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June 30, 2000

IPO Roundup: The High-Yield Dilemma

By Stephen Lacey & Rick Appin

The uncertain equity market does not bode well for several high-yield companies with initial public offerings in registration. The high-tech sector in particular is having a tough fight.

Here are some war stories.

Integrated Circuit Systems Inc., a Norristown, Pa.-based manufacturer of silicon timing devices, sneaked in its equity placement as the curtain comes down on high-tech financing (Nasdaq:ICST).

Difficult Route

Fairpoint Communications Inc., which has filed for a $230 million IPO (proposed Nasdaq symbol:FRPT), took the difficult fixed-income route with a $200 million, 12.5 percent senior subordinated high-yield debt offering earlier this year.

The placement by the Charlotte, N.C.-based firm received a lukewarm reception, according to high-yield traders.

"The deal came in a little bit tight and then traded down," one trader said. "It's a tough market. They're probably lucky to have gotten the deal done at all."

The bond was rated B3 and B- by Moody's Investors Service and Standard & Poor's, respectively.

If Integrated Circuit Systems' IPO is an indication, equity players are not attracted to companies courting the IPO market to repay debt. A Credit Suisse First Boston-led syndicate placed 12.5 million shares at $13. That was below the original offering price of between $15 to $17. The company saw its stock fade to $12 in first-day trading.

Integrated Circuit Systems is using the $151.5 million it netted in the placement to repurchase $93 million worth of subordinated notes due 2009 at 116.7 percent of par.

To be sure, these aren't the good times of the first quarter, when Alamosa PCS Holdings Inc. (Nasdaq:APCS) was able to double dip in the 144A and equity markets. In early February, the Lubbock, Texas-based carrier simultaneously placed a $350 million, zero coupon senior note and a $181.9 million IPO through a Salomon Smith Barney and Lehman Brothers-led syndicate.

The stock, which priced at $17 and traded as high as $43.63, has been a weather balloon for bondholders. Alamosa's zero coupon notes, priced at 53.46, were recently quoted at 49.

"There is some correlation between the high yield and the equity markets," said Michael O'Connor, a high-yield portfolio manager for Cincinnati Financial Corp. in Fairfield, Ohio. "I think we're seeing a more rational market today."

If that has fixed income buyers holding out for higher coupons, the exact opposite is true in the IPO market. In that market, buyers are whittling away prospective issuers' requests for capital.

Of the more than 50 companies that have priced deals since the beginning of January, some 30 have been forced to price their IPOs below the originally proposed range, according to Thomson Financial Securities Data.

If the correlation between the high yield and equity worlds is true, fixed-income players will have paid special attention to Community Health Systems Inc.'s (proposed NYSE:CYH) run at the public markets.

The company placed a $500 million subordinated note offering in a Forstman Little & Co.-led buyout last June. In the current deal, management for the Brentwood, Tenn.-based operator of acute health facilities turned to a Merrill Lynch-led syndicate to place its $300 million IPO.

Discount Deal

Like other deals in the second quarter, company officials were forced to discount the deal below an originally proposed $17 to $19 a share.

After trimming the price to between $13 and $15, the company's 18.75 million share offering priced at $13. As of press time, it was hovering around $14.

Proceeds from the placement have been earmarked for debt repayment, according to the company prospectus.

One reason for the offering's lukewarm reception, according to some traders, was the company's high level of leverage. Total debt to capitalization constitutes 70 percent of the company's capital structure, down from a level of 86.4 percent before the IPO.

Stephen Lacey, editor of The IPO Reporter and Rick Appin, associate editor at High Yield Reporter, are with sister publications of Traders Magazine.