Solutia drops as company starts restructuring talks; WorldCom stronger; airlines shoot higher on earnings

By Carlise Newman

Chicago, Oct. 16 - Solutia Inc. was the focus in distressed debt trading Thursday after the company said it has initiated discussions with its bondholders concerning a restructuring of the company's debt. Elsewhere, WorldCom Inc. and some airline names were buzzing.

Solutia's 7 3/8% notes due 2027 were seen down 3 points to 60 bid, 62 offered, while its 11¼% notes due 2009 were down 4 points to 90 bid, one trader said.

Solutia has $1.25 billion of funded debt including four series of bonds issued by the company and its subsidiaries. Outstanding bonds include the $223 million 11¼% senior secured notes due 2009; the $150 million 6.72% debentures due 2037 and putable in October 2004; Solutia Europe SA's €200 million 6¼% euro notes due 2005; and the $300 million 7 3/8% debentures due 2027.

The 2009 notes have a second lien on certain working capital but the remaining $680 million in bonds are unsecured. In addition to the bonds the company has a $350 million secured credit facility with a syndicate of lenders lead by Ableco Finance LLC, a unit of Cerberus Capital Management L.P.

"It wasn't exactly a surprise, this announcement today. But it does raise some questions. Bankruptcy could be in their future," a trader said. "I think the price of the bonds reflects that."

Meanwhile, WorldCom paper appeared to be on a roll this week, despite slipping revenues in the month of August and news that AT&T Corp. would continue pursuing charges that it was defrauded in federal court.

The bankrupt telephone company said late Tuesday its net income and revenues declined in August from July, blaming lower long-distance calls volume network-wide and higher reorganization expenses.

WorldCom said its net income totaled $132 million in August, compared with $207 million in July. Revenues fell to $2.0 billion, down from $2.1 billion in July. It ended August with $5.3 billion in cash, an increase of $600 million from the beginning of the month.

But WorldCom's bonds were seen rising 1 point to end the Thursday's session at 37 bid, one trader said.

"We saw WorldCom going out in the 361/2, 37 bid area. Those levels are better than they've done for a long time. They're on the fast track to get out [of bankruptcy]," he said.

Rival AT&T on Tuesday said it dropped its objection to MCI's plan to emerge from bankruptcy, but it will pursue charges in federal court that it was defrauded. AT&T had objected to MCI's reorganization plan in July, when it charged that MCI improperly routed telephone calls through Canada and on to AT&T's network, allegedly to avoid paying network-connection fees.

Airlines were quite active on Wednesday after both Northwest Airlines Inc. and Continental Airlines Inc. posted exceptional third-quarter earnings reports.

Northwest posted earnings of $42 million ($0.49 a share) compared with a net loss of $46 million ($0.55) in the year-earlier quarter. Analysts had expected Northwest to lose $0.46, on average, with forecasts ranging from $0.30 to $0.90.

Northwest's 11¾% notes due 2005 were quoted at 91 bid, 93 offered, up 3 points, a trader said.

Continental reported third-quarter net income of $133 million ($1.83 a share) reversing last year's loss of $37 million ($0.58 a share). Excluding a gain from selling ExpressJet shares, the carrier's third-quarter profit came to $0.49 a share. With an eye to supporting its pension plan, Continental contributed both cash and ExpressJet stock during the quarter.

Analysts had been looking for Continental to earn $0.43 a share.

Continental Airlines' 8% notes due 2005 were up 3 points at 91 bid, a trader said.

On Tuesday, Delta Airlines Inc. reported a net loss of $164 million ($1.36 a share), compared with a net loss of $326 million ($2.67 a share) a year earlier.

Delta's10% notes due 2005 were seen at trading unchanged at 93½ bid, 95½ offered.

"It won't be long before we don't do these three anymore, barring a worse economy, war or another terrorist attack," a trader said of Northwest, Continental, and Delta's bonds.

Also on the upside, another trader said, was Adelphia Communications Corp., all of whose bonds, he said "were up three or four points from the beginning of the week." He opined that investors "think the bonds are going to par - and then some " - and said that at least one large trading house had issued an internal memo recommending purchase of the bankrupt Greenwood Village, Colo.-based cable operator's bonds precisely on the assumption that the senior debt could be valued at par once the company restructures.

He quoted Adelphia's 10¼% notes due 2006 at 85 bid, 87 offered and its 10¼% notes due 2011 at 86 bid, 88 offered. Adelphia's 10 7/8% notes due 2010 were at 85 bid, 86 offered.

Another trader, however, was skeptical about the par-value speculation surrounding Adelphia. "This is a company that still has a lot of issues to resolve," he declared. "What makes anyone think these bonds are going to be at par value?"

At another desk, the 10 7/8s were seen up a point at 84 bid, and the company's 9 7/8% notes due 2007 likewise up a point at 83.

A market source there meantime saw UbiquiTel Corp.'s zero-coupon notes due 2010 three points better, at 70 bid, although he saw no news out on the Sprint PCS affiliate.

On the downside, textile maker Dan River Inc.'s bonds - which had gotten clobbered on Wednesday after the company said that it was in violation of its covenants, falling more than 30 points on the session to end at 45 - were down another five points Thursday, ending around 40 bid, after having dipped as low as 36 during the session, a trader said. "They got hit right in the gut," he marveled.

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