The week started out with a bang and then fizzled as equity market volatility took center stage. For the week ended April 5, a total of $12.1 billion in debt came to market, of which 87% was investment grade and the rest junk. That said, overall credit quality did deteriorate somewhat on the week as credit quality declined from A-/BBB+ to BBB+/BBB. There were no jumbo deals on the week, with the average deal size only $417 million, the second smallest reading of the year.
Lucent: Beware the Dark Side
The rumors loose in the market that Lucent is going to file are something that we would attribute to the chaos in telecom in general. At this point, the headlines are getting whipped up into a frenzy about the overleveraged high yield telecom players and what that will mean for a capex spending crisis. Lucent/Agere's pursuing a "you-ask-I-don't-tell" policy despite roadshows, bank debt calls, and frequent questioning by the press just compounds the sense of distrust with bondholders. The result of these disclosure policies is that we are not able to adequately assess the risk profile of the company's direct and contingent exposures, which lends itself to the "dark side" as the short mongers come out of the woodworks to hammer this company. For LU, we do not buy into the filing rumors since the company has far too many avenues to pursue.
Xerox: Facing the Headline Shredder
Xerox (XRX) has been taking heat for its 10-K delay, which obviously was not something XRX nor its bondholders needed. As has been amply pointed out in the press, late filings typically imply more financial trouble is on the way. However, we believe that XRX's delay is strictly based on the complexity of their accounting problems and the need to quantify some of the company's restatements. While that is based on logic rather than good disclosure, we will have the mystery solved shortly when the 10-K is filed. We do not want to downplay the accounting issues, but asset sales and the execution of the restructuring in the time period outlined by management are going to be the key drivers. For now, there are some very real, tangible developments on the liquidity front that should keep panic at bay.
Philip Morris: Layers of Smoke
Structural subordination risk has become more of a threat to bondholders in this market for a number of reasons and our view is that one of the ominous "layering" trends is occurring at Philip Morris. Bondholders at the MO level need to stay on the alert regarding the potential asset protection erosion that will come with the steady growth of senior claims at the Kraft level. The longer term trick for the unsecured bondholders at MO will be to monitor how their own risk profile changes with the steady structural subordination of their interests to future lenders at the Kraft unit, and how MO's evolving capital structure and relative mix of financings leaves the unsecured bondholder at MO positioned against the always-present risk of a class action cataclysm.
Telecom: The Capex Crunch
The massive cuts in the capital expenditure program of Winstar Communications reflects in more dramatic fashion a broader problem of credit constraints starting to flow back into the investment decisions of the more leveraged telecom players. The rationale of "one man's capex is another man's revenues and another man's loan" implies that we are going to see waves of revenue estimate revisions coming in the near term as even the financially viable find their capital alternatives diminished on both the stock and debt side of the ledger. The cuts in projections, when confirmed, will breed some additional NASDAQ chaos and set off another wave of risk aversion among lenders.
California: Get Me to the Courthouse on Time?
Prospects for a solution outside of bankruptcy grew slimmer as creditors started to question why they should continue to forbear from an involuntary filing. The California PUC's actions last week and this week support the Department of Water Resources, but hurt the utilities.
Xcel Emphasizes Stock Performance at Analysts' Meeting
Xcel sounded two cautionary notes for fixed income investors at its analysts' meeting. First, it wants to boost its stock price significantly, and second, it is emphasizing its nascent trading and marketing arm as the primary way to increase earnings. The agencies are split on the correct ratings for the various Xcel affiliates, but we expect the company to at least maintain the lower end of those ratings even in the face of its riskier moves.
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