Gazprom deal heard going well; Nextel, Williams up on results; junk funds see $141 million outflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 20 - Russian natural gas producer OAO Gazprom's upcoming 10-year note issue - already a mega-deal at $1 billion - was heard by high yield syndicate sources Thursday to be on course for upsizing.

Also in the energy area, Citgo Petroleum Corp. was heard to have priced its $550 million issue of eight-year notes while Northwest Pipeline slated a $150 million offering of seven-year bonds.

Secondary market activity centered around Nextel Communications Inc., whose bonds firmed on the wireless provider reported strong fourth-quarter numbers, while Williams Companies Inc.'s bonds were also better, as the pipeline operator reported results and said it would sell additional assets this year and pare down its debt load.

And market players will ponder whether a $140.7 million outflow in high-yield mutual funds seen in the week ended Thursday - the second consecutive outflow and fourth in the last five weeks - means that the recent trend of easy liquidity, which has spurred on both the primary and secondary markets, may be fizzling out. Changes in the junk funds are seen by many market participants as a reliable proxy for overall junk market liquidity trends.

This week's outflow follows the $7.8 million outflow seen in the week ended Feb. 12., according to market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif.

While last weeks' number was not a major outflow by any means, the fact is that over the past five weeks, a total of $375.332 million more has left the funds than has come into them, according to a Prospect News analysis of the AMG figures. That five-week outflow stretch was broken only by a $503.5 million inflow in the week ended Feb. 5, and in that time, the cumulative year-to-date inflow has fallen to $1.578 billion from its peak level of nearly $2 billion in mid-January.

One source characterized this week's outflow as a "worry sign."

However another sell-side source told Prospect News late Thursday that the pockets of the buy-side are far from empty.

"Talking to our traders and our distribution people, they are still saying that the market has a lot of cash," the source said. "I don't think it's a telltale sign that the market is going sour, or that we're about to dry up."

That said, this sell-side official commented that whereas the market was seeing a rash of large deals such as Houghton Mifflin, Georgia-Pacific and Crown Cork & Seal marching onto the forward calendar, the parade seems most recently to have thinned.

"Outside of DirecTV ($1.4 billion 10-year notes, B1/B) there does not appear to be any big deals coming. You see a couple of $150 million deals get announced here and there, but that's it."

Meanwhile Thursday price talk of 9 5/8%-9¾% emerged on Gazprom's $1 billion of 10-year bullets, a deal that is being marketed to both high yield and emerging markets accounts, worldwide, according to an informed source.

That source added that demand for the Gazprom paper is multiple times the announced amount of the offering and that the deal is likely to be upsized.

Dresdner Kleinwort Wasserstein and Morgan Stanley are joint bookrunners on the Rule 144A deal, which is expected to price Friday.

Added to the calendar during the sessions was one of the aforementioned $150 million deals, from Northwest Pipeline Corp. which announced its intention to sell seven-year senior notes via Lehman Brothers.

In a press release Thursday morning Northwest Pipeline's parent, The Williams Companies, Inc., announced it is exploring issuing subsidiary debt of $150 million to $300 million.

On the company's earnings conference call Steve Malcolm, chairman, president and chief executive officer of Williams, referred to the Northwest Pipeline deal as "just one example of gas pipeline financings we will be pursuing."

Although it is new debt, Williams is moving to deleverage, Malcolm said.

"While clearly our goal is to delever the company...in the interim the company is pursuing opportunistic financings to stack liquidity," added treasurer Jim Ivey.

Malcolm said debt at the end of 2002 was $14 billion. "We see that number falling below $10 billion and approaching $9 billion by 2005," he added.

Meanwhile Thursday the market heard terms on a deal that was said to have spent a slightly longer length of time in the pipeline that had originally been planned.

Citgo priced $550 million of 11 3/8% senior notes due Feb. 1, 2011 (Ba3/B+) at 99.38 to yield 11½%, 25 basis points wide of the 11% area price talk.

The deal was originally scheduled to price on Valentine's Day, and pricing was pushed back at least once, and possibly twice, as market observers noted two points about the deal: one, the Tulsa-based issuer is a subsidiary of Petroleos de Venezuela, SA, the national oil company of Venezuela, which has been embroiled in a strike surrounded by political turmoil since late December 2002, and two, proceeds from the deal are slated to fund a dividend to parent PDV America, Inc. to redeem bonds due 2003.

Given these facts one sell-side source not on the Citgo syndicate told Prospect News that 25 basis points does not represent an excessive amount of back-up.

"I heard that in the aftermarket it was trading up a couple of points," the source said. "It's not surprising that it came a little wide. It's a sizable deal, and you're paying a distribution, so you're going to get beaten up by the market a little bit."

Credit Suisse First Boston ran the books on the Citgo deal.

Finally on Thursday a sell-side source in Europe responded to a request from Prospect News for some color on the eurobond market.

"The market over here is fairly active though mainly in the crossover sector," the official wrote. "Spreads are relatively stable with the obvious candidates for bad trading being very credit specific. As guessed by most of the market, Legrand is slowly trading up as investors who made a point of staying out of the new issue now buy into it - despite the structural subordination, it's a B1 credit with a great business - and 11% is too cheap for this name."

"I am hearing that a number of deals are still at the starting gates and no doubt most that may originally have been structured as typical euro deals are now under work to attempt to convert them to the U.S. (contractual) style...the ironic thing is that even if all those TMT deals that created the biggest holes in euro investors' portfolios were structured in the U.S.-style, the recovery rates would probably still have been as low as they actually turned out to be."

In the secondary arena, Nextel was the "big mover of the day" in the words of one trader, after the Reston, Va.-based wireless operator posted a fourth-quarter net profit of $1.46 billion, or $1.38 per share, versus a net loss of $1.8 billion, or $2.25 per share, a year earlier. Fourth-quarter revenue was $2.33 billion, up from $1.88 billion a year earlier, while free cashflow was $122 million.

Nextel added a net of 503,000 customers during the quarter, bringing its total to 10.61 million users.

Buoyed by those numbers, Nextel's benchmark 9 3/8% notes due 2009, which had closed on Wednesday at 96.5 bid/97.5 offered, pushed as high as par during the session, before coming off that peak to close around 99.5 bid.

Nextel "really ran in the morning, and then softened up," another trader said, noting the 9 3/8s close in the 99.5 area, and the rise of Nextel's 10.65% notes to as high as 103 bid/104 offered from par bid/100.5 offered on Wednesday, while its 9.95% notes traded in a 100.5- 103.5 range.

"They were all up two to three points, then retracted by about a point, to end up around a point-and-a-half, two points.

On the equity side, however, Nextel's shares, which had initially traded solidly higher, ended up just a nickel (0.37%) to $13.53, on Nasdaq volume of 41.5 million shares, about two-and-a-half times the norm.

It should be noted that Nextel's sizable quarterly profit was largely attributable to a $1.22 billion gain from the deconsolidation of the firm's interest in NII Holdings Inc., which offers wireless service in the Philippines and Latin America. Excluding such one-time special gains and losses, Nextel earned $209 million (21 cents a share) in the latest quarter, versus a year-earlier loss of $188 million, (24 cents a share); analysts were expecting earnings of just nine cents a share in the latest period on this basis.

Of key interest to bondholders, EBITDA jumped 64% in the latest period to $886 million from $539 million a year earlier.

Elsewhere in the communications constellation, Qwest Communications International Inc. debt and shares were seen lower, after the Federal Communications Commission, going against the wishes of Chairman Michael Powell, ruled 3-2 that regional Bell operating companies would still have to offer low-cost access to their local phone networks to competitors, such as AT&T , Sprint, WorldCom and other, smaller rivals. While the Commission also ruled that they did not have to similarly open their broadband networks to the competition, such as internet service providers, that was but a small and hollow victory for the RBOCs such as Qwest, Verizon, SBC Communications and Bell South, since the local phone providers had lobbied harder against the provision that was passed.

Qwest, which provides local phone service in 14 states west of the Mississippi, said it was "disappointed that a majority of the FCC passed on this opportunity to jump-start investment and confidence in the telecommunications industry. The choice of resale over investment is not in the best interests of consumers, investors or the economy.

"The uncertainty that has surrounded the telecommunications industry for nearly the past two years - limiting access to capital and stifling new investment - will continue as a result of today's decision."

"The news came out, and Qwest got softer," a trader said, quoting Qwest Capital Funding's 7% notes due 2009 as having eased to 68.5 bid/69.5 offered from 69 bid/70 offered at the opening, while its 7¼% notes due 2011 were likewise half a point lower at 67.5 bid/69.5 offered.

"It was nothing dramatic, but they were a little softer, and we saw some sellers," the trader said.

Qwest shares, meantime, tumbled 57 cents (14.07%) to $3.48, on New York Stock Exchange volume of 13.1 million shares, almost double the norm.

Pegasus Communications Corp. shares jumped $2.34 (14.05%) to $19, on volume of 259,000 shares, seven times more than usual. That followed a 16.5% leap on Wednesday. Meanwhile, the bonds of the Bala Cynwyd, Pa.-based distributor of satellite TV programming were also up. A market source, looking over the day's activity, listed Pegasus' gain first, mentioning it even before Nextel's, as he quoted its 12 3/8% notes due 2006 and 12½% notes due 2007 as having both pushed up to 81.5 bid from prior levels around 79.

News reports said that investors were investors betting that DirecTV could decide to buy Pegasus as part of a settlement of ongoing litigation between the two companies. They're in court as part of a long-running dispute over Pegasus' license for rural franchises of DirecTV's satellite broadcast services

Pegasus itself said that current interest in its stock was linked to a recent report from Credit Suisse First Boston, which suggested that the time might be right for Pegasus to be bought by DirecTV - which itself is up for sale by corporate parent Hughes Electronics, a division of General Motors Corp.

Outside the communications area, Williams Cos. bonds "saw some activity," a trader said, quoting the Tulsa, Okla.-based pipeline operator's 9¼% notes due 2004 as having pushed up to 94.25 bid/96.25 offered from 91 bid/92.5 offered on Wednesday, while its 7 5/8% notes due 2019 rose to 70.5 bid/72.5 offered. He also saw the company's 8¾% notes due 2032 moving to 74 bid from 71.5 bid/73."You can see the movement," he said.

Another trader quoted its 8½% notes due 2012 closing at 78 bid, up from 76 bid/78 offered.

Williams shares zoomed 77 cents (26.55%) in NYSE dealings, to $3.67, as volume quadrupled to 17.5 million shares.

The company posted a fourth-quarter net loss of $201 million, (40 cents a share), considerably narrower than $1.24 billion ($2.39 a share) of red ink a year earlier. Excluding nonrecurring items and losses from discontinued operations, earnings from continuing operations were $98.5 million (19 cents a share), down from $142.7 million (28 cents a share) a year earlier.

Investors, however, were cheered by Williams' announcement that it would sell an additional $2.5 billion of assets in order to shore up its liquidity and pare down its debt. Williams projected that its debt load, which totaled $13 billion at the start of the year, would be cut to $11 billion by year's end, and to $9.5 billion by the end of 2004. It said it would have sufficient liquidity to meet its debt obligations and fund operations.

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