UAL down on warning; anthrax spooks market; upsized Smithfield prices

By Paul Deckelman and Paul A. Harris

New York, Oct. 17 - A warning from United Airlines' corporate parent that the carrier could fly off into the sunset - forever - caused UAL's bonds to lose altitude Wednesday, while the overall junk bond market pulled back from its initial highs on news of more cases of possible anthrax exposure. In the primary market, meanwhile, Smithfield Foods Inc. brought a sharply upsized deal to market, and the new bonds were heard to have firmed smartly when they were freed for secondary activity.

News that one of the most venerable names in U.S. commercial aviation history, United Airlines, might eventually join such other once-great carriers as PanAm, TWA, Braniff and Eastern in the great airline graveyard in the sky sent a jolt through the company's stock and bond investors Wednesday. UAL Corp. shares lost $1.79 in trading on the New York Stock Exchange, to end at $16.85, and at one point during the session traded as low as $16. Volume of about two million shares was around two-and-a-half times its average daily turnover of some 827,000 shares.

On the debt side, meanwhile, a trader quoted the Chicago-based airline giant's 10.67% notes due 2004 as having finished at 83 bid/84 offered, down seven points from previous levels in response to the news.

At another desk, however, no movement had been seen in one of the company's normally more active issues, its 9% notes due 2003, which remained at 89 bid.

"Activity in airline paper is sort of hit-and-miss," a market source there cautioned. "It's really not that active."

United's chief executive, James Goodwin, bluntly warned the airline's employees in a letter that if the carrier cannot quickly stem its huge losses - which have only worsened since the Sept. 11 terrorist attacks - then United would be forced to go out of business sometime next year.

Even before the Sept. 11 terrorist strikes, the airline was "not in a comfortable financial state, with costs exceeding our revenue on a daily basis," Goodwin wrote. Industry analysts had projected that United, the second-largest U.S. airline carrier after AMR Corp.'s American Airlines unit, would likely show losses for the full year of around $1 billion due to a slump in business travel, high labor costs and the softening economy, which had already been slowing markedly before the attacks.

In the wake of the terrorist blow - which included the seizure and destruction of two UAL planes with all aboard - "the situation is exacerbated with costs exceeding revenues at four times the pre-September 11 rate," Goodwin continued. "Today, we are literally hemorrhaging money. Clearly this bleeding has to be stopped - and soon - or United will perish sometime next year."

Even the promise of federal money - United stands to get an estimated $800 million of the $15 billion industry bailout package recently passed by Congress and signed into law - is not enough to turn things around; last week, UAL said financial losses stemming from the Sept. 11 attacks and the subsequent forced grounding of its fleet probably will exceed its share of the aid coming Washington.

While United's bonds were lower, other airline issues also struggled, in apparent sector sympathy with United, although the trader who saw UAL's bonds seven points down said he had not seen much real activity in them - "only in United," he asserted. Another trader, though, declared that the airline group as a whole "was easier, with Northwest Airlines and USAir both down points." The two carriers are considered by some bond market observers as among the weakest names in the sector, as opposed to the recent fallen angels UAL, AMR and Delta Airlines. The latter's bonds were heard having tightened by about 10 to 20 basis points on the session.

Air Canada's bonds were seen several points higher Wednesday, with its 10.25% notes gaining seven points to 33 bid and its 6.75% notes due 2004 holding steady around 30. Canada's national air carrier got a big boost Monday when government hearings into allegations of Air Canada's anti-competitive behavior were adjourned until the spring, after the airline argued that it needs more time to understand and respond to the events of Sept. 11.

That adjournment comes as a bitter disappointment to Canada 3000, the second-largest Canadian air carrier. Canada 3000 had asked the government's Competition Tribunal to rule against Air Canada's recently launched discount airline, Tango, whose establishment Canada 3000 views as a predatory move to drive it out of business. Separately, Canada 3000 chief John Lecky said this week that without substantial federal help, his rival carrier might run out of cash by Christmas; meanwhile, Air Canada is said to be sitting pretty on a cushion of up to $1 billion in available cash and bank credit; it may also be helped by investor sentiment that even were Air Canada to have to restructure in the courts, the Canadian government would never let its national flag carrier and its 42,000 jobs disappear.

On the other hand, some observers familiar with Air Canada's struggles suggest that company chairman Robert Milton has made a legion of enemies among bankers, airline industry players and members of Canada's governing Liberal Party, and Ottawa may be slow to heed his requests for federal assistance - especially if Air Canada does have a nice fat cash cushion.

Elsewhere, a trader said "everything started out strong, but then the market lost a lot of wind from its sails with the anthrax business."

More cases of anthrax exposure were discovered in Washington, mostly among Senate Majority Leader Tom Daschle's staffers, and that caused House Speaker Dennis Hastert to order the House side of the Capitol closed until the premises could be thoroughly inspected; while the Senate remains officially open for business, its own office buildings will be closed for a similar inspection. News of the spreading anthrax problem - and the contentions of security experts that the contamination campaign probably could not just be quickly dismissed as the work of some ill-trained, lone-wolf amateur nut - helped drag the equity markets down as well, the Dow Jones Industrial Average giving up its early gains to end down more than 150 points.

The trader noted, for instance, that Charter Communications' 8.625% notes which had ended at 95 bid/96 offered Tuesday, pushed as high as 97.5 bid initially, before retreating back to a close at 95.5 bid/96.5 offered, up just half a point on the session.

He also said that Nextel Communications Inc.'s 9% notes got as high as 71 bid/72 offered before dropping back to 68.5 bid/69.5 offered at the close, while Echostar DBS's 9.375% notes peaked at 103.75 bid before backpedaling to 101.25 bid/102.25 offered, both up only marginally from Tuesday's close.

"Selective telecom issues were up two to three points in trading this morning," another trader said, "but they probably gave most or all of it back."

But Global Crossing Holding Ltd. notes, which had firmed around four points on Tuesday after the international telecommunications operator's shares firmed, gained another point-and-a-half Wednesday, its 9.625% senior notes due 2008 ending at 22.5 bid/23.5 offered.

Global Crossing had been helped by news that the company had settled a legal dispute with TyCom, with all outstanding claims against each other dismissed. Those claims, which had been brought in both federal court and in arbitration proceedings, related to agreements between the parties for the construction and operation of Global Crossing's Atlantic Crossing-1 and South American Crossing fiber-optic cable systems. The Global Crossing notes also got a boost from news reports the company might sell some of its debt to private investors in exchange for an equity stake.

In the primary, optimism with regard to the status of the high yield market seems to run proportional to the amount of work on any given investment banker's desk. However, most of those quizzed by Prospect News on Wednesday expressed at least guarded optimism.

"Right now the market's less than it could be," one commented. "But it feels pretty darn good to me."

Two deals priced in the past two days: BRL Universal Equipment Corp.'s $100 million add-on, pricing Tuesday with a yield of 8.75%, and Smithfield Foods, Inc.'s $300 million senior unsecureds Wednesday at a yield of 8%.

One source commented Tuesday that there was no way the Smithfield deal would be upsized at pricing. "They don't need the money that bad," the source said.

Tonight that banker buys the beer, because the Smithfield paper did indeed arrive upsized from its announced amount of $200 million.

In secondary activity, the new Smithfield Foods bonds "broke well," traders said. By the end of the day it was quoted at 102 bid/102.5 offered after pricing at par.

Looking at the coming attractions, the primary market appears to be on the move, with Advance Auto Stores, Inc.'s $150 million add-on, and Dimon Inc.'s $175 million seniors both headed for pricing during the week of Oct. 22, according to a variety of sources.

A bit further off, perhaps, Insight Acquisition appears headed to market with $200 million senior subs, to fund its buyout.

And a little further down the road, Tesero Petroleum appears to be coming with a $200 million high yield component of an announced $1 billion financing facility via Lehman Brothers.

Nevertheless, among the investment bankers who took the time to speak with Prospect News on Wednesday, it seems far from perfectly clear that the market, and the economy in general, are on the road to recovery.

"The only stuff that's getting done is highly-rated stuff - four Bs or five Bs or existing issuers that the market knows pretty well," one commented, adding: "Right now it's kind of fits and starts, and I think it's going to continue to be that way."

"There's no benchmark to say 'Yes, we've reached the bottom,' or 'No, we've got a way to go,'" the banker continued. "We're just waiting for the exogenous events that are pushing stocks and bonds around, to quiet down a little bit. Then we'll get a sense of normalcy. Till then I think we're in uncharted waters."

End

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