Airlines bonds tumble but traffic light; UAL paper drifts lower; Calpine bonds creep higher

By Ronda Fears and Sara Rosenberg

Nashville, June 13 - Northwest Airlines Corp. landed on the radar screens of a batch of new distressed desks Monday following a story in The Wall Street Journal speculating the beleaguered legacy carrier is on the brink of making an emergency landing in bankruptcy court to unload some of its heavy debt burden.

"We just started tracking Northwest today" on the news article, a trader at a distressed boutique said.

Traffic in the bonds on distressed desks, though, was described as light. The news pushed virtually the entire queue of airline bonds lower, traders said, but, again, flow in those bonds was described as light. A lack of buyers for airline paper was a particular obstacle, traders said, while there was no shortage of sellers.

It also put an end to the steady, and at times seemingly inexplicable, rise in the bonds of United Airlines parent UAL Corp. over the past two weeks or so. One trader added, however, that uncertainty created by signs that there is an outside buyer for bankrupt UAL also put a wrench in its upward climb.

On the upswing, independent power producer Calpine Corp. paper was benefiting from short-covering, including some heavy trading in the stock, following the company's withdrawal of a tender offer for three series of bonds by its Canadian units because of market conditions, traders said.

Northwest drags airlines down

Northwest fell sharply across the board Monday following the Journal report, although the theme of the article - that the fourth largest U.S. airline is close to bankruptcy - was not new to many onlookers.

"It wasn't news, the idea that Northwest may be close to bankruptcy," a bond trader said. "The Wall Street Journal story just brought it into the light, put it on a lot more radar screens."

Northwest's bonds were generally described as lower by 2 points, with light flow because sellers aplenty could not be matched up with buyers. The 10% bonds were pegged at 53½ and the 7 5/8% bonds at 47¾ bid, 48 offered in the early afternoon. Northwest shares fell almost 12% during the session.

The article summed up some of the bad news that has been piling up for the Eagan, Minn.-based airline, which is commonly described by credit analysts as having the highest costs of any major U.S. carrier. Labor costs and fuel costs are two of the major debit items on Northwest's ledger.

The newspaper pointed out, too, that Gary Wilson, Northwest's largest single shareholder, who is also non-executive chairman of the board of directors, recently has been selling stock, as the airline prepares for a possible labor strike. According to SEC filings, Wilson has sold 60% of his stake in the airline since mid-May. Although labor contracts with union mechanics are still in negotiations, media reports have couched both sides as preparing for a strike.

Along with others in the airline industry, Northwest is also suffering from pension under-funding to the tune of $3.8 billion. There is legislative relief in the works for the airline industry, but onlookers argue that it may not come soon enough, and given the bankruptcy court's unique ability to cut labor costs by force, some analysts have speculated that Northwest and other cash-strapped carriers, including Delta Air Lines Inc., and Continental Airlines Inc., may use bankruptcy as a means to solve a host of problems.

But unlike Delta, which has acknowledged in SEC filings that bankruptcy may be looming on its horizon, Northwest has been less threatening with that option. Northwest chief executive Doug Steenland told the Journal that bankruptcy ""clearly is not the preferred choice and is not our first option."

UAL buffeted by buyer buzz

UAL's recent string of gains apparently was halted by the Journal article's drag on the entire group of airlines, one trader said. But, he added, uncertainty about an outside buyer for the bankrupt airline also weighed that paper down.

The UAL bonds were quoted by a distressed trader as easing back Monday to the 12½ bid, 13½ offered context from around 13½ bid, 14½ offered area on Friday.

On Friday, the creditors committee in UAL's bankruptcy case indicated for the first time that outside buyers have expressed interest in taking over the carrier, by disputing management's assertion that no other competing reorganization plans exist for UAL. But the committee didn't object to giving UAL management an extension to Sept. 1 in the exclusive period to file a reorganization plan.

The uncertainty coupled with the Northwest news was enough to snap the run-up in UAL paper, traders said. UAL bonds had made a comeback from single digit levels over the past two weeks or so based on positive reactions to CEO Glen Tilton's statements that the airline should emerge from bankruptcy some time in the third or fourth quarter and should be able to turn a profit next year.

The Associated Press reported that United, the world's second-largest carrier after AMR Corp.'s American Airlines, said it wasn't aware of any competing plans being put forward. AP said, however, that a news report Monday named Texas Pacific Group of Fort Worth, Texas, and investor groups headed by two former airline chiefs - United's Gerald Greenwald and Continental's Gordon Bethune - as interested buyers.

Calpine bonds edge higher yet

Calpine's bonds extended gains from Friday, when it announced that because of market conditions it would pull tender offers made for issues of three Canadian subsidiaries' bonds. The benchmark 8½% notes due 2008 moved up 1 point to 65 bid, 67 offered Monday from 64 bid, 65 offered on Friday.

A sellside trader, who is active in the full spectrum of securities in Calpine's capital structure, noted that the stock was up sharply, and another sell-sider added that short-covering in the stock was related to the company's withdrawal of the tender offer being seen as a positive event for its balance sheet.

Calpine shares rose 22 cents on Monday, or 6.92%, to $3.40. The Calpine convertibles followed the stock up, with the 4.75% issue quoted at 66 bid, 67 offered and the 6% issue at 94 bid, 95 offered.

On Friday, Calpine announced it was retracting its offer to buy back debt totaling up to $160 million linked to its Canadian subsidiary, due to market conditions. The tender was due to expire on June 22. It was for all or a portion of the euro-denominated 8 3/8% senior notes due 2008 and British-pound denominated 8 7/8% senior notes due 2011 of Calpine Canada Energy Finance II and the dollar-denominated 8½% senior notes due 2008 of Calpine Canada Energy Finance.

Last week, Calpine's bonds gyrated first backwards on news of an SEC request for documents relating to its downward revision of proved oil and gas reserve estimates plus documents concerning other matters as well, only then to get kicked back up by Calpine's announced tender offer for its $785 million of outstanding 9 5/8% senior secured notes due 2014, as required in the event of an asset sale - its U.S. gas reserves.

Elan suffers on news of new disease case

Taking a tumble Monday was the paper of Elan Corp. plc, trailing press reports that its top drug in development, Tysabri, was being linked to a possible fifth case of a rare brain disease.

Tysabri, which Elan is developing in conjunction with Biogen Idec Inc., was being used by sufferers of multiple sclerosis. It was withdrawn from the U.S. market in February after being linked to cases of the brain disease.

A trader said that Elan bonds fell approximately 1.5 points across the board. Its 7¼% notes due 2011 fell a point and a half, while its 7¾% notes due 2008 closed 92.50 bid, 93.50 offered, compared to 94 bid, 95 offered on Friday.

Another source had Elan's 7¾% notes due 2011 spotted at 85.50 bid, down from 87.75 bid at the open.

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