Banking & Capital Markets

Charter Communications: The Great Junk Hope

Glut or no glut, telecom issuers should jump in while the water's still warm.
Ed ZwirnMarch 12, 2001

Despite record borrowings on the part of telecommunications and wireless firms, it will take more than warnings of a glut to derail debt issuance in these sectors.

Charter Communications’ Feb. 28 agreement to purchase a handful of cable systems from AT&T in a deal worth $1.8 billion has set off a firestorm of anticipation among bond market aficionados.

The price tag on the deal includes $500 million of stock, some other cable systems with which Charter is willing to part, and about $1.05 billion in cash.

You may recall that Charter, controlled by billionaire Paul Allen, was responsible for the first major junk bond offering of 2001.

The $1.75 billion offering in the first week of January was considered a success, a sign that investors would be coming back to the high yield market.

The issues were underwritten by Morgan Stanley Dean Witter and Goldman Sachs. Moody’s Investors Services rates the firm’s senior unsecured debt B2, while Standard & Poor’s gives it a B-plus.

Originally marketed in December as a $750 million offering, the offering included a $900 million 8.75-year senior note segment priced at 99.9 percent of face value to yield 10.75 percent, and a $500 million 11.25 percent 10-year senior note priced at par and callable after five years.

The two months that have followed have seen a major contraction of junk bond spreads, with straight 10-year paper outperforming Treasuries by about 200 basis points, buoyed in a major way by record inflows into high-yield mutual funds that have occurred this year.

Major Bond Deals Swell Sector

And while U.S. corporate bond issuance in general has been high so far this year, so has high yield in particular, with primary issuance in January and February already topping the last six months of last year.

An increase in supply is also the major factor as far as telecommunications firms are concerned. But for both investment-grade and junk issuance, the demand has been there.

The most recent of these issues was also the largest corporate bond deal ever. France Telecom’s $16.4 billion multi-tranche, multi-currency extravaganza hit last week to a tremendous investor reception, and was said to have tightened up after pricing.

“There are a few $200 million to $400 million junk bond deals on the pipeline, but the next big thing may well be Charter,” says one junk trader at a New York brokerage. “The announcement of their latest acquisition has already caused speculation.”

And no wonder.

The firm conducted a total of 17 acquisitions in 1999 and 2000 worth a total $14.3 billion, more than $12.4 billion of that in the form of cash or assumed debt. Since January 1999, it has sold some $6.8 billion of junk bonds and preferred securities.

Market reports, and the fate of recent issues, all underscore the likelihood that Charter should see sufficient demand to issue a large bond offering rather quickly.

In other expected junk issuance:

  • Michael Foods, one of the biggest U.S. egg producers, plans to issue $200 million of 10-year (B2/B-) bonds being used to help finance a leveraged buyout of the firm by management and the Michael family. Bank of America Securities and Bear Stearns, which will manage the bond sale, also put together a $470 million high-yield loan package and a $200 million short-term credit to be replaced by the bonds.
  • Muzak LLC, the folks who gave the term “elevator music” its present-day connotation, plans to privately sell, probably Monday, $175 million of senior subordinated notes via CIBC World Markets and Goldman Sachs.

Highlights of the investment-grade pipeline include:

  • Allegheny Energy Supply Company LLC plans $400 million of (Baa1/BBB+) notes this week via Salomon Smith Barney.
  • Chevron Phillips Chemical Co. will reportedly sell $400 million of bonds via Goldman, Sachs and Morgan Stanley Dean Witter. The proposed senior secured bonds are rated Baa1 by Moody’s and BBB+ by S&P.

In the market for initial public offerings, there is some cautious anticipation heading into the new week given the lackluster debut by Loudcloud.

The much-hyped offering of the Internet infrastructure services provider co-founded by former Netscape executive Marc Andreessen priced late Thursday at $6 per share, the low end of its range. It finished its first day of trading at $6.16, on a day when the Dow Industrials dropped more than 213 points and the Nasdaq Composite fell by nearly 116 points.

The pricing values the company at $439.9 million, down from the $1.15 billion valuation originally predicted by underwriters Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co. this past fall, and below the $727.7 million valuation placed on the company in a private financing last summer, according to the Wall Street Journal.

Looking ahead, the equity secondary offering pipeline includes:

  • Duke Energy plans an offering of 25 million shares in a deal worth about $625 million. The stock closed Friday at $24.80.
  • Looking ahead to next week, details are emerging about the $6 billion to $7 billion Agere IPO, which market players are hoping will go down as 2001’s first blockbuster. The offering will consist of 500 million shares in the $12 to $14 range, says a source close to the deal. The offering is being “roadshowed” to East Coast investors this week.

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