Conseco bonds fall on interest announcement; Orbital Sciences sells 4-year units

By Paul Deckelman and Paul A. Harris

New York, Aug. 9 - Conseco, Inc. bonds were lower Friday, after the troubled Carmel, Ind.-based insurance and financial services concern said it would not make upcoming scheduled bond interest payments, instead invoking the standard 30-day grace period; in the meantime, Conseco said it would open talks with its bondholders, in hopes of working out a debt restructuring. News reports and some people in the market speculated that a Chapter 11 filing might not be far off.

In the primary market, Orbital Sciences Corp. sold $135 million of new four year bonds.

Meanwhile primary and secondary market players argued whether the latest high-yield mutual fund flow data was a case of the glass being half empty or half full. In the week ended Wednesday, $71.5 million more left the junk bond funds than came into them, according to weekly statistics released by AMG Data Services. That figure encompasses only funds which report changes weekly, and excludes distributions.

The latest week's outflow was far smaller than last week's $313 million outflow, and was the first outflow figure in recent weeks in merely double-digits, after many weeks of triple-digit outflows. The fund flows are seen by may market participants as a reliable barometer for overall junk market liquidity trends.

But offsetting that possible positive was the fact that this was still the ninth consecutive week in which the junk funds saw money flowing out; since the beginning of that losing streak, back in the week ended June 12, approximately $2.379 billion in cumulative outflows have been recorded, according to a ProspectNews analysis of the AMG statistics. While inflows have still been seen in 18 weeks out of the 32 weeks since the beginning of the year, the recent trend has been negative all the way, with the net inflow of funds since the start of the year having declined to approximately $3.065 billion from its peak levels around $5.65 billion, seen in mid-May.

One syndicate official said that while the outflow is not significant in size, the fact remains that it is the ninth consecutive outflow.

"It's the wrong direction," the sell-sider said.

Among secondary issues, the disaster of the day was Conseco, which announced in the morning that it would invoke the 30-day grace period on upcoming scheduled bond interest payments and that it was engaging Lazard Freres & Co. as its financial advisor and Kirkland & Ellis as its legal advisor, "for the purpose of beginning immediate discussions with our debt holders with a goal of restructuring the capital of the parent company."

Conseco CEO Gary D. Wendt said in the statement that "We have concluded that the barriers to further progress on our Turnaround plan now require a different approach. Our judgment is that the continued gradual financial restructuring that was the goal of the Turnaround plan is no longer the best course. Rather, 'radical change in the company's capital structure' - as one rating agency called for last week - is required."

The somber tone of the message was a change from the relatively buoyant tone of the series of previous "Turnaround Memos" to the stockholders from Wendt. The respected former GE Capital executive had been hailed as something akin to a savior when he took the reigns of the badly shaken, tottering company in mid-2000 and began cutting debt and bringing Conseco's share and debt prices back up to respectable levels. But in recent months, his turnaround efforts seemed to have stalled and Conseco securities were once again on the slide. Some analysts, financial columnists and shareholders asserted that Wendt had worn out his welcome, and that the emperor really had no clothes on.

While the Conseco announcement did not mention the dreaded "B" word, there was speculation in the media and the market that a filing could be in the cards, sooner or later. The Indianapolis Star, the largest paper in Conseco's home state, reported that "bankruptcy is one option that Conseco's officers and board of directors are considering as part of a new plan to right the insurance-finance company."

Citing internal memos which it had obtained paper quoted Liz Georgakopoulos, the president of the company's Conseco Insurance Group unit, as having told workers that "the effects of bankruptcy 'would be minimal, perhaps even positive' for employees of Conseco's subsidiaries, yet have a 'big impact' on owners, lenders and investors."

The paper went on to say that the Conseco executive had said in a July 29 memo that "what some argue that bankruptcy would do is accomplish the goals of the turnaround in a lightning-fast way. For us as a business, this road would be faster and . . . perhaps easier," she wrote. "The problem is that it would hurt our stockholders, including many of you, and others who have invested capital in the company. We as leaders of a financial services firm must balance the needs of all our constituents. . . . Because of this, (we) are carefully weighing all options before deciding on the new plan."

The Fitch ratings service lowered Conseco's rating to C, a sign, it said of imminent default, while Standard & Poor's cut the ratings to SD, for selective default.

Conseco debt "pretty much dropped down into the teens," a trader said, after having been "drifting down the last week or so." He saw Conseco's several series of new senior bonds - which had been issued to noteholders in an exchange offer several months ago aimed at extending the company's debt maturities by two years across the board - "as having fallen to bid levels around 15-17 from recent highs in the 40s, while bonds which were not exchange in the offer and which thus have shorter maturities but which are structurally subordinated to the new exchange bonds, as having fallen to around 11 bid.

Another trader saw the 9% exchange notes due 2008 as having fallen as low as 11 bid "immediately post-news," but then recovering off those lows to move up to the 15-17 area. The subordinated 9% notes due 2006, he said, fell as low as 6-8 bid right after the announcement, while "the other ones [unexchanged bonds] just sat."

A distressed-debt trader quoted Conseco's unexchanged 6.40% notes due 2003 around 12.5 bid and its unexchanged 8¾% notes due 2004 at 11 bid, while the 8¾% exchange notes due 2006 were in a 15-18 context.

The fact that the exchange notes are all trading on top of one another around that 15-17 area, regardless of the maturity, while the more subordinate unexchanged notes are all around the 11-12 area, is being interpreted by some in the market as an indicator that a bankruptcy filing may be near, since typically, all bonds of a given seniority in the capital structure trade at the same levels in a bankruptcy scenario, because all of their holders will be paid the same, regardless of the maturity of the bonds. In a case like Conseco's, the structurally senior exchange bonds would all trade at like levels, several points above the subordinated unexchanged bonds.

However, a trader said that while theoretically, the holders of the more senior exchange bonds have a better chance of getting a return than the holders of the unexchanged debt, "whether there's any workout [that will be] afforded to bondholders - the unsecured - I don't know. Many people think just the banks are going to get cash."

Conseco shares did not trade all day, remaining at Thursday's New York Stock Exchange close at 34 cents.

Elsewhere, traders saw some erosion in WorldCom Inc. debt following Thursday's after-the-close announcement by the bankrupt Clinton, Miss.-based telecom giant that it had uncovered an additional $3.3 billion of accounting irregularities, on top of the $3.85 billion previously disclosed. The distressed-debt trader said that "bids had disappeared during the day [Thursday] on news reports that additional major accounting problems would be disclosed, and he saw its bonds fall to around 12 bid from 14.

Another trader said that once the news was out, WorldCom's already battered bonds further retreated Friday, its own debt, such as the 7½% notes due 2011, dropping to 10.5 bid/11.5 offered from Thursday's closing levels around 13 bid/14, while the bonds of WorldCom's MCI long distance unit likewise dipped to 30 bid/35 offered from the high 30s previously. Bonds of WorldCom's Intermedia Communications unit were seen three points lower on the session, at 20 bid/24 offered.

Hollywood Casino Corp.'s 11¼% notes due 2007 were up nearly a point, to 108.50, reacting to the news announced Thursday that the company is being bought by rival gaming operator Penn National.

On the downside, Crown Castle International's 10¾% notes due 2011 lost eight points to end at 56, while other communications antenna tower names like American Tower Corp. were also lower.

Having found itself on a collision trajectory with a $100 million maturity a mere two months hence, Orbital Sciences Corp. breathed a sigh of relief during Friday's otherwise quiet primary market session as it brought its notes and warrants offering in for a soft landing.

And the market underwent an outflow from the high yield mutual funds - the ninth straight - as sources told Prospect News that Arcata, Calif. financial information firm AMG Data Services has reported a $71.5 million week-only outflow for the week ending Aug. 7.

With an Oct. 1 maturity on its 5% converts looming before it like a black credit hole, Orbital Sciences completed a Rule 144A transaction Friday for $135 million of notes and warrants units, according to syndicate and company sources.

The units are comprised of four-year senior secured second priority notes, which are not rated, and 16.5 million common shares, amounting to approximately 36% of the company.

The notes priced at par to yield 12%, and the shares came with a strike price of $3.86 per share.

Barry Beneski, of Orbital's public and investor relations department, told Prospect News that the company is quite pleased to get beyond the capital crunch it faced.

"We feel very good about addressing what was obviously a short-term source of anxiety and perceived risk on the part of our investors," Beneski said. "Investors wanted to know what Orbital's plans were to address (the maturity of the 5% converts due Oct. 1). And now we've answered that.

"What's more," Beneski added, "we feel that we addressed this issue in a very difficult market. We feel we were able to get the deal done that was available to us, that was the least dilutive of the options we were looking at.

"We're now moving forward and looking at the longer term, bigger picture issues of running the company and remaining profitable."

Sources reported to Prospect News that Orbital was in the convertibles market with a deal earlier in the summer that was ultimately pulled. Price talk on the pulled converts offering was said to have been for a yield of 7½%-8% with a 15-20% initial conversion premium.

Declining to confirm any details on that offering Beneski said: "I don't want to look back. Today's news is very much forward-looking, and now we are going to refocus on our core businesses."

Thursday 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.

When asked to comment Beneski said: "What's even bigger than the contracts is what they reflect. We've been in a two-year 'Back to basics' campaign, refocusing the company back on our core space technology businesses, primarily satellites and rockets.

"We've gone through some asset divestitures of some non-core businesses. We've reduced debt. We've put a new bank line in place. That was all done within the context of winning some very strong new-order business within those core businesses. Thursday's announcement continues that trend."

A secondary trader said he had not seen the new Orbital Sciences deal trading around, and noted that because it was "kind of a small deal," it probably had not attracted much attention.

Also on the new-deal front, the trader said that MedQuest Inc.'s new 11 7/8% senior subordinated notes due 2012, which had priced late Thursday at a discounted 97.781, were being offered around 98.5 on Friday. He believed that "the underwriter was making an issue bid," since there didn't seem to be much aftermarket interest in the new credit.

"I don't think it was very oversubscribed, so that everybody who participated got what they wanted. It wasn't an issue that was going to trade, really.

"I would think that on Monday, unless somebody steps up and supports it, it will probably drift off," he concluded.

In addition to being a difficult market thanks to the mutual fund outflows and other factors, sources told Prospect News throughout the week of Aug. 5 that beginning Monday high yield will also be a quiet market during the run-up to Labor Day. The anticipated quietness, those sources were quick to note, is as much attributable to the traditional late-summer lull in junkland as it is to the difficulties of this particular season.

The Prospect News forward calendar would seem to bear those sources out. Of the two deals positioned to price during the week of Aug. 12, only one was confirmed as probably doing so by syndicate sources.

San Francisco engineering and design services provider URS Corp.'s $250 million of seven-year senior notes (B1/B) via Credit Suisse First Boston remain on course to price mid-week, a syndicate source told Prospect News Friday.

Although a source earlier told Prospect News that Chukchnasi/Gold Resort & Casino $135 million of seven-year senior notes, which will reportedly not be rated, could price as early as the week of Aug. 12, there was no confirmation Friday that such timing remains likely.

Dresdner Kleinwort Wasserstein is the bookrunner. Price talk on the first-time issuer's notes will likely come in the 12%-13% range, according to an informed source.

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