Nextel firm, but other junkers ease as market retreats with stocks; TI Automotive postpones issue

By Paul Deckelman and Paul A. Harris

New York, Sept. 30 - Nextel Communications Inc. bonds were generally firm in Monday's dealings on positive views from a leading analyst and good news from the wireless company on the pending roll-out of its next major product. But Nextel was one of the few bright spots in an otherwise soft and soggy market, where most issues were quoted about a point lower and some were just quoted offered, with no bids seen. The bond blues were in tandem with yet another day of stock market retreat, as Wall Street closed out what has been a disastrous calendar third quarter. The bellwether S&P 500 and Dow Jones Industrial Average posted their largest quarterly loss since the fall of 1987, when the market suffered a noisy crash.

Things were little better in the primary arena as TI Automotive Finance plc became the latest would-be issuer to back-burner its pending note deal and head for cover, citing the ubiquitous "market conditions" as its reasoning. That postponement made TI's the third deal in the span of six sessions fall by the wayside.

Meanwhile Amerco announced that it would hitch up its new seven-year senior notes and hit the road on Tuesday.

Sources around the market seemed to be reaching deeply into their pockets to pull out a little bit of good news when contacted by Prospect News on Monday.

There continued to be talk revolving around the massive outflow from high-yield mutual funds for the week ending Sept. 25.

In its "Bond Market Roundup" on Monday, Salomon Smith Barney noted: "The largest weekly outflow of funds from the high yield market on record - $1.4 billion - confirmed that credit risk aversion is again climbing after a brief pause in August."

However high yield sources continue to report that the outflow is comprised of asset reallocations on the part of a very few large buy-side firms and that the money - much of which flowed into the market in the record $1.56 billion inflow for the week ending Aug. 28 - may have represented efforts to "time" an oversold market.

And, sources added, there remains cash on the buy-side that could be put to work when the right credits emerge.

In addition to the record outflow reported last week the high-yield primary market has seen three new deals postponed in the space of six sessions.

News of the latest postponement came not long after Monday's session closed, when a syndicate source confirmed that TI Automotive Finance plc postponed its offering of $215 million of 10-year senior notes (B3/B) via JP Morgan and Salomon Smith Barney.

The global auto parts supplier, which is based in Oxford, U.K. and in Warren, Mich., cited "market conditions," according to a source.

The first of the triumvirate of pulled deals was Allied Waste Industries, Inc., which withdrew its Rule 144A offering of $250 million of 10-year senior notes (Ba3/BB-/BB-) via Deutsche Bank Securities Inc. and Credit Suisse First Boston on Sept. 20. Allied Waste, which was being talked at 9%-9¼%, also cited market conditions.

And last Thursday Philadelphia-based Resource America, Inc. pulled its offering of $125 million of eight-year senior notes (B3/B) via Bear Stearns & Co. and Friedman Billings Ramsey. Once again the reason cited was market conditions.

Three deals postponed in the span of six sessions may sound ominous. However one sell-side source said on Monday that at least where Resource America is concerned it would be a mistake to read too much into the postponement.

"I don't know about the cash position of the accounts," this source said. "But I think the market is still there for a good E&P story."

This sell-side official explained that Resource America, which is part-exploration and production company, may have presented a story that contains too much complexity.

"The company was involved in several other businesses not related to E&P, so it's hard to analyze," the source said. "And you primarily had E&P buy-side analysts evaluating the name.

"Most of the accounts looking at the credit weren't familiar with management."

The high-yield market, this official explained, is a very "specialized" market, especially at present. And Resource America, in addition to energy exploration and production, is also involved in real estate and in equipment leasing. Therein, the source said, may be the root of the difficulty the credit encountered.

"Anytime you have a company that is involved in sectors that are drastically different it's hard for people to work with," the source said.

"If you get a buy-side analyst that does nothing but oil and gas and he gets a company that is a third oil and gas, a third real estate and a third equipment leasing, how does he form an opinion on the real estate and the equipment leasing? He can't."

Compounding the deal's difficulty, the source added, was its size. For a buy-side company to bring in three separate researchers to evaluate a $125 million deal does not represent an efficient use of research resources.

In any case Monday's news also contained evidence that the primary pushes on. The market heard that the roadshow starts Tuesday for Amerco's offering of $275 million of seven-year senior notes (Ba2) via Credit Suisse First Boston and Merrill Lynch & Co. Pricing is expected during the week of Oct. 7.

The issuer, a holding company for subsidiaries including U-Haul International, Inc., Amerco Real Estate Company, Republic Western Insurance Company and Oxford Life Insurance Company, said it intends to use the availability created under its revolver and cash on hand to repay its $100 million of notes payable under the Bond Backed Asset Trust due through 2023, and $175 million of 7 7/8% notes due May 15, 2003.

Finally on Monday price talk of 11¼%-11½% emerged on U.K.-based food services distributor Brake Bros. plc's upcoming offering of £175 million equivalent of 10-year senior notes (B3/B-) in euro and sterling tranches. The deal, via Credit Suisse First Boston and JP Morgan, is expected to price Tuesday or Wednesday.

Back in the secondary sphere, Nextel "was the firmest bond of the day," a trader said, "while the rest of the market was languishing." He quoted the Reston, Va. mobile communications company's benchmark 9 3/8% senior notes due 2009 as having finished at 77 bid/78 offered, unchanged on the session.

Nextel "was hanging in there," another trader agreed, quoting the 9 3/8s as having opened slightly easier at 76 bid/77 offered, but having firmed during the session to close at 77.25 bid, unchanged.

Nextel shares were up 25 cents (3.42%) on the session to end at $7.55. Nasdaq volume of 37.7 million shares was about 10 million over the usual turnover; Nextel was the sixth-busiest issue on the tech- and telecom-heavy Nasdaq, and the only one in the day's Top Ten volume leaders to finish in the black.

"I saw the Nextel bonds holding in there," a trader said, "and I wondered what kind of news they had."

Actually, the news was pretty good. Nextel and mobile phone producer Motorola Inc. jointly announced that plans to launch Nextel's Nationwide Direct Connect service are on track.

The two companies said that the year-long rollout of Nationwide Direct Connect service will start in the calendar 2002 fourth quarter, with the first phase to be offered in Nextel's New York and Boston markets. Complete implementation of coast-to-coast Nationwide Direct Connect is expected to be available to Nextel customers the middle of next year.

Nextel Direct Connect is described by the company as an "incredibly powerful long-range digital walkie-talkie feature" that allows Nextel customers to communicate instantly, with sub-second call set-up. Currently, all Nextel customers are able to use Direct Connect to reach other Nextel customers within their home calling areas; Nationwide Direct Connect will allow customers to use Direct Connect in other Nextel markets to which they travel, starting with the New York and Boston markets.

Nextel got another piece of good news during the session, when Sanford Bernstein equity analyst Alex Trofimoff said the stock had solid upside potential. He wrote in a research note that Bernstein believes that investors in companies such as Nextel, Sprint PCS and AT&T Wireless will shift their focus from wireless-centric performance measures, like subscriber net additions, to more financial-centric metrics like free cash flow and earnings.

"As wireless investors begin to shift their focus to earnings, we believe Nextel will clearly stand out as a solid investment opportunity, especially given the company's continued de-leveraging efforts," Trofimoff wrote. He adjusted his expectations full-year earnings from an 82-cent-per share loss previously, to a 9-cent-per share profit. In 2003, the analyst, who had expected Nextel to earn three cents a share, now believes it will earn 69 cents a share, especially now that Nextel's interest costs will be lower following its retirement of $1.8 billion of debt and preferred stock this year, and the elimination of the company's money-losing Nextel International affiliate from Nextel's consolidated reporting.

Apart from the good news from Nextel, things were "pretty ugly," a trader said. "There were moments of panic, a little bit of a move southward. The Dow (which lost slipped 109.52, to close at 7591.93) set a nasty tone, and everything was down a point or a point-and-a-half or more."

Among the issues moving in reverse on Monday, he said, were the troubled technology twins Nortel Networks Corp. and Lucent Technologies Inc. Both telecommunications equipment makers have been on the slide for some time, their once high-flying shares and bonds dragged down as the telecom companies whom they sell their pricey equipment to have cut back on their projected capital expenditures to save money. Last week, Nortel cuts its revenue projections, citing slumping sales, which started the bloodletting anew, with Lucent reluctantly coming along for the downward ride.

"Nortel and Lucent just continue to die on the vine," the trader said, quoting the former's 6 1/8% notes due 2006, which had finished Friday 36.5 bid/37.5 offered, as having fallen to offered levels - with no bids seen - around 35.25.

He said that the bonds had fallen - even as the shares rose nine cents (20%) to 54 cents - in spite of weekend comments by the company's chief executive officer, Frank Dunn, to the effect that Nortel still had ample cash on hand to complete its plan to return to profitability by next June. Bloomberg News reported Saturday that Dunn had said in an interview that Nortel will end the year with more than $3 billion, and said that the company would spend $1 billion in the first half of 2003 to cut jobs and product lines, leaving about $2 billion in cash by the firm's June deadline for its return to profitability.

The trader said that the bonds of Murray Hill, N.J.-based Lucent, affected by the same industry dynamics as its Brampton, Ont.-based rival, were also easier. Lucent's 7¼% notes due 2006, which closed at 42 bid/44 offered on Friday, as having opened Monday at a wider 41 bid/44 offered. They closed at 38 bid/40 offered.

Elsewhere, a distressed-debt trader saw United Airlines' 10.67% notes due 2004 at bid levels in the 19-21 range, "down from a little higher"; the troubled Number-Two U.S. airline carrier's bonds had been seen trading around the mid-20s last week, after United's five employee unions proposed a package of $5 billion of wage cuts spaced out over five years - less than what the airline was seeking as part of its belt-tightening campaign, but seen as a serious and substantial number nonetheless, which should provide grounds for the two sides to negotiate.

Another trader saw no specific trading activity in United, but allowed that "airline paper was well-offered, although there were no bids."

He said the big loser of the day, in terms of price movement if not necessarily in terms of actual volume trading, was Magellan Health Services Inc., after the Columbia, Md.-based healthcare services management company announced it had hired Gleacher Partners LLC as it considers a possible comprehensive capital restructuring as an option to reduce its overall debt.

Magellan cautioned in its statement that it believes that it will not be in compliance with one or more of its covenants with its lenders in the fourth quarter, although it plans to seek waivers from the lenders.

But it warned that if the waivers were to be denied, Magellan would be in a situation where it would not have the ability to repay its debt if the lenders were to accelerate the deadlines. It added that its ability to obtain liquidity required for its operations would be uncertain.

The trader quoted Magellan's 9% notes due 2008 as having fallen to around 25 bid/27 offered, a 10-point slide from Friday's close. On the equity side, Magellan's already badly battered stock lost six cents (18.75%) to end New York Stock Exchange dealings at 26 cents. Volume of 712,000 shares was more than triple the norm.

And Dynegy Inc. bonds were being quoted solidly lower Monday, although actual trading activity was muted. The Houston-based energy marketer and trader's 6 7/8% notes due 2011 were seen as low as 28 bid versus Friday's close at 35, while its 8 1/8% notes due 2005 fell to 31 bid from 38, as did its 8¾% notes due 2012. The 7.45% notes due 2006 ended down eight points at 32 bid even as its shares gained six cents (5.45%) to end NYSE dealings Monday at $1.16.

Dynegy announced that it had sold its Hornsea Ltd. onshore natural gas storage facility in the U.K. to British utility Scottish & Southern Energy plc for almost $202 million.

A market source cited reports that some in the industry believe that while the asset sale is a positive, it is by no means a panacea for debt-ridden Dynegy, which has fallen sharply over most of the past year, in a merchant energy business shakeout triggered by the collapse of crosstown rival Enron Corp. and exacerbated by federal regulatory scrutiny of the industry and falling energy demand in the face of a softer economy.

Separately, Dynegy's interim chief executive, Dan Dienstbier, was reported to have told the company's approximately 5500 employees that further layoffs are inevitable as the company pursues the corporate restructuring plan recently approved by its s board of directors.

The Houston Chronicle said that it had obtained a letter sent out by the Dynegy chief to its workers on Friday. The letter did not specify how many additional layoffs might be necessary at Dynegy, which has already been trimming its employment rolls, or where they might take place.

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