102 bid/102.75 offered, before coming slightly off those highs to end the day at 101.75 bid/102.25 offered.

He meantime pegged Swift Energy's new deal at 101.25 bid/102.25 offered going out, also up from par initially.

Away from the primary, the AMG mutual fund flow figures showed a $145 million inflow in the most recent week, according to a syndicate official who watches the data. That marks the eighth straight week that money has flowed into the market.

Looking at already established debt, Nextel's bonds were down about three points across the board after Moody's put the company's ratings, including the B1 on its senior unsecured debt, under review for a possible downgrade.

Moody's said its review would focus on the Reston, Va.-based wireless operator's "ability to grow cash flow in amounts sufficient to meet its capital expenditure requirement and mounting debt service obligations, and to achieve free cash flow in a reasonable time frame." Although Nextel currently enjoys "a good liquidity position" (over $3.4 billion in cash and an undrawn $1.5 billion revolving credit), Moody's cautioned that its term loans will begin to amortize in the fourth quarter, as its revolver commitment begins to reduce, and its three outstanding discount note issues will begin to require cash interest payments starting next year.

Nextel's benchmark 9 3/8% notes were being quoted as low as 61.5 bid and its 9½% paper was at 61, both down three points.

Elsewhere among the telecoms, Moody's cut several ratings of Flag Telecom Holdings Ltd. in response to Wednesday's news that its board had approved a restructuring plan under which all of its creditors will be paid, although at a sizeable discount to par. The ratings agency cut the Bermuda-based "carrier's carrier's" senior implied rating to Ca from Caa2, and cut the rating on its Flag Ltd. 8¼% senior notes due 2008 to Ca from Caa3. It kept the ratings on Flag's 11 5/8% dollar- and euro-denominated global senior notes due 2010 at Ca.

The 8¼% notes, which on Wednesday had jumped six points to 28 bid, stayed where they were, while the 11 5/8% paper rose eight points to that same 28 level.

Time Warner Telecom Inc. bonds were on the slide, its 10 1/8% notes quoted at 67.25 bid, down from 69. Its shares meantime lost more than 11% on Thursday, although there was no fresh news out on the Colorado-based facilities-based carrier. Among really distressed telecom paper, a trader said that MacLeodUSA, Inc. paper "was hanging out in the mid 20s range." While he saw the paper in 24.5 bid/25.5 -type markets during the morning, "after that, all of the offerings just disappeared and we're not quite sure what happened after that." The Cedar Rapids, Iowa-based competitive local exchange carrier is currently reorganizing under Chapter 11.

Outside of telecoms, there was weakness seen in the closely related cable sector, whose shares and bonds alike have recently been driven lower on investor concern over mounting debt levels, slowing subscriber growth and - after Adelphia Communications Corp. recently disclosed sizable off-balance-sheet debt obligations - possible accounting issues.

The Wall Street Journal reported Thursday in its influential "Heard on the Street" column that investors who may have once thought cable was a sure thing, with its near-monopoly position, solid customer base and growing revenue, may now be having some second thoughts. Not only is there concern in the wake of Adelphia's stunning disclosure that debt levels, already considered high, may be even higher than has been previously acknowledged, but now, "some investors are worrying that the industry's so-called operating cash flow figures might not be as strong as they have appeared. Investors are 'giving the cable companies too much credit for the cash flows they have, relative to their capital needs to grow it'," the screed quoted one portfolio manager as warning.

Adelphia's shares tumbled 19%, or $1.89 in Nasdaq dealings, to $8.01; meanwhile, its 10 7/8% notes dipped to 89 bid from prior levels at 93, while its 10¼% paper fell to 87 bid from 90. Its 9 7/8% paper due 2003 was in the 83 bid area, although a trader said he hadn't seen much in the way of trading.

And the Journal further remonstrated that "it turns out that Adelphia is far from alone in having off-balance-sheet debt." The possibility that other cable operators may have similar problems - Adelphia is already the subject of a Securities and Exchange Commission probe - is also dragging the securities of those companies lower. On Thursday, Charter Communications Inc.'s paper was quoted down a point across the board and its shares losing $1.03, or 10% on the Nasdaq, to $9.41. Its 10% notes due 2009 ended at 95.5 bid and its 8¼% bonds were at 89.5, both a point down. Cablevision Systems' spread-quoted bonds widened out about 25 basis points on the day to 325 basis points over the comparable Treasuries. Its shares lost $2.60, or nearly 9%, in New York Stock Exchange dealings, to close at $26.35.

On the upside, a trader marveled that Gap Stores "put their [disappointing] numbers out - and the bonds flew," at least for a while.

He saw the San Francisco-based apparel retailer's 6.90% notes due 2007, which ended Wednesday at 88 bid/89 offered, trading up to 89.5 bid, even as the company reported that same-store sales for March fell 12% from year-ago levels, marking two straight years that its sales have been declining. And bad as the March sales results were, April could well be worse, with the Gap projecting that April would only produce about 42% of the combined sales for the last two months. If those projections hold, April sales would only total about $900 million (March's were $1.21 billion), or about a 25% plunge from April, 2001 sales.

Despite those sobering numbers and the resulting 10% fall in its shares in NYSE dealings to $13.86 (down $1.58), the bonds remained on the upside all day, although they trimmed their gains late in the session and only finished half a point better at 88.5 bid/90.5 offered.

Crown Cork & Seal's bonds were heard better by a couple of points, despite a lack of fresh new news on the Philadelphia-based maker of consumer packaging products. Crown Cork, which recently sold its pharmaceutical packaging business and which may be shopping other assets, is one of the few high yield bond issues who've been mentioned in connection with asbestos claim litigation liability exposure which has not yet ducked under the bankruptcy court umbrella.

On Thursday, its 7 1/8% notes due later this year were up almost three points to 95 bid, while its 6¾% paper was also three points higher, at 87 bid.

"All of their paper has just been moving north" over the past few days, a trader said. "People may think that the asset sales are going well, or that the asbestos concerns are not quite as big a concern - or maybe just that the asbestos concerns have been pushed off past the maturity of these bonds - for these bonds are coming due pretty soon."

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