Hilton up on possible lift to investment grade; primary falls silent

By Paul Deckelman

New York, Aug. 25 - Crossover issues seemed to be where it was at in the high-yield secondary market Wednesday, as Hilton Hotels Corp. bonds were heard quoted higher in quiet trading after Moody's Investors Service said it was considering an upgrade back to investment grade for the Beverly Hills, Calif.-based lodging chain's debt. Meantime 6-B Canadian aircraft maker Bombardier Inc.'s bonds initially rose on investor response to the company's earnings results - but then came off those highs after Moody's said it might cut the company's ratings to junk status.

If the secondary market was quiet, the new-deal arena was virtually lifeless, market participants said.

A trader saw Hilton's bonds "maybe a touch stronger," quoting its 7.20% notes due 2009 at 110 bid, 111 offered, and its 7½% notes due 2017 at 108 bid, 109 offered, both half a point higher on the news that Moody's was scrutinizing the venerable hotels giant for a possible upgrade.

At another desk, Hilton was seen even stronger, with its 7 5/8% notes due 2012 quoted above 114, a gain of a point-and-a-half on the day.

Moody's said its review for an upgrade of the ratings, including a Ba1 for its senior unsecured bonds, "is prompted by the company's improving credit profile as a result of debt reduction and earnings growth, as well as a favorable demand outlook for the lodging industry." That's a major turnaround from the situation in December 2001, when Moody's dropped the company's ratings to Ba1 from an investment-grade Baa3 previously in the wake of the slump that Hilton and other lodging companies - along with other travel-related industries - experienced in the wake of the Sept. 11 terrorist attacks just three months before. The lodging industry has since managed to bounce back, even in the face of the slow economic upturn and higher fuel prices.

Moody's said that in eyeing Hilton for an upgrade back to investment grade, it would focus on "the sustainability of future lodging demand, the likelihood that credit measures will improve further, the level of secured debt in the company's capital structure, and the company's commitment to maintaining an improved financial profile in the context of its strategic and financial policy objectives."

Bombardier cuts gains on Moody's review

Moody's was far less positive about the prospects for investment-grade issuer Bombardier, in announcing that it was placing that company's ratings, including the Baa3 for its senior unsecured debt, on review for a possible downgrade to junk.

That knocked the skids out from under what had, up till that point, been a decent surge in the company's bonds, which a trader characterized as "all over the place."

The company "did well, had good earnings and then got put on review for a downgrade," he said, causing its U.S. dollar-denominated 6¾% notes due 2014 to first jump to 85.75 bid, 86.75 offered from Tuesday closing levels at 84 bid, 85 offered, pushed up by investor response to the earnings data.

The company reported weak numbers for the fiscal second quarter ended July 31 versus a year ago, as net income slid to $23 million (one cent per share) from $68 million a year ago (four cents a share). The penny a share was about half of what Wall Street had been expecting. But Bombardier stressed that its second-quarter numbers represented a strong sequential improvement over the first quarter.

For instance, it said, consolidated earnings before taxes of $44 million compared favorably to the negative $209 million of EBT the company showed in the first quarter, as consolidated revenues rose 10% to reach $3.9 billion versus $3.5 billion in the first quarter.

The company said the improvement was paced by its important Bombardier Transportation railroad equipment unit, which had EBT of $46 million for the quarter versus $196 million of red ink in the first quarter.

Investors apparently focused on the positive spin the company put on its results in taking the bonds up to their highs for the session. "That was after the [company's] press conference, which was smooth and shallow," the trader said.

However, those bonds tumbled at least part of the way back down after the Moody's downgrade news, ending at 84.75 bid, 85.5 offered - still up on the day but well below the peaks.

Moody's cited the Montreal-based transportation equipment maker's "continued weak operating performance and financial returns in the company's aerospace unit, potential for further pressures on performance if additional deferrals or cancellations of regional jet orders occur, lack of adequate profitability in the rail systems unit, and overall continued weak levels of cash flow generation relative to group indebtedness."

Bombardier - which makes the smaller jets used by a number of major airlines for their regional feeder operations that funnel passengers to their hubs - has been impacted by the continuing troubles of the airline industry, particularly such key customers as US Airways Inc., which went bankrupt, emerged and is currently fighting to avoid a return trip there, United Airlines Inc., which is currently mired in Chapter 11, and Delta Air Lines Inc., which may be the next major operator to go that route unless it can cut its bloated cost structure down to size. Moody's said the expected emergence from bankruptcy soon of customer Air Canada could offer "an offset to any such [aircraft order] cancellations or deferrals" by the other airlines as they struggle to cut costs - but it also warned that "any reduction of current production rates would likely require further restructuring actions."

Bally finds buyers

Elsewhere, a trader saw a generally becalmed market, "even in the volatile stuff, that you see every day, like Levi [Strauss & Co.], Land O' Lakes, Goodyear, Calpine - all nothing."

He saw a few stronger levels being bandied about, though on limited trading. Bally Total Fitness Holding Corp.'s bonds, for instance, "have taken it on the chin for a couple of days, you saw some buyers surfacing out there," bringing the Chicago-based fitness club operator's 9 7/8% notes up to "about an 80-ish bid running around, looking for paper," up from recent lows at 77.5 bid, 79.5 offered.

Qwest rises

He saw Qwest Communications International's bonds better on "some news," apparently a reference to the Denver-based company's announcement that its effort to take out $750 million of 7.20% notes coming due Nov. 1 is progressing nicely, with some 76% of the bonds tendered so far (see Tenders and Redemptions elsewhere in this issue).

He quoted Qwest's 7% notes due 2009 as having pushed up to 88.5 bid, 89.5 offered from prior levels at 87 bid, 88 offered.

Dean Foods better

He also saw Dean Foods Co.'s bonds "definitely a little stronger, with the Dallas-based dairy products distributor's 8% notes due 2007 at 109 bid, its 6 5/8% notes due 2009 at 106, and its 6.90% notes due 2017 at 102, all up at least a point on the day.

"I haven't seen numbers [price levels] like this in a little while," the trader said.

Market mostly quiet

But apart from those pockets of activity, he said, market activity was "abysmal," he said, "most depressing. Inquiries were spotty, at best, but there's nothing running around. The Street guys were absolutely dead quiet. Half of them aren't even in, and the accounts that we do speak to, I'd say eight out of 10 have one, two or three people out, and you're talking with junior guys [with no real deal-making authority] just, like, one day out of grad school. No one is doing anything."

It was pretty much the same story in the primary arena, where a source said that "not much is going on new issue side. Secondary trading is up marginally from [Tuesday], but there's just not much to say these days."

Another pronounced the market as "dead. There's nothing on the forward calendar. New issuance will probably start building again post-Labor Day."

A primary source - commenting on the latest extension of tender offers by UAP Holding Corp. and its United Agri Products subsidiary (see Tenders and Redemptions) noted that those tenders for the Greeley, Colo.-based agricultural company's existing bonds are to be funded by the issuance of new income deposit securities - and said that "to the best of my knowledge, all prospective IDS offerings are currently still active, and waiting for equity market conditions to improve so they can launch, presumably sometime after Labor Day, when activity picks up and investors are back."

Until that time, however, another primaryside player opined that there's "zippo going on here. Time to clean off the desk and empty the emailbox."

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