Northwest Airlines bank debt and bonds climb on Q2 numbers

By Paul Deckelman and Sara Rosenberg

New York, July 26 - Northwest Airlines Corp.'s bank debt was stronger by about a point across the complex Tuesday, as investors were pleased with earnings results that outperformed analyst estimates, according to a trader.

Northwest's term loan A was quoted at 95.5 bid, 96.5 offered, its term loan B was quoted at 98 bid, 99 offered and its term loan C was seen at 96.5 bid, 97.5 offered, the trader added.

Junk bond traders likewise saw strength in the Eagan, Minn.-based airline company's bonds, attributing the rise to the smaller-than-expected per-share losses.

A trader in distressed bonds saw Northwest up anywhere from one to three points on the day, quoting its 10% notes due 2009 two points higher at 42 bid, 44 offered and its 8 7/8% notes due 2006 a point better at 64 bid, 66 offered. He also saw Northwest's 9 7/8% notes due 2007 up a point at 48 bid, 50 offered, while its 7 7/8% notes due 2008 got all the way up to 42 bid, 43 offered from prior levels around 39 bid, 41 offered.

Northwest's numbers "were actually better than expected," another junk trader said, "and that benefited their bonds."

He saw the 10s having climbed to bid levels around 43.5 by the end of the session, well up from their close Monday at 40.5 bid, 42 offered, and also quoted its 8 7/8s as having advanced to 65.75 bid, 66 offered, from 63 bid, 64.5 previously.

"Both the short end and the longer end felt better," he said. "The numbers were better - the loss was smaller than expected."

Yet another market source saw Northwest's 8.70% notes due 2007 actually off a point at 47, although he saw the 7 7/8s were two points better on the day at 42 and the 8 7/8s up a point at 65.

The not-as-bad-as-feared results helped to also boost Northwest's Nasdaq-traded shares by 43 cents (9.66%) to $4.88, on volume of 6.6 million, nearly double the usual turnover.

In the second quarter ended June 30, Northwest reported a net loss of $225 million ($2.59 per share), including unusual items - a deterioration from a year earlier, when it lost $182 million ($2.11 per share) on that same basis. Excluding $54 million in net unusual items, the second-quarter loss was $279 million ($3.21 per share), far wider than the year-earlier loss of $78 million (90 cents per share), excluding unusual items. However, while that loss was wider than last year's it was still less than the $3.29 per share of red ink that Wall Street had been expecting.

However, although the company beat estimates and the results were not quite so bad as everyone feared, Northwest's flight path is still turbulent and uncertain, with executives of the fourth-largest U.S. carrier telling analysts on a conference call following the release of the numbers that Northwest must have the approval of its employee unions for the full $1.1 billion of permanent labor cost cuts it is seeking, as well as timely legislative relief from Washington for its cumbersome pension obligations. Otherwise, they acknowledged, it could very well wind up in an involuntary restructuring through the courts.

"We need to rapidly achieve at least $1.1 billion in labor cost savings and resolve our pension plan challenges by freezing our defined benefit pension plans and obtaining federal legislation that addresses existing problems in the pension laws. Failing to do so will force Northwest to consider other alternatives, including filing under Chapter 11 of the U.S. Bankruptcy Code," the company's president and chief executive officer, Douglas M. Steenland, said in the news release announcing the results.

"Many of our major competitors have significantly lowered their labor costs, both in and outside of bankruptcy, leaving Northwest with the highest labor costs in the industry. Moreover, low cost carriers continue to grow and represent a significant competitive challenge. It is imperative that we reach labor agreements with all of our unions as quickly as possible.

"Along with several of our unions, we have asked Congress to enact legislation that allows a longer time period for airlines to pay off the unfunded liabilities in their pension plans. We remain hopeful that we will be able to address this issue quickly," Steenland's statement concluded.

The Senate Finance Committee on Tuesday approved and sent to the full Senate a pension reform bill that includes a provision letting the nation's troubled airlines stretch out over 14 years the amount of time in which they will have to fulfill their unfunded pension obligations, a sharp increase from the current three years.

Northwest's chief financial officer, Neal Cohen, said on the conference call that while the company has an ample cash cushion , north of $2 billion, for now, this will inevitably be drawn down - and Northwest effectively has no access to sources of additional liquidity as long as its labor cost situation and its pension problem remain up in the air (see related story elsewhere in this issue).

Other second-quarter statistics reported Tuesday included an increase in operating revenues of 11.3% versus the second quarter of 2004 to $3.2 billion and an increase in passenger revenue per available seat mile of 3.1% on 4.4% more available seat miles. Operating expenses in the quarter, excluding unusual items, increased 18% versus a year ago to $3.33 billion. And, fuel prices averaged 164.2 cents per gallon, excluding taxes, up 52.2% versus the second quarter of 2004.

Delta up too

While Northwest's bonds got a lift from its smaller-than-feared per-share loss, rival distressed "legacy carrier" Delta Air Lines Inc. went along for the ride.

Delta's bonds had retreated on Monday on renewed warnings that the Atlanta-based Number-Three U.S. carrier is endangered by high fuel costs and the same kind of pension burdens Northwest has.

On Tuesday, however, a trader saw them up about a point across the board, with Delta's benchmark 7.70% notes due 2005 moving up to 76 bid, 78 offered, its 10% notes due 2008 firming to 32 bid, 34 offered, its 7.90% notes due 2009 inching up to 29 bid, 31 offered, and even its 8.30% notes due 2029 edging higher, at 24 bid, 25 offered.

Another trader saw the 8.30s half a point higher on the bid side at 23.75, up from 23.25 bid, 24.25 offered Monday, but said that "it was tough to tell whether they were genuinely better or whether they just tightened a little." He saw the 7.70s actually lower on the session, at 74 bid, 76 offered, down from 76 bid, 79 offered on Monday.

Traders have noted what could be the beginning of a compression in Delta, with the 7.70s - which mature in December but in the meantime trade far above the levels in the 20s and 30s of the company's other bonds - having come down from their recent lofty levels above 80, seeming to be heading closer to the levels at which the company's other bonds are trading as its financial situation deteriorates and bankruptcy looks ever more likely.

Also among the airlines, American Airlines parent AMR Corp.'s 9% notes due 2012 were unchanged at around 80.5 bid, a trader said, and "you never see Continental," whose 8% notes scheduled to mature in December trade slightly above par.

Distressed bonds mostly quiet

Outside of the airlines, traders said there was not much going on in the overall junk bond market, and certainly not much among the distressed issues.

The first trader did see Charter Communications' bonds a little better, with its 8 5/8% notes due 2008 two points up at 78 bid, 79 offered.

Otherwise, he saw no further improvement in aaiPharma Inc., whose 11½% notes due 2010 had firmed several points to bid levels around the 94-95 area on Monday after the bankrupt Wilmington, N.C. -based drug company said that it had completed the previously announced $209 million sale of its pharmaceuticals division to Xanodyne Pharmaceuticals Inc.

He saw no change from recent levels in the bonds of bankrupt Atlanta-based power generating company Mirant Corp., whose busted 2½% and 5¾% convertible notes held steady at 86 bid, 87 offered and 91 bid, 92 offered, respectively, while its 7.40% notes that were to have come due last year and 7.90% notes due 2009 were also unmoved, at 95 bid, 97 offered and 96 bid, 98 offered.

Among the asbestos-challenged issues, a market source saw bankrupt Lancaster, Pa.-based floorcovering maker Armstrong World Industries' bonds a point better at 79 bid, while bankrupt Toledo, Ohio-based insulation maker Owens Corning eased a quarter point to 73.5 bid. The big gainer in the group, at least in nominal terms was bankrupt Southfield, Mich.-based auto parts maker Federal-Mogul Corp., which firmed to 27.25 bid from 26 previously.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.