Charter up again on Allen talk; Cablevision sinks on Moody's cut; Newfield, MedQuest price

By Paul Deckelman and Paul A. Harris

New York, Aug. 8 - Charter Communications Inc. bonds firmed for a third consecutive session Thursday, as the high-yield market bubbled once more with speculation that company founder and principal owner Paul Allen could take Charter private - this time after Charter acknowledged the possibility in a Securities and Exchange Commission filing. But industry rival Cablevision's bonds swooned after Moody's Investors Service downgraded the ratings of its key unit. There was also activity among the troubled telecoms, on news reports of apparent additional accounting fraud at WorldCom Inc. and earnings data and lowered guidance from Qwest Communications International Inc.

In the primary arena, Newfield Exploration Co. priced an upsized offering of 10-year bonds, while MedQuest Inc. also came to market with a 10-year bond offering.

Charter Communications - whose bonds had risen the previous two sessions after the St. Louis-based cable operator reported what the market considered decent second-quarter results (a far-smaller quarterly loss versus a year ago) and reiterated its previously announced guidance - was up again on Thursday. And as had been the case for much of last week, speculation that its controlling shareholder, multibillionaire Microsoft Corp. co-founder Paul Allen, might decide to take advantage of the sharp slide in the company's stock price in the wake of a general cable industry sector retreat, to take the company private and/or buy a sizable chunk of Charter's $17 billion of outstanding debt at a deep discount.

Last week, that speculation was sparked by a lengthy New York Times story which explored that possibility; on Thursday, Charter, as part of a Schedule 13 D (schedule of beneficial ownership) filing with the SEC, said that Allen is considering a number of possible transactions involving Charter.

Allen, it said, "is considering and may make from time to time market or other purchases of public debt of the Issuer or its subsidiaries, including debt convertible into common stock of the Issuer."

The billionaire tycoon "is further considering possible restructuring transactions designed to reduce the Issuer's leverage. Such transactions could include, without limitation, the possibility of proposing a debt to equity exchange pursuant to which Mr. Allen and/or others would exchange debt of the Issuer or its subsidiaries for common stock of the Issuer or equity of Charter Communications Holdings Company."

Alternatively, the filing continued, "Mr. Allen could propose a going private transaction in the future that would result in Mr. Allen acquiring beneficial ownership of all or substantially all of the common stock of the Issuer."

However, the filing cautioned, "Mr. Allen has not determined what if any course of action he may take with respect to any of the foregoing, nor has he made any proposals to the Issuer."

Wall Street, where cable company shares and bonds have been mostly on the slide all year on a combination of an industry slowdown in the face of a soft economy, mountainous debt loads at many companies (including Charter) and investor jitters in the wake of the Adelphia Communications Corp. fiasco, is looking for any silver lining and is in no mood for cautionary warnings getting in the way of a good advance.

Traders said Charter bonds were up about two to three points on the session, in a 62-64 bid context, on the Allen news. Its 8 5/8% notes due 2009, which had finished around a 58.5-59 level on Wednesday, pushed upward to 61.5 bid/62.5 offered, one said, while at another desk, the Charter notes were seen having pushed as high as 64 during the day.

On the equity side, Charter shares rose 32 cents (12.40%) in New York Stock Exchange dealings Thursday to close at $2.90, although volume of 7.5 million shares was about the usual.

While the Charter bonds were heading north on the renewed Paul Allen speculation, Cablevision's debt was going in the opposite direction.

Earlier in the session, Cablevision reported a second-quarter loss of $98.493 million (59 cents per share) versus year-ago earnings of $238.49 million, which still translated into a 69 cent-per share loss because of various special items. The 59 cent-per-share loss in the latest period was actually well under the $1.06 per share loss which analysts had generally been looking for. Revenues totaled about $1.07 billion, again higher than Street estimates. Cablevision also pretty much stood by its previous full-year guidance, although it did reverse its previous forecast of a 0.5%-to-1% gain in basic subscribers in its core Cablevision NY Group, now projecting a 1%-to-1.5% subscriber loss.

Cablevision also announced plans to shed underperforming assets, including its Clearview Cinemas unit, and to close 26 unprofitable The Wiz New York-area consumer electronics stores, while keeping 17 other Wiz stores open. The company plans to chop its workforce by 7%.

Cablevision "was holding up all right post-earnings release," a trader said, with its 7 5/8% notes due 2011, which had closed Wednesday at 76.5 bid/77.5 offered, actually firming half a point in the early going. But then, "Moody's downgraded them - and they collapsed," the bonds careening down to 68 bid before coming off those lows to end at 72.5 bid/73.5 offered, about four points lower on the session.

At another desk, Cablevision's 8 1/8% notes due 2009 were quoted six points lower going home, at 74 bid. Its shares lost $1.24 (15.82%) on the NYSE to end at $6.60, on volume of about 9 million shares, more than double the usual.

Moody's cut the ratings on Cablevision's CSC Holdings subsidiary, dropping its $3.7 billion of senior unsecured notes to B1 from Ba2 previously and lowering its $600 million of senior subordinated notes to B2 from Ba3. All ratings were put on negative review for possible further downgrades.

Moody's said that the downgrades "principally reflect lingering concerns about the company's perceived funding shortfall as expected to occur in 2003, and the insufficiency of the company's actions to address this critical concern to date in accordance with expectations, notwithstanding past opportunities to do so."

The ratings agency further warned that "the company's viable options to enhance its still diminishing financial flexibility are now much more limited given current market conditions, from both capital access and asset valuation perspectives. While we continue to believe in the adequacy of the underlying implicit asset value in support of the company's obligations, the ability to monetize a portion thereof is much more suspect at present, and the probability of default has risen in recent periods and is likely to worsen over the forward rating horizon."

A trader said that between Charter and Cablevision and Qwest, "that was 90% of the action [Thursday].

The third member of the triumvirate, Qwest, started things off on a negative note when it reported second-quarter results. As expected, the picture was not pretty for the Denver-based regional Bell operating company, which had a net loss of $1.14 billion (68 cents a share). Although most of that was attributable to $926 million in charges, and the loss was considerably narrower than the year-ago deficit of $3.31 billion (or $1.99 a share), Qwest was forced to revise its full-year guidance for 2002 down from previous analysts' expectations. The company now expects total revenue (including that from its QwestDex yellow pages business, which is still in the process of being sold), of between $17.1 billion and $17.4 billion, down from consensus projections of about $17.8 billion, and it sees a loss before one-time items of 46 cents to 49 cents a share - at least double the 23 cents a share the analysts were looking for.

Bankruptcy rumors have swirled around the troubled company in recent days, on top of current probes of its accounting by both the SEC and Denver prosecutors, and the company's recent acknowledgment of some $1.1 billion of accounting errors, which will force earnings restatements. Qwest said in its earnings announcement that it will not be in a position to file its quarterly 10-Q report with the SEC in a "timely" manner.

Qwest's recently appointed CEO, Richard Notebaert, took the bull by the horns Thursday and addressed the bankruptcy talk, reportedly declaring on a conference call that "there's no discussion like that taking place in my office."

The new chief - who replaced former Qwest head Joseph P. Naccio as the company's accounting problems started to come to light - also pointed out that Qwest was in the process of lining up an additional $500 million for its QwestDex unit, with a Bank of America affiliate already committing to $200 million of that and B of A working with Qwest to restructure the covenants on its credit facility. Notebaert declared rhetorically that "Someone's not going to give you $500 million if they're worried about bankruptcy."

He also said that Qwest expected to have some news "shortly" on the sale of all or part of QwestDex , which the company hopes will yield as much as $8 billion to $10 billion proceeds, and said Qwest has enough money on hand to fund operations for at least the next 12 months.

The up-and-down nature of the news coming from Qwest caused its shares and bonds to gyrate around Thursday. Qwest debt "had a downdraft in the morning of three or four points," a distressed-debt trader said, "then they were right back up in the afternoon," and ended a point or two higher.

He saw Qwest's 7 5/8% operating company notes due 2003, which had closed Wednesday at 83 bid/85 offered, fell as low as offered levels around 81 before rebounding to close at 86.5 bid/88.5 offered, apparently buoyed by Notebaert's confident assertions.

Another trader quoted Qwest has having see-sawed around before ending "not much changed," its 7 ¼% holding company notes due 2011 having dropped to 38 bid from prior levels around 40 before coming off those lows to 40.5 bid/41.5 offered. He saw its 7.20% operating company notes due 2004 as having recovered to 81.5 bid/82.5 offered from lows around 78 bid/80 offered.

Qwest shares likewise swung wildly between a high of $1.39 and a low of $1.08 before closing at $1.20 - exactly where they closed on Wednesday. Twenty-five million shares traded, up from around 17 million normally.

Also on the telecom front, WorldCom "was moving around," a trader said, citing CNBC's reports that as much as $2 billion of additional accounting irregularities had been discovered at the bankrupt Clinton, Miss.-based telecom giant. He quoted its bonds as having fallen from 14 bid/15 offered, down to 10 bid, before bouncing back, partially, to 12.5 bid/13.5 offered.

The CNBC report proved to be accurate in spirit - but understated the amount in question; after the market closed, WorldCom acknowledged that it had found an additional $3.3 billion, on top of the previously reported $3.85 billion of accounting irregularities. And there was further bad news, with WorldCom also admitting in a statement that it may have to write off as much as $50.6 billion to reflect the declining value of assets when it restates results since 2000.

Outside the communications sphere, a trader said AES Corp. debt "caught some wind in its sails" on the news of the International Monetary Fund's $30 million loan pledge for troubled Brazil, where AES has significant exposure. Investor worry about the health of the company's Latin American operations has helped to drive down its shares and bonds lately. AES 9½% notes due 2009, which closed at 42 bid/43 offered Wednesday, traded as high as 48 bid Thursday before going home at 45 bid/47 offered.

In new issues activity, terms emerged Wednesday on two 10-year deals, as Newfield Exploration Co. priced its notes mid-talk and MedQuest Inc. came wide of the talk and priced at a discount.

Newfield Exploration, the second of two oil and gas exploration and production firms to complete drive by deals during this week, priced its offering of $250 million of 10-year senior subordinated notes (Ba3/BB-) at 99.168 on Thursday to yield 8½% - in the middle of the 8 3/8%-8 5/8% price talk.

The off-the-shelf deal came via the joint bookrunning team of UBS Warburg and JP Morgan.

One syndicate source, when pressed for color, commented: "Demand was strong and it was great book."

A buy-side source who spoke with Prospect News Thursday had taken a look at both Newfield and the offering from Chesapeake Energy Corp., which priced $250 million of 10-year senior notes (B1/B+) on Wednesday to yield 9¼%, wide of the 8 7/8% area price talk.

In the end, however, this buy-sider chose not to play either deal.

"I thought they were nice-quality names - appropriately priced for risk-averse investors," the source said.

"I just think there's a little more value in names that have a little more hair on them."

Asked whether from a buy-side point of view price talk (8 7/8% area on Chesapeake, and 8 3/8%-8 5/8% on Newfield) didn't seem just a little rich given the present circumstances in high-yield, this portfolio manager allowed that such might be the case.

"It's a measure of peoples' risk-aversion and desire to buy non-tech/telecom/cable names" the buy-sider remarked.

"Nobody wants those sectors. And people I think are a little bit cautious about some of the economically sensitive issues that come when the economy is so sluggish.

"So what's left? Very little. And a well run energy company that has a good operating history is very appealing."

Sell-side sources have been advising Prospect News that Newfield and Chesapeake, along with Alpharetta, Ga.-based diagnostic imaging services provider MedQuest Inc., share the distinction of being "defensive" names and that therefore all three transactions have good chances in what most of those sources are characterizing as a "difficult" market.

Indeed, the MedQuest transaction did price Thursday. Its $180 million of 10-year senior subordinated notes (B3/B-) came discounted to 97.781 to yield 12 ¼%, wide of the 11½% area price talk. JP Morgan was bookrunner.

One of the factors rendering the present market difficult, according to various sources, is the reported eight successive weekly outflows from the high yield mutual funds, totaling $2.307 billion.

When Prospect News brought that subject up during the conversation with the above-quoted buy-sider, the source attributed the succession of outflows to "all the credit devaluations, the negative headlines on individual credits and the dramatic widening in spreads over the last few months that have hurt performance.

"It suggests you're not going to see a turnaround soon," this portfolio manager added. "You need to see more evidence that the economy is doing better, and more evidence that the stock market is stabilizing. Then I think you'll see the high yield do a little better."

When the new Newfield Exploration bonds were freed for secondary dealings, "they broke slightly upward," a trader said, quoting them as having inched up to levels around 99.25 bid/99.75 offered from their 99.168 issue price earlier in the session.

The other newly issued energy bonds - Chesapeake Energy Corp.'s 9% senior notes due 2012, which had priced Wednesday at 99.389 and which went home later that session quoted at 98.75 bid/99.25 offered - continued to hover slightly above their issue level on Thursday, at 98.625 bid/99 offered.

No secondary activity was immediately seen in the new MedQuest bonds.

Finally, although market sources were anticipating terms on a new notes-and-warrants deal from Orbital Sciences on Thursday, at the session's end no terms had been heard.

The Dulles, Va.-based space technology firm is bringing $135 million of Rule 144A units comprised of four-year (likely non-callable) senior secured notes and common stock purchase warrants, via Jefferies & Co. It will use the money to redeem $100 million of convertible notes due in October 2002 and to repay a $25 million term loan.

Price talk was heard Thursday according to market sources: a 12% yield, with warrants for 16 million common shares (approximately 36% of the company), and a 10% premium strike price.

Earlier in Thursday's session the company announced in a press release that its Technical Services Division, based in Greenbelt, Md., has been awarded a two-year $22 million cost reimbursable contract from Lockheed Martin Corporation for engineering support services for NASA's upcoming Hubble Space Telescope servicing mission.

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