Continental, Alaska Air dive; Fleming feeds liquidity fears; warnings signal selling spree

By Ronda Fears

Nashville, March 28 - Trading volume was modest in convertibles Friday, but the trend leaned toward selling as the day began with a review of a string of headlines after the close Thursday that seemed to officially mark the start of the "early [earnings] warning" season.

Nothing materialized in the way of the "big" deal coming to market this week, although there was still buzz throughout Friday's session.

"A rumor a day, but no deals," said one hedge fund manager in New York.

"It is as though we're waiting for a war to start," he added, perhaps with a certain level of sarcasm referring to pricing terms of late.

Earlier in the week, two small drive-bys priced with very aggressive terms. Both the new HCC Insurance Holdings Inc. and Integra LifeSciences Holdings Corp. deals ended the week below par.

Meanwhile, the market is looking to next week and still anticipating a "big" deal, as well as more details on the $300 million mandatory on tap from Allied Waste Industries Inc.

Allied Waste said on its conference call late Thursday that in addition to the $4 billion refinancing package, which includes $300 million of divestitures, it plans to cut 500 jobs next month. Also, the company forecast 2003 revenue at $5.05 billion, which is below analysts' projection.

Hedge funds appear to already be preparing for the Allied Waste deal, as volume in the stock spiked Friday to about 1.7 million shares versus the 30-day average of 550,000. The stock closed off 12c, or 1.4%, to $8.60.

Speculation on who the "big" deal may be coming from include both Comcast Corp. and Nextel Communications Inc. as both filed huge registration statements this week. Comcast's - which added additional guarantees to previously registered securities - was for $7 billion while Nextel's all new filing was for $5 billion.

Arris Group Inc. saw one of the biggest declines on its earnings warning. But to the upside, Avon Products Inc. boosted its sales forecast.

Increased selling pressure also was seen in Continental Airlines Inc. and Alaska Air Group Inc. amid concern that the war in Iraq will compound an already flagging air industry, although many believe there will be a government bailout package of some sort.

Fleming Cos. Inc. continued to flounder - with the converts falling into single digits - as the company fed into the market's liquidity fears, delaying its financials once more and made what seemed like a "desperate plea" to its banks and other lenders for financing.

Gold was flying, though, and Freeport McMoRan Gold & Copper Inc. raked in some nice gains.

There also was some increased interest in healthcare names that would alternatives to HealthSouth Corp., traders said. Those included Health Management Associates Inc., PacifiCare Health Systems Inc., Community Health Systems Inc., Lifepoint Hospitals Inc. and Universal Health Services Inc.

"Better buyers were seen in the healthcare space," a convertible dealer said.

"People are looking to pick up some bargains. There had been across-the-board weakness as a direct outcrop of the HealthSouth fiasco."

The trader also noted that HealthSouth bondholders retained the law firm Fried, Frank, Harris, Shriver & Jacobson.

Another blow in the HealthSouth story, although not entirely unexpected, came as The New York Times reported that federal officials also are looking into whether the alleged HealthSouth fraud extends to the Medicare system.

HealthSouth's converts were seen around mid-afternoon at 9 bid, which would be down 2.5 points from Thursday's close. The stock, which is trading over the counter, ended down 1c to 8.4c.

Health Management Associates seemed to be the most popular among the healthcare names, the trader said, which he mostly attributed to a research note out of Merrill Lynch.

Merrill Lynch & Co. equity analyst A.J. Rice said in a note Thursday that Health Management Associates "has emerged as a potential safe haven investment for many investors while the broader health services group goes through an unsettling period."

The Health Management Associates 0.25% convertible due 2020 was quoted up about 1 point on the day to 67 bid, 67.25 asked. That issue becomes callable Aug. 16, at 53.588. The Health Management Associates 0% convertible also was bid up 1 point to 87.75 bid, 88 asked.

Health Management Associates shares closed up 84c, or 4.5%, to $19.39.

PacifiCare and Community Health also saw nice gains of 1 to 1.5 points in the converts.

It was a sellers' day for airlines, though, as Fitch named Continental along with American Airlines Inc. as facing the biggest war risks and Standard & Poor's Corp. cut Continental's ratings.

Among major U.S. carriers, American and Continental face the greatest risks from a prolonged Iraq war, Fitch Ratings said in a report Friday.

S&P downgraded Continental's senior secured debt to B from B+ and senior unsecured debt to CCC+ from B-, and is keeping the ratings on negative watch as part of a review of four major U.S. airlines due to the impact of the war in Iraq.

"The largest single risk related to the war in Iraq is the dramatic fall-off in passenger traffic - particularly on international routes - that is currently clouding the airlines' short-term revenue and cash flow forecasts," Fitch said in the report.

"In domestic markets, early reports indicate that bookings and traffic could fall by 10% or more in the first few weeks of the war. On the international side, traffic declines of more than 30% can be expected to persist through at least the end of April, mirroring a trend seen after the start of the Gulf War in 1991."

Concerns over the potential bankruptcy liquidation of United Airlines Inc. (UAL Corp.) and speculation of a near-term bankruptcy filing by American have led buzz about a new industry relief package from the U.S. government, which Fitch believes is highly likely in a matter of weeks.

The European Union nations agreed Friday to relax regulations to help airlines cope with heavy financial losses expected from the Iraq war but made no financial bailout, the Associated Press reported.

But traders said the possibility of a bailout was not comforting, given that the industry had already been given a so-called bailout package after the Sept. 11, 2001, terrorist attacks in the U.S. to no avail.

Although Continental Airlines has operating expenses that are the lowest among the solvent major carriers, Fitch said the deterioration of the revenue outlook is exposing the airline to new risks of a liquidity squeeze later in the year. Fitch estimates that incremental war-related cash losses to Continental in April will be in the range of $70 million to $90 million.

The International Air Transport Association last week said that airlines could mount $10 billion in losses due to the war, on top of $30 billion in accumulated losses since the Sept. 11, 2001, terrorist attacks in the U.S.

"Continental is unlikely to have any additional access to the capital markets, and it has no remaining unencumbered assets to pledge in debt agreements, either borrowings outside of Chapter 11 or a debtor-in-possession facility in bankruptcy," Fitch said in the report.

Last week, Continental announced that war-related demand weakness was leading it to reduce capacity across its system, and said it would make 1,200 additional job cuts by the end of the year aimed at reducing 2004 operating expenses by $500 million.

But Fitch said 2003 debt maturities of $493 million represent "another significant cash flow claim that will lead to a worsening of Continental's total liquidity position."

The Continental 4.5% convertible bonds dropped about 3.5 points to 37 bid, 40 asked, one trader said. The 6% convertible preferreds were quoted at 10 bid, 11 asked.

Continental's stock closed down 24c, or 4.4%, to $5.21.

Alaska Air was caught in the downdraft, although the ratings agencies have said it appears to have one of the better credit pictures.

The new Alaska Air floater found some support in the final hour of trading, the trader said, but closed down 1 to 1.5 points to 97 bid, 97.5 asked.

Alaska Air shares ended down 42c, or 2.5%, to $15.98.

Fleming dropped around 5 points Friday, traders said, as the company delayed filing its 2002 financial statements and is seeking a 15-day extension of the March 28 deadline for filing its yearly results.

Fleming said it is also talking to lenders and vendors regarding what it called "near-term liquidity constraints," saying in a company statement that unless it can get "sufficient alternative financing, the company now believes that its 2002 financial statements will likely include a going concern uncertainty."

The Fleming 5.25% convertible due 2009 fell about 5 points to 7.625 bid, 11.625 asked, one trader said.

If vendors stop shipping goods to Fleming, onlookers fear it will augur a path to bankruptcy similar to Kmart. The link between Fleming and Kmart is "sort of incestuous," as one distressed trader put it.

Kmart was forced into bankruptcy in January 2002 after vendors, including Fleming, stopped shipping because of liquidity concerns. And, it was the pact with Kmart that catapulted Fleming into the top food distributor spot.

Kmart got bankruptcy court approval to renege on the contract with Fleming in early February, and that is believed to have been a major blow in Fleming's revenue stream, profit outlook and treatment from the credit rating agencies.

Another slam was Fleming's $1.5 billion claim in the Kmart bankruptcy case getting reduced to $400 million in a settlement approved by the bankruptcy court earlier this week.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.