Qwest continues to fall in response to probe news; several issuers hitting the road

By Paul Deckelman and Paul A. Harris

New York, July 11 - Qwest Communications International Inc.'s bonds continued to retreat for a second consecutive session Thursday, still reeling from Wednesday's announcement that federal prosecutors are investigating the troubled telecommunications operator, which had caused two of the three major ratings agencies to respond with debt rating downgrades.

In the primary market, four junk bond deals appeared from behind the bushes on Thursday - although none of them took market observers completely by surprise. Launch dates and other details were heard on dollar-denominated offerings from Casella Waste Systems, Inc. and Swift & Co. in addition to a two-piece dollar and euro deal from Grief Bros. Corp. and a straight eurobond issue from Glass Holdings GMBH & Co., KG (Gerresheimer Glas, AG).

One investor who spoke Thursday with Prospect News said there is still quite a lot of cash to be put to work in the high-yield market in spite of the fact that five out of the past eight weeks have seen money flowing out of high-yield mutual funds. However Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, said that the primary market may not be the place to put that cash to work.

"I'm leery," Gaffney stated. "In the primary market, because people have this need for safety they're paying up for the defensive issues so there's less value there. And I think the more marginal credits are companies that probably have something wrong with their business.

"To me there's a lot of risk in the primary market. I think you're better off scouring around for good deals in the secondary market."

Although she conceded that there is conceivably a case for current conditions to be characterized as a buyer's market, Gaffney declined to absolutely embrace that description.

What the present market clearly is, she said, is a bifurcated market in which investors are seeing defensive credits that price too richly and weaker credits that perhaps embody an inordinate amount of risk.

"That could continue for some time," she added. "We've got stocks continuing to move lower, which doesn't bode well for the high-yield market.

"If you're going to be ducking for cover you look for safety. And what about the double effect? If stocks are headed lower, does the consumer stand off? And are we going for a double dip, which means maybe spreads are going to widen back out again?"

Gaffney, who told Prospect News on May 30 that Loomis Sayles' high yield accounts were running somewhere close to 20%-25% in triple-Bs, said Thursday that the accounts are running 15%-20% in convertible securities. (See related story in this issue.)

A sell-side source who spent a few minutes speaking on the telephone Thursday with Prospect News said that amid the dire circumstance that have presently befallen the U.S. capital markets Oregon Steel Mills, Inc.'s $305 million of seven-year first mortgage notes (B1/BB-) perhaps represents a ray of light. The deal priced Wednesday at 98.772 to yield 10 ¼%, at the tight end of talk.

"I was encouraged that it was able to get done," said this official, who was not on the syndicate of the Oregon Steel Mills deal.

"It seems like everything else out there is struggling mightily as people are distracted by Qwest, WorldCom, Adelphia..." the sell-sider added.

"Your technical picture in the high yield has not been great over the past couple of weeks, with the AMG outflows. On top of that we're in July and the equity markets are on a roller coaster ride."

This official said that from the last week in May until the last week in June the high yield essentially repriced itself by 100-125 basis points in terms of where credits in the primary market were getting done.

Part of it, the source explained, could possibly be attributed to a calendar that became "backed up with supply." Also, the official added, some of the credits that came during this period "were of somewhat less quality than things that came earlier.

"Then you had all these other distractions," the source added. "You couldn't get any investor focus because they were so distracted by what was going on in the secondary market. They were getting whacked on redemptions and they were getting whacked on their positions in WorldCom and more recently Qwest. And it has all snowballed into this giant ugly market.

"In all honesty I'm glad we're in the summer," the sell-side source said. "I'm certainly glad this didn't happen in March or April when we had a lot more deals on the road."

Yet in spite of the heavy weather that has continued to blow in upon the US capital markets during the week of July 8 four companies - three from the U.S. and one from Germany - did announce their intentions Thursday to soon start roadshowing deals.

Casella Waste Systems will hit the road Monday with $150 million of 10-year senior subordinated notes (B3/B), via Goldman Sachs & Co.

Swift & Co., which is acquiring 54% of the U.S. and Australian beef, lamb and pork business from ConAgra, will start roadshowing its $400 million of seven-year senior notes (B+) on Tuesday via joint bookrunners Salomon Smith Barney and JP Morgan.

Delaware, Ohio industrial container company Grief Bros. will begin marketing a two-piece dollar and euro offering in Europe on Monday. Salomon Smith Barney is the bookrunner on the 10-year senior subordinated notes.

And Monday the European roadshow starts on (Gerresheimer Glas's €150 million of nine-year senior subordinated notes via joint bookrunners JP Morgan and Goldman Sachs.

Timing also became clearer Thursday on Graham Packaging Co., LP/GCP Capital Corp. I's $100 million add-on to its 8¾% senior subordinated notes due Jan. 15, 2008, which is set to hit the road Monday via Deutsche Bank Securities Inc. and Salomon Smith Barney.

Meanwhile a new structure was announced Thursday on Carmeuse Lime's Eurobond offering, which is set to price Friday. The new structure is comprised of €175 million of 10-year non-call-five senior secured notes (Ba3/BB-) with price talk of 10½%-11% and €75 million of five-year floating rate notes. BNP Paribas is running the books.

Also set to price Friday is AG Finance, SA (Antargaz)'s eurobond. The price talk is 9 7/8%-10 1/8% on its €150 million of nine-year senior notes (B2/B), via Deutsche Bank Securities and Credit Lyonnais.

Oregon Steel Mills Inc.'s new 10% first mortgage notes due 2009 - which had priced Wednesday at 98.772 and then moved up to 100.75 bid in initial secondary dealings later that same session - continued to hold most of those gains Thursday, hovering in the 100.5-101 bid area.

Back among already established bonds, Qwest Communications dominated market activity for a second straight day, with its short-dated operating company paper heard down about a point or so and its longer-dated holding company level bonds down an additional four or five points following their 10 point slide on Wednesday.

Qwest was "down moderately," said a trader who quoted its holding company 7.90% notes due 2010 as having retreated to about 41 bid/43 offered Thursday from Wednesday's close at 44 bid/45 offered. "The real damage," he said, was done yesterday" [i.e., Wednesday], when those bonds had lost about 10 points after the Denver-based regional Bell operating company's mid-morning announcement that the U. S. Attorney's office in Denver had begun a criminal investigation of Qwest, making it the latest in a recent string of high-profile U.S. company to find itself under criminal scrutiny by the feds for alleged book-cooking or other related offenses. Qwest, which vowed cooperation with the new federal probe, is already being investigated for alleged accounting irregularities by the Securities and Exchange Commission, an ongoing probe which has caused the once high-flying telecom's bonds and shares to tank and which has led to a recent executive suite shakeup that ousted longtime CEO Joseph P. Nacchio. In response to the new federal probe, Moody's Investors Service and Fitch Ratings laid multi-notch ratings downgrades on Qwest on Wednesday, while Standard & Poor's said it might do so as well.

A distressed-debt trader characterized the pace of trading in Qwest on Thursday as "active" and pegged the holding company bonds in that same low 40s neighborhood.

And yet another trader quoted Qwest's 7% notes due 2009 and 7¼% notes due 2011 in that 41-43 context, down about four to five points on the session and off about 15 points in the past two sessions.

"Wow," he said with some emphasis, in assessing the erosion of the Qwest long debt in just the past two days.

Meantime, the short-dated operating company debt "was a little weaker. There weren't a lot of bids for the paper," he said, quoting Qwest's 6 3/8% notes coming due this Oct. 15 as having fallen back to around the 88.5 bid/89.5 offered level from 90 bid/92 offered late Wednesday.

Elsewhere, a trader said that WorldCom Inc. paper "continues to drift lower," the bonds taking their cue from the generally weaker telecom/communications sphere in the wake of Qwest's latest bit of bad news, which seemed to kill off a nascent upturn in telecoms that had been seen on Monday and, especially, Tuesday on positive sector funding news.

He quoted the WorldCom benchmark 7½% notes due 2011 and its 8¼% notes due 2010 initially a point lower, dipping to around the 14 bid area in morning dealings before firming off those lows to close in the 15-15.5 bid area, unchanged to only marginally lower.

WorldCom was "just bouncing around a little bit, and there wasn't a particular tone to anything we saw "[Wednesday]. Another trader saw it "down about half a point or a point. There was some trading - but not a lot."

A market-watcher saw Clinton, Miss.-based WorldCom's 7½% notes at 14.5 bid, down from their recent highs earlier in the week around 18, while its 7 7/8% notes due 2003 had dipped to about 17 bid from previous peaks of 19. The bonds of WorldCom long-distance subsidiary MCI were quoted a point lower, at 45 bid, with the debt of another WorldCom subsidiary, Intermedia Communications Inc., unchanged in the upper 20s.

Level 3 Communications Inc. was the recipient of some of that aforementioned good telecom sector funding news earlier in the week, when the Broomfield Colo.-based telecommer announced that an investment group that includes Berkshire Hathaway Inc. - controlled by legendary Wall Street tycoon Warren Buffett - would invest $500 million in the company. While that sent its bonds soaring on Monday and Tuesday into the lower 50s from prior levels in the 30s, they came off of those peaks Wednesday as the Qwest news dragged all of the high-tech names down. On Thursday,a trader said, "you saw a little bit of a dip in the morning" to around the 52.5 bid/53.5 offered level for its benchmark 9 1/8% senior notes due 2008; then "as the market felt better the last three hours of the day, all of the tech stuff [ with the notable exception of Qwest ] recouped about a point to end above 53 bid.

Merger speculation involving two high-yield telecom names seemed to cool off on Thursday. While market buzz that Deutsche Telekom unit VoiceStream Wireless and AT&T Wireless were in talks on a possible merger deal had boosted VoiceStream''s bonds into the mid-90s on Wednesday, by Thursday, "they lost a little bit of the wind from their sails," a trader said, the 10 3/8% notes dropping back to 92.5 bid/93.5 offered.

And a New York Times report that telephone giant Verizon will probably not make a bid for bankrupt international telecom network operator Global Crossing left the latter's bonds mired down around a penny-and-a-half on the dollar; speculation that the deep-pocketed regional Bell operating company might step forward to buy Bermuda-based Global Crossing out of bankruptcy had actually pushed the latter's paper up to around four cents on the dollar or so, a distressed-debt trader said, "but then it came back down." Under those circumstances, he joked, those bonds are as likely to pay off "as lottery tickets."

Outside of the telecom bubble, Calpine Corp.'s bonds were down about four points across the board, the San Jose, Calif.-based independent power producer's 8¾% notes due 2007 ending at 64.5 bid and its 7 7/8% notes due 2008 closing at 58.5 bid. At another desk, its 8½% notes were seen finishing at 61.5 bid/62.5 offered, down from 63 bid/65 offered previously, while its 8 5/8% notes due 2010 went home two points down at 59.5 bid.

Arlington, Va.-based sector rival AES Corp.'s 8 3/8% notes due 2007 lost more than three points, to close at 48 bid.

No fresh negative news was immediately seen on either power company. Earlier in the week, The Wall Street Journal reported that AES was among several energy producing companies whose energy trading units denied manipulating the wholesale power market in Texas in filings with utility regulators in the Lone Star State.

Gap Stores Inc.'s 5 5/8% notes due 2003 were quoted unchanged around 98 bid, and its 6.90% notes steady at 90 bid/91 offered, despite a threatened ratings downgrade by Standard & Poor's following the company's report of a 6% drop in same-store sales totals in June from a year earlier - the 27th consecutive monthly fall in the widely used retailing industry performance gauge.

While the San Francisco-based apparel retailer - which operates the Gap, Old Navy and Banana Republic clothing store chains did report a 2% gain in total sales in June versus a year earlier (including those stores which have not yet been open a full year), S&P warned that it might drop the current ratings (including the BB+ rating on Gap's bond debt) " if the company does not improve sales and operating performance, especially during the third quarter of 2002."

S&P further cautioned that it expects that Gap will remain "very challenged in the near term because consumers have responded poorly to The Gap's merchandising offerings for more than two years, and the company has had to mark down a significant amount of merchandise. "

Gap's June sales, while lower versus a year ago - no surprise there, given the extended slump which has made lower same-stores data as much a part of the company as its trademark blue jeans - were still somewhat better than expected. But even this glimmer of a silver lining carries with it a dark cloud - the stronger-than-expected sales in June have drawn down end-of-season sale merchandise inventories, which could have a "somewhat negative impact" on July sales, chief financial officer Heidi Kunz said in a statement.

"Why S&P didn't cut the Gap's ratings already like three months ago, knowing full well that the same-store sales are going to continue to languish, I don't know," a trader said, although he noted the small rise in June total sales from last year and the apparent "leveling off of the trajectory" of same-store sales declines in recent months. With things seeming to begin stabilizing, albeit at low levels, he noted, "the '03 paper has hung in there."

Also on the retailing front, bankrupt Kmart Corp. was seen "off a couple of points," a trader said, seeing the beleaguered Troy, Mich.-based discount retailing giant's paper having fallen to bid levels around 40.5-41 from 43 bid recently.

Mail-Well Inc.'s bonds were seen lower for a third straight session, its 9 5/8% notes due 2012 dropping to 84 bid, down four points on the day and sixteen points over three sessions, while its 8¾% notes due 2008 closed at 70 bid, down two points Thursday and 17 points in three sessions.

Those bonds had swooned about 10 points on Tuesday and then just continued falling after the Englewood, Colo.,-based printing company warned that it expects second- quarter earnings before restructuring and other charges to be below forecast results, largely as a result of lower-than-expected revenues.

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