Asbestos names continue post-election rise; MCI better despite big loss

By Paul Deckelman and Sara Rosenberg

New York, Nov. 4 - Asbestos names continued to gain ground Thursday in both bank debt and bond trading, with investors apparently heartened by the prospect that the results of this week's elections may mean a break in the legislative logjam that has up till now prevented the establishment of a mechanism for paying asbestos claims and limiting company liability.

Elsewhere, the bonds of the formerly bankrupt MCI Inc. were seen better, even as the Ashburn, Va.-based long-distance operator posted a huge third-quarter loss, although that was almost entirely due to a big writedown it had to take in the value of its assets.

Traders in distressed bank debt said that the biggest mover in their market was Armstrong Holdings Inc., which released third quarter numbers.

Armstrong's bank debt was quoted at 70 bid, 72 offered, up about three points on the day and up close to seven points over the last two days, according to a trader.

On Thursday, the bankrupt Lancaster, Pa. -based floor, ceilings and cabinet company. announced third-quarter numbers that included net sales of $893.5 million, a 4.9% increase over third quarter net sales of $851.4 million in 2003, and operating income of $48.8 million compared to operating income of $17.8 million in the third quarter of 2003.

For the nine months ended Sept. 30, net sales were $2.642 billion, an increase of 7.7% from the $2.4532 billion reported for the first nine months of 2003, and operating income was $94 million, compared to an operating loss of $4.3 million for the first nine months of 2003.

Asbestos names gain

But Armstrong wasn't the only asbestos-challenged company to trade up, and earnings weren't the only upside driver.

USG Corp.'s bank debt was quoted at 108.25 bid, 109.25 offered, up from 107.5 bid, 108.5 offered on Wednesday. W.R. Grace & Co. bank debt was quoted at 107 bid, 108 offered, compared with 106 bid, 107 offered Wednesday, and Federal-Mogul Corp. was quoted at 94.5 bid, 94.75 offered, up from a 94 context on Wednesday.

A trader in distressed bonds, meantime said that USG was "still strong," its 8½% notes due 2005 having risen to 124 bid from previous levels around 120, although he did not see USG's defaulted 9¼% notes, which were to have matured in 2001. A trader at another shop did see those bonds, unchanged in a 120 context.

Thursday marked the third straight session that USG's bonds had been up sharply, and attributed much of the strength to the market's hopes for a quick resolution of the asbestos issue once the new Congress gets back into session early next year.

Just like Armstrong, USG, a Chicago-based building products company, Grace, a Columbia, Md.-based specialty chemicals and building materials company, and Federal-Mogul, a Southfield, Mich.-based vehicle parts manufacturer, were all driven into bankruptcy over the last few years under a flood of lawsuits brought by people claiming medical conditions as a result of their exposure to asbestos in the products made by the various companies, either as workers at company subsidiaries or consumers.

Efforts to set up a claims mechanism, to be funded by the companies and their insurers, have up till now been stymied by partisan wrangling in Washington, particularly in what had been the nearly evenly divided Senate. While Republican leader senator Bill Frist (R-Tenn.) and his Democratic counterpart, Tom Daschle (D-S.D.) Finally agreed last month on the size of the proposed claimants fund, at $140 billion, their differences over such issue as whether plaintiffs would still be able to pursue their claims against the companies in court led to Congress adjourning without a workable bill.

But in Tuesday's elections, Daschle was ousted from his Senate seat and the Republicans - considered more pro-business than the Democrats - gained extra seats, weakening the power of the Democratic minority to block action on bill provisions it might not like.

That helped shoot USG's bonds up over the past three sessions, including Tuesday, in anticipation of such a sea change in Washington on this.

The other asbestos names were also up earlier in the week, and it was the case on Thursday as well.

A distressed-bond trader saw Armstrong's issues, such as its 6.35% notes due 2003 and 7.45% notes due 2029 up a point to 68 bid, 69 offered.

Another trader saw the bonds all up to 67.25 bid, which he saw as a rise of between 3¼ and 4¼ points, depending on the issue.

The trader also saw the bonds of Toledo, Ohio-based insulation maker Owens Corning, such as its 7½% notes due 2005, all up ¾ point to 55 bid. Like the other issuers, Owens Corning too was driven to seek bankruptcy by the rapidly multiplying asbestos lawsuits.

And he saw Federal-Mogul's bonds, such as its 7½% notes due 2009, all up ¼ point to about 29.

The first trader, however, saw the Fed-Moguls hovering around 30, up several points over the past few sessions.

MCI lower, then makes gains

MCI - which used to be WorldCom Inc., until it restructured through the Chapter 11 process, shed billions of dollars of old debt, changed management and emerged earlier this year from bankruptcy - reported a third-quarter net loss of $3.4 billion, mostly due to some $3.5 billion in writedowns that the company took on the value of its assets, citing continued tough competition. But on an operating basis, MCI had $121 million in the third quarter, up from operating income of $77 million a year earlier.

It had further favorable news for investors, saying that pricing pressures among its largest customers might be easing, and it touted the effects of cost cuts on its bottom line.

A trader said the intimidating headline that the company had lost $3.4 billion in the quarter produced a "knee-jerk reaction" downward.

But he said MCI bounced from its lows to come back Thursday. He saw the company's 6.688% notes due 2009 first "bouncing around" at levels somewhat below their Wednesday close at 99.5 bid, before the bonds recovered to end somewhat higher, at 100.5.

"They didn't race up," he said, "they bounced around" first.

He saw the MCI 5.908% notes due 2007 ending at 100.5 bid, 100.875 offered, "a little better" than Wednesday's 100.25 bid, 100.5 offered. But the 7.735% notes due 2014 rose to 98.75 bid, 99 offered level from 97.25 bid, 97.75 offered, he said, "so those were up smartly. It was a big move for this bond," he concluded.

Another market source saw the three year bond at 101, the five-year at 99.75 and the 10-year at 98, all up half a point on the session.

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