Xerox off, Computer Associates in freefall; Silver Legacy, Concordia deals price

By Paul Deckelman and Paul Harris

New York, Feb. 22 - Xerox Corp. bonds were quoted lower on the session Friday, although there seemed to be no fresh news out about the copy technology kingpin. There was, however, plenty of news - all of it bad - in the market about Computer Associates International, and its nominally investment-grade bonds continued their plunge.

In the primary market, investors were betting on Nevada casino operator Circus and Eldorado Joint Venture/Silver Legacy Capital Corp., which sold $160 million of 10-year mortgage bonds; the securities were then quoted stronger when freed for secondary dealings. Also pricing was an upsized euro-denominated offering from Concordia Bus AB.

Xerox "got mowed today," in the words of a trader, although there was no immediate fresh news out on the Stamford, Conn.-based office machines and copier giant. "There were no headlines or anything on them, but they just got killed, so expect some bad news to come out on them Monday or Tuesday."

He quoted Xerox's 5½% notes due 2003 opening the trading day at 91 bid/92 offered, and falling to 86 bid/87 offered by the end of the day. At another desk, the fall was not quite as pronounced, but Xerox was still seen down at least a point, below 90 bid.

Xerox's long-dated Xerox Capital Trust I 8% due 2027, which had traded in the 59 bid area on Thursday, were as low as 56.5-57 Friday.

On the equity side, Xerox shares, which had closed at $9.43 Thursday on the New York Stock Exchange, stayed somewhat below that level most of the day, but at one point in the morning suffered a sharp, though short-lived plunge. They fell down as far as $8.60 before pulling out of that trough and recovering most of the lost ground, although they still ended down 33 cents (3.50%) at $9.10. Volume of 5.6 million shares was about normal.

"Apart from bonds which had some kind of a story to them, it was a pretty slow day in the secondary market all in all," said another trader, who speculated that having started the week off with the Presidents' Day holiday, and with schools in many areas closed for a mid-winter recess, many market participants may have decided to take the week off and go on vacation. "The whole week was pretty much like that, slow and uneventful."

He saw AES Corp. - whose debt had fallen sharply earlier in the week on economic problems in Latin America, where it has significant exposure, and a threatened ratings downgrade - now "settling into a range." He quoted the Arlington, Va.-based global power producer's senior bonds having opened in the 57-58 bid area, with the widely traded 9 3/8% due 2010 having gotten as high as 63.5 bid by mid-morning, before coming off those peak levels to fall back down to the 59.5 bid/60.5 offered neighborhood, before going home at 61 bid/62 offered. Other AES issues trading in that same general area, he said, included its 9½% notes, "although there wasn't a whole lot of action." while its 8 7/8% notes and 8¾% notes ended bid around 60.5-61.

AES shares, which had also been on a steep slide for much of the week, actually ended up two cents on the NYSE at $4.13 - the first gain of the week. Volume of over 15 million shares was more than triple the usual turnover.

AES "was better than where they had been during the week," the trader said, "though not as high as they had been earlier in the week. I thought the bonds were going to end up today still in the 50s - and maybe they should be in the 50s."

Referring to the company's announcement earlier in the week that it planned to sell as much as $1.5 billion of domestic and foreign assets to improve its balance sheet, he opined that "AES, like everyone else, is trying to sell assets, but in this kind of fire-sale scenario that AES is indeed in, they are going to have to sell a large amount of assets to achieve that $1.5 billion in proceeds because obviously, when you need to sell something, people aren't going to bid what (the assets) are worth, as they would in a normal sell."

He further noted that just when AES is trying to put power generating and energy trading assets on the auction block, industry rivals like Calpine Corp., and Mirant Corp. are doing exactly the same thing, "although not to the same extent, along with some other of the weaker credits, even in high-grade land, so it's going to be tough" for AES.

Meanwhile Calpine's debt - which also has been getting punched around recently due to such factors as the same industry dynamics hurting AES (including the continued investment community fallout from the collapse of Enron Corp.) and some problems uniquely its own, like SEC scrutiny about alleged improper information disclosures - likewise was range-bound Friday, the trader said. Its 8½% notes due 2011, after having opened around the 69 bid/71 offered, traded as low as 67 and as high as 72. "They traded a little north of the open and a little south of there, so they traded in a pretty decent range."

Also seen holding more or less inside a range was Nextel Communications Inc., a day after the Reston, Va.-based Number-Five U.S. wireless carrier reported bullish fourth-quarter results from its core domestic wireless service, even as it attempts to quantify the likely earnings impact of problems at its international unit, NII Holdings.

A trader saw the company's benchmark 9 3/8% senior notes due 2009 "staying in a range, right around 57.5-59.5." Another trader pegged the bonds in the 58.5-60 area, and saw Nextel's 10.65% notes in the 57-58 region. "They were steady," he said," but on not a lot of volume. They popped (Thursday)," when the Nextel bonds were up three points on after Nextel reported that Its U.S. revenue total for the fourth quarter rose 23%, to $1.88 billion from $1.53 billion a year earlier, as it added more wireless subscribers than expected. EBITDA - earnings before interest, taxes depreciation and amortization, a key bond market measure of a telecom company's cash-flow generation capacity and expected ability to service debt - jumped 29% to $539 million.

But Nextel was essentially yesterday's news by Friday, when the largely becalmed market failed to even react much to its first high-yield mutual fund inflow number in three weeks. According to market participants who track the weekly fund-flows numbers released by AMG Data Services, $129.9 million more flowed into the junk mutual funds in the week ended Feb. 20 than left them. In the previous two weeks, the funds had seen a net outflow of some $568.6 million. So far this year, though, with inflows having been seen in five out of the first eight weeks of 2002, the funds show a net aggregate inflow of $1.323 billion. The fund flow statistics are considered by many to be a generally accurate barometer of overall market liquidity trends.

With a paucity of real news happening in the high yield sector, attention lately has been focused on nominally investment-grade issues which have run into accounting problems - almost a kiss of death these days, it seems - liquidity issues or other red flags and which have begun trading like junk bonds.

For a third straight session, Computer Associates bonds were seen having widened out sharply, as bid levels which had been quoted around 450 to 500 basis points over comparable Treasuries at the beginning of the week were ending up more than double that spread in some cases by the end of it. In just one session, one market-watcher said, the companies bonds had widened out from around 700-750 basis points over to 1100-1150 over, as the Islandia, N.Y.-based software company admitted that it is the subject of two separate government probes, by the Securities and Exchange Commission and by the U.S. Attorney's Office for the Eastern District of New York. While the Long Island (N.Y.) newspaper Newsday has reported that the federal probers are looking into whether the company recorded some of its maintenance agreements as software sales in order to boost its recorded revenue, Computer Associates has steadfastly denied that there had been any accounting irregularities.

Those possible legal troubles - coming as they do in the wake of the Enron meltdown and the well-publicized troubles of other companies with accounting issues - seem to have spooked the commercial paper market; according to news reports, Computer Associates was forced to tap into its bank credit line after experiencing difficulty in selling commercial paper, which large companies often use to fund day-to-day operations.

"What these companies (like Computer Associates and others which have run into trouble selling short-term paper ) are doing is tapping their bank loans, which is not good, first because it's more expensive (than the commercial paper) and also because it shows they have liquidity problems," the market source said. "People who own these securities, at the first sign of any trouble, they want out."

Noting that the bonds were now being quoted around in dollar terms rather than on a spread basis, like investment-grade credits normally are, he saw the company's 6¼% notes due 2003 as having fallen to 92.5 bid Friday from prior levels around 96.25; its 6 3/8% notes due 2005 were ending at 85 bid, down from 88.25; and its 6½% notes due 2008 were closing at 76 bid, down from 78.5.

Its shares, meanwhile lost $2.91 (15.40%) in NYSE dealings to end at $15.99, on volume of 38.9 million shares - a tenfold increase in usual activity levels.

But another investment-grade credit which had come under some recent junk market scrutiny but which now seems to have turned the corner and is on the way back to respectability, telecommunications operator Qwest Communications, "did better today," another market-watcher said. "Their paper has tightened considerably in the past two days," he said, an improvement helped by a positive conference call during which CEO Joseph Nacchio projected first-quarter negative cash flow in the $300 million-$400 million range - a considerably smaller cash flow loss than the $500 million or so it had previously been predicting. Nacchio, declaring that management of the Denver-based provider of local telecom service "feels good" about the prospects for the first quarter, said the revised cash-flow outlook would help Qwest reach its goal of being free cash flow positive by the second quarter.

Qwest's 7¾% notes due 2006 firmed to the 93-94 range while its other bonds - still quoted on a spread basis - tightened up, its 7% notes due 2009 bid at 410 basis points over Treasuries, better than the 490 basis points over seen earlier in the week. The spread on its 7.90% notes due 2010 tightened to 430 basis points over Treasuries from their recent 510. The company's longer-dated 7¾% bonds due 2031 were bid at 390 basis points over the government paper, versus 425 basis points on Thursday.

Back in the pure junk sphere, the new Circus and Eldorado/Silver Legacy notes, after having priced earlier in the session at 99.6112, were heard by traders to have moved up smartly in secondary dealings, going home bid in the 101 area.

But generally, following a quick, midweek burst of newly announced business, the high yield primary market ended the week of Feb. 18 quietly. Two deals priced Friday: an upsized sterling deal from Concordia Bus AB, and the dollar-denominated offering from Circus and Eldorado Joint Venture/Silver Legacy Capital Corp.

Concordia Bus AB increased its add-on to its notes due February 2010 to €60 million from €50 million and priced it at 102.00 to yield 10.538%, via Goldman Sachs & Co.

Commenting on the deal's upsizing a syndicate official told Prospect News that talk had tightened progressively from 101.50 to 101.75, and ended up at 102 area. Hence the deal priced "through the original price talk."

Circus and Eldorado Joint Venture/Silver Legacy Capital Corp. sold $160 million of new mortgage notes at 99.6112 to yield 10.1875%, via Banc of America Securities, Dresdner Kleinwort Wasserstein and Merrill Lynch & Co.

Keith Foley, vice president and senior analyst for Moody's Investors Service which assigned its B1 rating to the new Silver Legacy notes, said that while the collateral represented in mortgage notes occasionally prompts a credit upgrade, in the case of Silver Legacy's new bond the Moody's rating was identical to the company's senior implied rating.

"In this particular situation the first mortgage notes represent a majority of the capital structure," Foley explained. "If in fact that secured debt represents a majority of the capital structure it's not typically given credit above and beyond the senior implied rating."

Standard & Poor's rated the Silver Legacy paper B+.

Also on Friday another voice from the sell-side expressed the belief that participation of hedge funds in high yield could be amplifying the volatility in the market.

"The shorts are relentlessly targeting and attacking certain leveraged issuers that they perceive to be 'vulnerable,' the source said. "Examples of this can be found in telecom and energy, which both are in overbuild situations in the middle of an economic downturn.

I also think that hedge funds are exerting undue influence on market sentiment through the press. It's a self-fulfilling prophesy that when you short a company's stock and then leak a negative - unsubstantiated rumor about it through some Internet-based news service, or even worse, through an established newspaper, that the stock will go down.

"The next article, of course, can then talk about how such-and-such negative factor is driving the stock down. This goes on over and over again and the negative coverage is unrelenting and consistent.

"Theoretically, if rumors are really unsubstantiated, they shouldn't affect a company's stock price, but in this case the hedge funds are praying upon people's nerves post-Enron."

At Friday's close only two deals amounting to $355 million were on the calendar for the week of Feb. 25: New World Restaurant Group's $155 million via Jefferies, and Corus Entertainment, Inc.'s $200 million from Merrill Lynch.

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