Williams, Adelphia firm off lows in wild session; Kaufman & Broad upsizes euro deal

By Paul Deckelman and Paul A. Harris

New York, July 24 - Williams Cos. Inc. bonds bounced off their lows Wednesday to firm slightly, despite the official conclusion of the company's fall to junk bond status with a Moody's Investors Service downgrade. Bankrupt Adelphia Communications Corp. debt also managed a little upside, even as the company's founder and long-time CEO and two of his sons were literally hauled off to jail in handcuffs. The sudden strength of these two recently weakened credits could have something to do with the almost giddy atmosphere across Wall Street on Wednesday, as stocks - beaten down over the last week or so - roared back to stage their biggest rally in nearly 15 years.

In primary market dealings, even though the Dow Jones Industrial Average zoomed up nearly 500 points on Wednesday, two more issuers - numbers three and four over the course of two days - left the high-yield primary market with hands in empty pockets. Casella Waste Systems, Inc. and Marietta Corp. both pulled their deals. And both postponements, sources said, can be primarily attributed to present conditions in the capital markets.

On the other side of the Atlantic issuers sang a different song on Wednesday, however, as Kaufman & Broad, SA, and ProSiebenSat.1 Media, AG both priced junk bond deals in the euro market, with Kaufman & Broad increasing its offering.

Back in the secondary, traders said the action was hot and heavy, after a recent stretch in which activity had slowed to a trickle, stilled by both the usual summer doldrums and the carnage in the equity markets, which scared many players to the sidelines.

But on Wednesday, as stocks first headed lower, continuing the headlong plunge of the past few sessions, and then suddenly turned higher and kept right on going (the Dow Jones Industrial Average ended up 488.95 - 6.4% - to 8191.29, its second-biggest point gain ever, while the Nasdaq and the S&P 500 also jumped), junk bonds were having a "roller coaster, day" in the words of one trader. "[Stuff] was all over the place."

He saw WorldCom Inc.'s battered paper down about a point, at 12.5 bid/13.5 offered, while the newly bankrupt Clinton, Miss.-based telecommunications giant's MCI long distance unit's paper was also easier, at around 40 bid/41 offered. Another trader likewise saw WorldCom's bonds "stagnant, with not much movement" at 12.5 bid/13.5 offered.

A trader saw Qwest Communications International Inc.'s bonds "trading in a five point range" after some early weakness that sent its 7.20% notes due 2026 and 8 7/8% notes due 2031 - which had finished around 80 bid Tuesday - cascade down to offered levels as low as 67 before coming out of those depths to end in the high 70s by the end of the day.

Also on the telecommunications front, Lucent Technologies Inc.'s longer-dated debt was off about half a point, while its shorter stuff was about a quarter point lower. That followed the not-unexpected announcement by the Murray Hill, N.J.-based telecom equipment maker its ninth consecutive quarterly loss. Lucent dropped $7.9 billion ($2.31 per share) during the fiscal third quarter, most of it due to a $5.8 billion ($1.70 per share) non-cash charge to write down the value of assets. A year ago, the company lost $3.2 billion (95 cents per share).

The trader saw Xerox Corp. bonds lower ahead of Thursday's scheduled release of second-quarter numbers. He saw Xerox's 2003 paper dip to 81 bid/82 offered from prior levels around 83.5 bid/ 84.5 offered, while its 5 7/8% notes due 2004 ended at 72.5 bid/73.5 offered, down from 74 bid/75 offered.

"Their numbers are coming out Thursday and everyone expects the numbers to be a little bit worse than expected (analysts generally are looking for the Stamford, Conn.-based copier and office machines giant to lose a penny per share for the quarter, on revenues of about $3.9 billion.

One of the most riveting scenes on TV screens on the trading floors was the spectacle of Adelphia fonder and long-time CEO John J. Rigas being arrested in Manhattan on securities fraud charges, along with two of his sons, Timothy and Michael, both former Adelphia executives. Federal prosecutors charged that the Rigases had treated the company like "their own private piggy bank," allegedly using its funds to build a golf course and on all kinds of other non-cable-related spending. Two other ex-Adelphia executives, James Brown and Michael Mulcahey, were also arrested.

The sight of the Rigases doing what is known in the TV news business as the "perp walk" after their arrest - probably the first time Wall Street has seen that kind of sight since then-U.S. Attorney Rudolph Giuliani was personally making high-profile securities fraud busts on the trading floors back in the 1980s - was credited with helping giving stocks a shot in the arm, along with news that Congress had agreed on a bill setting tougher penalties for corporate accounting fraud. The highly publicized arrests, along with the general Washington consensus on the need for action were seen as important steps in restoring investor confidence in the markets after a series of accounting scandals and resulting corporate bankruptcies.

Adelphia bonds "moved all around [Wednesday] on news of the Rigases getting arrested," a distressed-debt trader said. "Bonds traded down and then they kind of popped back up. There was a brief bit of weakness, and then they rose back up toward the end of the day." At his shop, Adelphia's bonds, after dipping as low as the mid-20s early-on, pushed off those lows to as high as a wide 35 bid/40 offered.

At another desk, Adelphia's 9 7/8% notes due 2005 - which had finished Tuesday around 31 bid/33 offered - fell as low as 25 bid during the session, but rebounded off their lows to end a point or so higher on the day.

But the bonds of Charter Communications continued to show weakness, a trader describing them as languishing "down in the 50s," while another saw them first "trade up a bit and then down" before finishing around 51 bid. Another trader saw them two points lower than Tuesday's levels across the board.

Outside of the telecom, cable and tech areas, a trader saw Gap Inc. lower, the San Francisco-based apparel retailer's 6.90% notes due 2007 opening at a wide 75 bid/85 offered, well down from 87.5 bid/89.5 offered on Tuesday. Gap came partially off those lows to finish at 80 bid/86 offered. He also saw bankrupt retailer Kmart Corp.'s debt softer on the session.

Williams Companies paper began trading off the high yield desks at many shops Wednesday, coinciding with Moody's Investors Service completing the big Tulsa, Okla.-based pipeline operator and energy trader's fall from high grade respectability by downgrading its bonds four notches to B1 from Baa3 previously. Moody's cited its concerns that Williams won't generate enough cash to pay its debts, and said a further downgrade was possible if the company fails to renew its bank facility (which expired on Tuesday) in a timely manner and sell enough assets to help cut debt.

The Moody's move completes a process that began on Monday when the Fitch ratings service junked Williams and which continued Tuesday when Standard & Poor's dropped its ratings to below-investment-grade.

But even as it fell squarely into junkbondland, investors on both the bond and equity sides seemed a bit more comfortable with the credit; a trader said that it had "closed off its lows," quoting the Williams holding company paper going home around 35 bid/36 offered, up from Tuesday's levels around 32; at another desk, a trader, quoting its 6 1/8% notes due 2003 as having fallen from Tuesday's close at 33 to as low as 28 bid early in the session, saw quotes later in the day approaching the 40 bid area. On the equity side, Williams shares, which had slid badly the previous two sessions, were up 6 cents (5.04%) to $1.25.

But other energy generating and trading companies continued to feel the sector's recent heaviness. AES Corp. 8 3/8% notes due 2007 were four-and-a-half points lower, at 27 bid, while Calpine Corp.'s 8 5/8% notes due 2010 lost four points to 46 bid.

The two new deals canceled Wednesday by Casella and Marietta joined Tuesday's pulled offerings from Graham Packaging Co. LP/GPC Capital Corp. I and Mobile Storage Group, Inc.

With four deals pulled in two days and volatility in the equity markets, sources on both the buy and sell sides wondered Wednesday whether the high-yield market is presently open for new issuance.

"I don't think it is," said portfolio manager Curt Barrows, who along with Karen Bater manages the Nationwide High Yield Bond Fund.

"I have a new prospectus on my desk but I just don't think that you're going to have anything for a while. I don't think you're going to have retail money coming in here until there is some stability. And even though people have cash you know how it is: the market runs on fear and greed. And right now people are scared to death. It's going to take a while for them to get greedy again.

"Until you get some of that I just don't see new issuance."

During a conversation with Prospect News, Barrows recited a list of years in which he watched the high yield plow its way through economic downturns - 1987, 1990, 1994 and 1998. He said he sees some things in common among those downturns and the present circumstances.

"If you look at the pressure on the high yield market there is pressure on some high yield deals," he said. "But mostly what's doing it is the fallen angels - companies that were investment grade only a matter of weeks ago.

"Williams is trading 30 cents on the dollar. Until yesterday it was triple-B on both sides. Enron was investment grade three days before it filed. WorldCom was single-A at the beginning of the year.

"You're also seeing that pressure even with the utilities. Calpine was investment grade. CMS was investment grade. Reliant, Dynegy...all these companies were investment grade just a few months ago. And they've all come into our market. It's been huge and it has caused a lot of problems.

"I think those companies have come under the same pressures that have affected the equity market, i.e. a lack of confidence in management and in the business model."

A sell side source, the third over the course of three days, also told Prospect News Wednesday that the new issue market presently appears closed.

Joining the list, Wednesday, of deals pulled on July 23 and 24 was Casella Waste Systems of Rutland, Vt., which postponed its offering of $150 million of 10-year senior subordinated notes (B3/B), on Wednesday. Goldman Sachs & Co. was the bookrunner. A syndicate source attributed the postponement to market conditions.

Market conditions were also cited as the primary reason that Marietta pulled its $75 million of seven-year senior secured notes (B3/B-) via Jefferies, an informed source told Prospect News. Even though part of the proceeds from that deal were slated to fund the acquisition of Morton's Restaurant Group - and reportedly shareholders subsequently accepted the buyout offer from Castle Harlan - $39 million of the proceeds were to be used to refinance the company's existing debt, the source pointed out.

With four deals in the tank in two sessions observers will no doubt zero in Thursday when, according to a syndicate source, Delaware, Ohio industrial container company Grief Bros. Corp. goes to the block with its two-piece $300 million of 10-year senior subordinated notes (B2/B+) in dollars and euros via Salomon Smith Barney. Price talk of 8 5/8%-8 7/8% was heard on Wednesday.

Also on Wednesday, official price talk of 10½%-10¾% was heard on Glass Holdings/GMBH & Co. KG (Gerresheimer Glas AG)'s €150 million of nine-year senior subordinated notes (B3/B). The Dusseldorf, Germany-based packaging supplier to the pharmaceutical industry figures to price its deal Friday via JP Morgan and Goldman Sachs.

Indeed it was from Euroland that Wednesday's happiest news arrived in the high yield primary.

German media firm ProSiebenSat.1 Media, AG priced its €200 million of seven-year senior notes (Ba3/NR/BB+) at 96.512 to yield 12%, via Deutsche Bank Securities Inc.

And happier still, Paris-based single family housing developer Kaufman & Broad, SA upsized to €150 million from €125 million its offering of seven-year senior notes (B1/BB-) and priced them at par to yield 8¾%, at the tight end of the 8¾%-9% price talk. Merrill Lynch was bookrunner.

"Euros have been strong," a sell-side source commented in the wake of ProSiebenSat and especially Kaufman & Broad.

"For the right names deals are still getting done."

As Barrows of the Nationwide High Yield Bond Fund mulled the terms of Kaufman & Broad, Wednesday, he said: "In Europe the market is very skewed. Either it's trading in bond heaven or bond hell. There's very little in between.

"If it's well received it does very well. If it isn't it just doesn't get done anymore."

Asked if these were not the specifications of what numerous observers have described to Prospect News as a "bifurcated market," Barrows said indeed they are. And "bifurcated," he said, is certainly a term that presently applies to US high yield.

"It's either trading at 10 cents on the dollar or it's trading at $1.10 on the dollar," he said. "It's been that way for a while, which says that it's not a legitimate market at this point.

"But it will work its way out."

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