UAL higher despite earnings bomb; other airlines stronger on Merrill upgrade; HealthSouth ekes out gain

By Carlise Newman

Chicago, May 2 - UAL Corp. reported the biggest quarterly shortfall of any major U.S. air carrier on Friday, but its bonds held up remarkably well in distressed debt trading. UAL's strength and an upgrade by Merrill Lynch & Co. equity analysts on several airlines, including Continental Airlines, Delta Airlines, and Northwest Airlines, lifted a sector that has not managed a move higher in several days.

The $1.3 billion net loss of Chicago-based UAL, parent of bankrupt United Air Lines, topped rival AMR Corp., which posted a $1 billion first-quarter loss last week and narrowly averted bankruptcy for the third time after winning wage concessions from labor.

UAL's 9¾% notes due 2021 were seen by a distressed debt trader at 6½ bid/7½ offered, up a point from Thursday's levels of 5½ bid/6½ offered.

"They're only slightly higher but that's a lot better than it could have been," said the trader. "In fact, it's pretty amazing, given what their report looks like."

UAL, which filed the largest bankruptcy in U.S. airline history in December, said its loss was $14.16 per share, compared with a loss of $510 million or $9.22 per share a year earlier. Operating revenue fell to $3.18 billion in the quarter from $3.29 billion a year earlier.

"The first quarter was particularly difficult, given travelers' concerns about the conflict in Iraq, the weak economy and a fierce low-fare environment, as well as speculation about our company's future - speculation that is now abating," said chief executive Glenn Tilton.

United said it ended the first quarter with $1.6 billion in cash, of which $644 million was restricted for payment of certain obligations. United said it has been burning through $2 million a day, but this would have been $4 million without drawing down $92 million in debtor-in-possession financing.

"The upgrade from Merrill, not anything in the earnings, is what brought UAL up," said a trader.

Merrill Lynch equity analysts upgraded some of the major carriers because of improving profit prospects and a lessened risk of bankruptcy. Lifting the rating to buy from neutral, Merrill upgraded Alaska Air Group, Continental Airlines, Delta Air Lines, Frontier Airlines, and Northwest Airlines.

As a result Continental Airlines' 8% notes due 2005 were seen rising to 51 bid/52 offered from 47.5 bid/48.5 offered Thursday. Delta Airlines' 8.3% bonds due 2029 were quoted at 53 bid/55 offered, up three points from 50 bid/52 offered. And Northwest Airlines' 8 7/8s of 2006 finished at 57.5 bid/58.5 offered, up from 54 bid/55 offered.

"It was pretty busy on our desk for a Friday. The Merrill (airlines) upgrade helped, kept the airline names busy. But there was more than usual. The war officially out of the way may have been a catalyst," said a trader.

HealthSouth Corp.'s bonds, falling into the refuse pile after the company's forbearance agreement with its credit facility lenders expired Thursday, managed to eke out gains on Friday. HealthSouth's 7 5/8% notes due 2012 were seen bid at 66 and offered at 68, according to a trader. He said the bonds were trading at 64 bid/66 offered Thursday. Another desk quoted the bonds at 65 bid/67 offered.

"There isn't really any reason for it, not after the way the bonds have been trading lower recently. Maybe short-covering ahead of the weekend," said the trader.

In addition to the forbearance expiring, the Birmingham, Ala.-based hospital operator also failed to make interest payments its debt. The company said it has not entered into a new forbearance agreement with the lenders under its credit facility, or with the holders of any other indebtedness, and can't guarantee that any of its lenders, noteholders or other creditors would not seek legal action - although it added that it did not expect that they would.

In earnings news, Western Wireless Corp.'s bank debt was reported as trading on Wednesday unchanged in the mid-80s, according to a trader. The bank debt "traded fairly actively" Friday after the company posted a narrower first-quarter net loss and revenue rose due to a larger customer base.

Bellevue, Wash.-based Western Wireless said its net loss narrowed to $21.6 million, or 27 cents a diluted share, from a net loss of $120.6 million, or $1.53 a share a year earlier. Total revenue for the wireless service provider rose 15% to $327.2 million from a year earlier, as the company added 18,300 U.S. customers and 95,100 customers to its international businesses.

Western Wireless Corp. 10 ½% notes due 2006 were quoted at 55 bid/56 offered, up three points in the past two sessions, a trader said.

Kmart Corp.'s bonds fell back slightly to 15 bid/17 offered, down "about a half point" from Thursday, when the 9 3/8% notes due 2006 were seen at 14.5 bid/16.5 offered, a trader said.

There was no major news on the Troy, Mich.-based retailer, although Thursday a report said Kmart's target date to emerge from bankruptcy has been pushed back one day to May 6 because a bankruptcy court order approving its emergence from Chapter 11 was filed a day later than expected.

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