UAL bonds dive on DIP funding; Fleming gyrates on SEC probe; funds see fifth straight inflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 14 - United Airlines bonds plummeted on Thursday on news that the troubled air carrier was lining up debtor-in-possession financing as a contingency against a possible bankruptcy filing. Fleming Cos. bonds were also lower - although improved from their low levels of the session - on news that the wholesale grocery distributor faces a Securities and Exchange Commission probe.

In primary-side activity, National Water Works turned on the spigots of a $200 million ten-year deal Thursday, slightly ahead of schedule.

Meantime, high-yield mutual funds saw a large net inflow for a fifth consecutive week, continuing a recent trend of easy liquidity that has helped spur both new-deal activity and secondary market buying.

Market sources said that AMG Data Services of Arcata, Calif. Was reporting that $332.5 million more came into the funds than left them during the week ended Wednesday. The weekly statistics are regarded by many market participants to be an accurate barometer of overall junk market liquidity trends.

The latest week's result was the fifth straight inflow, and followed a gigantic $1.104 billion inflow seen in the week ended Nov. 6. Over that five-week period, net inflows have totaled approximately $2.752 billion, according to a Prospect News analysis of the AMG figures, which only take into account funds that report on a weekly basis and do not include distributions.

For the year to date, net inflows increased to approximately $6.117 billion - the highest cumulative total of the year so far - from, the prior week's approximately $5.784 billion, according to the analysis of the AMG statistics. Inflows have not been seen in 27 out of the 46 weeks since the beginning of the year.

Observers wondered whether the latest inflow would convince market players that the recent rally is real and spur a sharp upturn ion buying; they noted that last week's huge inflow did no such thing, its effect blunted by the "tree-falling-in-the-deserted forest" effect produced by last Friday's abbreviated pre-holiday trading session, followed by Monday's Veteran's Day holiday market closure.

Traders have noted, however, a generally better tone to the market over the past several weeks, with some previously beleaguered issues having moved up smartly in that time.

In the primary, National Waterworks became November's third deal thus far to price at the tight end of its price talk, joining Owens-Brockway Glass Container Inc. (Nov. 5) and AmerisourceBergen Corp. (Nov. 12).

The Waco, Tex. waterworks firm late Thursday drained $200 million from investors who bought its 10-year senior subordinated notes (B3/B) at par with a yield of 10½% - at the tight end of the 10½%-10¾% price talk.

Goldman Sachs & Co. and JP Morgan were joint bookrunners. UBS Warburg was the co-manager.

"People have money to put to work," one high yield official said. "The equity markets were up again today. We saw some pretty good activity in the secondary market over the last couple of days. That leads you to believe that people are going to be putting money to work at the types of yields you've been seeing."

This official sounded an optimistic note regarding the two deals remaining to be priced during the week of Nov. 11. Cummins Inc.'s $200 million of eight-year senior notes (Ba2/BB+/BB-) via Salomon Smith Barney and JP Morgan should fare well on the strength of the company, the official said.

As for Constar International, Inc., its $175 million of 10-year senior subordinated notes (B3/B) via Salomon Smith Barney and Deutsche Bank Securities Inc. - the deal to help fund the spin-off of Constar from Crown Cork & Seal, and to repay debt to Crown Cork & Seal - the official also expressed optimism.

"If Wynn Las Vegas can get a deal done for a private finance-type of operation I think Constar can get a deal done too - in the 11¼%-11½%-type of area."

Noting that price talk on Constar's notes is 10¾%-11%, the official added that prior to pricing the bond deal the company needs to complete its IPO. "With the problems that they've been having with the equity deal and the fact that investors know that they need the money they're going to be penalized a little bit," the sell-sider said.

This official also shared information about the largest-proceeds deal presently in the high-yield primary, R.H. Donnelley Corp.'s $750 million in two tranches via Salomon Smith Barney, Bear Stearns and Deutsche Bank Securities, which is the second of the directories deals to come in the autumn of 2002.

Disclosing that the roadshow started on Tuesday Nov. 12, the official said that Donnelley is "going pretty well.

"It was in New York today," the source added, "The roadshow luncheon was very well-attended.

"I think the way Dex Media is trading Donnelley won't have a problem getting good execution - right where Dex is now."

The source reported recently seeing the new Dex notes trading at 103.5-104, down from a high of 105.

Aside from the straight-up junk bond deals poised to price during the second half of November, this sell-sider also expressed interest in the high-grade deal coming from TECO Energy Inc.: $240 million of senior notes due 2007 (Baa2 negative/BBB- negative) set to price Friday afternoon via sole bookrunner Credit Suisse First Boston.

The price talk on TECO's new notes, the official exclaimed, is 12½% area.

"When was the last time we saw a company with six Bs pricing at 12½%?" the source asked.

"Just think how painful it is for that company to repay debt. They have bonds that are maturing literally in the next 30 days. They waited too long to refinance their bonds. As a result the market is making them pay up to take them out. Plus their performance has been declining and they are on negative watch by the rating agencies.

"As soon as an investment-grade company starts dropping down they lose access to the capital markets. They're dead." (see related story on the TECO Energy deal in this issue)

Back in the secondary, among the names benefiting from the improved tone recently was United Airlines. A battered name which seemed to have rebounded nicely, its 10.67% bonds had gained substantial altitude in the last few sessions, climbing as high as 42 bid from levels around 20 in the recent past, helped by the overall better tone of the market, news that the company had paid the Nov. 1 coupon on those bonds, news that it had rescheduled $500 million of soon-maturing debt, and news that it's pilot's union had agreed to a $2.2 billion five-year package of wage concessions - a key step in the airline's efforts to win still more concessions from its other unions.

But those bonds, as well as the airline's other debt, had retreated somewhat in recent days on a mixture of profit-taking off the heady gains, combined with lingering investor skepticism that the Chicago-based Number-Two U.S. carrier would really be able to avoid following smaller rival U.S. Air Group into bankruptcy.

That skepticism was back with renewed vigor on Thursday, as the bonds and shares fell sharply on the news that United was trying to line up $2 billion of DIP financing for use if it were to enter bankruptcy. DIP financing provides the liquidity which a bankrupt company needs to continue its operations while it restructures.

On Wednesday, United's recently installed chief executive officer, Glenn Tilton, told the New York Times that UAL would file for bankruptcy by Dec. 2 if it were to be unsuccessful in obtaining other financing, including the $1.8 billion of federal loan guarantees it has been seeking.

There was no immediate word on which banks would likely provide the financing, although news reports mentioned J.P. Morgan Chase, Citigroup and GE Capital, all of which are major DIP lenders, as likely lead banks in a UAL DIP transaction. At $2 billion, such a financing would match the largest previous DIP laons, which were extended to Kmart Corp. and to WorldCom Inc., both of which are currently in Chapter 11 proceedings.

While the fact that the company is trying to line up DIP funding does not in and of itself absolutely mean that United will seek bankruptcy protection from its junk bond holders and other creditors, it does indicate that such a course is at the very least quite possible, if not likely.

Accordingly, UAL's 10.67% bonds - which by Wednesday had fallen back to the mid 30s from their prior highs above 40 - dropped 10 or 11 points Thursday traders said, closing at around 25 bid, down from 36 previously.

"United just crapped out," a trader said, in quoting the airline's debt sharply lower.

At another desk, its 9¾% notes due 2021, which had recently been bid in the mid-to-high 20s, were heard offered at 24, with no bids seen.

"There's a lot of weakness there," a trader said.

There was some discussion in the market whether the UALs were trading flat, or without accrued interest - something that usually occurs when a credit defaults or files for bankruptcy, or is perceived by the market as being on the verge of doing so.

One market source opined that it was his belief that United debt had not previously traded flat - but that the 10.67% paper was doing so on Thursday.

"I'll say this for the capital markets - once a bond starts trading flat, they're rarely wrong about this [possibility of a coming default or bankruptcy]."

But a trader said that UAL debt had, in fact traded flat before, several weeks ago, when things looked darker for the airline before the coupon payment and the other good news, and asserted that if it were trading flat Thursday, it was thus, "not such a big deal, especially after the news today.

"I'd seen them flat before," he added, "I think it's just how you can negotiate it."

UAL shares meanwhile nosedived 55 cents (14.99%) to close at $3.12.

Elsewhere, another major downsider on Thursday was the bonds of Fleming Cos., which had announced late Wednesday that it had been informed that the SEC plans to conduct an informal inquiry into a number of matters related to Fleming, including previous media speculation regarding Fleming's vendor trade practices; the presentation of second- quarter 2001 adjusted earnings per share data in Fleming's second quarter 2001 and 2002 earnings press releases; the company's accounting for drop-ship sales transactions with an unaffiliated vendor in Fleming's discontinued retail operations; and the company's calculation of comparable store sales in its discontinued retail operations.

Fleming said it would cooperate with the probe.

That news came too late to affect Wednesday's dealings, but on Thursday, Fleming "was the name du jour," a trader said, although he noted that it "definitely saw a rebound" off their lows of the day.

Fleming's 10 1/8% senior notes due 2008, which on Wednesday had ended trading at 88.5 bid/89.5 offered, opened way down, at 78 bid, and fell as low as a wide 72 bid/80 offered as the market digested the news. But by the end of the day, those bonds had cone at least part of the way back to end around 81 bid/83 offered.

"They recouped a lot," the trader said. They were down four or five points on the day - but off their lows."

Another trader saw Fleming's 10 5/8% notes due 2007 as having fallen as low as 58 bid from Wednesday's close at 66 bid/67 offered. But by the end of the day, he pegged them at 61 bid/63 offered.

Fleming, he said, "was where 99% of the action was."

The SEC news - making Fleming the latest in a long line of companies which have come under intense regulatory scrutiny - was seen to have completely overshadowed its good news, released earlier Wednesday, that it had agreed to sell 28 of its Food4Less retail food stores in California to Save-Mart Supermarkets, for as much as $165 million. The sale is part of the Dallas-based wholesale grocery supplier's previously announced plans to unload 112 underperforming retail supermarkets, allowing the company to use the proceeds to cut debt, while it concentrates on its core wholesale business.

Fleming shares fell 89 cents (14.83%) to $5.11 in Thursday's dealings.

Also in the supermarket aisle, Pathmark Stores 8¾% notes due 2012, which had fallen nearly 10 points to around the 80 bid level on Wednesday after the Carteret, N.J.-based supermarket operator's issued an earnings warning, were seen unchanged at those lower levels on Thursday.

Elsewhere, Echostar DBS reported a third-quarter loss of $168 million, or 35 cents a share, versus a $3.1 million profit a year earlier, although most of the Littleton, Colo,-based satellite broadcaster's loss was attributable to a $134 million charge relating to Vivendi Universal's $1.5 billion investment in EchoStar this year and $40 million of unrealized investment losses.

Echostar's 9 3/8% notes which on Wednesday had ended at 102.5 bid/103.5 offered, bottomed at 100.5 bid/101 on Thursday before firming slightly off its lows to end the day at 101.5 bid/102, down a point on the session.

CMS Energy's 8.90% notes due 2008 were a point better, at 80 bid, after the Dearborn, Mich.-based utility and merchant energy generating company reported net income of $23 million (16 cents a share) - reversing a net loss of $569 million, or $4.29 a share, in the year-ago period.

The company also said it will probably have to restate its 2000 and 2001 financial results, according to a review by its new auditor, Ernst & Young. But CMS expects a net positive effect to earnings because of the restatements, which it said were unrelated to recent revelations of bogus "round-trip trading" involving CMS and other merchant energy providers.

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