UAL bonds firm on cost-cutting progress as market makes early exit

By Paul Deckelman and Paul A. Harris

New York, Nov. 27 - The Thanksgiving holiday break got underway in the high-yield market with an abbreviated session Wednesday - and the early close along with the prospect of turkey, stuffing and yams pretty much killing everyone's appetite for any kind of real activity, in either the primary or the secondary spheres. United Airlines bonds were quoted up several points, though on very limited trading, as the troubled airline seemed to be making further progress toward getting the kind of cost-cutting it needs to get a federal loan guarantee.

In the primary sphere, word filtered down that container-maker Ball Corp.'s $200 million senior notes deal is likely to come to market some time during the first part of December. Other than that though, new-dealers - exhausted from a rapid-fire barrage of deals the previous Friday (four on Nov. 22) and Monday (five on Nov. 25), as well as the excitement produced by the well-received nearly billion-dollar R.H. Donnelley Corp. offering on Tuesday - pretty much rested on their laurels and surveyed what was easily the busiest month they've had since June.

The Bond Market Association recommended a 2 p.m. ET close on Wednesday ahead of Thursday's Thanksgiving holiday, which would see the U.S. financial markets shuttered completely, followed by another early close on Friday, when little or nothing of substance would be accomplished. What effectively amounted to virtually a five-day holiday weekend caused market participants unfortunate enough to have to come in Wednesday to do what they had to do (which is to say, not very much) and then split, often well ahead of the "official" close.

"It was not a really crazy day," a trader said with no small degree of understatement, "just buying and selling some odd lots and cleaning up positions for people - but beyond that, it was a real non-event."

A trader saw some upside movement in United Airlines paper, after the troubled Number-Two U.S. airline carrier said late Tuesday that it expects to come up with cost cuts and revenue improvements totaling $14.1 billion over the next five-and-a-half years. Included in that figure would be approximately $5.2 billion of labor cuts - somewhat less than the $5.8 billion the airline had originally been shooting for, owing to capacity reductions the airline has recently announced. Even with the smaller labor-savings figure, United said it expects the cost cuts to boost its profits by $1.2 billion.

United's release of updated information on its expectations for labor savings and other cost-cutting moves is part of its campaign to convince the Air Transportation Stabilization Board to give it a $1.8 billion federal guarantee as it tries to borrow $2 billion; Elk Grove Village, Ill.-based United has warned on several occasions that failure to get the loan guarantees would likely result in a bankruptcy filing.

The trader said the updated news on the company's fight for more cost cuts helped the bonds on Wednesday, with UAL's 10.67% notes due 2004 heard about 2¼ points higher at a relatively wide 32.25 bid/34.75 offered.

"That has to do with them getting their labor savings agreed to, although they still have to get the machinists to ratify it, and then it goes in front of the loan board."

On Wednesday, the 37,000 members of the union - which also represents baggage handlers and reservation agents as well as the airline's mechanics - voted in union halls around the country on whether to accept pay cuts of 6% to 7%. If the machinists say yes, it would represent $1.5 billion in labor savings for United over the 5½ years - a key part of the puzzle. The pilots' union has already signed off on $2.2 billion of labor cuts, and the flight attendants are voting on a $412 million package.

Late Wednesday, United separately announced that the union representing 181 flight dispatchers who work at the airline's Operations Control Center near Chicago agreed to provide some $2 million of cuts annually over the 5½ year period.

United shares were up 12 cents (3.42%) in Wednesday dealings, to $3.63.

Elsewhere, the trader said that news that WorldCom had reached a partial settlement of civil fraud charges with the Securities and Exchange Commission that likely would mean only a fine of several million dollars and continued government oversight - but no admission of wrongdoing by the embattled company in the wake of allegations of $9 billion of accounting fraud - really didn't do much for its bonds; in fact, they actually eased.

News some days earlier that the bankrupt Clinton, Miss.-based telecommunications giant and the SEC were trying to settle the matter so that WorldCom would be able to expeditiously emerge from Chapter 11 had already sent its bonds up into the upper 20s, about double their previous levels, while those of its MCI long distance unit had firmed smartly into the mid-to-upper 50s from around 40ish bid levels previously. With the prospect of a relatively favorable settlement of the fraud charges for the company already having been priced in, the bonds "were off a couple of points from their highs of the past few days," with parent WorldCom's bonds at 25.25 bid/26. The MCIs, he said, were at 55 bid/56 offered, off about a point to a point-and-a-half from their recent peak.

He further saw Lucent Technologies Inc. bonds - which had recently been strengthening on the prospect of several new large telecom equipment supply contracts and even some takeover speculation (which proved to be unfounded) - as having "given back some of their gains," with the Murray Hill,

N.J.-based equipment manufacturer's 7¼% notes due 2006 "a little weaker" at 67.375 bid/65.625 offered.

Also on the telecom front, Nextel Partners Inc. debt eased slightly, after Moody's Investors Service on Tuesday cut its bond ratings to Caa1 from B3 previously. The Kirkland, Wash.-based affiliate of Nextel Communications Inc. - which markets Nextel's two-way communications services in medium- and smaller-sized markets - faces "the increasingly challenging operating environment for all wireless carriers as the industry matures and competition becomes more fierce," Moody's said in its downgrade message.

The ratings agency said the downgrade "also reflects Moody's concerns that the anticipated cash flow growth of Nextel Partners will be more difficult to achieve, thus making impairment of the senior unsecured notes at Nextel Partners, Inc. more likely. While to date, the company has met or exceeded Moody's expectations for operating performance, Moody's has been concerned with the company's aggressive use of debt to finance its expansion, as reflected in our negative ratings outlook since last November."

Still, a market source said, the company's debt "wasn't even down a point," despite the downgrade. "It really didn't move."

He quoted Nextel Partners' 12½% senior notes due 2009 at 91 bid, off half a point.

Another telecom issue, Level 3 Communications Inc. 's benchmark 9 1/8% senior notes due 2008, was being quoted around 61 bid, which a trader said was up perhaps a point, "but not a whole lot; it's not like they ran away."

The bonds had firmed to that level on Tuesday, when news surfaced that the Broomfield, Colo.-based fiber optic network operator was in talks to buy Genuity Inc., a troubled Woburn, Mass.-based communications company. Among the roughly 3,000 customers Level 3 would pick up in the deal is one particularly big fish that Genuity was servicing - America Online Inc.

On Wednesday, Genuity - which defaulted on its credit line in July after former parent Verizon Communications Inc. declined to pick up its option to buy 80% of the company - announced that it had filed for bankruptcy protection to facilitate the sale of its assets for about $242 million to Level 3.

Earlier this year, Level 3 got a $500 million cash infusion from an investor group that included Berkshire Hathaway Inc., controlled by legendary Wall Street wise man Warren E. Buffett, whose implied seal of approval helped to lift the company's bonds and shares. Level 3 said it would be on the acquisition trail, and has inked several small deals for assets from distressed telecom companies, as well as acquisitions in software distribution, which now accounts for a large part of its revenues.

Outside of the communications sphere, El Paso Corp.'s bonds, which had fallen by as much as 10 points Tuesday after Moody's dropped the ratings on the Houston-based diversified energy company's senior unsecured debt to Ba2 from an investment-grade Baa3 previously, remained around those lower levels; a trader saw the company's 7½% notes due 2017 offered at 89 and its 7% notes due 2011 offered at 75, "but they were all left bid-without, with not a bid to be seen on them." He also saw subsidiary Coastal Corp.'s 7¾% notes due 2035 left offered at 67, likewise with no bids seen.

Dynegy Inc.'s 6 7/8% notes due 2011 were quoted a point lower, at 32, after the Houston -based merchant energy company's debt ratings were lowered Tuesday by Standard & Poor's. Still, a market-watcher said, that was the only movement he had seen in Dynegy on "a very quiet day."

While Dynegy "has taken concerted steps to bolster its financial liquidity and reduce the burden of debt leverage by divesting assets throughout 2002," said S&P analyst John Kennedy in cutting the company's corporate credit ratings to B from B+, "still, expected cash flow from Dynegy's reconstituted business plan is insufficient to fully offset the massive amount of debt leverage retained from the prior failed business strategy."

The analyst also said that the new company's new plan "does not provide a sizable amount of discretionary funds as net cash flow after maintenance capital expenditures for 2003 is about $100 million."

On the new-deal front, Levi Strauss & Co.'s new 12¼% senior notes due 2012, which priced Tuesday at 98.581 and then traded as high as 99.25 bid before falling back to go home around 98.375 bid/98.625 offered, straddling the issue price, firmed slightly Wednesday. A trader saw the bonds having opened at 98.75 bid, although he added that "there were no trades that I saw took place - probably just the manager supporting it - but bidding a quarter better than where it was offered" Tuesday night.

Beyond that, he said, "secondary trading was very very inactive." He saw no activity in Charter Communications Holdings LLC, whose benchmark 8 5/8% notes due 2009 continued to hang around the 50-51 bid neighborhood. They were unmoved despite the speculation Tuesday that the St. Louis-based Number-Four U.S. cable operator is might issue new stock and use the proceeds to pay down debt, a thesis advanced in a Goldman Sachs equity research report. Goldman said the new shares would likely be sold to current shareholders or to its controlling investor, billionaire Microsoft Corp. co-founder Paul Allen.

Allen, meantime, bought 845,940 shares of Charter Class A common stock at $29.61 apiece with interest, after exercising put options, according to a filing with the SEC. That lifts Allen's stock holdings to 19.8 million Class A common shares, he disclosed in the filing. Under terms of the 2001 put agreement, Allen agreed to purchase the stock for $25.85 a share plus 4.5% interest compounded annually, the filing said. After the transaction, 8.3 million Charter shares remain subject to the agreement.

The news boosted Charter's shares by 38 cents (26.21%) in Wednesday dealings to $1.83, on Nasdaq volume of 42.3 million shares, nearly five times the usual.

"No Charter numbers came out today, nor did anything really trade," he said, also noting that "Lucent is still pretty stagnant; Nextel, no movement there, "quoting the benchmark 9 3/8% notes at 92 bid/923 offered. "That's where they opened and closed, but there was no real trading."

The retailing sector, he continued, "is quiet," with "nothing happening" in such names as The Gap, Rite Aid Corp., Fleming Companies and Kmart Corp.

"If anything, it was the same as it was the day before," he concluded, "but not really a ton of trading. It was real, real quiet."

In the primary only Ball Corp. jarred the customary pre-holiday calm last Wednesday, as the market wound down toward the Thanksgiving hiatus. The Colorado container company was heard to be coming with $200 million to price before the middle of December.

One official from the high yield syndicate of an investment bank took stock late in Wednesday's abbreviated session and commented that the shortened week of Nov. 25 had been a productive one in which most of the signs seemed to be pointing in favorable directions for high yield.

"The market is very strong right now," the official said. "There is a strong bid in the secondary and there is liquidity to support good levels of primary new issuance.

"I think the performance of a lot of these deals in the secondary is probably making buyers of the new issues happy. Everything seems to be trading well."

In particular this official pointed to the pre-Thanksgiving week's big deal, R.H. Donnelley Corp.'s two-tranche $925 million note sale, a Rule 144A offering that upsized from $750 million on Nov. 26. Bookrunners were Salomon Smith Barney, Bear Stearns & Co. and Deutsche Bank Securities Inc.

Both tranches priced at the tight end of price talk that had been downwardly revised the previous day.

An upsized $325 million of eight-year senior notes (B1/B+) priced at par to yield 8 7/8% (talk was 8 7/8%-9%), and $600 million of 10-year senior subordinated notes (B2/B+) priced at par to yield 10 7/8%, at the tight end of the 10 7/8%-11% talk.

The sell-side source who spoke Wednesday with Prospect News said that the new Donnelley senior subs had been trading as high as 105 in the secondary market, and the seniors just a tad lower.

The official said that Donnelley, in addition to other recently transacted deals in the high-yield primary, and the recent run of consecutive inflows into high-yield mutual funds point to strength in the junk bond market.

"The inflows have been showing that there is good liquidity in the market that is supporting the primary forward calendar as well as secondary trading," the official commented.

Donnelley proved to be the locomotive on an eight-tranche train that roared through the primary market station during the week of Nov. 25, totaling $2.197 billion (face) of business transacted in the run-up to Thanksgiving.

In addition to Donnelley the only deal to come with a full roadshow was Grant Prideco which priced $175 million of seven-year senior notes (Ba3/BB-) at par on Nov. 25 to yield 9% (at the tight end of the 9%-9¼% price talk) via Deutsche Bank Securities.

The remaining five deals were drive-bys. They included:

--Lyondell Chemical Co.'s $337 million add-on to its 9½% senior notes due Dec. 15, 2008, upsized from $200 million and priced at 97.75 on Nov. 25 to yield 10.004% versus talk in the 10% area via Credit Suisse First Boston and JP Morgan,

--MDC Holdings' $150 million of 10-year senior notes (Ba1/BB+) which came at 98.942 on Nov. 25 to yield 7.15%, via Salomon Smith Barney,

--TriMas Corp.'s $85 million add-on to its 9 7/8% senior subordinated notes June 15, 2012 (B3/B) which priced at 101 on Nov. 25 to yield 9.684%, via Credit Suisse First Boston and JP Morgan,

--Vertis Inc.'s $100 million add-on to its 10 7/8% senior notes due June 15, 2009 (B2/B-) which priced at par, also on Nov. 25, via Deutsche Bank Securities and JP Morgan, and

--Levi Strauss & Co.'s upsized $425 million of 10-year senior notes (B3/BB-) which was increased from $300 million and priced on Nov. 26 at 98.581 to yield 12½%, via Salomon Smith Barney and Banc of America Securities.

And market sources on both the buy- and sell-sides tell Prospect News that the aftermath of Thanksgiving could prove to be uncharacteristically active as issuers continue to seek access to the high yield through a "window of opportunity," which, sources say, has opened since the equity market bottomed out during the first half of October.

"With the drive-by activity we saw last week, assuming no event occurs that will take liquidity out of the market or change the market's view, the first two-and-a-half to three weeks of December will be pretty active," commented the above-quoted official.

The only deal to appear last Wednesday, however, was Broomfield, Colo.-based container company Ball Corp., which for weeks had been heard to be in the market as it arranges financing for its $900 million acquisition of the European container company Schmalbach-Lubeca AG.

A syndicate source told Prospect News late in Wednesday's session that the roadshow is likely to begin shortly after the Thanksgiving holiday weekend on the company's $200 million of 10-year senior notes (Ba3/BB) via Lehman Brothers, Banc of America Securities and Deutsche Bank Securities.

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