AMR's earnings push bonds lower; Kmart up as company steps closer to leaving bankruptcy

By Carlise Newman

Chicago, April 23 - Just when it seems it can't get any worse for American Airlines parent AMR Corp., it does. The airline posted "dreadful" earnings Wednesday, according to its chairman and chief executive Don Carty, although its bonds did not perform too badly in the circumstances.

On a lighter note, Kmart Corp. got a boost following news that a judge approved the company's reorganization plan late Tuesday. The company also announced it will exit bankruptcy two months sooner than originally planned.

Kmart's 9 3/8% notes due 2006 were quoted rising three points Wednesday, to 20 bid/21 offered from 17 bid/18 offered Tuesday.

After four days of hearings and negotiations to resolve some 188 objections, the company's reorganization plan was approved by the court, and the retailer said it hopes to exit bankruptcy on May 5.

Kmart's reorganization plan calls for a substantial investment by ESL Investments Inc. and Third Avenue Value Fund of at $140 million in exchange for shares of stock in the reorganized Kmart. Troy, Mich.-based Kmart also has a call right for up to an additional $60 million of convertible unsecured note financing from ESL Investments. ESL has agreed that the cash that it would receive under the plan of reorganization as a holder of approximately $380 million of pre-petition bank debt will be used to purchase additional equity.

Other details of the plan include: holders of Kmart's prepetition bank debt (other than ESL) will receive 40 cents for each dollar of debt they hold; and holders of prepetition notes and debentures will receive 29% of the stock of reorganized Kmart to be outstanding immediately following the effective date of the plan.

"Kmart was active but there's nothing coming up, other than getting out of bankruptcy, so I don't see any major movement ahead," said a trader.

AMR received another crushing blow in the recent string of events weighing on the bankrupt air carrier. AMR's 9% bonds due 2012 were seen bid at 29 and offered at 32, down a point from Tuesday's price of 30 bid/33 offered, itself a four-point drop from Monday.

Chairman and chief executive Carty described as "truly dreadful" the first quarter loss of $1.04 billion, or $6.68 a share, and gave no indication that there is any sign of financial recovery in a "brutally difficult financial and business environment".

The loss was wider than the consensus expectation for a loss of $6.08 a share, but less than the $10.09 per share loss a year ago.

The airline also canceled its conference call Wednesday with analysts and the press.

"The earnings were bad but they were priced in the bonds," said a distressed trader.

A report by the Dallas Morning News Wednesday said AMR is considering replacing its chief Carty.

Late Monday, Carty gave a public apology for the controversy over executive compensation. Despite his admission, union officials have said that American failed to disclose special pension funding and bonuses for executives even as pilots, mechanics, flight attendants and other workers agreed to big pay cuts - and are threatening to revote on their previous acceptance of the give-backs.

Federal Mogul Inc.'s 7½% notes due 2004 rose another point Wednesday, moving to 14.5 bid/16.5 offered from Tuesday's levels of 13.5 bid/15.5 offered, according to a trader.

On Tuesday, Federal Mogul reported a narrower first-quarter net loss of $34 million, compared to a net loss of $1.4 billion in the first quarter of 2002. Also on Tuesday, the Southfield, Mich.-based global supplier of automotive components filed its disclosure statement in court.

Mirant's 9 1/8% bonds due 2013 were quoted a half-point higher Wednesday at 58.5 bid/60.5 offered. The Atlanta energy company's bonds firmed this week after it obtained a waiver from its lenders regarding potential events of default in order to allow the company to focus on refinancing its debt.

From a wider perspective, an analyst viewed the distressed debt market as "very healthy" overall.

"A lot of money has been raised for distressed. It will remain very active for a long time," said the analyst. "Distressed investing has shown a decent return. You're seeing more institutional money and I think that's just going to get better."

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