United Airlines bonds fly on union concession offer; Resource America deal postponed

By Paul Deckelman and Paul A. Harris

New York, Sept. 26 - United Airlines' battered bonds headed skyward on Thursday, as the troubled airline giant's unions offered $5 billion of concessions over five years in an effort to keep UAL out of bankruptcy and the airline indicated that it would carefully study the union proposal.

Things weren't going so well on the primary front, as Resource America Inc. pulled its planned $125 million offering off the table due to market conditions; new-deal players meanwhile mulled the ominous news that junk bond mutual funds had suffered a billion-dollar-plus mega-outflow in the week ended Wednesday, bringing to an end a four-week winning streak that had seen market liquidity improve substantially.

The bad news in junk outweighed the sighs of relief that might have been heard elsewhere in the capital markets Thursday as the Dow Jones Industrial Average closed its second straight positive day by gaining 155 points.

Arcata, Calif. financial information firm AMG Data Services reported $1.4 billion of outflows from high-yield mutual funds for the week ending Sept. 25, sources told Prospect News after the close of Thursday's session.

One sell-side source characterized it as a "MONSTER OUTFLOW" in a late email message.

Another sell-sider who spoke late Thursday on the telephone with Prospect News said: "Money is very skittish right now because of all this volatility so you're seeing it shift around.

"I think investors still have significant cash on the sidelines, though," the official added.

The outflow for the week ending Sept. 25 brings to a conclusion a succession of four inflows that included the record-breaking $1.56 billion inflow reported for the week ending Aug. 28 - a succession that totaled approximately $2 billion, according to one market source.

Nor was the funds flows data the only piece of negative news to hit the high-yield primary market on Thursday.

Philadelphia-based oil and natural gas development and transporting company Resource America, Inc. pulled its $125 million of new eight-year senior notes (B3/B), citing "volatile market conditions," according to a press release issued by the company.

"We and our advisors believed an opportunity to access the high yield markets at favorable rates was available," chairman, president, and CEO Edward E. Cohen stated in the release. "The volatility in the market since we announced our intent on September 13, 2002 has resulted in an indicated coupon which we feel can be improved upon in a more stable market environment."

Bear Stearns & Co. and Friedman Billings Ramsey were joint bookrunners.

In the wake of Resource America's disappearance one sell-side official commented that Resource America was "a small-EBITDA company, trying to be opportunistic.

"In this market what you've seen is the better quality companies continue to get decent execution," the official added.

Resource America intended to use the proceeds from its deal to redeem the company's $115 million of 12% senior notes and repay bank debt.

Since the Labor Day break sources on the sell-side have been telling Prospect News that the present circumstances in the U.S. economy in general and the high-yield market in particular favor "growth-acquisition" deals over "refinancing" deals.

One sell-side official told Prospect News Thursday that in the present circumstances it really only makes sense for issuers to bring refi deals if they are facing maturity issues with respect to their debts.

"Right now you're getting the benefit from a low-rate environment - your earnings and your EPS," the official said. "That's what the Street is focused on.

"If you term out your debt you're going to lose that. You're going to set yourself up for the longer term when rates eventually do rise but in the short term you're not going to get the benefit from whatever the delta is between the cost of your bank debt and the cost of what you'd have to issue in terms of longer-term fixed rate debt.

"Guys who go out and refi now are really trying to take care of maturities as opposed to trying to put more fixed-rate debt in the capital structure."

This official said that clearly the economy and the high-yield market now favor growth-acquisition junk bond deals.

"Those are the deals that people want to get into the market," the source said. "Those people want to make sure that their capital is in place so they can close their acquisition, whereas the refi guys, if they don't have any near-term maturities, can wait and play the yield curve and take advantage of the low rates on the short end."

Another official from the sell-side pointed to a spate of yellow pages directories acquisition deals heard to be headed into the market - QwestDex, BCE and Sprint - and commented that investors see these credits as "stable, steady-growth" companies.

"It's an easy business to get your arms around," the official said. "It's big and liquid, and the sector has performed well. The names that are out there, for the most part - TransWestern, Yell, TDL - have all done very well for investors.

"It looks like Qwest will be first, with a deal probably in about two weeks," this sell-sider added.

QwestDex is heard to be headed to the market with an offering of near $1 billion. And the sell-side official noted that the likely sizes of the directories deals will also be of importance to investors.

"The bigger deals are having appeal just because they are liquid," the source said. "You're sure of a lot of holders that are going to have paper in the market.

"You had the Jefferson Smurfit-Madison Dearborn deal. You have the directories deals. You have the Legrand deal coming out of Europe. And there is Burger King coming down the pike.

"Clearly everything that has been going on in the economy has forced a lot of companies to shed some non-core assets. And the buyout community has been the beneficiary of picking those up."

Back in the secondary arena, United Airlines "was up a lot," a trader said, on news of the union's offer to cooperate with management in cutting costs.

He quoted the carrier's 10.67% notes due 2004 up five points to 26.5 bid. UAL's 9 1/8% notes due 2012 were four points better at 20 bid.

United, the Number-Two U.S. carrier, warned some weeks ago that it might be forced to follow smaller competitor US Airways into an emergency landing in the bankruptcy courts unless it was able to get its costs under control, and laid out a plan to cut costs by $2.5 billion in the next year, with $1.5 billion of that to come from its unionized employees. The carrier's five unions rejected that notion out of hand, but said that they would give newly installed chief executive officer Glen Tilton their own counterproposal.

Although the union's offer came a few days after the airline's own self-imposed deadline, the carrier said it would study the plan and negotiate with the unions on it, raising the hopes of investors that some kind of compromise could be hammered out. United indicated to the unions that it will negotiate with the individual unions, to determine how the $1 billion of wage savings the unions are offering for this year could be divvied up.

UAL shares took wing on Thursday, rising 73 cents (33.03%) in New York Stock Exchange dealings to end at $2.94. Volume of 6.4 million shares was nearly triple the usual turnover.

The trader said that he "didn't really" see any movement in the bonds of the other air carriers in response to the UAL news, although he opined that they would probably benefit by United managing to avoid bankruptcy.

But while United was gaining altitude, back on the ground telecommunications equipment makers were encountering static.

Nortel Networks Corp. said late Wednesday that it expected third-quarter revenues from continuing operations to come in about 15% under second-quarter levels - down from the company's previous estimate of a sequential drop of up to 10% for the quarter.

The Toronto-based telecom equipment maker expected a marginally larger pro forma loss per share from continuing operations, before special items, in the third quarter, versus the nine cents per share pro forma loss seen in the second quarter. Nortel cited the continued deterioration of the overall telecommunications industry - the buyers of its equipment - in making the more pessimistic predictions.

Nortel's 6 1/8% notes due 2006 were quoted down four points at 34 bid/36 offered. Its shares, meantime, lost seven cents (10.94%) in NYSE dealings Thursday to end at 57 cents. Volume of 44 million shares was half again as much as the usual turnover. Nortel, whose once-robust share price has dwindled down into penny-stock territory over the past week or so, also outlined plans to boost its share price - and thus avoid the embarrassment of being de-listed - via a reverse split which could push its shares back up to between $10 and $20.

Nortel competitor Lucent Technologies Inc.'s bonds followed those of its Canadian rival, with its 7¼% notes due 2006 down two points at 44 bid/45 offered, while its 6.45% bonds due 2029 were also down a deuce at 32 bid/33 offered. Lucent's shares lost a dime (9.90%) to close NYSE dealings at 91 cents, on volume of 54 million shares, somewhat heavier than the usual 41 million.

The troubles of the equipment makers did not cast a total pall over the communications division; gainers included wireless player Nextel Communications Inc., whose zero-coupon notes due 2008 gained a point-and-a-quarter to end at 75.5 bid. Communications antenna operator Crown Castle International Corp.'s 10¾% notes due 2011 were quoted up three points at 68.5 bid, while international cabler Telewest Communications plc's 9 5/8% notes due 2006 were up more than three points at 20.5 bid.

Among the retailers, Gap Inc. picked Disney Corp. Theme park chief Paul Pressler to become its new chief executive officer, replacing Millard Drexler, who announced over the summer that he would leave the post. The San Francisco-based apparel maker is hoping that Pressler's experience in marketing one of the world's best-known brand names will stand him in good stead when it comes to marketing Gap's lines of brand-name denim and khaki clothing, although skeptics note that Pressler has no actual clothing industry experience.

Gap shares rose 46 cents (3.84%) to $12.45, but its bonds were seen little moved, with the 5¾% notes due 2009 quoted at 104 bid. A poster on an investment-oriented Internet message board speculated that "the bond market is more skeptical by nature. I would be very surprised if the bonds were bid up [Thursday]. The new CEO is inheriting a problem company; we don't know yet what his recipe for turning GPS around will be."

Fleming Cos., whose bonds had shot up dramatically over the two previous sessions on news that the Dallas-based groceries distributor would sell its money-losing retail operation, put the proceeds into cutting debt and concentrate on its core wholesale business, was heard to have eased slightly on Thursday.

"Fleming gave back some of the ground [it had gained]," a trader said, quoting its 9 7/8% notes due 2012 as having retreated to 57 bid/59 offered from prior levels around 61 bid/63 offered. But activity in the credit was restrained; a distressed-debt trader said he had "had inquiries in [Fleming] - but I saw no markets."

Fleming's biggest customer, troubled discount retailing giant Kmart Corp., was seen having rebounded a bit from recent lows, its 9 3/8% notes due 2006 quoted up about three points at 20 bid/21 offered.

A trader saw weakness meanwhile in the supermarket sector in general, with Winn-Dixie Stores' 8 7/8% notes at 97.75 bid/98.75 offered, down nearly two points.

Government figures showing a bigger-than-expected boost in new home sales in August helped the homebuilding sector to remain steady to up slightly, although it should be noted that the group has already been trading at very strong levels relative to the rest of the market. Shares of homebuilders went up after the Commerce Department reported that sales rose 1.9% to a record 996,000-unit annual pace, up from the revised 977,000-unit rate seen in July. The surge in new home sales was fueled by the lowest mortgage rates in years, which offset the negative factors of a still-soft economy and consumer worries about their own financial situations. The August totals came in well above the 980,000-unit pace that economists were expecting.

K. Hovnanian Enterprises' 8 7/8% notes due 2012 were up two points at 88 bid. KB Homes' 8 5/8% notes meanwhile were steady at 101.5 bid, while Ryland Homes' 8¼% notes were likewise hanging in at 100.5.

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