Stock surge fails to move junk market much

By Paul Deckelman and Paul A. Harris

New York, Oct. 1 - After having taken their lumps for most of September, the equity markets came roaring back Tuesday to open the new month and the final calendar quarter of the year. But that stock market surge did little to help the junk bond market, participants said; in fact, the raging bull stampede probably drew the attention of market timers and other opportunistic players away from bonds as an asset class and back toward equities.

The Standard & Poor's 500 saw its biggest single-session gain since August, jumping 32.63 (4%) to 847.91, while the Dow Jones Industrial Average soared 346.86 (4.6%), its biggest advance since July, to end at 7938.79. All 30 of the market bellwether's component issues rose - the first time in seven months that's happened. Meantime, the Nasdaq Composite Index gained 41.66 (3.6%), closing at 1213.72.

But over on the bond side, "it was really kind of quiet," a trader said. "There really was nothing of note going on." When asked whether the return of the stock bulls to Wall Street after their recent long absence had any kind of carryover effect on junk bonds, the trader shook his head and said "not just yet."

"Unfortunately," another trader said, the stock rebound "was a little too late in the day, and not much happened." While he saw the day's levels "a little bit better than [Monday]," overall, he said, "there was nothing to write home about."

There really wasn't even a lot of trading in Level 3 Communications Inc. bonds, even though the Broomfield, Colo.-based telecommunications company's Nasdaq-traded shares boomed 71 cents (18.25%) to close at $4.60 Tuesday, on volume of five million shares, about the usual.

The company's benchmark 9 1/8% senior notes due 2008 were seen trading in a range between 52 and 53 bid, around the same levels they've recently held, despite the big stock surge.

"They didn't move at all," said one trader who quoted the issue at 52 bid/54 offered, around a point lower. "They had been around 56 or 57 the other day, so [Tuesday] was no great shakes."

Another trader saw the bonds up about a point to 53 bid but said overall, things were "kind of quiet."

There was no fresh positive news on the company seen that would explain the strong stock performance. On Friday, Bloomberg News had reported that Level 3 had offered to buy Broadwing Inc.'s long-distance network for as much as $200 million, attributing its information to unidentified persons familiar with the situation. No official confirmation or denial has been forthcoming since then from either company. Cincinnati-based Broadwing has been looking to dump the money-losing unit and cut debt.

Such as sale, if it does take place, "would allow Level 3 to connect customers such as Procter & Gamble Co. and BCE Inc., Canada's biggest phone company, to its fiber-optic network," Bloomberg reported. It noted that legendary billionaire investor Warren E. Buffett, whose Berkshire Hathaway Inc. Is part of a consortium that recently invested $500 million in Level 3, "has said Level 3 can capitalize on rivals' failures because it has financial backing and experienced managers."

Elsewhere in the telecom sector, things were likewise quiet. A trader quoted Nextel Communications Inc. - whose bonds had been about the only real bright spot for an otherwise sagging junk market on Monday - as being little changed on Tuesday, its widely traded 9 3/8% senior notes due 2009 "hanging in there" in the high 70s. At another desk, the 9 3/8s were quoted about a point higher, although in quiet dealings, at 79.5 bid.

There was little change seen in the bonds of Williams Communications Group Inc., even as the U.S. Bankruptcy Court for the Southern District of New York approved the troubled Tulsa, Okla.-based telecom operator's Chapter 11 plan of reorganization.

Under terms of that plan - which had already gotten the backing of both the bond holders and the bank lenders - the bondholders and suppliers, who are owed about $5 billion, will get about 54% of the new equity after the company reorganizes. Leucadia National Corp. will get 44% of the reorganized company in return for investing $150 million in Williams Communication and buying some claims of Williams Communications' former parent, Williams Cos. for $180 million. Holders of securities-related legal claims would be given up to 2% of the reorganized company's shares, and potentially could recover further sums from the company's officer and director liability insurance.

Williams' four classes of junk bonds - its 10.70%, 10 7/8%, 11.70% and 11 7/8% notes - were all quoted around 10.25, unchanged on the session.

A trader likewise saw "not much change" in the bonds of Lucent Technologies Inc., which have been deteriorating anew in the wake of Lucent's own recent warning that that its per-share loss for the fiscal fourth quarter that ended Monday would be three times worse than originally expected, as well as weakened guidance by another telecom equipment maker, Nortel Networks Inc. Bonds of both had been lower on Monday; on Tuesday, Nortel was unseen while Lucent's 7¼% notes due 2006 remained anchored at 38 bid/40 offered and its 2008 bonds were at 30 bid/35 offered.

Outside of the telecom sphere, little movement was seen in the bonds of The Scotts Co., even as the Marysville, Ohio-based maker of lawncare products announced that it would postpone a planned offering of 4.5 million shares, citing market conditions.

Scott's 8½% notes due 2009 remained at 102 bid.

Standard & Poor's meantime said that even though the net proceeds from the planned equity offering had been expected to be used primarily for debt reduction, the postponement would have no effect on Scotts' BB/Positive ratings or outlook. S&P said it "still expects Scotts to continue to improve its financial profile and reduce debt as a result of the company's initiatives to improve working capital management. Scotts' ratings could be raised if the company can demonstrate a sustainable improvement in its credit protection measures over time."

Magellan Health Services Inc.'s debt was being quoted lower for a second consecutive session, following the Columbia, Md.-based healthcare services management company's announcement Monday that it had hired Gleacher Partners LLC as it considers a possible comprehensive capital restructuring as an option to reduce its overall debt.

Magellan's 9% notes due 2008 - which were seen Monday as having fallen to around 25 bid/27 offered, a 10-point slide from Friday's close - were quoted Tuesday at 21.5 bid.

The high-yield primary market produced little in the way of news on Tuesday.

Some observers had been anticipating terms on Brake Bros. plc's new 10-year senior notes as early as Tuesday; however terms on the eurobond deal were unavailable at the end of the session, and rumor had it that the talk had widened.

Meanwhile on Tuesday Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News that high-yield bond spreads versus Treasuries, currently reported to be at their widest in over a decade, represent risk-aversion on the part of the investors.

"I think in late August you saw spreads come in a little as the stock market bounced," Difley said. "But since the equity market rolled back over, late August through September, you saw spreads go right back out.

"The bottom line is that there hasn't been a whole lot more stomach for risk-taking. There are just too many uncertainties out there."

The uncertainties that he cited were the current direction of the U.S. economy and the possibility of a war with Iraq.

In the intermediate term, he said, it's difficult to spot a turning point or to identify a catalyst that will improve the performance of the high-yield market.

"We're also headed into year-end, where sometimes people are more risk-averse," Difley added. "They don't want to step into something that could blow their performance for the year.

"I think there are some hurdles for the high-yield market for the near term," he added. "But if you look at where spreads are, out over a longer time period, obviously they aren't going to stay this wide forever.

"I think it depends upon your time horizon, as to whether or not you want to step into the high-yield market. I think from a longer term perspective you've certainly got very wide spreads, here."

Asked to comment on three recently postponed junk bond deals - Allied Waste on Sept. 20, Resource America on Sept. 26 and TI Automotive on Sept. 30 - Difley specified that collectively they portend very little.

"I think it's very 'case-by-case,'" he said.

"Investors are very selective here. The market right now is just open to a very few, select companies."

An official on the sell-side cited "spread compression" as further evidence that investors are zeroed in on specific credits and perhaps paying less heed to what the credit ratings agencies have to say.

"There hasn't been much spread compression in the last four or five weeks despite the fact that the market has absolutely tanked," this official said.

"You would think that since the market did tank single-Bs would widen significantly more than double-B credits. And that's just not happening. The whole market is just pushing itself out together."

The sell-sider said that the differential between single-Bs and double-Bs had been out to around 450 basis points during the second quarter of 2002.

"Now it's hovering at 350," the source added. "Although the market has gotten substantially worse than what it was before, the differential between double-Bs and single-Bs is narrower. That's telling me that investors are being very credit-specific. They don't really care what the rating is."

As to the above-mentioned postponed deals, this sell side official also said that collectively they indicate nothing about the market as a whole and must be considered on a credit-by-credit basis.

He pointed to the two deals that remain on the calendar as business expected to price during the week of Sept. 30 and forecast that both transactions would be completed.

The first of the two, from Brake Bros., was talked Tuesday at 11¼%-11½%, and was expected to price either Tuesday or Wednesday. According to one market source, talk on the U.K.-based food services distribution company's two-part £175 million equivalent of 10-year senior notes (B3/B-) in euro and sterling tranches via Credit Suisse First Boston and JP Morgan had widened to 12%. However Prospect News was unable to confirm this with syndicate sources on Tuesday.

No price talk has yet been heard on the other deal in this week's market - St. Louis scaffolding services company Brand Services Inc.'s offering of $165 million of 10-year senior subordinated notes (B3/B-), also from the joint bookrunning team of Credit Suisse First Boston and JP Morgan. Terms on that deal are expected on Thursday or Friday, according to a syndicate source.

Both are LBO-financings, the sell-side official pointed out. The Brake Bros. deal will be used to fund the acquisition of the company by Clayton, Dubilier & Rice, Inc. and Brand Services' offering proceeds will be used to fund the acquisition of the company by JPMorgan Partners from DLJ Merchant Banking.

"You have sponsors behind them, with big wallets," the sell-sider reasoned, adding that the distinction is an important one to investors.

"I think they like the yield and I think they like the fact that there is a sponsor in there with two- or three-hundred million dollars of their own money in the transaction, beneath the bondholders as equity," the source said.

"It's a nice cushion compared to just buying a little company with senior subordinated notes.

"If you look back on the fourth quarter of 2000 you'd see a similar trend," the source added, "little new issuance but LBO issuance was up dramatically."

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