QwestDex plans $1 billion bond sale to fund buyout; secondary mostly stilled

By Paul Deckelman and Paul A. Harris

New York, Aug. 26 - The recently very quiet high-yield primary sector returned to center stage Monday, as Qwest Communications International Inc.'s soon-to-be-sold QwestDex telephone directory unit was heard to be planning to sell as much as $1 billion of new bonds to help fund its pending buyout by Carlyle Group Inc. and Welsh, Carson, Anderson & Stowe. If a deal of that size does finally come to fruition, it would be the biggest issuance of new junk since January, when Charter Communications Holdings Inc. sold $1.1 billion of bonds in a three-tranche placement and Owens-Illinois Inc.'s Owens-Brockway subsidiary sold $1 billion of seven-year notes.

News of the impending mega-deal - even one that will take place in October - easily overshadowed the paltry end-of-summer activity in the secondary market, which saw most levels little changed from where they had been on Friday.

The planned deal for QwestDex is the first part of a two-stage $7.05 billion leveraged buyout of Qwest's directory business.

Carlyle and Welsh Carson are paying $2.75 billion for the first piece of the business of which $2.33 billion is to be financed in the debt markets.

The investment banks and issuers have now begun bandying prospective pieces of deal, which is to be split across bond and loan markets.

"Right now we're hearing that the bond part will be about $1 billion," a source close to the deal told Prospect News.

"I hear that it could be less, but right now these are working figures and it depends upon which person you talk to at which investment bank.

"Obviously if the bond market doesn't pick up after Labor Day the bank loan could skew higher," the source said.

"The bond market's been so bad that everyone's just praying that people come back from Labor Day refreshed with money to spend," the sell-sider added.

According to sources close to the bank deal, the size of that piece figures to be somewhere in the $1.33-$1.5 billion range with an approximately 50-50 split between revolver and term loan components.

One source confirmed Monday that the banks involved in both the bank deal and the junk bonds are Banc of America Securities, Deutsche Bank Securities Inc., JP Morgan, Lehman Brothers and Wachovia Securities, Inc.

Timing, according to one informed source, now appears to have the bond deal coming in mid-October. The QwestDex LBO is set to close 60-90 days hence.

Elsewhere, Monday, market sources reiterated or clarified the status of various deals. Syndicate sources said that Constar International Inc.'s $200 million of 10-year senior subordinated notes (B3/B), via Salomon Smith Barney - a registered offering that is part of the spin-off of Constar from Crown Cork & Seal - remains in the "delayed" category. Ditto Swift & Co.'s $400 million of seven-year senior notes (B1/B+) via Salomon Smith Barney and JP Morgan, which pulled off the road on July 16 after ConAgra announced an 18.6 million pound beef recall.

Meanwhile the status of NCI Building Systems Inc.'s $50 million add-on (B2/B) via Wachovia Securities and Banc of America Securities, heard as possibly pricing during the run-up to Labor Day, now takes its place among a spate of deals that are said to hinge on the condition of the high-yield market in the wake of the coming Labor Day recess, according to an informed source.

When forecasting the likely condition of that market, many of the sources who have communicated with Prospect News during the pre-Labor Day lull have pointed to the succession of 11 consecutive outflows from the high yield mutual funds, now totaling approximately $2.5 billion.

The optimists say that the outflows reported by AMG Data Services have recently tapered off in size. For the week ending Aug. 21 investors pulled out $44.6 million, which is relatively flat, they point out.

Yes, say the pessimists, but the flows continue to be negative ones.

In Monday's edition of "The Situation Room," from Banc of America Securities, that investment bank's high-yield strategist Ali Balali noted that while outflows of capital from high yield continued for the 11th consecutive week, "the magnitude of outflows ($45 million, less than half of the amount reported for the previous week), the flow trend reported by the funds (226 funds reported flat to positive flows while 192 reported outflows) and the increased secondary activity suggest that we may see a reversal of capital outflow from high yield shortly. The high yield market closed the week with a current yield of 11.19%, a YTW of 13.86%, and a STW of 1,046bp."

Back in the secondary, news of the huge QwestDex deal had little impact on the battered Denver-based regional Bell operating company's existing bonds. A trader saw the operating company's longer dated paper hanging in around the same 71-73 bid levels they had held on Friday, and likewise saw little movement in any of the other names which had been pushing upward toward the end of last week.

"Yeah, we had some movement on Thursday and Friday of last week, but [Monday] there definitely was no follow-through on any of the names, whether it was Qwest, Nextel, Charter, Owens-Illinois, or Level 3. If anything, there was some sporadic buying a couple more buyers than sellers , but not much of a follow-through."

The trader saw Charter Communications' paper as having opened and closed at bid levels around 63-65, "pretty much where they went out on Friday;" St. Louis-based cable-television operator Charter had run up towards the latter part of the week on consolidation speculation which gripped the cable industry after investment-grade cable giants AOL TimeWarner, AT&T Broadband and Comcast agreed on a huge transaction which will simplify the industry by unwinding AT& T's partnership with TimeWarner, allowing AT&T Broadband to be bought by Comcast.

He had pretty much the same assessment for Level 3 Communications Inc.'s 9 1/8% notes due 2008, which hung in around that same 59-61 bid range, unmoved by the news that the Broomfield, Colo.-based fiber optic telecom network operator had reached agreement with its lenders on easing the covenants on its credit facility, although it also agreed to have less borrowing availability.

Kmart Corp.'s announcement Friday that it had decided not to go ahead with previously reported plans to ask that its debtor-in-possession borrowing capacity be raised by $500 million helped push its bonds up a bit Monday, a trader said. Kmart's assertion that its liquidity position was OK was seen as the catalyst that pushed its bid levels up about two points or 2½ points, at 25-26 bid, depending on the issue, he said. But apart from that, he noted, "Nothing really happened anywhere [Monday] - especially here" at his own shop.

The trader did see some higher bid levels - but no offerings - on short-dated airline paper, with Northwest Airline's 2004 notes firming up to 76 bid without any offers, from 72 bid without on Friday.

"People are just looking for the right-hand side," he noted. "I think you'll find a lot of the short Continental Airlines paper, a lot of the shorter Delta Airlines, and AMR is bid without right now." The only air carrier paper not seen as better bid was United Airlines, the airline with the most financially precarious situation; while the other carriers' bonds are generally quoted in the 50s, 60s and 70s, depending on the tenor and the coupon, UAL's continue to languish in the 20s.

Elsewhere, he also saw the status quo in place, with Charter's 9.92% notes at 43 bid, up around a point on the bid side but with no offers, and its benchmark 8 5/8% notes 2009 at 63.5 bid/64.75 offered, about where they'd been on Friday. He saw Level 3 also "pretty much offered around the same levels as Friday," with the 9 1/8% notes on either side of 60.

The trader saw minor movement in light trading among names in the recently firming merchant energy sector, where, he said, "some of the guys were bid without." Calpine Corp.'s 8½% notes due 2011 were being quoted at 54 bid and its 8½% notes due 2005 at 54.5 bid, perhaps a point better.

A trader saw Lucent Technologies Inc.'s 7¼% notes due 2006 as having improved from 63 bid on Friday to bid levels in the 63-4 context [Monday], "not a big run-up It wasn't like they were trading in the 50s and then ran up."

However, Lucent's shares jumped 34 cents (24.67%) to $1.87 in busy New York Stock Exchange dealings of 609 million shares, about double the usual, aided by Friday's news reports that the Murray Hill, N.J. based telecom equipment giant was planning further belt tightening measures, including sizable job cuts. It was also helped by Monday's reports that company chairman Henry Schacht had personally bought a million shares of the hard-hit stock earlier this month, according to a Lucent filing with the Securities and Exchange Commission.

But on the bond side, a trader said, Lucent was "completely unseen" on Monday.

With the last week in August traditionally one of the slowest weeks, activity-wise in the high yield world, even when things are going well, nobody is looking for any kind of real activity in the run-up to the three-day Labor Day holiday break. On Monday, a trader summed it up, "you'd be hard pressed to find anything that changed by more than a half a point."

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