Pegasus bank debt back on the slide; Air Canada not much changed despite union pact

By Paul Deckelman and Sara Rosenberg

New York, May 21 - Pegasus Media & Communications Inc.'s term loan D and Pegasus Satellite Communications Inc.'s bank debt reverted back to falling on Friday after having enjoyed a short, steadying reprieve Thursday, the renewed decline being blamed on investors' continued bankruptcy fears.

The term loan D was quoted at 96 bid, 98 offered versus previous levels of 98 bid, par offered, a trader said. The tranche had begun the week at 101 bid, 102.5 offered, declined to par bid, 101.5 offered on Tuesday, and then dropped again on Wednesday to 98 bid, par offered, where it remained until Friday.

The Satellite paper was quoted at 95.5 bid, 96.5 offered, down from previous levels of 96 bid, 97.5 offered, according to the trader. The tranche had begun the week at around 99, dropped to around 98 on Tuesday, and then continued its decline on Wednesday to 96 bid, 97.5 offered, where it remained until Friday.

Among bond investors, Pegasus' notes - which had declined sharply early in the week, then firmed a bit off those lows Wednesday before resuming their decline Thursday - continued to ease on Friday.

A trader saw the Pegasus Satellite 12 3/8% notes due 2006 at 49 bid, 52 offered on Friday, down from 52 bid, 55 offered on Thursday, while its 9 5/8% notes due 2005, which had been heard quoted at

a wide 50 bid, 55 offered Thursday, were likewise bid at 49.

"Just about all of their bonds were in the high 40s, lower 50s context," he said, the major exception being Pegasus Satellite's 13½% notes due 2007, which have fallen into the lower 20s. He saw the bonds at 21 bid, pretty much where they had finished Thursday.

At another desk, a market source had pegged most of the Pegasus bonds a little higher, in the low-to-mid 50s, but saw them unchanged on Friday from Thursday's levels. He saw the 131/2s continuing to languish around the mid 20s and saw the company's 12¾% notes due 2007 at 40 bid, also unchanged on the day.

Pegasus' decline began on Tuesday following the company's 10-Q filing with the Securities and Exchange Commission. In the filing, the Bala Cynwyd, Pa.-based diversified media and communications company revealed that is was trying to figure out how to pay a $51.5 million breach-of-contract settlement to DirecTV Inc., whose satellite TV programming Pegasus distributes to customers in rural and small-town markets. Pegasus' problem is magnified by the fact that it has no firm idea of how much pre-judgment interest it will have to pay - perhaps as much as $12 million over the cost of the award itself - and how much the bond will be if the company decides to appeal the decision.

If the company fails to pay, it could be in default under its credit facilities and its bonds. And, without waivers, Pegasus Satellite Television, Pegasus Media and/or Pegasus Satellite may have to file for protection under Chapter 11, the filing said.

Air Canada steady

Elsewhere, little or no movement was seen in the bonds of Air Canada, despite the insolvent Canadian airline having achieved an enormous breakthrough in its restructuring efforts late Thursday, when it announced that the company had reached agreement on cost-cutting with the Canadian Auto Workers union, which represents some 5,000 customer sales and service agents and crew schedulers at Air Canada.

Those U.S. dollar-denominated 10¼% notes due 2011 had fallen to levels as low as 27 bid, 29 offered earlier Thursday when it looked like the two sides would remain at an impasse and the GE unit warned that it would not want to see a lengthy, drawn out negotiations process. But later in the session, though before the Thursday evening announcement, the bonds had come back up to 30 bid, 32 offered, little changed on the day.

Despite the clearly positive nature of Thursday's news however, there was no surge in the bonds, against a backdrop of a generally quiet and muted market.

A trader said that he had seen "nothing" in the bonds.

At another shop, a trader said that he had seen the bonds offered at 35, up about three points on the offered side from Thursday's close, but had seen "no left-hand [bid side]."

The CAW had been the last of five unions to sign on to the company's plans to reduce its labor-cost structure by C$200 million - a key condition to Air Canada's proposed restructuring financing deal with Deutsche Bank and GE Capital Aviation Services, a unit of General Electric Corp. The financing is crucial to the company's plans to emerge from its insolvency proceedings under the Canadian equivalent of the bankruptcy laws, the Companies Creditors' Arrangement Act, by Sept. 30.

The Ontario court overseeing the restructuring on Friday extended Air Canada's protection under the CCAA by four months to Sept. 30. Creditors are expected to vote on the company's plan to settle some $9.5 billion of debt and other obligations by Aug. 15.

Besides the union agreement and the bankruptcy-protection extension, Air Canada got further good news on Friday as the country's finance minister Ralph Goodale said he is willing to let Air Canada take a longer than normal 10 years to cover its pension plan deficit - another critical step toward completing the investor bailout. The 10 years is twice the usual five-year period. Canada's cabinet must still approve the pension extension scheme.

Delta higher again

Elsewhere on the airline front, Delta Air Lines Inc.'s bonds continued to firm Friday, along with its common stock, a day after a Lehman Brothers analyst had issued a positive research piece on the Atlanta-based air carrier - even though Delta faces large challenges in cutting its labor costs, which the analyst acknowledged.

A trader said the Delta bonds were "better," although he said he had not seen "a whole lot of trading in them" going on. He quoted Delta's 8.30% bonds due 2029 as having firmed a point on the session to 42.5 bid, 43.5 offered.

Another trader quoted those bonds at 41 bid, 43 offered but noted that they had crept up over the past two sessions from levels earlier in the week around 37 bid, 39 offered. He meantime saw Delta's 7.70% notes at 63.5 bid, up half a point or so.

On the equity side, Delta's New York Stock Exchange-traded shares - which had boomed some 15.86% on Thursday on the Lehman news - were up another 10.85% or 65 cents on Friday to close at $6.64 on volume of over 10 million shares, about double the usual turnover.

Analysts said that besides the positive glow generated by the Lehman recommendation, Delta's shares - and those of other air carriers - got a boost Friday as crude-oil futures dipped under $40 a barrel in apparent response to Saudi Arabia's announcement that it would recommend a 2 million barrel-per-day increase in output by the Organization of Petroleum Exporting Countries, of which the Saudis are probably the most influential member.

The rise in Delta's shares and bonds Thursday and Friday represented a dramatic turnaround, since the company's securities had fallen back only a few sessions earlier when it acknowledged in its quarterly filing with the SEC that if it is not successful in getting its pilots to sign on to much larger wage and benefit concessions than they have offered so far Delta could face possible bankruptcy - the first time that the company had officially acknowledged that possibility, even though the language was the standard cautious boilerplate type phrasing typical of SEC filings.

In the interim, Delta has still not overcome the hurdle of its pilot costs - highest among the old-line major air carriers. The two sideways remain far apart, with the captains offering 9% in compensation cuts and the airline seeking 30%. Even with that unresolved problem - as well as jet fuel costs recently having risen in tandem with world crude oil prices - Lehman Brothers equity analyst Gary Chase on Thursday upgraded his rating on the stock to overweight from equal weight, and increased his target price for the stock to $10.

What's more, Chase wrote in the research note, while he agreed that Delta faces daunting challenges in reforming its cost structure and dealing with higher fuel prices, the shares could conceivably be worth even as much as $20 under the right circumstances, chief of which is that the pilots would cave and accept the 30% reduction, which seems unlikely at this point. That lofty price would also assume a 33% equity dilution in exchange for the concessions and an 8% cut in non-labor costs.

Adelphia unchanged

Adelphia Communications Corp. bonds, which had gotten something of a small boost earlier in the week, after Time Warner Inc.'s chairman and chief executive officer, Richard Parsons, said that his company's Time Warner Cable unit might be interested in buying some or perhaps even all of Adelphia's assets if the price were right, were seen pretty much unchanged Friday, even as Time Warner held its annual shareholders meeting on its studio lot in Burbank, Calif.

A trader quoted the bankrupt Greenwood Village, Colo.-based cable operator's 10¼% notes due 2006 as unchanged at 102 bid, 104 offered.

A second trader saw Adelphia's 10¼% notes due 2011 likewise unchanged at 106.5 bid, 107.5 offered.

At another desk, Adelphia's 10 7/8% notes due 2010 and 9 3/8% notes due 2009 were each unchanged at 105, while its 7 7/8% notes due 2009 were seen having eased half a point to 98.5 bid.

At the Time Warner annual meeting, the question of whether the cable giant would acquire Adelphia was the very first query from a shareholder during the informal Q&A portion of the program.

Parsons did not go beyond the stance he took earlier in the week as he answered the question.

He told the shareholder - who amid some good-natured laughter from the audience had said that all of her friends who had Adelphia cable were clamoring for Time Warner and wanted to know if there was a chance that Time Warner would buy Adelphia - that the company "is very high on the cable business. We like the cable business. It's one of the very few really big and mature, substantial businesses out there that not only is growing on the bottom line, at double-digit rates, but growing on the top line," with all of the kind of new services that cable companies are rolling out on their platforms.

"So we have said that we are interested, at the right time and the right structure and price, in expanding our presence in that business, expanding our cable footprint," Parsons continued. "That's one of the reasons why we drove so hard last year to create some [financial] capacity to do some things," via asset sales and debt-reduction efforts.

But getting down to specifics, the Time-Warner CEO said that "whether we will acquire Adelphia or be a participant in that process, I can't tell you right now, because these things have their own rhythm and they have to roll out in their own way. But I will tell you that we like the business and we'd like to expand," adding, tongue planted partly in cheek, that "we'd like to be able to satisfy you and your neighbors that you've got the Number-One cable and high-speed service in America - namely ours."

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