American Airlines scales new heights, Continental, Northwest follow; Calpine rallies

By Carlise Newman

Chicago, June 5 - Airlines scored another day on the upside Wednesday as AMR Corp. continued its ascent, and Continental Airlines Inc. and Northwest Airlines Inc. basked in the afterglow.

American Airlines parent AMR Corp. had already been zooming forward this week but saw new gains Wednesday after Goldman Sachs & Co. analyst Glenn Engel said he saw significant upside in AMR stock and J.P. Morgan analyst Jamie Baker raised his rating on the stock. AMR's stock reached a new high for the year Thursday.

AMR's 9½% notes due 2012 were seen rising another three points Thursday, to 61 bid/63 offered, from 58 bid/60 offered, for a total of eight points higher than Tuesday, according to a trader.

"For lack of a better term, airlines were really flying this week. We had our hands full. AMR was going strong Monday and just kept going," said the trader.

Goldman's Engel said that recent data suggested AMR's performance showed signs it would no longer lag the industry. He said Continental Airlines Inc. may show a profit for June, and that Continental and AMR shares could double their value based on "only a modest" corporate recovery, helped by government aid, wage and capacity cuts, moderate fuel prices and slightly higher business travel.

J.P. Morgan's Baker said in a note that AMR and Northwest Airlines Corp. will likely emerge as sector leaders and forecast that American, Continental, Delta Air Lines and Northwest would show per-share profits for 2005.

Continental's 8% notes due 2005 were quoted up two points Thursday at 90 bid, 91 offered from

88 bid, 90 offered, a trader said.

Northwest Airlines' 7 7/8% notes due 2008 were seen unchanged at 80 bid, a trader said. The St. Paul-based airline said Thursday its May traffic fell 12.8% to 5.34 billion revenue passenger miles from 6.12 billion a year earlier, as concerns about SARS continued to hurt results. In a press release Thursday, the airline said load factor, or percentage of seats filled, decreased to 75.4% from 78.8% last year.

On Monday American reported its load factor was 73.7% in May, up 4.1 points from a year earlier.

"With the war out of the way, and SARS going down, you're going to see airline debt benefit from that. AMR was in the teens at one point," said a distressed debt trader.

Still active Thursday was Calpine Corp., which said on Thursday it would issue $800 million in secured notes. The notes, to be sold by Calpine Energy Services' Power Contract Financing LLC, will be due in 2010 and secured by the cash flow from two contracts.

Calpine's 8½% notes due 2011 were quoted at 73 bid, 74 offered, up from 70 bid, 72 offered Wednesday.

One of the contracts is an existing long-term deal to sell power to the California Department of Water Resources. The other is a new deal to buy power from a financial institution.

San Jose, Calif.-based Calpine, like many other power producers, has faced major financing challenges during the last several years, hurt by a recession-linked drop in electricity prices and demand. It has been forced to slash capital expenditure and seek additional financing to ease liquidity concerns.

"It's about time," said a trader of the news.

Mirant Corp., whose bonds had moved higher with Calpine Wednesday after days mired at lower levels failed to follow its counterpart higher Thursday after a downgrade from Moody's Investors Service.

Mirant's 7 5/8% notes due 2006 were quoted unchanged at 80 bid, 81 offered, a trader said.

"One thing about Mirant...they have sticking power," said a distressed debt trader. "They've been hit by a lot in the last year or so and have still managed to stay out of bankruptcy."

Moody's downgraded the senior unsecured rating was lowered to Ca from Caa2. Mirant's senior unsecured ratings continue to be notched down from the senior implied rating to reflect the expectation that Mirant's restructuring efforts will result in significant amounts of new secured debt, effectively subordinating the senior unsecured bonds, the rating agency said.

"Since Mirant's international assets are already largely encumbered by existing secured debt at the asset level, Moody's believes there is minimal value remaining for senior unsecured obligations at Mirant Corp. given current market conditions," Moody's said in the statement. "Moody's is maintaining a negative outlook pending further clarification on the ultimate resolution of current negotiations with Mirant's bank group and the proposed exchange offers."

Seeking to restructure its bond debt, Mirant on Monday offered to exchange new secured notes due in 2008 for $1.45 billion of existing bonds due within three years.

In addition, the Atlanta-based energy company said it is asking holders of the bond debt to vote in favor of a "fast track" pre-packaged plan of reorganization, in case an insufficient number of banks or bondholders agree with its out-of-court restructuring plan.

Mirant was downgraded Tuesday by Standard & Poor's Ratings Services. S&P downgraded Mirant's corporate credit rating and senior unsecured debt ratings to CCC from B. The ratings remain on CreditWatch, but the implications were revised to developing from negative.

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