AMR heralds U.S. Airways merger, bonds pop; Alpha Natural earnings beat forecast, lifts sector

By Stephanie N. Rotondo

Phoenix, Feb. 14 - AMR Corp. was the nom du jour in the distressed debt market on Thursday, as the company officially announced a merger with U.S. Airways.

Traders reported that the bonds were all up, but it was the benchmark 6¼% convertible notes due 2014 that saw the most volume. Under the terms of the deal, AMR bondholders will be made whole and will receive 72% of the new equity in the combined company.

Meanwhile, coal names were getting boosted after Alpha Natural Resources Inc. reported earnings that beat estimates.

A trader said that Arch Coal Inc.'s debt "got lifted in sympathy."

AMR merger lifts bonds

Official news of a merger between bankrupt AMR and U.S. Airways resulted in a massive pop for AMR bonds.

"Everything rallied a bit on the merger news," a trader said, seeing the 6.25% convertible notes closing around 104, versus intraday highs in a 106 to 107 context.

Another trader pegged the issue at 105.

At another desk, a trader said the paper traded as high as 107 right out of the box. The bonds settled back in to 104-105, which the trader called still "up pretty substantially."

The merger - valued at $11 billion - will create the world's largest airline and is expected to produce annual savings and new revenue of over $1 billion within two years.

Both companies are aiming for the deal to be completed by September.

AMR creditors will receive 72% of the new equity in the combined company, with U.S. Airways shareholders receiving the remaining 28%. AMR bondholders are expected to be made whole.

U.S. Airways' chief executive, Doug Parker, would be appointed CEO of the merged entity and AMR's CEO Tom Horton would stay on as non-executive chairman.

The bankruptcy court overseeing AMR's case still needs to approve the deal, as do U.S. Airways' shareholders.

Gimme Credit LLC upgraded AMR to stable from deteriorating on the news.

"Under CEO Doug Parker, we expect American will "straighten up and fly right," wrote Gimme Credit analyst Vicki Bryan in a note released Thursday.

Alpha numbers boost coal

Alpha Natural Resources reported a narrower-than-expected loss on Thursday, which helped the bonds - as well as those of Arch Coal - gain ground.

A trader pegged Alpha's 6¼% notes due 2021 at 88 5/8, up 1½ points. The 6% notes due 2019 rose half a point to 91.

In Arch Coal paper, the trader said the bonds "tried to make a bounce, but kind of retreated," seeing the 7% notes due 2019 fall nearly half a point to 87 1/8.

However, the 7¼% notes due 2021 were up, closing at 86 7/8.

Another market source placed Alpha's 6¼% notes rising over 2 points to 89¼ bid.

A third trader called the issue up "a couple points" at 89, while Arch's 7¼% notes were deemed up "half a point or so" at 87.

Despite a decline in fourth-quarter revenues and a wider operating loss, Alpha Natural's total loss came in above expectations.

Net loss was $128 million, or 58 cents per share, compared to a loss of $793 million, or $3.62 per share, the year before.

Adjusted loss was 19 cents per share, which was much better than the 55 cents per share expected by analysts polled by Thomson Reuters.

Revenue was $1.56 billion, down from $2.07 billion the previous year.

Kodak dips, NII inches up

Elsewhere in distressed debt, a trader said Eastman Kodak Co.'s 9¾% second-lien notes due 2018 were off "about a point," offered at 791/2.

Another trader also saw the debt weakening, quoting the issue at 78 bid, 79 offered.

"The company filed an 8-K with some cash flow estimates," the second trader noted.

Meanwhile, NII Capital Corp.'s bonds "stabilized," according to a trader.

He called the 7 5/8% notes due 2021 up nearly a point at 713/4.

"There was a little pocket of strength there," he said.

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