Dull dealings on half-day after 4th; WorldCom debt-swap talk largely ignored

By Paul Deckelman

New York, July 5 - "They came late and they left early" was how one Wall Streeter described the behavior of those junk bond market players who actually had to come in for Friday's abbreviated session, which saw things officially wrap up at 2 p.m. ET. At those shops which were, in fact open, secondary trading was described as uniformly light and featureless. WorldCom, Inc. debt, recently hugging the spotlight, was seen unchanged, even in the face of news reports that bondholders were considering the idea of swapping their debt for equity.

Primary market activity remained on hold on Friday, with market players wondering whether the new-deal market can get itself back on track in the face of investor angst over the WorldCom-led market erosion, the usual early-summer doldrums and the recent reduction in market liquidity, exemplified by a fourth consecutive week of high yield mutual fund outflows.

With the U.S. primary market essentially sidelined, just two new upcoming deals were heard floating around in Europe Friday, both energy-related.

Gazinvest Finance BV (Netherlands) will be bringing a €200 million issue of five-year senior unsecured notes to market shortly. There was no immediate word on timing or underwriters for the issue, which is being unconditionally guaranteed by Moscow-based Gazprombank (the Joint-Stock Bank of the Gas Industry), which in turn is majority-owned by Russian natural gas giant OAO Gazprom. Moody's Investors Service rates the upcoming Gazinvest issue at Ba3, with a positive outlook, citing "the important role Gazprombank is playing in the strategy of its parent, OAO Gazprom."

And market sources were hearing that French propane and butane distributor Antargaz will be bringing a €150 million issue of nine-year senior notes to market via Deutsche Bank Securities Inc. and Credit Lyonnais. The company is expected to begin a short roadshow for the deal on Monday, with pricing likely by Friday.

"It's kind of funny," a high yield syndicate source said, "that the U.S. market has become so hostile for new issuance, so unaccommodating, that it didn't surprise us to see that the only things that are going to get marketed right now are out of Europe."

He noted the fact, previously reported on these pages, that all of the deals that have come to market within the last 10 days or so have all had to either be downsized from original projections or priced outside of pre-deal market price talk or both in order to get them done.

For instance, he said, LBI Media Inc.'s $150 million of 10 1/8% senior subordinated notes due 2012, which priced on June 28, was downsized from the $200 million that was initially shopped around, and its final yield was well outside of price talk of around 9%. And Solutia Inc./SOI Funding Corp., which sold a downsized $200 million issue of 11¼% senior secured notes due 2009 (versus $250 million originally) not only had to reduce the size of the deal and price the notes at a deeply discounted 89.992 in order to fatten the yield acceptably to the 13% area, well outside price talk in the 12%-plus region, "but they had to give away 5% of the company" to get the deal done." The Solutia notes were sold in units along with warrants for 5% of the St. Louis-based chemical company's common stock.

"In the primary everybody's terrified right now based on the way those two deals, LBI and Solutia, came," the source said. "It looks like the primary market has gone hostile and doesn't really welcome new issuance."

Against that melancholy backdrop, he said, "we've been looking suspiciously at the Gristede's and Workflow Management deals that were supposed to price [last week] but didn't." Gristede's Foods Inc., a New York-based supermarket chain, is slated to sell $175 million of new Rule 144A senior notes due 2012 via Deutsche Bank and Jefferies & Co., with price talk heard in the 11%-to-11¼% area. Meanwhile, Workflow Management Inc., a Palm Beach, Fla.-based provider of printed office products and inventory management tools, is scheduled to sell $170 million of seven-year senior secured notes in the Rule 144A market, also via Jefferies.

The source said that another deal that might attract some notice, if only as a litmus test as to the market's sentiment toward domestic new issuance, is Oregon Steel Mills Inc.'s pending $300 million tranche of new Rule 144A first-mortgage notes due 2009, which is coming to market via Goldman Sachs & Co. The Portland, Ore.-based steel plate and pipe producer's issue is scheduled to price on or around Wednesday.

"We'll look [this week] at this Oregon Steel Mills deal for any kind of indication of how receptive the market will be," the syndicate source said. "We'll be curious to see if that can get done, in light of how unaccommodating the primary has been."

The source said that for a while, "everything was getting confused with this oversupply, or overabundance, of new issuance, that came in the wake of the Memorial Day holiday. All of a sudden we had 26 deals on the calendar - every underwriter was realizing all of the cash that had come into the market, like high-yield mutual funds for the first part of the year, and they did some work over that weekend and came up with every single name that they could. Anyone that was remotely interested in issuing a high yield bond came to market, seeing it as a low-cost way of raising capital, although there definitely some casualties along the way."

By mid-June, however, the tide had begun to turn. The equity markets were heading south, while in junkbondland, major issuers such as Adelphia Communications Corp. and new fallen angels Qwest Communications International Inc. and WorldCom were also heading lower, pushed downward by investor angst over their huge debt loads, regulatory probes of problematic accounting maneuvers and a general slowdown in revenues and new subscribers across the entire communications industry spectrum.

And the plentiful liquidity seen earlier in the year also began to evaporate a bit. High yield mutual funds, considered by many a reliable barometer of overall market liquidity trends, had peaked in mid-May with a cumulative year-to-date inflow total of about $5.6 billion, according to a Prospect News analysis of the weekly fund-flow figures released by AMG Data Services. The cumulative balance was still in the $5.4 billion neighborhood as late as the week ended June 5 - but it's been all downhill since then, with approximately $1.168 billion more leaving the funds than have come into them in the last four weeks.

On Friday, market players said, AMG reported that outflows for the week ended July 3 came to $213.174 million, on top of the $158 million of outflows seen the week before. The latest week's figures - taking into account only those funds which report on a weekly basis, and excluding distributions - bring the total inflow number for the year to date down to approximately $4.277 billion - still a sizable cumulative total, but well below earlier peaks. Inflows to the funds have been seen in 18 out of the 27 weeks since the year began, although the trend has been decidedly negative for the past four weeks, and for five out of the last seven.

The negative outflow numbers "are starting to add up," the syndicate source said. "It'll make things more interesting" than they had been earlier in the year, when liquidity was more plentiful and the decision whether or not to come to market with a junk bond if a company needed to raise funds was almost akin to a no-brainer.

With liquidity starting to constrict and a more negative psychology having taken hold, "I think the primary market is going to quiet down for the next couple of weeks," the source said. "There's going to be a few guinea pigs, like Gristede's and Workflow Management. We've been watching to see whether there is any indication [that the deals will either imminently come to market or be pulled].

For the moment, it would seem, "the demand for new paper seems to have quieted, satisfied." But with the past week admittedly "a weird short week," having a holiday sandwiched between two early closings on Wednesday and Friday - a combination rarely seen, "we're going look to [this week] to resume some level of normalcy. Any transactions that are on the calendar that price [this] week, people will be watching to see whether the primary market has entirely been oversaturated with new paper, and we'll go from there. "

In the secondary market on Friday, "we didn't do a damn thing," one of the few traders who was actually in and answering the phone laughed. "It was a complete non-event. There were no markets [Friday] in anything."

That included WorldCom, whose bonds showed little response to news reports that bondholders have been in talks with the company and may propose a debt-for-equity swap, which would be carried out under a pre-packaged Chapter 11 filing for the troubled Clinton, Miss.-based telecommunications giant.

Such a proposal would wipe much of WorldCom's approximately $30 billion of debt from its books, leaving the company - parent of the Number-2 U.S. long-distance operator MCI - debt-free and thus in a comparatively favorable position relative to its rivals such as AT&T Corp. and Sprint Corp.

If the swap were to be accomplished through a pre-packaged bankruptcy process - which generally takes far less time than a regular Chapter 11 proceeding, in which the courts must sort out competing claims and the company must first win approval of its creditors for a restructuring plan - it would allow WorldCom to emerge from bankruptcy fairly quickly, which would help it to hang onto customers and key employees alike, who might otherwise jump ship in the event of a lengthy, complicated case.

The downside of such a plan would be the total wipeout of the company's equity, which ranks after debt in the capital structure in the event of a reorganization scenario. Hopes that the company might be able to somehow turn itself around without heading for the courts have propelled WorldCom's shares up over the past few days from their Nasdaq closing levels of around six cents on Monday, to 25 cents on Friday, up three cents on the session (13.64%). Volume of 371 million shares was well below the billion-share daily totals seen in the previous three sessions, though still almost four times the usual turnover.

Any bonds-for-equity plan might be endangered, news reports said, by WorldCom's efforts to secure new financing from its bank lenders, who currently rank on a par with the bondholders in terms of seniority but who would be expected to demand first access to any collateral as the price for coming across with the badly-needed fresh capital.

The bonds had fallen to levels in the teens - where exactly depending on their maturity - after WorldCom admitted that it had classified nearly $4 billion of operating expenses as capital expenditures, thus spreading those costs out over a number of years rather than deducting them all at once, the way operating costs normally are accounted for. The financial sleight-of-hand allowed WorldCom to book quarterly profits and positive EBITDA cash flow in 2001 and the start of 2002 - earnings which are going to now have to be re-stated. WorldCom - which abruptly fired longtime chief financial officer Scott Sullivan and accepted the resignation of another senior financial executive - might have to add as much as another $1 billion to be restated due to other accounting problems, according to people familiar with its situation. The Justice Department meantime was reported by The Wall Street Journal to have sought to curtail WorldCom's own internal probe of the alleged book-cooking, out of fear of possible witness tampering that could interfere with the concurrent federal investigation, the paper said.

But all of this, a trader said, was like a tree falling in the forest with no one to hear it drop. He said that WorldCom's bonds held steady around the levels to which they had recently moved, with the benchmark 7½% notes due 2011 hovering in the 14-16 bid region and the shorter bonds maybe a point or two better than that.

"There were a couple of guys out there looking for some paper, but it was in right the context of where everything closed [Wednesday]. But even if bonds traded up, you can't take it as an indication of anything positive, because there was such a limited amount of players, it means nothing. This was a non-event."

There were "just a handful of trades, and no movement that we saw in any sector," he said, because" really, even the Street participants, the brokers and the brokers' brokers, many shops were closed."

"Nothing really happened," another trader agreed. "We did all of 10 trades," and then everyone just packed up and went home.

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