Sprint Nextel up on numbers, debt-pay plans; auto credits continue rebound; Allis-Chalmers suspends deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 6 - Sprint Nextel Corp. bonds and those of its Sprint Capital Corp. financing subsidiary were seen better Wednesday after the Overland Park, Kan.-based wireless telecommunications company reported second-quarter numbers. Although the company fell into the red in the latest quarter versus a year-ago profit, its subscriber-loss figures were less severe than expected. Sprint also announced plans to raise capital and could use some of those proceeds to reduce debt.

Another earnings-related upsider was Amkor Technology Inc., whose bonds firmed after the Chandler, Ariz.-based semiconductor testing and packaging company posted its seventh straight quarterly gain.

Bonds of automotive bellwether General Motors Corp. and Ford Motor Co., as well as their respective auto-loan financing units, were seen better by a point or more pretty much across the board, continuing to rebound from the oversold condition seen last week after industry leader GM posted a gigantic quarterly loss - described by one market wag as being "bigger than the tailfins on a '59 Caddy" - followed by its announcement of an equally sizable downturn in its July vehicle sales.

Also continuing to recover after having reached their nadir a couple of sessions ago on bad earnings were the notes of Dallas-based telephone directory publisher Idearc Inc., with traders attributing the rebound to short covering.

In the primary arena, Allis-Chalmers Energy Inc. was heard to have suspended its upcoming $350 million issue of 10-year notes. High yield syndicate sources also saw Texas Industries Inc. getting ready to bring an add-on to its existing 7¼% notes to market, possibly as soon as Thursday.

Market indicators continue climb

Back among the established issues, a trader said that the widely followed CDX index of junk bond performance was up 7/16 point on Wednesday, quoting it at 93 1/16 bid, 93¼ offered. The KDP High Yield Daily Index rose by 19 basis points to end at 70.46, while its yield narrowed by 3 bps to 10.60%.

In the broader market, advancing issues trailed decliners by a narrow margin. Activity, represented by dollar volume, declined by 2.5% from the levels seen in Tuesday's session.

"It was a funny day," a trader said. "I got the sense that every single dealer was doing something different. There wasn't a ton of Street trading, but you could see that things were happening.

"It was one of those days where every individual dealer was working on what they had to work on. It wasn't a terrible day, but it wasn't overly active."

"It was a pretty quiet day," another trader observed. "I don't think we heard too much."

Sprint up despite loss; plans convertible sale

Sprint Nextel's bonds firmed following the release of the company's quarterly numbers, some of which were better than expected, and the announcement that it will sell $3 billion of new convertible notes and may use at least some of those proceeds to reduce existing debt, which net of cash and marketable securities stood at $19.5 billion at the quarter's end. The total outstanding principal amount was $22.6 billion. The company said the money generated from the converts sale would be used for general corporate purposes, with debt paydown the only possible use to be specifically mentioned.

Sprint Nextel's widely held 6% notes due 2016 were easily the most actively traded issue of the day, with over $100 million of the split-rated (Baa3/BB/BBB-) bonds changing hands by mid-afternoon, more than four times the volume of the next most busily traded credit. A trader pegged the bonds going out up 1½ points on the session at 86.5 bid, 87.5 offered.

Another trader - who admitted that normally, "we don't trade a lot of Sprint over here" - nonetheless said that "a lot of them were trading." He saw the 6s having risen to 87, while the company's 6 7/8% notes due 2013 had moved up to 78.5, its 6.90% notes due 2019 had gone out at 83.25, and on the longer end, its 8¾% bonds due 2032 had firmed to 90.75.

"They definitely were very active," he declared.

A market source saw the 6s push all the way up to the 87.5 mark in busy intraday round-lot trading, before coming down from those peak levels around mid-day to about the 85.625 bid area, up a point. However, a late spurt carried the bonds back up to as high as 88, before they went out at their previous high of 87.5, up more than 3 points on the day.

Also active were the 7 5/8% notes due 2011, which were quoted as having firmed to 99.125. The source further saw the 8¾% bonds going out at 91.5, up nearly 3 points on the day, although the 6.90s actually ended up marginally lower at about the 85 level.

At another desk, however, those same 6.90s were called 2 point gainers on the day at 87.5.

While the wireless company's bonds were better, its New York Stock Exchange-traded shares were pushed lower by investor dismay about the upcoming convertible issue, which has the potential to dilute the existing equity float by an estimated 10% to 15%. The shares ended down $1.21, or 14.15%, at $7.34, near their low for the day, on volume of 119 million, about 3½ times the usual turnover.

Sprint Nextel announced that in the second quarter it lost $344 million, or 12 cents per share, versus a year-earlier profit of $19 million, or 1 cent per share. However, excluding one-time items like the $149 million of pretax charges connected with the former Sprint Corp.'s 2005 acquisition of what was then Nextel Communications Inc., which covered items like personnel severance and asset impairments, adjusted earnings for the quarter came in at 6 cents per share, double what Wall Street was looking for.

Sprint Nextel continued to lose customers in the quarter, although the pace of the hemorrhaging was slowed. During the quarter, it reported the net loss of some 901,000 customers, including 776,000 post-paid customers - i.e. those who are billed on a regular monthly basis and are considered more valuable than pre-paid customers. However, the downturn was less than analysts had been expecting.

Sprint Nextel, which serves some 52 million customers nationwide, making it the third-largest U.S. wireless operator behind AT&T/Cingular and Verizon Wireless, said that churn, or the rate of customer cancellations, dropped to 2% in the quarter from 2.45% in the first quarter. Sprint attributed its smaller-than-expected customer-loss results to, among other factors, sales of its new Samsung-produced "Instinct" phones, as well as the company's introduction of unlimited voice and data plans.

However, the company warned that it expects to report higher post-paid subscriber losses in the current third quarter due to a seasonal uptick in churn versus the second quarter, and anticipates "modest pressure" on post-paid customer ARPU - average revenue per user, a key economic performance metric in the telecom industry - for the balance of the year.

On the upside, company executives said in a morning conference call with analysts following the release of the results that they expect the recent sequential declines in post-paid customer gross additions to moderate, and see free cash flow improving "substantially" in the year's second half.

They further projected that Sprint Nextel expects to remain in compliance with its debt covenants for the foreseeable future and expects to reduce its gross debt level by at least $1 billion by the end of the current quarter (see related story elsewhere in this issue).

Amkor up on better results

Also on the earnings front, a trader saw Amkor Technology's bonds "all up ½ point on good numbers," with its 7 1/8% notes due 2011 at 94.75 bid, 95.75 offered, its 7¾% notes due 2013 at 91 bid, 92 offered, and its 9¼% notes due 2016 at 94.5 bid, 95.5 offered.

At another shop, a market source said the 7¾% notes were ½ point better at 91.5.

Amkor's Nasdaq-traded shares meantime rose by 91 cents, or 11.06%, to $9.14, near their session high. Volume of 7.7 million shares was more than double the norm.

Amkor released its earnings data as the markets were closing on Tuesday. Its second-quarter net income rose to $65 million, or 33 cents a share, more than double the year-earlier earnings of $31million, or 16 cents a share, although the latest figures include a $10 million gain, or 5 cents per share, on a real estate sale. The results were slightly above analysts' expectations.

However, Amkor issued bearish guidance, warning that its results for the current third-quarter would come in below market expectations, citing softening global consumer markets and economic uncertainty. It projected that third-quarter sales would be up between 4% and 6% from the $690.7 million recorded in the second quarter, which itself was an improvement from $652 million a year earlier, although it was off a little from the first quarter.

Amkor executives on a late afternoon conference call Tuesday also predicted net earnings for the third quarter of between 24 cents and 28 cents per share.

They further said that Amkor plans to cut more than 600 jobs in the current quarter as part of its ongoing belt-tightening efforts.

Little numbers impact on Dean Foods

A trader said that Dean Foods Co.'s bonds were only "lightly traded," with the Dallas-based dairy producer's 7% notes due 2016 unchanged at 91 bid, 92.5 offered.

The notes went nowhere even though the company reported that second-quarter earnings jumped 72% to $48.9 million, or 31 cents per share, from $28.4 million, or 21 cents per share, a year ago. The company cited its decision to hike prices for its products, offsetting higher energy and commodity costs.

On an adjusted basis, excluding one-time items, Dean earned 33 cents per share, up from 30 cents a year ago and slightly above Wall Street expectations.

However, on its conference call with analysts, company executives cautioned that fits third-quarter and full-year earnings would come in below previously released estimates, citing the impact that cost increases and stiff competition weighed on its Horizon Organic milk business.

The company's chief executive officer, Gregg Engles, lamented that "it is unclear when a recovery to profitability will occur in the Horizon brand.

Automotive names cruise higher

Automotive benchmark bonds like General Motors' 8 3/8% paper due 2033 and Ford's 7.45% securities due 2031 were seen each up at least a point or more, leading the carmaker's other bonds and those of their respective auto finance units, GMAC LLC and Ford Motor Credit Co. higher as well, as investors sought to put the big downturn the auto bonds had suffered after GM's giant second-quarter loss Friday - $15.5 billion, third-worst in company history - in the rearview mirror.

The bonds have been firming over the last few sessions and Wednesday was no different. A trader - exclaiming "wow!" - saw the 8 3/8s at 51.5 bid, 52.5 offered, while the Ford 7.45s were up 3½ points at 52.5 bid, 53.5 offered.

Another trader only saw the GM benchmarks up 2 points at 50 bid, 52 offered, and saw GMAC's 8% bonds due 2031 also up by a deuce at 55.5 bid, 57.5 offered.

Yet another trader pegged the GM long bonds 4 points better on the day at 51 bid, while the GMAC bonds were up 1½ points at 56.5.

Among GM's other bonds, a trader saw its 7.20% notes due 2011 at 62 bid, 64 offered, versus 60 bid, 62 offered previously, and opined that it looked like "everything was up 1 to 2 points across the board." He also saw the GM 7 1/8% notes due 2013 better at 53.5 bid, 54.5 offered.

Another market source saw those latter bonds at 54.5 bid, up more than 2 points, with the 7.20s up 2 points at 62.

Among the auto-finance paper, other than the long GMACs, a market source saw the company's 6 7/8% notes due 2012 up 2 points at the 62 level, while its 7¾% notes due 2010 finished at 79 bid, up 2 points. Ford Credit's 7% notes due 2013 ended at 72, up more than 2 points.

Idearc rebound rolls on

A trader said that the Idearc 8% notes due 2016 "moved around a little," seeing the bonds going out at 42.5 bid, 43.5 offered, up from a 40-41 context on Tuesday. "Maybe some people shorted it, and now they're kind of scrambling to cover."

A second said that the bonds had gained 3 points to go home at 42.

Another trader saw the Idearc bonds trading in a 43-44 range. "I thought it was starting to be overdone when it broke [below] 50 - below 40, it certainly seemed to fit that category. But it seemed to get a little bit of a momentum trade today for sure."

A market source saw the 8s as one of the more busily traded issues of the session, with over $25 million of the bonds having changed hands by mid-afternoon - second only to the Sprint Nextel 6% notes. The Idearc notes were seen up nearly 2 points at 42.75 bid. At another desk, those bonds actually were pegged up 2 points to the 43 level.

The Idearc bonds had held around the 59-60 level until last Tuesday, when they tumbled 10 points down to the upper 40s, after the company reported sharply lower second-quarter earnings versus a year earlier. Except for a small reprieve last Wednesday, they continued getting beaten down day by day, finally cratering at around 39 on Monday before rebounding a little on Tuesday and now, extending that rebound into Wednesday.

Idearc sector peer R.H. Donnelley Corp.'s 8 7/8% notes due 2016 were being quoted around the 46 level.

Donnelley's wholly-owned Dex Media Inc. subsidiary's 8½% notes due 2010 and 9 7/8% notes due 2013, both issued by the Englewood, Colo.-based company's Dex Media West LLC unit, were also seen trading around the 95.5 and 77 levels, respectively.

However, one of the traders said that while the bonds of Cary, N.C.-based Donnelley and its Dex unit were getting some lift from Idearc's rebound over the last two sessions, "it wasn't with anything near the same kind of volumes, certainly not that I saw."

He said that Idearc "was bigger, more active, from the first thing this morning. The others have done a little better - but I think that [Idearc] is the [preferred] trading vehicle."

MGM Mirage steady after Tuesday gain

A trader saw MGM Mirage's bonds pretty much unchanged after the rise which that paper saw on Tuesday, helped by the Las Vegas-based gaming giant's quarterly numbers and, more importantly, by its announcement that it had gotten commitments so far from a number of big banks for a $1.65 billion, or a bit more than half of the roughly $3 billion in financing it is trying to set up with joint venture partner Dubai World to fund construction of its CityCenter hotel, retail and condominium complex on the celebrated Las Vegas Strip.

He quoted its 5 7/8% notes due 2014 little changed at an 80-80.5 context. "I guess they're trading down more closely to the bid side, but [there was] not too much change in most of those."

He saw the company's 7½% notes due 2016 at 81.25 bid, 82.25 offered, while its 9 3/8% notes due 2010 were likewise steady at 97.5 bid, 98.5 offered.

Among other gaming names, a market source saw Boyd Gaming Corp.'s 7¾% notes due 2012 up a point at 87.5 bid, while Station Casinos Inc.'s 6% notes due 2012 were quoted 2 points better, around the 70 level.

Another trader meantime saw Trump Entertainment Resorts Inc.'s 8½% notes due 2015 gyrated around between a low of 46.25 and a high of 48, "and everything in between," going out at around 46.5 bid, 47 offered, down about "a point and change" from Tuesday's level, with "a good amount of paper changing hands."

He meantime saw Harrah's Entertainment Inc.'s 10¾% notes due 2016 around the 73.5-74 area. He said the Las Vegas-based biggest casino operator's bonds have lately been suffering "death by a thousand cuts"; the 103/4s have "kind of slowly traded down from the mid-to-high 80s of a month ago." Like the Trump bonds, the Harrah's paper was also "trending towards the weaker side" on the day, down more than a point.

Texas Industries to tap 7¼% notes

No new issues were priced.

However there were primary market developments.

A buy-side source said that Texas Industries plans to tap its 7¼% senior notes due July 15, 2013 (existing ratings Ba3/BB-) in a non-fungible add-on deal, on Thursday.

The size of the deal remains to be determined, pending demand, but is expected to be modest.

Banc of America Securities is leading.

The buy-sider spotted the existing Texas Industries 7¼% notes due 2013 at 98½ bid, and said that the add-on notes are expected to come around 93.50 to yield approximately 9%.

Asked to comment on the five point discount to the trading price of the outstandings, the buy-sider said that the Dallas-based cement construction materials company operates in an economically sensitive construction-related sector, and is pressured by rising energy prices.

The source, who is looking at the deal, added that presently high-yield bonds need to be priced to sell in order to clear the market.

The buy-sider expects the company to use the proceeds of the tap for general corporate purposes - possibly to term out bank debt.

The original $250 million issue priced at par in June 2005.

Allis-Chalmers suspends notes offer

Elsewhere Allis-Chalmers Energy suspended marketing of its $350 million offering of 10-year senior notes (B2) via RBC Capital Markets and Goldman Sachs, pending the outcome of a shareholder vote set for Aug. 14.

The Houston-based oilfield services company is in the high-yield market to help finance its acquisition of Bronco Drilling Co., Inc., repay Bronco's outstanding debt and to raise working capital and other general corporate purposes.

Earlier this week hedge fund Wexford Capital LLC announced that ISS Governance Services, a proxy voting firm, issued a report on August 4, recommending that Bronco shareholders vote against the proposed merger, stating that the deal is not in Bronco shareholders best interests.

In early April, Third Avenue Management LLC, Bronco's largest shareholder, stated that the $437.8 million bid for Bronco was "woefully inadequate."

Not slipping over the edge

A mutual fund investor whose portfolio includes high-yield bonds as well as stocks told Prospect News that the Federal Reserve did the right thing on Tuesday, leaving interest rates unchanged at 2%.

"I think they feel that if the economy continues to be weak, inflation will take care of itself," the investor commented.

"In the face of an economy that is treading water they are determined to provide sufficient liquidity via the discount window, and they want a positive yield curve."

The investor, noting that there are two more Fed meetings in 2008 from which interest rate policy decisions could emerge, doubts that the central bank will move rates until the next U.S. president has been sworn into office in January 2009.

The most eye-catching financial news this investor has seen is the revision of the U.S. gross domestic product for the fourth quarter of 2007 to negative 0.2%.

"Now we actually have had a negative quarter," the investor commented.

"It doesn't look as though the economy is slipping over the edge, but clearly it doesn't have any upward momentum."

Plain vanilla

Against this backdrop the investor is sticking with top-tier, publicly traded, "plain vanilla" names, when it comes to shopping for junk bonds.

The source also remarked on the continued weakness in the automotive sector, and added that the General Motors family of debt securities is trading in a classically distressed fashion.

The money manager said that the General Motors Corp. 8 3/8% notes due 2033 were seen Thursday at 50 bid, 51 offered, yielding approximately 17%, up from 48 bid, 49 offered on Tuesday.

The source also saw the General Motors Acceptance Corp. 5 5/8% notes due 2009 trading at 90 bid, yielding approximately 20%.

"The long GMs are trading at a much lower dollar price, however the yield is lower," the investor remarked.

"That is often what happens when you have a stressed credit. The shorter maturity names trade at higher dollar amounts but higher yields. The longer bonds trade at lower dollar prices but lower yields.

"Thus you have an inverted curve.

"The way to look at it is 'cents-on-the-dollar,'" the manager remarked.

"If I wanted to buy GM or GMAC I would buy the longest because it's the lowest dollar price."

The manager said that some investors might reason that if they're going to take risk on a name they should go for the highest yield and the closer maturity, in the belief that they will be paid off before anything bad happens.

"That theory only holds up if you think nothing bad at all is going to happen before the maturity of the bonds," the money manager warned.

"That's how people get fooled.

"They incorrectly reason that the bonds become due before the secured bank line, and forget that in a distressed situation the banks are not likely to allow the company pay off a subordinated creditor."

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