Tyco up again on coming IPO; WorldCom still working on loan; Technical Olympic prices

By Paul Deckelman and Paul A. Harris

New York, June 13 - Tyco International Corp.'s halfway-junk bonds continued to firm for a second straight session Friday on investor euphoria over the company's upcoming initial public offering for its CIT Group unit - even though new questions arose about the financial practices which led to the recent ouster of Dennis Kozlowski as chief executive officer, bears questioned whether the IPO would actually yield the $5 billion minimum valuation the company has set, and the company came under renewed investor scrutiny during a conference call. Meantime, WorldCom Inc. - whose bonds had firmed late Thursday on anticipation it might deliver big news during Friday's Webcast of its annual shareholders meeting - stalled as no major news came out of the meeting and investors peppered executives with critical questions.

In the roiling seas of the US capital markets, the waters of the high-yield primary remained choppy as the week of June 10 came to a close. Both of the junk bond deals that priced Friday - one with two tranches - came wide of their price talk, as did three of Thursday's deals. And one of Friday's deals, Burns Philp, was downsized by $50 million.

And two new deals hopped aboard the Prospect News forward calendar Friday as the market learned of new offerings from Stone Container Corp. and Workflow Management.

However before Friday's activity was properly underway the market heard that AMG Data Services had reported an outflow of $292 million from high-yield mutual funds for the week ending June 12.

"We've been hearing that some accounts have been experiencing redemptions," one sell-side official commented.

"People are just taking a little bit of gains off the table. You've still got a couple of sectors that are trading well. Some retail names are trading well. Some gaming is trading really well. People are just taking some money off the table."

The official hedged his bets, however, as he allowed that the recent financial news has been anything but rosy.

"You look at the flip side of the coin and you have stuff blowing up all over the place. You've got to believe people are taking losses too. That could be a reason for the outflow too: people just wanting to get out while they can and cut their losses."

To set the stage for Friday's primary market activity it is useful to take a quick look at the preceding day. On Thursday June 13 four deals priced. One, from Advanced Optics upsized and priced tight to its talk. The other three priced wide of talk, and two of them downsized. They were 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%). Metaldyne was downsized to $250 million from $300 million and AmeriCredit was downsized to $175 million from $300 million.

The chop continued to exert itself in Friday's transactions as Australian yeast-maker Burns Philp priced a downsized US$400 million (from US$450 million) of 10-year senior subordinated notes (B2/B), via Credit Suisse First Boston. The notes priced at par to yield 9¾%, 50 basis points wide of the 9%-9¼% price talk.

The chop was also felt in Technical Olympic USA, Inc.'s $350 million two-part offering via Salomon Smith Barney. Technical Olympic's $200 million of eight-year senior notes (Ba3/B+) priced at par to yield 9%, wide of the 8½%-8¾% price talk. And the $150 million of 10-year senior subordinated notes (B2/B-) priced at par to yield 10 3/8%. Price talk on the subs was 75 basis points area over the yield of the seniors.

Of the seven high yield tranches that priced Thursday and Friday, six priced wide of talk and three were downsized.

"I personally think that we have crossed that mythical line of demarcation from a sellers market to a buyers market," one sell-side source commented Friday.

"You have a few factors involved here," the source continued: "One, the secondary market is for sale, two, there's tons of new supply out there, thus giving buyers many choices as where to put their funds to work, three, the AMG, which has been inkling us toward the negative end of things in recent weeks has shown us another significant outflow, and four, volatility in the world has not helped things."

Another sell-side source pointed to the forward calendar.

"Personally I think with the huge increase in the size of the forward calendar, the outflow from the high-yield mutual funds and the overall sentiment that implies, and the volatility mostly in the down direction in the equity markets, the supply/demand equation has gotten into an imbalance," this source commented.

"I think the size of the calendar is the overwhelming factor. It would be hard to imagine except in the hottest of markets a forward calendar of that size - specifically one that grew as quickly as this one did - getting absorbed without some pricing impact.

"Throw in overall market concern and the conditions were ripe for this, even for some of the higher-quality issuers."

And as two deals exited that forward calendar Friday, two showed up to take their places, bringing the total dollar-denominated business positioned on the Prospect News forward calendar to an even $3 billion.

Stone Container Corp. announced it will return with an offering of $400 million of 10-year senior notes (outstanding ratings B2/B), which is expected to price on Wednesday or Thursday following a conference call earlier in the week of June 17. Joint bookrunners are Deutsche Bank Securities Inc. and JP Morgan.

And remedying a covenant breach in its credit facility appears to factor into Workflow Management, Inc.'s motivation to bring $170 million of seven-year senior secured notes (B2/B+), starting Tuesday, via Jefferies & Co. (see related story in this issue).

Also on Friday, Kennametal, Inc. priced its split-rated $300 million of 10-year senior notes (Ba1/BBB) at 99.629 to yield 7.253%. Goldman Sachs & Co. and JP Morgan were the joint bookrunners. A syndicate source told Prospect News that some high yield accounts played Kennametal.

The week of June 17 finds 11 dollar-denominated junk bond deals, representing $2.365 million of business, poised to go down in the primary market. In addition there is one offering from Kronos International for €270 million.

In the secondary market, Tyco's now split-rated (Ba2/BBB-) bonds were heard firmer for a second straight session Friday, its 6 3/8% notes due 2006 seen at around the 84 bid level and its 6¾% notes due 2011 at around 80 bid, both up around four points on the session.

At another desk, a trader said that most of the activity seemed to be in the bonds of the CIT subsidiary, such as its 7 1/8% notes due 2004. They had fallen as much as 15 points earlier in the week after Tyco was downgraded to junk by Moody's Investors Service, threatened with a similar rating cut by Standard & Poor's, dumped its general counsel amid a nasty public exchange of recriminations and continued to reel from the aftermath of Kozlowski's forced resignation and regulatory investigations growing out of its transactions with the departed CEO. But after the Securities and Exchange Commission said late Wednesday that Tyco could finally proceeds with the long-awaited CIT share sale - seen as absolutely crucial to Tyco's hopes of paring its $27 billion debt burden down to more manageable levels - the CIT paper began moving back upward on Thursday and Friday, he said, the 7 1/8s bouncing off their lows to return to prior levels 95-96. He quoted other CIT 2003 and 2004 issues in that same context.

As for parent Tyco, he said, "it wasn't up as much as the CIT paper," with the Tyco bonds having gained about a point or two on Thursday and another two to three points on Friday.

Tyco's shares, however, were down 40 cents (13.90%) to $13.40 in busy New York Stock Exchange dealings on volume of 53 million shares, about 20 million more than usual.

On Friday, The Wall Street Journal reported that CIT has attracted some preliminary interest from would-be investors, some in the financial community were skeptical that it would attract the $5 billion minimum - $25 per share - that CIT was looking for. Getting that $5 billion is key to Tyco's plans to get rid of some $10 billion of its debt within the next year. Even if it gets that $5 billion, it would still represent a sharp comedown from the $9.5 billion which Tyco paid for the unit just last year. Tyco agreed to write off $4.5 billion of goodwill as part of the price for getting SEC approval for the IPO.

Meantime, the Journal's online edition reported Friday that John Fort, the former CEO who was appointed to that position again on an interim basis after Kozlowski was forced to step down ahead of his indictment by New York officials on tax evasion charges, may have been involved in transactions that raised potential conflict of interest issues, including his 1996 sale of a house in New Hampshire to Kozlowski when the latter became CEO. Officials widened their probe of Kozlowski's alleged tax evasion involving costly rare paintings he bought to include a look at whether company loans were involved in those dealings.

Also Friday, Tyco held a conference call, at which investors grilled Fort and other company officials on the cause of the precipitous loss of stock value and on the corporate governance issues raised by Kozlowski's legal problems and related issues. Fort said that Tyco is seeking a "strong leader" with "integrity" to replace Kozlowski. Chief Financial Officer Mark Swartz meantime tried to reassure investors and analysts that the company was not having a liquidity problem and would be able to pare its debt substantially within six months, using the IPO proceeds and cash on hand.

Once the CIT offering is complete, assuming proceeds are at least $5 billion, Swartz said Tyco anticipates in the next six months repaying $10 billion of debt for a remaining debtload of $17 billion plus have cash in excess of $1 billion.

Over the next 18 months, through 2004, he said the company expects to get debt down to $14 billion and have sales of $36 billion with EBITDA in excess of $7 billion.

"We need to stop the noise out there so people can focus on our fundamentals," Swartz said.

"Our ratings should improve as they catch up with our fundamentals."

WorldCom executives found themselves in much the same situation on Friday, fielding tough questions from shareholders who have seen their once high-flying stock chopped down to levels below $2. In very heavy NYSE trading of 167 million shares, nearly double the usual, the shares lost a nickel (3.33%) to $1.59. Shareholders demanded to know why their stock had cratered, and sought answers to questions raised by the company's loan of several hundred million dollars to then-CEO Bernie Ebbers and the recently resigned chief's $1.5 million-per-year golden parachute.

WorldCom's bonds, meantime, "were up one to two points in the morning, but then were back down again later," a distressed-debt-trader said, while another trader noted that "it ran up [Thursday] on the expectation that there would be some news, but then lost it. He saw the Clinton, Miss.-based telecommunications giant's benchmark 7½% senior notes due 2011, which had opened at around the 51.5 bid/52.5 offered level they had pushed up to in Thursday's late dealings dropping back to end the day at 50 bid/51 offered.

"People were expecting some more dynamic news [about company efforts to secure a new $5 billion credit facility] and they didn't get it." He saw WorldCom's 7¾% notes due 2006 drop to 77.5 bid/78.5 offered at day's end, from 79 bid/80 offered Thursday.

During the webcast of the annual meeting, CEO John Sidgemore, who took the reins after Ebbers' resignation, declared "we believe that we don't have a liquidity crisis. There is a perception [in the media] of a liquidity crisis. We have gone to work to correct that." He said WorldCom is cash-flow positive and can service its debt, unlike well publicized situations of other players in the telecom sphere and related industries.

Sidgemore said that WorldCom continued to work with its banks on the $5 billion financing plan and was "hopeful it could be closed in the next few weeks" - a disappointment to any market participants who anticipated some kind of positive announcement during Friday's annual meeting, and a possible signal that the financing might not be completed by the end of the month, the target which WorldCom had previously laid out.

Sidgemore tried to mollify the investors, reminding them that "this is not the best market in the world to be raising money in as a telecommunications company. If we pull this new facility off, it will be a really tremendous feat." He declined to elaborate on just how far along in the process WorldCom and its bankers were.

WorldCom's CFO, Scott Sullivan, added that "whether this deal gets done in June, July or the beginning part of August, it's most important that it gets done on our terms. That is the most important thing." By that, Sullivan means, the loan should be "flexible and it has good terms and it does not have restrictive covenants. That could undo the company a year or two down the road. So the most important thing is getting it done on our terms, where we have wide covenants if we will have to give covenants, which I believe we will have to do today."

He said the company's top three lenders have already committed to the transaction and "it is moving down the syndicate, the way that it should be."

Also on the communications front, WorldCom competitor Sprint Corp. became the latest wireless telecom player to warn that it would not be able to meet its optimistic earlier targets for new subscriber additions, issuing a statement late Thursday in which it said that second-quarter net wireless customer additions would be 300,000, blaming what it called "aggressive short-term pricing promotions" by some of its competitors, while full-year wireless subscriber growth would fall short of its prior projection of 3 million new customers by between 10% and 15%.

Sprint's bearish guidance caused S&P to drop its senior bond rating a notch from BBB to BBB-, the last stop before falling to junk levels, and its bonds were heard to have widened out by as much as 60 basis points on the session, with its 8 3/8% notes due 2012 quoted at the equivalent of a 94 bid level down from nearly 97 previously. Its shares lost $2.54 (17.77%) in NYSE dealings to end at $11.75, while the tracking shares of its PCS wireless group plunged $1.59 (26.54%) to $4.40. Volume on the latter was 68 million NYSE shares, almost eight times the norm.

Sprint thus follows the earlier lead of some of its junk-rated affiliates who sell the Sprint service in smaller markets, and who have already sharply cut their subscriber-addition targets for the quarter, chief among them Alamosa PCS and AirGate PCS Iinc. The bonds of both companies had already fallen sharply on their own reduced customer targets, and now tumbled again on Sprint's bad news. Alamosa's 13 5/8% notes due 2011, which had fallen 10 points Thursday to 51 bid after it forecast net subscriber additions for the second quarter to only be in the 15 to 25 thousand range - well below previous expectations of as many as 30 to 35 thousand new customers - fell another 10 points Friday, to 42 bid.

AirGate's zero-coupon bonds, which had fallen sharply earlier in the month on its own lower guidance and which were down another five points Thursday to around 35 on Alamosa's bad news, continued to swoon, being quoted Friday at around 28 bid.

And junk market wireless bellwether Nextel Communications Inc. was likewise lower, its 9 3/8% senior notes due 2011 dropping down about to 59 bid/60 offered from Thursday's close at 63 bid/64 offered and its 12% notes a point lower at 71.

But Rural Cellular's bonds were seen "up a couple," one market source said, quoting its 9¾% notes due 2010 at 58 bid, up two points on the session, However, he noted that those bonds - which had been as high as the lower 80s at the beginning of May - have been really getting hit for the past couple of weeks" before Friday's slight bounce.

Communications antenna tower operators, who lease space on their structures to the wireless companies, declined along with the PCS and cellular operators, American Tower's 9 3/8% notes due 2009 falling to 58 bid/60 foffered from 61 bid/63 offered, and Crown Castle International's 9 3/8% notes due 2011 falling from Thursday's 73.5 close to 70 bid/71 offered Friday.

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