Agents on deals forWilliams Communications and Level 3 Communications reportedly are bumping up pricing and offering juicy up-front fees, respectively, as they try to woo buysiders already holding their share of telecom paper. While market players note that Williams and Level 3 are two of the best telecom names to be had, an oversupply of sector paper and an increasing interest in health care and food industries is sapping interest. "These are two top names with top-notch credit and they're not blowing out," said one buysider, contrasting the recent telecom credits with other big deals like Michaels Foods, Greif Brothers, Caremark, and Winn-Dixie. These deals saw institutional tranches sell out quickly as buysiders jumped to put their money to work after a slow start to the year for new issuance.
Bankers reportedly flexed up pricing on the Williams deal to LIBOR plus 33Ž 4% and there is talk that upfront fees on Level 3 are as high as 2%. The market has been full of telecom credit for at least 18 months, but what makes the current situation noteworthy is that buysiders are not jumping at the deals despite the strength of the two companies. No one doubts the deals will get done, but bankers said the going will be slower than it should be for companies the caliber of Williams and Level 3. A banker at Lehman Brothers confirmed pricing on Williams, but declined to comment on the state of the deal. J.P. Morgan Chase did not return calls regarding upfront fees on Level 3 or buyside interest in the deal. Calls to Williams and Level 3 were not returned by press time.
"Most portfolios are pretty full of telecom. Even if you do like the deal or the credit you don't have room for it," said Greg Smith, partner at Stanfield Capital Partners. He explained that since telecom has accounted for most issuance in the market, the two deals are competing for portfolios that already have significant exposure to the sector. "They are trying to place paper into a full sector--For these deals it's not so much a credit issue but a technical issue," he said. Smith added that current appetite is for health care and food businesses as managers are more bullish on these sectors because there is more portfolio capacity for them. "Healthcare has bad periods but the feeling is that things have settled down," he said.
Additionally, a week before the deals came to market other industries also made a play for available institutional money. "The first two months of the year were slow, but now there are a variety of industries to choose from," saidJoe Welsh, portfolio manager at Oppenheimer Funds. Welsh, agreeing with Smith, said there is more buyside interest for recent healthcare deals like Triad Hospital and Caremark and grocery deals such as Michaels Foods and Winn-Dixie. Welsh added that any interest generated by the two big telecom deals is more a reflection of the strength of the names than renewed enthusiasm for the sector. That sentiment is shared by John Fekete, high-yield bond analyst at Tritan Partners. "Yields have only come in on benchmark names. There's been no evidence of a resurgence in telecom overall for the last five months--yields are not in for other players and no one is coming up with any equity deals," he added.
Market sources seem to be split over which deal will fare better. Some bankers pointed to Williams' higher credit rating and more advanced network as reasons to accept 25 basis points less on pricing. While others said the larger subordinated capital structure of Level 3 and the higher upfront fees and pricing on the deal may work in its favor. And other buysiders just don't look at telecom at all--"If it doesn't have positive cash flow we're not interested," said Mark Gold, managing director, Trust Company of The West.