WorldCom continues bounce on bank loan talk; Wise Alloys deal heard shelved

By Paul Deckelman and Paul A. Harris

New York, May 8 - Wall Street came roaring back from its recent doldrums with the biggest stock market surge in many months Wednesday, although the high-yield market chose not to jump on the bandwagon. However, selected issues were gainers, including WorldCom Inc., whose paper continued the late surge seen Tuesday and ended higher, on further news reports that it was in talks on a big bank loan and might even be near an agreement with potential lenders.

In the primary market Wednesday, no new deals were heard to have priced by the time activity wound down and, in fact, word emerged that one deal already on the calendar - Wise Alloys LLC/Wise Finance Corp.'s planned $150 million seven-year-note offering - was postponed. Sun International Hotels Ltd., meantime, was heard on the verge of bringing a rapidly marketed $200 million add-on deal to market Thursday, with the proceeds slated to be used to redeem its outstanding 9% notes due 2007.

Recently buy- and sell-side sources have been telling Prospect News that the forces of supply and demand in the high yield are notably out of balance at present.

In a new report titled "Supply/Demand Gap at Record Level," Martin S. Fridson, chief high yield strategist at Merrill Lynch & Co. wrote: "For the first four months of 2002, weekly average inflows to high yield bond mutual funds ran at a higher rate than in any full year since AMG Data Services began reporting flows in 1992. Weekly average new issuance, meanwhile, was on a par with the 2001 rate, the second lowest on record. [The comparisons are relative to the size of high-yield mutual funds as a whole and the size of the high-yield market, respectively.]

"This extraordinary divergence between investors' appetite and underwriters' ability to satisfy it, we believe, is powerful enough to push high yield bond prices to higher levels than a standard risk-reward analysis would justify."

The present supply-demand ratio has led to what Fridson's report characterizes as "the high yield sector's record richness," a situation which buy-side sources have noted with increasing frequency since mid-April in communications with Prospect News - the signpost deals being, among others, XTO Energy Inc. and Pioneer Natural Resources, both of which priced new junk bonds to yield 7½% in the last two weeks of April.

"On April 30, 2002, the Merrill Lynch High Yield Master Index's spread-versus-Treasuries was a record 188 basis points (3.8 standard deviations) narrower than our econometric model of the risk premium deemed appropriate," Fridson wrote in his report. "At +601 basis points, the month-end spread was down sharply from +734 at the end of 2001. Over the same four-month interval, the Garman Model's estimated spread rose from +752 to +789."

Fridson spelled out the present situation Wednesday in an e-mail message to Prospect News.

"Spreads remain wider than historical average, but they should be because risk is greater than average, too," the message read. "Spread IS tight - very much so - versus prevailing risk."

Bob Franklin, portfolio manager of the Nationwide High Yield Bond Fund, told Prospect News on Wednesday that the present dynamics at play in the high yield are not enticing.

"We've been sitting out most of the new issues," Franklin stated in a message. "We're in a situation now where deals are being brought to sponge up the cash in the high-yield market. That's frequently a prelude to disappointment."

Several sources have been telling Prospect News that the supply component of the supply-demand equation is presently being impacted by fallen angel credits descending into high yield from the world of investment-grade corporate bonds.

Franklin conceded that given present supply-demand circumstances in high yield and given the possibility that the US economy may be in recovery, such fallen-angel credits might warrant a closer look from investors than would otherwise be the case. Still, he added, the fallen angel supply falls far short of bringing the forces of supply and demand into balance.

"One should consider carefully bonds whose ratings decline to speculative grade," Franklin said. "Frequently for these companies the transition to the high yield market is like crossing the River Styx.

"This go-round is different because (1) it's arguably the end of a recession, and (2) the market is extremely skittish because (a) Enron destroyed investors' confidence, (b) a lot of people don't want to have to explain again why they're holding the next Global Crossing or Enron, (c) one rating agency is doing the Chicken Little thing, and (d) the SEC is trying to explain what it's been doing the past 10 years.

"So, there may be some bonds getting downgraded that might not need to be.

"And yes, if one is inclined to get involved in those bonds it's a buyer's market, but only for a handful of names. A prudently diversified portfolio manager, who doesn't ordinarily buy distressed names on purpose, could perhaps take a limited position in WCOM and a few other high profile names. That still leaves plenty of cash in the market."

A sell-side source also conceded that at present accounts appear to be taking a few close looks at specific distressed credits. However, this source added, the investment banks are poised to continue bringing product into the primary market.

"I think on the distressed side of things, with the Worldcoms et al. now trading in and around our market, investors are definitely looking at these with some hard eyes," the source stated.

"I think our primary market remains relatively robust, however. There is cash available, and while we have seen some postponements of late, those are specific to those credits, not the market in general.

"As far as new issuance, we are diligently working on our next round of deals as planned."

Meanwhile in Wednesday's primary market activity Bahamas-based Sun International Hotels, Ltd., announced it was bringing a $200 million add-on to its 8 7/8% senior subordinated notes due Aug. 15, 2011 (existing: B2/B+). The deal, via Bear Stearns & Co. and Deutsche Bank Securities Inc., figures to price Thursday afternoon.

Also on Wednesday a syndicate source confirmed that Wise Alloys, LLC/Wise Finance Corp.'s offering of $150 million seven-year senior secured notes (B3/B+) via Merrill Lynch was postponed. Price talk on the offering had been 11¼%-11½%.

In the wake of the postponement one sell-side source noted the recent disappearances of PCA International, Panavision and Hollywood Entertainment, and characterized the postponements as credit-specific incidents.

"Yes Wise has been canned," the source commented. "The deal was from a company that was third in a three-horse race, and the other two horses are Alcoa and Alcan, two huge companies by comparison.

"All this in an industry that has very little if any annual growth in it."

Finally on Wednesday timing emerged on Roundy's Supermarkets $200 million of senior subordinated notes, which will start its roadshow by the middle of the week of May 13, and possibly as early as Monday, according to a syndicate source. Bear Stearns is the bookrunner.

In secondary dealings Wednesday, junk bond traders watched the breathtaking equities rally, which saw stocks post their biggest gains since September - the Dow Jones Industrial Average was up 305.28 points - just two days after equities had slid sharply, with the Dow off nearly 200 points.

But a bond trader - cynically asking whether the day's stock gains would be given back in Thursday's dealings - observed that "it seemed like [among] high yield guys, there wasn't as big a reaction in the tech names and the telecom names as there was in the Nasdaq (up 122.47 points on the day) . It seemed like it was a little more muted. There wasn't a lot of confidence that the rally on the Nasdaq would continue."

Which is not to say that technology and telecommunications issues which were seen doing well in stock dealings were unmoved on the bond side. The stock rally was led by tech bellwether Cisco Systems Inc., which topped analysts' earnings estimates and was seen sparking a surge in the whole tech group. On the bond side, one of the beneficiaries was Xerox Corp. bonds, which the trader said "definitely felt better." Although the Stamford, Conn.-based copier and office machines giant's shares were up just 20 cents, or 2.67%, in New York Stock Exchange dealings, to $7.70, its bonds were up considerably. The trader saw Xerox's 5½% notes due 2003 at 90 bid, having "snapped back nicely" from Tuesday levels as low as 83.5 bid/85 offered.

Xerox firmed even against the sobering backdrop of Fitch Ratings revising its outlook on the copier king's debt and that of its subsidiaries to "negative" from "stable" previously; the ratings agency said the negative outlook on Xerox's BB rated debt reflects the company's on-going talks with its bank group to refinance its $7 billion credit revolver ahead of its maturity in October (although Fitch believes the effort will ultimately be successful). It also cited the likelihood that Xerox's core cash flow could limit its access to the capital markets, and noted the delay in the company's quarterly and annual earnings filings, in the wake of its recent settlement with the Securities and Exchange Commission.

Fitch declared that it was "crucial" that Xerox continue to execute its cost-cutting programs, in order to return its core operations to consistent profitability levels in the face of expected flat to lower revenues. "Cash flow remains strained and will have to increase significantly in order to support debt obligations," Fitch warned.

Elsewhere, the trader also saw a one-point gain in Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009, which closed at 69.5 bid, up from 68.5 on Tuesday, even as its shares were up 54 cents (11.46%) to $5.25 in Nasdaq dealings.

Not only was Nextel helped by what was described as an overall better tone in the telecom sphere - with WorldCom's anticipated good news providing much of the push for that - it also got a lift from news reports based on SEC filings indicating that company chairman William Conway had purchased 100,000 shares of the Reston, Va.-based wireless company's Class A commonstock at $5.45 a share on April 29.

Such a vote of confidence in a company "is always good to see," the trader said, although he added that "sometimes I wonder how much of that [kind of stock buying by companies' top brass] is just window dressing. Do they just want to send a signal to the market or do they really, really believe strongly about it?"

But the dominant name in the telecom world Wednesday - at least in the view of the financial markets - was WorldCom, whose bonds "shot out right at the opening and ended pretty much up across the board," a trader said, the paper given wings by continued news reports that it may be able to alleviate its near-term liquidity needs with new bank financing.

WorldCom's nominally investment-grade bonds have recently traded like junk bonds on the Clinton, Miss.-based telecom giant's well-publicized problems, with some issues dipping down as low as the 40s; on Tuesday, they had been heard up anywhere from three to six points in late dealings, after CNBC reported that WorldCom was in talks with lenders led by J.P. Morgan Chase & Co. on what could be either a $2 billion unsecured credit facility, or a $5 billion secured facility.

Speculation about new funding continued Wednesday, even as the The New York Times reported that it might draw down a $2.65 billion existing credit line, which is slated to expire in June, in order to be able to meet its liquidity needs.

The trader quoted WorldCom's shorter dated bonds up solidly on the day, while its longer-dated paper "kind of traded down" later in the day from its peak levels.

He saw the company's benchmark 7½% notes due 2011 finishing up five points on the session, having moved up to 49.5 late Wednesday from levels of around 45 Tuesday before the CNBC report that started talk of a new bank loan.

"All of the short paper did better, as would be obvious," he continued, pegging WorldCom's shortest issue, the 7 3/8% notes due 2003, at 87 bid/88 offered, well up from prior levels around 78 bid/79 offered. But the long issues, like the bonds maturing in 2028 and 2031 "didn't do too much, up but nowhere near as much as the short paper."

By the end of the day, he continued, "there hasn't been anything official from the company or from J.P. Morgan, its banker." While the financial markets understand that multi-billion-dollar financing deals can't be concluded in the blink of an eye, the trader cautioned that "if we don't hear something definitive [by Thursday] or at least hear from the company or from J.P. Morgan that yes, this is all true and talks are progressing, then I think people are going to start selling into this rally."

Another trader saw WorldCom's short end "up a lot," quoting the 7 3/8 notes due 2003 up seven points on the session, at 86.5 bid/87.5 offered, and other 2003 paper up about the same amount. WorldCom's 2004 notes were up about six or seven points on the session, he said, with the 6½% notes due 2004 closing at 64 bid/65 offered. But he saw the longer-dated maturities only up about half a point to one point at the most. "Obviously, the confidence was in the shorter maturities."

At yet another desk, WorldCom's 6½% notes due 2010 were seen having firmed to 49 bid, up three points on the day.

Qwest Communications International - like WorldCom nominally a high-grade bond whose debt has traded down to junk-bond-like levels in recent weeks - was seen solidly higher on news that bids for the Denver-based telecommunications company's soon-to-be-sold telephone directory business could come in as high as the $7-8 billion range, which is above original expectations. Several prominent private equity firms are seen as likely buyers for the operation.

"There were definite buyers [for the bonds] around" both Tuesday and Wednesday, a trader said, "and they were ending bid without," as no bonds were being offered for sale by their holders. He quoted Qwest's 6 7/8% notes due 2033 at bid levels in the 81-81.5 area, well up from their levels in the mid-70s on Monday. Qwest's shorter paper was also higher, its 5 7/8% notes due 2004 up at least four points in two days, to around 87.5 bid.

Outside of the telecom sphere, a trader saw Adelphia Communications Corp.'s moving up, noting that "it smells like there's some news in the air" on the troubled Coudersport, Pa.-based cable TV operator; indeed, late in the day the company announced that its board of directors had authorized Adelphia's financial advisors - Salomon Smith Barney, Credit Suisse First Boston and Banc of America Securities - to begin soliciting offers for certain of its assets, including cable systems in Southern California, Florida, Virginia and the Southeast U.S. The trader quoted Adelphia's 10¼% notes due 2011 at 86 bid/88 offered, three points better on the session.

On the downside, Primedia Inc. bonds were lower after Moody's Investors Service cut the New York-based magazine and electronic publishing company's debt ratings, dropping its senior unsecured notes to B3 from B1. The ratings agency said the company's de-leveraging effort had been at both a pace and magnitude below Moody's expectations. Its 8½% notes due 2006 were quoted down more than four points on the session, at 84.5 bid.

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