Level 3 jumps on results, outlook; McClatchy tender boosts bonds; Pep Boys get hit as CEO splits

By Paul Deckelman and Paul A. Harris

New York, April 23 - Level 3 Communications Inc.'s bonds firmed solidly Wednesday after the Broomfield, Colo.-based telecommunications company reported better-than-expected first-quarter revenues and reiterated its previously announced 2008 guidance.

Also on the earnings front, McClatchy Co. reported disappointing numbers - but the Sacramento, Calif.-based newspaper company also announced that it was tendering for several series of its short-term bonds, giving that paper a boost.

Elsewhere, The Pep Boys - Manny, Moe & Jack was seen easier after the Philadelphia-based automotive parts retailer and service chain announced the resignation of its chief executive officer, who will be replaced on an interim basis.

A buy-side source marked junk up another ½ point on Wednesday, and remarked that high yield is presently experiencing "a lack of cash supply."

In the primary sphere, Inergy LP was heard getting ready to price an add-on issue to its existing eight-year notes on Thursday.

Market indicators move up

A trader saw the widely followed CDX index of junk bond market performance up 1/8 point to 96½ bid, 97 offered. The KDP High Yield Daily Index was meantime up 14 basis points to 75.67, while its yield tightened by 4 bps to 9.25%.

In the broader market, advancing issues led decliners by around a five-to-three margin, while activity, as measured by dollar volumes, eased by 2% from Tuesday's levels.

"Things opened kind of sloppy," a trader said, "and we saw a couple of bids get hit early. Then they kind of caught some footing and pushed higher the rest of the day."

He said that so far, corporate earnings "have been in line or beating expectations, and people are feeling comfortable and are looking to put more cash to work, so we're seeing more buyers than sellers." Nonetheless, he said that the trend was "light activity, volume-wise."

"All in all," he concluded, "the market's pretty healthy."

Level 3 moves to a higher level

A trader said that Level 3 "was probably the biggest mover of the day," up about 3 points on the company's quarterly results.

The company's bonds "moved up" on its earnings and its positive outlook, he said, with the 9¼% notes due 2014 "a good mover," rising to 87.5 bid, up 3 to 4 points on the day. He saw the same kind of movement on Level 3's 12¼% notes due 2013, which ended at around 98, and its 8¾% notes due 2017, "maybe the most active one," which pushed up to 82.5.

Yet another trader characterized Level 3's bonds as "up a bunch."

However, another trader called the 91/4s "about unchanged."

A market source at another desk saw the 91/4s 4 points better at 88 bid, while the 83/4s gained more than 4 points to end at 82.25.

Equity investors were as enthused as bondholders about the company's results and its projections. Level 3's Nasdaq-traded shares zoomed 54 cents, or 22.78%, to finish at $2.91, on volume of 83.5 million, about 2½ times the norm.

Level 3 reported that its first-quarter loss narrowed to $181 million, or 12 cents a share, from $647 million, or 44 cents a share, a year earlier, although excluding debt-extinguishment costs, that year-earlier loss was 15 cents per share.

While the latest quarter's loss was slightly worse than the 10 to 11 cents per share that analysts were expecting, it also said that revenues rose 3% from a year ago to hit $1.09 billion, beating Wall Street projections of around $1.05 to $1.07 billion. Adjusted EBITDA grew to $210 million, up from $170 million a year earlier.

Level 3 attributed its smaller loss and better revenues to cost cuts and stronger sales of network services.

On a conference call following the release of the earnings, Level 3's chief executive officer, James Q. Crowe, and its chief financial officer, Sunit Patel, said that the company - which in the past has been hindered by problems in fulfilling customer orders for its services, creating what Crowe called "bottlenecks" that he said have since been largely corrected - is looking forward to achieving core communications services revenue growth of 8% to 13% for 2008, as it had previously projected. The executives also reiterated previous predictions of adjusted EBITDA of between $950 million and $1.1 billion for the year, and said that the company - which has lost money for years and had negative free cash flow in the first quarter - expects to be break-even on free cash flow for the remaining three quarters of this year. Level 3 aims to be free cash flow-positive for the full-year 2009.

McClatchy results a drag, but tender saves the day

Elsewhere, traders noted that McClatchy's quarterly numbers were of little help to its 7 1/8% notes due 2011 - but those bonds still rose after the company announced that it was tendering for $250 million of its shorter maturity debt, including the 7 1/8s.

A trader saw the bonds move up to about 89.5 bid, 90.25 offered versus Tuesday's levels at 88.5, while another called the bonds 3 point gainers at 89 bid, 90.5 offered.

The results, which one trader called "weak," "apparently disappointed many investors," another said. The company said that it suffered a net loss of $849,000 versus year-earlier net income of $9 million.

First-quarter revenues were down almost 14% from a year ago, with advertising revenues hurt by the weakening economy and shift in demand from traditional newspapers, like McClatchy's Miami Herald, Sacramento Bee, Fort Worth Star-Telegram, Kansas City Star, and Charlotte Observer, to online advertising venues.

However, the company separately announced that it would tender for up to $250 million of its 7 1/8% notes, 9 7/8% notes due 2009 and 4 5/8% notes due 2014, which pushed the bonds back up. It will buy a certain maximum amount of each issue which is less than the outstanding amount, buying the bonds on a pro rata basis should the tender offer be over-subscribed.

McClatchy also sought to reassure its bondholders that its debt-cutting efforts were on track, telling them during a conference call that it had reduced debt by $76 million during the first quarter and has repaid an additional $53 million of debt since the close of the quarter (see related story elsewhere in this issue).

Pep Boys eases as CEO leaves

A trader saw Pep Boys' 7½% notes due 2014 down a point at 84.25 bid, 86.5 offered, which he called down a point on the session, noting that the company announced that its CEO, Jeff Rachor, resigned to become a principal in an automotive dealership venture. He will be replaced on an interim basis by Mike Odell, currently the chief operating officer. Odell is considered "a serious candidate" for taking the job on a permanent basis.

Pep Boys also announced the appointment for former Toys 'R' Us executive vice president and CFO Ray Arthur to the same two posts with Pep Boys. He will replace Harry Yanowitz, who announced his intention of leaving to pursue other interests earlier this year.

Pilgrim's Pride rules the roost

A trader said that Pilgrim's Pride Corp.'s 8 3/8% notes due 2017 rose 1 point to 90 bid, 91 offered; he said the Pittsburg, Tex.-based poultry producer's bonds "have been going up all this week," given a boost by an article in this past weekend's Barron's. "They were up a couple of points on Monday and on Tuesday and up another point today [Wednesday]," he said.

The article projected that chicken-breast prices would rise by 20 cents per pound to $1.65 this summer, noting recently announced production cuts at several processors including Pilgrm's Pride, which is chopping output by 5%.

While warning that the industry needs a price of $1.85 to break even, it also said that Pilgrim's Pride shares look like a relative bargain at 7.4 times projected 2009 earnings.

Freescale bonds mixed

Traders saw Freescale Semiconductor Inc.'s bonds mixed in active trading, following the Austin, Tex.-based computer chip manufacturer's release of quarterly earnings late Tuesday; those bonds had run up over the past several sessions in anticipation of the results.

On Wednesday, a trader said, its 8 7/8% notes due 2014 were unchanged at 83.5 bid, 84.5 offered. He called the bonds volatile, noting that they had been "down 2 [points] yesterday [Tuesday]."

A market source saw the bonds down more than ½ point at 83.625 bid, while the company's 10 1/8% notes due 2016 were up ¼ at 74.75.

But yet another source quoted the latter bonds at 72.625, down nearly 2 points.

New FireKeepers bonds seen keeping initial gains

A trader said the new FireKeepers Development Authority 13 7/8% notes due 2015 - which priced at 96 bid on Tuesday but which was then seen to have jumped as high as 99.5 bid 100.5 offered in initial aftermarket dealings - "opened up softer," a trader said, at 99 bid, par offered, and held that level for "most of the day." However, he said, the new bonds got a late boost to 99.75 bid, 100.5 offered.

"It seems like better buyers are out at this point. It seems like a lot of the short-term investors that cleaned up are hanging tight now."

Another trader called the bonds par bid, 100.75 offered.

However, at another desk, a trader said that he "did not see even one quote" in the new issue, calling the situation "bizarre."

Inergy to price add on

In the primary, no new issues were priced.

Inergy LP and Inergy Finance Corp. announced a $150 million add-on to their 8¼% senior notes due March 1, 2016.

The debt refinancing deal, which is being led by Wachovia Securities, Lehman Brothers and JP Morgan, is expected to price on Thursday.

Also on Wednesday CCS Inc., raised yield talk on its $312 million offer of senior unsecured notes due November 15, 2015 (Caa1/B-) to 13¼% from the 13% area, in a price talk revision that left the coupon talk unchanged at 11%, implying that the contemplated original issue discount has deepened.

Goldman Sachs & Co. and Deutsche Bank Securities are joint bookrunners for the bridge refinancing.

Backlog; Basell anticipated

With respect to the LBO-related bond backlog, a buy-side source told Prospect News on Wednesday that there has lately been a buzz about the hung bank debt of BIL Holdings (Lyondell-Basell Finance Co. Ltd.).

"The bonds can't be far behind," the source said with respect to the hung up $8 billion equivalent high yield bridge loan.

The buy-sider said that Citigroup is leading the charge on the bank debt. When the bond debt surfaces Merrill Lynch will be quarterbacking.

As with others whom have spoken to Prospect News recently, this source is also looking for some of the Intelsat Holdings Ltd. bond-related debt to surface in the near future.

The big questions, the buy-sider added, are whether the LBO deals from Clear Channel Communications Inc. and BCE Inc. (Bell Canada) will ultimately fall apart.

Elsewhere, an informed source told Prospect News that bond risk related to the LBO of Alltel Communications Inc. has not gone away.

Two weeks ago sources were expecting as much as $2.5 billion of the $5.2 billion total bond risk to surface. One investor claimed to have put in for some of it at 83.50 to yield 13½%. However, this investor said, the dealer did not follow up.

Speculation was rampant that, trailing recent strength in the market, the underwriters pulled back at the 11th hour, hoping to eke out another point or two on the price.

However the informed source, who described the Alltel deal as being in something of a "stalling pattern" at present, doubts that the underwriters will attempt to push investors on pricing.

The source said that there remain pending documentation issues related to transforming the risk to a bond from a bridge loan.

The source added that the lead underwriter had a good order book built up at 83.50 to yield 13½%, and added that it would be surprising to see substantial changes to that pricing context when Alltel resurfaces.

© 2015 Prospect News.
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