Qwest, WorldCom gain; Armstrong World better bid; UAL still rising

By Carlise Newman

Chicago, May 5 - Qwest Communications International Inc. advanced in distressed debt trading Friday on a few positive bits of news from the company, including that the troubled telecommunications company would invest an additional $75 million to deploy digital subscriber line technology. As a result, other distressed telecom names such as WorldCom Inc. followed suit, rising to modest gains in light activity.

Qwest said it is investing $75 million to expand the availability of Qwest DSL in its 14-state region.

Denver-based Qwest's 7% notes due 2009 rose to 70 bid/71 offered from 69 bid/70 offered at the opening, while its 7¼% notes due 2011 were likewise a point higher at 69.5 bid/71.5 offered.

On Friday, the Justice Department recommended that the Federal Communications Commission approve Qwest's application to provide long-distance telephone service in Minnesota. The Justice Department said Qwest has opened the local service market in Minnesota to competitors - the step required for incumbent phone companies like Qwest to be allowed to offer long distance.

Three of the four members of the Minnesota Public Utilities Commission recommended last month that the application be rejected.

Qwest got in trouble with Minnesota regulators for crafting what they said were illegal secret agreements with two local phone competitors that helped those rivals while hurting others. The utilities commission has fined Qwest $26 million and ordered the company to extend 18 months of discounts to local competitors.

"There was some general firming up in telecom names. WorldCom moved a three-quarters of a point, maybe a point higher," said a distressed debt trader.

He quoted WorldCom Inc.'s bonds at 30 bid/31 offered, up from 29 bid/30 offered early Friday.

HealthSouth Corp.'s 7 5/8% notes due 2012 were seen bid at 67.5 and offered at 69.5, according to a trader. He said the bonds were trading at 64 bid/66 offered Thursday, and 66 bid/68 offered Friday.

"HealthSouth was kind of wild last week, down four points, up four points, and there's not really a reason for it," said the trader.

On Monday, HealthSouth's first chief financial officer pleaded guilty to fraud charges, becoming the fifth and final former CFO to admit guilt in the company's massive accounting scandal.

Aaron Beam pleaded guilty in U.S. District Court in Birmingham to bank fraud and making false representations to HealthSouth's lenders. The charges carry a maximum penalty of 30 years in prison and a $1 million fine, plus forfeiture of any profit gained through fraud.

Last week, the Birmingham, Ala.-based hospital operator failed to make interest payments on its debt after forbearance expired. 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 said that it doesn't expect that they will.

The government has accused HealthSouth and a group of its former officers of deliberately overstating earnings by $2.5 billion over several years.

"We saw some movement in asbestos names today," said a distressed trader, one of which was Armstrong World Inc. The company's bonds were quoted "about a point" higher at 42 bid/43 offered, up from 41 bid/42 offered Friday.

The bonds rose despite information found within in a Securities and Exchange Commission filing saying that Armstrong plans to file updated projected financial information with the SEC which will result in creditors' recoveries under its reorganization plan being reduced.

Armstrong is updating the projected information it had filed with the initial disclosure statement on Dec. 20, due to developments within its business since December 2002. Based on the new information, the estimated range of reorganization value of the company would be reduced "to a degree that would not be immaterial," and the expected recoveries and distributions for creditors would be reduced, according to an SEC filing.

Armstrong will file a revised exhibit with the court to replace the outdated information.

The company's disclosure statement and plan have been approved by the court, pending the filing of updated information. The disclosure statement will be circulated to creditors to solicit votes of approval. It will also be sent to non-voting shareholders.

Lancaster, Pa.-based Armstrong World Industries is a flooring manufacturer.

In other news, airlines were seen stronger again Monday following strong gains Friday. Even bottom-of-the barrel UAL Corp. was a bit better, according to a trader, saying the company's bonds were half a point higher.

UAL's 9¾% notes due 2021 were seen by a distressed debt trader at 7 bid/8 offered, up from 6½ bid/7½ offered Friday.

"We still see some trading in UAL sometimes but generally it's usually pretty dead," said the trader. "These last few days of activity have been kind of surprising."

On Friday UAL reported the biggest quarterly shortfall of any major U.S. air carrier. 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.

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

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