Airlines jump as oil prices slide; HealthSouth tumbles as trading resumes; Universal City, Swift price

By Paul Deckelman and Paul A. Harris

New York, March 21 - Airline industry bonds and shares gained altitude on Friday as oil prices slid on news that U.S.-led forces had captured much of Iraq's oil fields relatively intact, minimizing likely supply disruptions. They also benefited from news that major carriers were slating sizable cuts in their operations as a means of bringing costs under control. On the downside, HealthSouth Corp. bonds were sharply lower as the troubled company's securities began trading once again, following an extraordinary nearly two-day trading suspension from the Securities and Exchange Commission.

In the primary sphere, Universal City Development Partners printed a 12% yield on $500 million worth of new eight-year notes. And Con Agra Foods, Inc. rounded up sufficient interest among investors for its sale of Swift & Co. 12½% notes due January 2010 to price $150 million, yielding 12.899%.

With those two deals pricing, primary market observers remarked to Prospect News that at the close of Friday's session the forward calendar contains only two deals, both expected to price during the last full week of March.

When asked how that forward calendar came to be so sparse, those sources pointed to the map of the Middle East, where a U.S.-led military alliance is pressing its campaign to oust Iraqi dictator Saddam Hussein. And they also pointed to the 10-year U.S. Treasury note, which, they said, jumped nearly 50 basis points in yield during the week gone by.

Noting that the 10-year Treasury note was yielding over 4.10% Friday afternoon, one capital markets source advised Prospect News that the increase from a level around 3.55% less than seven business days earlier represented "the biggest one-week jump in over a year."

One reason for the jump, the source said, could be the dramatic decline in the price of crude oil over the same period.

"All these economists on the street basically have a bunch of macroeconomic indicators in their models," said the official. "And when you take oil down from almost $40 a barrel to the mid-to-high $20s in a week that's bound to influence things" (at Friday's close one source quoted a price of $26.91 per barrel).

One high yield observer told Prospect News that the increase in the yield of the 10-year Treasury bodes ill for the junk bond market.

"All the bank lines are going up in cost, and you have to figure that people still want to price stuff off of spread," said this official. "They're going to get jacked."

However another source said that a higher yielding Treasury could be taken as a sign of an improving economy and so would register a positive impact upon high yield.

"You had money flowing into equities this week, after weeks of record breaking outflows," the source said (TrimTabs.com Investment Research, Inc., of Santa Rosa, Calif., reported a $900 million inflow to equities for the week ending Wednesday, March 19).

"For the last nine months the flows to equities have been real negative. So you had an artificial depressing of the equities market by pulling all of that liquidity out.

"So even though Treasuries are going up it doesn't really matter because the equity-effect is going to be pretty dramatic in high yield," the source continued.

"The real issue is that you have a lot of (high yield) guys that weren't really getting the benefit of the yield curve, because people don't really believe that's where they're going to be six months from now. So spreads are quite a bit higher than they would have been otherwise.

"As the economy improves spreads should start coming in."

During Friday's session Universal City Development Partners priced $500 million of 11¾% seven-year senior notes (B2/B-) at 98.834 to yield 12%, at the wide end of the 11¾%-12% price talk. JP Morgan and Banc of America Securities were joint bookrunners.

Also Friday Con Agra Foods, Inc. sold $150 million of 12 ½% senior subordinated notes due Jan. 1, 2010 (B2/B) used by Swift & Co. at 98.25 to yield 12.899%, according to a syndicate source. The notes came cheaper than the 100-101 talk, via Salomon Smith Barney and JP Morgan.

And late Friday in a press release, Northville, Mich.-based auto parts supplier Hayes Lemmerz International, Inc. announced that an offering of senior notes would be part of its exit financing plan from Chapter 11. In the release the company noted that it received a commitment for exit financing from affiliates of Citigroup Inc. of up to $550 million to support its plan of reorganization to emerge from bankruptcy. The confirmation hearing is set for April 9.

Other than that offering, no news of new additions to the forward calendar surfaced on Friday.

Two deals are poised to price during the week of March 24. Terms are expected on Barney's Inc. $90 million proceeds of five-year senior secured notes (B3) via Jefferies & Co. during the week and Dan River Inc.'s $150 million of six-year senior notes (B3/B-) via Deutsche Bank Securities, is now thought to be the only high yield deal on the road, with the roadshow set to conclude on Thursday.

When the new Universal City notes were freed for secondary dealings, a trader said, they firmed to par bid/100.25 offered from their issue price earlier in the session of 98.834. The trader said the new Swift notes, meantime, "didn't do much," moving to offered levels of 99.25, although with no bid immediately seen.

Back among already established issues, United Airlines and Northwest Airlines Corp. each announced cuts in their operations Friday, becoming the latest major carriers to take the meat ax to their work forces and schedules in an effort to get bloated operating costs down to more manageable levels.

That, combined with the news of quick U.S.-British advances into the areas of southern Iraq where most of that country's oil fields are located - which sent crude prices tumbling to their lowest levels since early December and caused the biggest weekly drop (24%) seen since January, 1991 - helped boost both the bonds and the shares of the carriers, which have been battered by the combination of rising fuel costs and lessened demand for flights in the wake of war-time terrorism jitters.

Airline bonds "were strong - just crazy," a trader marveled, quoting Delta Airlines Inc.'s 7.70% notes due 2005 as having risen to 63 bid/65 offered from prior levels at 59 bid/61 offered, while Northwest Airlines Corp.'s 8 3/8% notes due 2004 flew as high as 73.5 bid/75.5 offered, up from 70 bid/72 offered on Thursday. "Even AMR Corp. was up," he said, with the parent of American Airlines' 9% notes due 2016 firming to 24 bid/25 offering.

The trader also saw B/E Aerospace - an aircraft components maker whose bonds usually go up and down with those of the airlines- "up a little," its 9½% notes at 62.5 bid.

At another desk, Delta's 8.30% notes due 2029 had firmed to 47.5 bid from 43 bid/44 offered previously, while its 9% notes due 2016 rose to 48.5 bid from 44 bid/45. A trader there also saw AMR's9% notes due 2012 having risen to 19 bid from 14 bid/15 offered on Thursday.

"Everyone came out with announcements [of further operations cuts], and people are hoping the war will be short, and maybe the government might help the industry," he explained.

On Friday, Chicago-based United - which along with parent UAL Corp. filed for bankruptcy protection last year - said that it will cut flight capacity by 8%; its unions meantime said that the carrier wants to put 3,448 mechanics and flight attendants on temporary leave.

Minneapolis-based Northwest plans to reduce capacity by 12% and cut 4,900 jobs, or 11% of its workforce.

Earlier in the week, Houston-based Continental Airlines Inc. announced plans to eliminate 1,200 jobs by year-end, and Dallas-based AMR said that it would reduce flight capacity on international routes by 6%.

Atlanta-based Delta is also expected to follow suit with major cuts in schedules and/or workforce.

Equity investors were just as pleased as their debtholding counterparts at the prospect that the airlines would bite the bullet and make needed cuts, and at the possibility of a short war that would result in a fall in oil prices. On Friday, Delta's New York Stock Exchange-traded shares zoomed $2.43 (27.55%) to $11.25; Continental was up $1.36 (26%) to $6.61; AMR rose 42 cents (24%) to $2.17; and Northwest improved 89 cents (11.95%) to $8.35.

While the airline bonds were taking flight Friday, the bonds of healthcare operator HealthSouth Corp. were on the sick list, having tumbled sharply once a temporary trading halt imposed by the SEC expired at a minute before midnight ET on Thursday.

Traders quoted its various senior issues, such as its 7 5/8% notes due 2012, as having fallen to 44 bid/46 offered, from prior levels above 90 on Tuesday, the last prior full trading session for those bonds, while its 10¾% subordinated notes due 2008 careened down to 16 bid/18 offered - a level which a trader, employing some understatement, termed "kinda ugly" when compared against the 85 bid levels those bonds held on Tuesday. The company's bonds were said to be trading flat (without accrued interest) - a sign the market believes that a default, or worse, is imminent.

Early Wednesday, the Birmingham, Ala.-based provider of outpatient rehabilitation services, imaging and other medical services announced that FBI agents had served warrants for documents as part of a government investigation; later that same morning, the SEC filed charges of "massive accounting fraud" to the tune of $1.4 billion against the company and its chairman, Richard M. Scrushy, and said that all trading in the companies shares and bonds would be temporarily suspended. That forced investors and traders to unwind trades in millions of dollars of bonds, a move which most market participants called unprecedented in their memory.

Elsewhere, El Paso Corp. bonds continued to firm Friday in the wake of news that the Houston-based energy producer and pipeline operator had settled lawsuits arising out of California's energy crunch in late 2000 and early 2001. El Paso confirmed earlier news reports - which had sent its bonds up several points on Thursday as well - that it settled the claims that it had allegedly withheld natural gas supplies from the market in California and several other Western states, for a total of $1.7 billion. Most of the settlement is not in cash, but is in future discounts for natural gas prices, and most of the settlement is stretched out over a period of 20 years. The settlement thus averts the risk that the Federal Energy Regulatory Commission might have punished El Paso more severely for its actions during the energy crunch.

El Paso's 6¾% notes due 2009 were at 82 bid, as were its 7 7/8% notes due 2012; its 7% notes due 2011 were at 80 bid; its 8.05% bonds due 2030 were at 74.5 bid; and its 7¾% bonds due 2032 were at 72.75, all up about four or five points.

All told, a trader said, Friday's junk market "was quite strong, with equities powerful" on the prospects of a short, relatively bloodless war. "There were mostly just buyers around."

A second trader observed that "even though the focus has lately been on the war, things are still grinding north. There's still money to be put to work."

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