National Steel lower as bidding heats up; AMR feels the pain of CEO's comments

By Carlise Newman

Chicago, April 11 - National Steel Inc. gave back some of the gains accrued in past days on Friday, as U.S. Steel Inc. added $25 million to its bid for the bankrupt company and AK Steel Corp. fought back with a higher bid. Continuing downward, airlines remained mired in flat to lower levels, restrained by news of a $3 billion government aid package that hinges on cost cuts within the companies.

In a relatively muted session - one distressed trader was simultaneously opening a bottle of wine for an ensuing meeting while discussing price quotes - activity remained bogged down in names seen in recent sessions.

National Steel's 9 7/8% notes due 2009 were quoted lower at 65 bid/67 offered, a drop of a point from Thursday when they were seen at 66 bid/68 offered. The bonds had slowly risen this week as the deadline for bids in the bankruptcy auction loomed Thursday, and two interested companies reaffirmed their bids, and one looked to emerge as the winner.

Pittsburgh-based United States Steel Corp. said on Friday it raised its bid for National Steel to $775 million, an additional $25 million, after winning a key labor deal that gives it an advantage over rival bidder AK Steel Holding Corp. The increased bid takes into account the addition of the assets of the National Steel Pellet Co. unit to the deal, and includes the assumption of $200 million of National Steel's debt.

The offer is significantly lower than the $925 million bid by AK Steel Corp., which reaffirmed its bid late Thursday. However, U.S. Steel has the advantage of its labor contract with the steelworkers union, while AK Steel failed to cut its own labor deal by a court-imposed deadline earlier this week.

On Friday, National Steel's union workers threatened to strike if AK Steel Holding Corp.'s plan to buy the bankrupt company and terminate labor agreements is approved.

Traders said they had seen some active sessions during the week, but Friday was not one of them, according to one market participant.

"Lots of New York and Connecticut schools are closed or closing early today ahead of next week. People have been disappearing all afternoon," said a distressed trader, referring to the Easter holiday week-long vacation many schools provide.

American Airlines Inc. saw its bonds fall into an even deeper well Friday after several events that left the bankrupt air carrier more doomed than ever.

The Fort Worth-based air carrier's 9% notes due 2012 were seen losing another two points to 28 bid/30 offered after levels of 30 bid/32 offered.

On Thursday, reports circulated that American's chief executive Donald Carty warned that the world's largest airline may still file for bankruptcy even if union workers agree to big concession packages next week.

Carty told workers if they did not vote to approve wage concession pacts aimed at saving the airline $1.8 billion in labor costs a year, a bankruptcy filing would be imminent. The three main unions have set deadlines of Monday and Tuesday for voting on deals struck about 10 days ago.

The rest of the sector fared only slightly better. Northwest Airlines' 7 7/8% notes due 2008 were seen at 48.5 bid/50.5 offered, dropping a half a point from Thursday. Delta Airlines' 6.65% notes due 2004 were seen bid at 74, offered at 75, close to levels from Thursday's close.

On Thursday, a ratings downgrade from Moody's Investors Service on three major airlines - Delta, Northwest and Continental Airlines - threw a wet blanket on the airlines' bonds.

U.S. House and Senate negotiators approved on Friday a package of aid worth about $3.5 billion to U.S. airlines. The vote by a House-Senate conference committee added the aid to an emergency spending bill for the war in Iraq that Congress hopes to pass before the weekend.

The money approved included $2.4 billion in reimbursements to airlines for security costs and a suspension of passenger security fees, worth another $520 million. It extended war risk insurance for one year, a provision worth about $600 million to the airlines. Lawmakers also approved $275 million for jobless aviation industry workers.

However, the package has one condition: that airlines demonstrate they had cut costs by 10% in the past year to get the assistance.

"Airlines....blah. They're barely breathing," said a distressed trader.

Aquila Inc.'s bonds were "slightly lower" after the company announced $630 million in new loans Friday, but received a downgrade from Standard & Poor's. The Kansas City, Mo.-based energy provider's 7 5/8% notes due 2009 were quoted bid at 75 and offered at 78, down a point from levels earlier in the day, when they had been trading at 76 bid/79 offered.

The financing package consists of two secured loan facilities - a one-year $200 million loan to UtiliCorp Australia, Inc. at an interest rate of 7% and a $430 million three-year term loan to Aquila at an interest rate of 8.75%. The initial amount drawn under the one-year loan will be $100 million, and the company will have an option to draw another $100 million within the next 30 days.

Proceeds from the loan package will be used to terminate the company's existing 364-day senior bank facility, repay synthetic leases associated with two power plants in Illinois, and cash collateralized outstanding letters of credit.

But S&P rained on Aquila's parade by lowering its senior unsecured rating to B from B+. The outlook is negative.

"This was not one of those weeks when one issue leads the market in a direction. When HealthSouth and Fleming started to drop, anyone active was doing that. Today was hit or miss - random stuff happening all over the line," said one distressed debt trader of Friday's action.

HealthSouth was actually a gainer on Friday. Its 7 5/8% notes due 2012 "ran up again today," a trader said, to 55 bid and looking for an offering from 53.5 bid/54.5 offered on Thursday.

"What's with them?" he marveled, noting that the bonds had begun the week languishing down around 47 bid/48 offered.

He suggested that "someone must be out there recommending them. Someone must have done an analysis and recommended these things."

Another possible explanation was that HealthSouth's banks signed a forbearance agreement with the company after its March 27 default on a $1.25 billion credit facility. The agreement does not unfreeze the facility, but it means the bank group - headed by J.P. Morgan Chase Bank and Wachovia Securities - agreed to take no action against the company until May 1.

Birmingham, Ala.-based HealthSouth, a provider of outpatient rehabilitation services and diagnostic services, has been struggling since last month, when federal probers announced accounting fraud indictments against the company and a number of its key executives. That knocked its once par-level senior bonds down as low as the 40s and its subordinated debt and convertibles way below that, and sparked talk the company may be forced into bankruptcy.

The upward move also sparked surprise in the convertibles market.

HealthSouth's forbearance agreement follows a default which led to the banks freezing the funds, putting paying the 3.25% convertibles, which matured April 1, into limbo.

"We saw a little bit of HealthSouth [converts] trade today at 24. They've been moving up gradually all this week," said a distressed trader.

The thinking is that with this breather from the forbearance, there might be a chance for the company to ferret out a funding source, and if they can manage to avoid bankruptcy, then the converts will be paid off.

"If they keep from filing [bankruptcy], then the converts would get paid, because they've already matured," the trader said.

"If they file, then the convert holders are screwed. There's too much senior paper ahead of them. It's a long shot. You may hit a home run, or you may crap out."

(Paul Deckelman and Ronda Fears contributed to this report.)

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