Kmart easier on accounting concerns; Moody's upgrade lifts Amazon; PanAmSat upsizes

By Paul Deckelman and Paul Harris

New York, Jan. 25 - After two sessions of relative stability following its bankruptcy filing earlier in the week, Kmart Corp. debt was once again being knocked around Friday - this time on concerns about possible improprieties in its accounting practices, raised by an anonymous letter to the beleaguered company. On the upside, meantime, internet retailer Amazon.com, which reported its first-ever quarterly profit, was rewarded by a Moody's Investors Service ratings upgrade, and its bonds continued to firm.

In primary market activity Friday, what had been a slow, holiday-shortened week burst into life with two deals pricing and work continuing on a third late in the session. But out of those three, the focus was on PanAmSat Corp.'s offering which was increased to $800 million from a planned $500 million and came to market with a yield at the low end of talk.

Back in the secondary, Kmart was rocked by the unsigned letter, which purported to be from several employees and which raised questions about its accounting practices. Besides the company's board of directors, other recipients included Kmart's auditors, PriceWaterhouseCoopers, as well as the Securities and Exchange Commission. Kmart promptly reported the letter to authorities and commissioned an independent investigation led by an outside counsel, while the SEC began its own probe.

Whether this will turn out to be merely a momentary distraction - or the tip of a giant scandal iceberg that might turn Kmart into another corporate Titanic - will revolve around the key question, yet to be answered: who sent the letter, and why? Might it be an accounting insider with real knowledge of possibly cooked books, desperately trying to head off an Enron-type debacle? Or might it turn out to be disgruntled employees or ex-employees looking to settle a score with the troubled Troy, Mich.-based discount retailing giant and choosing to strike now, when the company has been driven to its knees and into the bankruptcy courts? Even under the best of circumstances, a letter suggesting accounting irregularities at a major company can never be laughed off as a prank, but especially not in the current climate, with Kmart especially vulnerable and headlines about Enron's accounting sins - and Arthur Andersen's alleged document shredding - dominating the financial headlines.

"Kmart was weaker today," said a trader who noted the company's latest setback, and the consternation it caused among investors. "After Enron, everybody's just so scared. Accounting irregularities - there you go again. People just sell first and think later."

Kmart's unsecured bonds - driven down into the 40s from levels in the 80s when the year's trading began not four weeks ago, had appeared to have found some sense of stability over the previous session or two, after the company sought protection Tuesday from the holders of its more than $2.7 billion of junk bonds and other creditors, via a Chapter 11 filing with the U.S. Bankruptcy Court for the Northern District of Illinois, in Chicago. The theory was that the other shoe had dropped and the long-awaited filing everyone feared had now occurred and was out of the way; Kmart was newly armed with a $2 billion debtor-in-possession facility, a legal shield against negative actions by balky suppliers or other creditors, and a legal mandate to get out from under potentially hundreds of burdensome leases.

But anyone who shorted the bonds would seem to have made an opportune call. The trader said that while the bonds had opened at bid levels in the 44.5-46 area, "instantly, right when the news (about the anonymous letter) hit the tape, they dropped down to 38-40," although he allowed that he did not see a lot of actual trading in that lowered context.

After about half an hour to 45 minutes, he continued, the bids "started to creep right back up. It didn't take long." As the day wore on, levels "raced back up three or four points" from their early lows, he said, and "it was almost as if it didn't have too much of a lasting effect at all."

Still, he noted, Kmart paper finished "generally weaker," with the shorter-dated notes closing around 42.5 bid/43.5 offered and the longer-dated debt in the 41.5 bid/43.5 offered area. Even so, the bonds "closed higher than when the rumor (of the accounting problems) first came across the tape."

Another trader declared that Kmart bonds "finished pretty much weaker" on the session due to all of the speculation of accounting problems on top of the company's already sizable load of very real troubles. He quoted the 9 3/8% notes due 2006 as having closed Thursday bid around 44-45, and then going down to 41 bid Friday before recovering somewhat to finish at 43 bid/44 offered. "Net-net, they were down about two points on the day.

On the equity side, the questions raised by news reports about the anonymous letter helped drop Kmart's ragged shares 8 cents, or 8.60% in New York Stock Exchange trading, to 85 cents. Volume of 54 million shares was almost four times the usual turnover.

Elsewhere, on-line retailing giant Amazon.com's bonds were up for a second consecutive session, given a continued boost by its report earlier in the week of its first-ever quarterly profit and, on Friday, news that Moody's Investors Service had upped the ratings on its senior unsecured debt to B3 from Caa1 and had lifted its subordinated debt to Caa2 from Caa3.

Amazon's 10% notes, which on Thursday had gained three points to close at 80 bid, added on another point to end at 81. Traders noted that the Seattle-based Internet book "e-tailer"'s bonds were well up from bid levels around 75 that they had held before the company announced Tuesday that in the fourth quarter, it had a net profit of $5 million (1 cent a share) - a sharp turnaround from its year-earlier loss of $545 million ($1.53 a share). It was the first quarterly profit for Amazon after combined losses of over $3 billion since the company went public back in 1997.

In announcing that it had upgraded Amazon's debt ratings, Moody's cited its expectations "that the company has sufficient cash on hand to finance its operations for the medium term and will not be required to access the capital markets in 2002." It also noted "improved operating measures and sharply lower cash drain from operations."

Moody's added that it believes the $1 billion of cash on the company's balance sheet at the end of 2001 "will be sufficient to finance year-end vendor payables and finance cash needs through the medium term. Barring unexpected changes to corporate strategy, such as acquisitions or renewed expansion of business lines or physical plant, Moody's does not believe that Amazon will need to access the capital markets to finance ongoing operations within the next 24 months."

Moody's was not so complimentary about another well-known high yield issuer Friday, announcing that it was putting American Tower Corp.'s ratings - including the B3 on its bonds - under review for a possible downgrade.

The ratings agency said it was concerned about "the potential softness in the demand for tower space from the major wireless carriers in the US given the current outlook for slower subscriber growth going forward, and this concern applies to all the independent tower operators." As for American Tower specifically, it warned that the Boston-based communications antenna tower operator faced "the combination of a potentially weak business environment combined with the reduced liquidity due to the cancellation of the recently received commitment for $250 million of incremental bank debt," which prompted Moody's to review its ratings. It said that the loan, before its cancellation, "had been viewed as providing the company with important operating and financial flexibility."

American Tower, in announcing that it had chosen to cancel the undrawn $250 million facility, asserted that its $2 billion of other debt facilities - consisting of an $850 million term loan A, a $500 million term loan B, and an undrawn $650 million revolving line of credit as of December 31, 2001 - "will be more than sufficient to finance its current business plan."

American Tower's bonds - which had been heard to have firmed about six points over the previous two sessions - went into reverse after the Moody's pronouncement. A trader quoted its 9 3/8% notes due 2009 having dipped from around 74.5 bid/75.5 offered at the opening to about 72 bid/73 offered going home Friday.

Elsewhere in the communications sphere, he said Time Warner Telecom's 9¾% senior notes due 2008 fell back after Moody's cut the Littleton, Colo.-based broadband operator's ratings, dropping its senior unsecured notes a notch to B3. While the bonds had traded around 82.5 bid/83.5 offered before news of the downgrade hit the tape late in the session, afterwards, he saw them offered around 80 with no bid and projected that they were "sure to go lower."

In downgrading the ratings, Moody's cited "our heightened concern that scaled-back enterprise spending plans and carrier network capacity re-grooming may persist in pressuring TWTC's operating performance further, from a level that already falls short of our expectations. The outlook remains negative."

For a second consecutive session, Haliburton Co. bonds "were well bid for" Friday, a trader said. Those bonds - nominally investment-grade rated at Baa2/A- - have recently been trading like junk bonds, quoted in dollar prices instead of spreads over Treasuries, and trading at levels well below par (its 6% notes due 2006 hover in the high 80s) because of investor worries over the Dallas-based oilfield services and construction giant's possible asbestos liability concerns.

But equity and debt securities of Haliburton and other companies with potential asbestos problems - including Georgia Pacific Corp., Dow Chemical Co., and high yielders Crown Cork & Seal Co. Inc. And the bankrupt USG Corp. - were all higher Friday, on market speculation that the U.S. government may intervene in an attempt to limit the extent of any future exposure to asbestos settlements. Players cited rumors - not confirmed by the White House - that the president might try to work out an arrangement to cap asbestos liability. A flood of claims has already sent a number of large industrial companies running to the bankruptcy courts over the last year or so, and threatens to get even worse, critics of the litigation binge say. Haliburton's own slide toward the junk markets was sparked last month by market reaction to several large asbestos liability verdicts against its units in various states.

Back among the "pure" junkers, Conseco Inc. bonds remained firm Friday, after a week of upside linked to the Carmel, Ind.-based insurer's recently announced buyback of $34 million of its bonds maturing in 2002 and the possibility that it might be of a mind to continue repurchasing its debt.

A trader quoted the company's 8 3/8% notes due 2004 as having moved up a point to end at 54.5 bid/55.5 offered, although he allowed that "there really was no activity to speak of."

And that seemed to be pretty much the case in the overall market. Another trader called the day "pretty slow, secondarywise." Instead of trading bonds, everyone, he said "was just watching the latest news, particularly about Enron," whose stunning story took a strange turn Friday with the revelation by police in Texas that the company's former vice chairman, John Cliff Baxter, was found shot to death in his car in a Houston suburb, an apparent suicide. Baxter had resigned his post in May after having spent 10 years with the once-mighty Houston-based energy trading giant. News reports indicated that Baxter had been a strong internal critic of the kind of secret partnership arrangements which led to the company's demise.

The trader said that the news of the former Enron executive's apparent suicide didn't have too much impact on the company's bonds, which have been knocked down below 20 cents on the dollar. He quoted the debt about 17.375 bid/18 offered, off slightly from 18 bid/19 offered on Thursday, but said there really wasn't much action in the name - "just a lot of speculation" about what - if anything - Baxter's death might have to do with the company's troubles. "They'll probably make a TV movie about this whole mess," he quipped.

The market's sense of overall quietude extended to its reaction to the first reported high yield mutual fund outflow of the new year, which followed three consecutive weeks in which more money had flowed into the funds than had left them.

In the week ended Wednesday, $266.4 million more left then funds than came in, according to market participants who track the weekly fund flow statistics compiled by AMG Data Services. Many market participants see the statistics as a reliable barometer of overall liquidity trends.

In the previous week, inflows totaled $361 million. The first three weeks of the year, net inflows added up to $1.787 billion, but the latest week's data brought that cumulative inflow total down to $1.521 billion. But, a trader said, there hadn't been too much market response - "luckily, it wasn't too heavy."

He said Friday "was a really quiet day - we're starting to run into conference time," noting that a number of major investment banks which underwrite and trade high yield bonds would be running conferences over the next few weeks, which would likely provide much useful information to market players attending but which would also throw damper on actual trading activities on those days the conferences were being held.

"Who knows?" he asked rhetorically. "Hopefully, we'll be able to get some business done here - but it was very quiet today."

From the primary desks, throughout the four-day, holiday-abbreviated week of Jan. 21 sell-side sources told Prospect News that the forward calendar has not shaped up to be what had been anticipated in the waning days of 2001.

Were it not for PanAmSat Corp.'s whopping, upsized $800 million, which priced on Friday, the high yield primary would have seen only two deals price during the week, for a total of $375 million.

However, Curtiss O. Barrows, who along with Karen Bater manages the Nationwide High Yield Bond Fund, believes that high yield is presently a good place to be - "a better place than the equity market" - for the circumspect investor.

"There are times to be aggressive and there are times to be cautious," Barrows commented, "and we believe this is a time to be cautious.

"However," he continued, "we've seen a fair amount of money flows in different funds. Some of it's not necessarily public funds. But we've had money come in. And I think there have been nice two-way flows.

"So I'm pretty constructive on the market. I think the liquidity in trading is obviously better than it was last fall, or even last summer."

In activity Friday, PanAmSat was the big news, upsizing its new junk bond deal to $800 million from $500 million and pricing it at par to yield 8½%, at the low end of talk of 8½% to 8¾%. Credit Suisse First Boston was bookrunner.

Shortly after PanAmSat priced, a spokesperson expressed the company's pleasure at its execution during a brief telephone conversation with Prospect News.

Also on Friday U.S. Oncology, Inc.'s $175 million of 10-year senior subordinated notes priced at par to yield 9 5/8%. Bookrunners were UBS Warburg, Wachovia Securities and Deutsche Banc Alex. Brown.

Late in Friday's session a syndicate official told Prospect News that managers were still at work on Azteca Holdings SA de CV's $150 million senior notes due July 2003. Terms were unavailable at press time.

One new deal sprouted on Friday: The Scotts Co. will bring a $70 million add-on to its 8 5/8% senior subordinated notes due Jan. 15, 2009 (B2/B+) via J.P. Morgan. The deal is set to price Feb. 1, according to a syndicate official.

In addition to Scotts, the week of Jan. 28 figures to see five other deals price; a total of $1.31 billion of new issuance is anticipated.

They are: Coventry Health Care $175 million via Salomon Smith Barney (price talk 8¼% area); TSI Telecommunications, Inc. $245 million, from Lehman Brothers; Jacobs Entertainment, Inc.'s $120 million out of CIBC World Markets; Bluewater Energy Services BV's $200 million via ING Barings; and Solectron Corp.'s $500 million, a deal being managed by Goldman Sachs.

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