Wrong number for telecom investors; Coventry Healthcare brings new deal to market

By Paul Deckelman and Paul Harris

New York, Jan. 29 - Telecommunications issues took it on the chin Tuesday, in the aftermath of Global Crossing Ltd.'s not-unexpected bankruptcy filing, a big loss and sobering guidance from Level 3 Communications Inc. and investor angst about Williams Communications Group Inc. and its former corporate parent, The Williams Cos. Inc.

In primary activity, health care was the focus, with Coventry Health Care pricing a deal and Hanger Orthopedic announcing a planned offering.

Among existing issues, the big news of the day was in the telecom sector, and it was almost all bad, Monday's announcement of Global Crossing's bankruptcy - believed to be the largest telecom failure in U.S. corporate history - threw a somber shadow over the sector, including such Global Crossing rivals as Level 3 and Williams Communications.

Level 3 reported a fourth-quarter net loss of $3.3 billion ($8.54 a share), sharply wider than the $552 million of red ink, ($1.50 a share) seen a year ago. The Broomfield, Colo.-based long-distance carrier said most of that loss was due to charges of more than $3.2 billion due to losses linked to job cuts and the sale of its Asian assets. Excluding those charges, Level 3 said its loss was $475 million ($1.24 a share) - less than the Wall Street consensus forecast of $1.68 a share.

But the smaller-than-expected operating loss was cold comfort; looking to the 2002 fiscal year, Level 3 said it anticipates a net loss of $1.10 per share in the first quarter, although that is well below the $1.63 per share loss the analysts are expecting. But the company also projected that customer cancellations and service disconnections in the first half of 2002 are likely to continue at levels similar to those experienced during the second half of 2001, representing about 20% of Level 3's current recurring revenue. It further warned that if the current rate of sales and cancellations continues, it would violate revenue requirements on its credit line. The company said that it has opened talks with the credit facility's administrative agent bank in hopes of finding "an appropriate solution prior to any potential covenant violation."

Level 3's benchmark 9 1/8% senior notes due 2008 were quoted down a point or so to around the 46 bid level. Its shares lost 72 cents (15.42%) in Nasdaq trading, to close at $3.95. Volume of 10 million shares was slightly less than half of the average daily turnover.

Level 3 was not the only name struggling Tuesday; "the telecoms in general had a rough day," a trader said. "The whole sector was very weak, and feels heavy."

He quoted Williams Communications' 10 7/8% notes down about three points on the session, to the 35 bid/37 offered area. Another traders saw them down four points, at 36 bid/37 offered.

Williams Cos. - the Tulsa, Okla.-based pipeline operator and energy trader and former corporate parent of Williams Communications (the latter was spun off last year) - announced that it was delaying its scheduled release of its earnings data until it evaluates its financial obligations to the money-losing Williams Communications, which has some $1.4 billion in debt out and a lease deal covering assets that cost $750 million. Williams Cos. said the study was prompted by Standard & Poor's Jan. 15 downgrade of Williams Communications' unsecured debt rating to CCC-, as well as Monday's bankruptcy filing by Global Crossing. In its statement, Williams Cos. explained that the study is intended to eliminate credit-rating and equity-price triggers that form part of guarantees provided by Williams Cos. to its former unit, a Tulsa-based long-haul telecom operator.

Besides the possibility that it might be on the hook for some - or possibly all - of the $2.2 billion of Williams Communications obligations, Williams Cos. was seen also suffering from the recent collapse of Enron Corp. due to both "guilt by association," since it is in a similar line of business as the failed Houston-based energy trading giant, and because of its own exposure to Enron, which will amount to a 12 cent-per-share charge in the fourth quarter.

Williams Cos. shares plunged $5.36 (22.20%) Tuesday in New York Stock Exchange trading, to $18.78. Volume of over 26 million shares was six times the usual daily turnover.

The investor angst over Williams Cos. "doesn't directly affect Williams Communications," the second trader said, "but still, the implications are there." Equity players obviously thought so too; Williams Communications shares lost 29 cents, or 17.79%, on the NYSE on Tuesday, to end at $1.34. Volume of 19.3 million shares was almost four times the usual handle.

Also in the telecom sphere, the trader said, Time Warner Telecom debt was "down significantly" from the levels it had held prior to being downgraded a notch to B3 on Friday by Moody's Investors Service. He quoted the Littleton, Colo.-based broadband operator's 10 1/8% notes at a wide 67 bid/72 offered, "down 10 to 15 points from its pre-downgrade levels" in the low 80s.

Also lower, he said, was high yield wireless sector bellwether Nextel Communications Inc., whose 9 3/8% notes due 2009 ended around 72.5 bid/73.56 offered, down three points. Global Crossing, meantime, fell back to about 6 bid/7 offered from levels in the 8-9 area after it filed for bankruptcy on Monday. "It was a pretty grim day," the trader declared.

At another desk, Telewest plc's bonds were heard solidly lower, its 11¼% notes at 72 bid, its 11% notes at 71 and its 9 7/8% bonds at 69, all down about eight points on the session. Nextel's 9½% notes notes were heard down three points at 72.25 bid

The telecom sector carnage was not even limited to junk issues. WorldCom Group's A3/BBB+ bonds were heard to have traded wider on market buzz that the Clinton, Miss.-based long-distance giant's debt ratings were likely to be knocked down to junk-bond levels, even though S&P, the lower of its two major ratings, denounced the unsubstantiated story as "nonsense." WorldCom's ratings are considered stable by both S&P and Moody's.

The company's bonds "traded wider today," a high yield crossover trader noted, although he had no accurate quotes. "They're still investment grade, not quite a crossover yet - but they're getting close."

Equity players obviously put enough stock in the impending downgrade story, despite the S&P denial, to take WorldCom's shares down to their lowest levels in 7½ years, as the shares ended down $1.60, or 13.33%, to $10.40. Volume of 153 million shares - more than seven times usual - made it easily the most active issue on the Nasdaq.

Outside of the telecom sphere, pockets of strength were seen in what was termed a "generally sloppy" market by one trader.

He quoted Conseco Inc's 8½% notes up four points, to 90 bid, from 86 bid/87 offered, while another trader saw the Carmel, Ind.-based insurer's bonds up at least two or three points on the session, with its 6.40% notes due 2003 rising to 75 bid from the lower 70s. Conseco announced that it planned to raise between $700 million and $800 million by selling its variable annuities unit and some smaller assets, with the proceeds earmarked for the further reduction of debt. In his "Turnaround Memo #18," Conseco Chief Executive Officer Gary D. Wendt said that although the variable annuities business "is not a good strategic fit with our middle market customers, who are interested in more predictable annuity products, including our fixed and equity indexed products," it would be a "highly valuable" to companies looking to pursue a leadership position in that segment of the industry. He said that several initial bids have already been received, with terms for the sale of the unit expected to be finalized by the end of the first quarter. Conseco did not indicate a likely sale price for the variable annuities business or the other assets it intends to unload.

"I suspect (the Conseco news) will be positive to the bonds" over the next session or so, a trader said. Conseco debt firmed last week on the news that the company had increased the amount of debt maturing in 2002 that it had retired by buying it back at a discount to $266 million - fully 30% of the $864 million that had been outstanding last June 30.

A market observer saw Xerox Corp. bonds continuing to firm in the wake of the surprising fourth-quarter operating profit which the Stamford, Conn.-based copier and office machines giant reported Monday. Excluding restructuring charges and the effect of currency translation, Xerox earned 15 cents a share in the share during the quarter versus analysts' consensus forecasts for a penny-per-share loss.

That pushed Xerox's recently issued 9¾% notes due 2009 up to 94 bid Monday from about 91.5 previously, its 7.15% notes due 2004 up to 92 bid from 89.5, and its 6.25% bonds due 2026 up a deuce to 92. In Tuesday's dealings, the observer said, Xerox continued to rise the rocket, estimating the bonds went home a point or two higher from Monday's finish.

Kmart bonds saw only "minimal" action Tuesday, a trader said, even as the beleaguered Troy, Mich.-based retailer's shares jumped 31 cents (33.70%) to $1.23 on the NYSE, on heavy volume of 73 million shares, more than four times the usual turnover. The stock surge followed the bankrupt discounter's announcement that it has received court approval to continue providing wages and benefits to employees, and has gotten assurances from many key vendors that they are resuming shipments of merchandise to its 2,114 stores on normal terms. Even so, the bond trader sniffed, Kmart debt was "dead," its 9 3/8% notes hanging in around the same 42.5 bid/43.5 offered level they'd held in the wake of last week's Chapter 11 filing.

The debt of one of Kmart's key vendors, Fleming Cos. Inc. - which had already resumed shipments of grocery products after being assured by the court that its claims would be paid - "continues strong" meantime, a trader said. He quoted the Dallas-based grocery wholesaler's 10¼% notes due 2004 at 96 bid, up two points on the session, although he said he was seeing "no firm right side (i.e., offer levels). The bids just keep getting stronger every day."

Apart from particular issues with a story attached to them, like Kmart, Fleming, Conseco or the telecoms, though, he said, things remain muted, particularly as the Federal Reserve's policy-setting Federal Open Market Committee holds its two-day meeting through Wednesday.

"Yesterday (Monday) was brutally slow. (Tuesday) picked up a little, with a couple of people taking some shots, some customers trying some bottom fishing ahead of the (Fed) meeting, " he said. "All and all, though, it's not what a January should feel like."

In the primary, terms emerged on Coventry Health Care's offering of $175 million 10-year senior notes, which priced at par to yield 8 1/8%, "through" the 8¼% area price talk, according to a syndicate source. Salomon Smith Barney ran the deal.

A secondary trader saw the new Coventry bonds trade up to 101.75 bid; the bonds went home quoted in the 101.25 bid/101.75 offered range.

Meanwhile, Hanger Orthopedic Group, Inc. announced it would wheel in a new offering of $200 million seven-year senior notes (B-), via joint bookrunners Lehman Brothers, J.P. Morgan and Salomon Smith Barney. The roadshow starts Wednesday and the deal is expected to price Feb. 8.

Sell-siders who spoke Tuesday with Prospect News struck a philosophical chord and waxed just a bit nostalgic as they eyed the days of January 2002 dwindling down.

"I think we're already over $6 billion if you include the split-rated deals that have been done," one sell-sider commented, after acknowledging that January had not been everything the primary market was hoping for.

"It certainly isn't as much as was done last year," the official continued. "But if you look at what was done last year...I mean, heck, Global Crossing did a deal last February. Where are they today?

"It's a much different market than it was at the beginning of the year last year," the official continued. "Its focus is different. And the guys who were doing deals then aren't doing them now."

Another sell-side official, foretelling sizeable new issuance headed for the primary in March - a couple of "event-driven" deals in the $500 million to $1 billion range - commented that 2002 has thus far been rather quiet, and could easily stay that way for a period.

"From what I hear it's going to be kind of quiet from a lot of the banks over the next couple of weeks," this official said. "It's been quiet up to this point already. We've only had a third of the issuance that we had in January of 2001 - a little over six billion. Last January it was something like $15 billion."

This official also commented that early 2002, with regard to the amount of liquidity in the high yield, and the slow trickle of new issuance rising to it, seems utterly familiar.

"It's playing out rather like it did in the second half of 2001, where the demand outstrips the supply," the official said. "So in the secondary market prices go up and yields come down."

Tuesday heard price talk and timing emerge on pending business for the week that concludes January and begins February 2002.

TSI Telecommunications came out with price talk of a yield in the 12% area on its $245 million offering of 10-year notes via Lehman Brothers. Pricing is expected midday Thursday.

And price talk of 12%-12¼% emerged on Jacobs Entertainment, Inc.'s $120 million of seven-year notes via CIBC World Markets. That deal is expected to price Friday.

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