UAL bonds gyrate as mechanics throw plans into turmoil; Allegiance Telecom up on debt plans

By Paul Deckelman and Paul A. Harris

New York, Dec. 2 - United Airlines' bonds fell and then bounced back again as the troubled air carrier's plans for avoiding bankruptcy were thrown into disarray by a rejection by the machinists' union - which then went back into negotiations with the company and hammered out a new agreement, which will be subject to another vote.

Elsewhere, Allegiance Telecom Inc. debt firmed Monday in the aftermath of the company's pre-holiday announcement that it had amended its credit agreement and would be examining different options for cutting the size of its debt load.

In the primary sphere, the short run to Christmastime 2002 got underway, offering the market a glimpse at what sources say promises to be a comparatively high volume of business in the primary as the year draws to a close.

New deals and/or new details on already announced offerings emerged Monday from Ball Corp., Brickman Group Ltd., PerkinElmer, Inc. and Westport Resources Corp.

Market observers who returned to their offices from the Thanksgiving holidays on Monday were greeted with news that high-yield mutual funds had gobbled down another big plateful of cash, $730.6 million of it in the week ended this past Wednesday (Nov. 27). The numbers from AMG Data Services, normally released to the market on Thursday night or Friday, were delayed because of the Thanksgiving holiday.

An analysis of the statistics by Prospect News shows that over the past seven weeks in which inflows have been seen, some $3.91 billion more has come into the market than has left it, and overall cumulative net inflows for the year fattened to $7.275 billion from $6.544 billion.

With the inflow, the trader said, the market "opened with a bid" on Monday, particularly the new Dex East Media and R.H. Donnelley deals, both up another point from last week's levels.

He saw the Dex 9 7/8% senior notes at 106.75 bid/107.75 offered, while the 12 7/8% subordinated notes were at 108.75 bid/109.75 offered. The Donnelly 8 7/8% notes were at 105.25 bid/105.75 offered. Its 10 7/8% subordinated notes were at 106.75 bid/107.5 offered.

"They were all up," he said, "there's tons of cash around. People are just looking for ways to put their money to work."

Similar views were heard from primary desks.

"The market is hot," one sell-side official told Prospect News on Monday. "It's as good as it's been since June."

This source zeroed in on the 10-day time span from Nov. 12-21 and noted that Allied Waste North America priced a rapidly marketed, upsized offering of $300 million 10-year senior notes (Ba3/BB-) to yield 9¼% on Nov. 12 and just nine days later priced a $75 million add-on to those notes at 103.25 for a yield to worst of 8.669%.

Alluding to the short time span between the original deal and the add-on the source said: "It's not often you see that. If there is a single testament to the frothiness of the market that may be one.

"And despite our abbreviated week last week we had another huge inflow," the sell-sider added, the seventh consecutive inflow, the official noted.

"The trading levels of recently priced deals is another great barometer to the levels of subscription," added the sell-sider. "The fact that the R.H. Donnelley deal traded up four points on the break, despite the fact that price talk was revised downward, and the Grant Prideco bonds traded up three points on the break.

"These deals have been dramatically oversubscribed," the official commented, adding that subscription levels serve as evidence of a bond-hungry buy-side.

As other sell-side and buy-side sources have recently advised Prospect News, this sell sider said that what had been a buyer's market, as evinced especially by the investor-friendly terms of the Wynn Las Vegas LLC's $370 million of 13½% eight-year second mortgage notes that priced on Oct. 25, has lately become a seller's market, with upsized par-pricing deals coming at the tight end of and sometimes inside price talk.

"It is a testament to the fact that it's a market driven by technicals," the official stated. "There has been very little fundamental evidence that defaults are subsiding and that the economy has turned because we still have the threat of war out there which would undoubtedly close the market for some period of time.

"I think this cash continues to accumulate faster than people thought it possibly could," the sell-sider added. "My guess is that accounts will be saying they're stuck with 10% cash, and we can't put it to work. The secondary names have rallied to extreme levels: AK Steel's senior notes are trading at 7% flat. That is a hyper-cyclical Rust Belt company with a coupon that could be 200 basis points inside of Ford.

"That's absurd."

So far the rallying high-yield market has enticed comparatively healthy credits to the waterhole, the official commented. Given recent transactions, however, less robust issuers may soon begin to step out from the trees and venture forth in an attempt to slake their thirsts for capital.

"I think you are going to start seeing some much more sketchy single-B type transactions that have been put on ice for the last six months," the sell-sider commented.

As market activity got underway on Monday word circulated that a four-B name, Ball Corp., which has loomed for several weeks on the shadow calendar, will run a comparatively quick roadshow this week and then price $200 million of 10-year senior notes (Ba3/existing BB) on Thursday via Lehman Brothers, Deutsche Bank Securities Inc. and Banc of America Securities.

Also the roadshow began Monday for Brickman Group Ltd.'s $150 million of seven-year senior subordinated notes (B2/B). The Langhorne, Pa. landscaping company looks to price the deal Dec. 11 via CIBC World Markets and Lehman Brothers.

Details also emerged Monday on PerkinElmer, Inc.'s $225 million of 10-year senior subordinated notes. The roadshow will begin this week and pricing is expected to take place during the week of Dec. 16 via Merrill Lynch & Co.

And late in Monday's session word circulated that Westport Resources Corp. would bring a $300 million add-on to its 8¼% senior subordinated notes due Nov. 1, 2011 (existing ratings Ba3/B+), with the roadshow set to get underway in the middle of the present week, and pricing expected during the week of Dec. 9 via Credit Suisse First Boston, JP Morgan and Lehman Brothers.

The original Rule 144A offering of $275 million priced on Oct. 31, 2001.

Back in the secondary sphere, United Airlines, whose bonds had firmed several points in very light trading during Wednesday's abbreviated pre-holiday session, was rocked later that day by the results of the voting by members of the International Association of Machinists, representing mechanics and other ground employees. While the wing of the union representing 24,500 ramp workers and customer service agents approved some $800 million in wage concessions over a five-and-a-half-year period, the local representing the airline's 13,000 mechanics turned down the $700 million of concessions they were being asked to make, by an overwhelming 57-to-43 margin.

That caused Standard & Poor's to downgrade the airline's debt ratings, already at a weak CCC, to CCC- with the ratings agency warning that the mechanics' vote "makes bankruptcy virtually inevitable."

United was hoping to get unanimity from its employee groups on more than $5 billion of labor cost savings over the five-and-a-half year span, a key component of its efforts to come up with $14 billion of cost savings and/or revenue enhancements over that time; the airline hopes that this plan will convince the Airline Transport Stabilization Board to okay a $1.8 billion federal loan guarantee, without which UAL will be unable to borrow $2 billion it needs to tide itself over the rocky period until those cost cuts and revenue-raisers kick in. Without the machinists, the plan is virtually a dead duck.

Their rejection caused UAL's 10.67% notes due 2004 to fall from levels as high as 32.5 bid on Wednesday, before the vote, to levels as low as 20-21 bid, a trader said, in very thin trading on Friday, when there was a severely limited amount of market activity before an early (2 p.m. ET) close.

But executives of the airline and the leaders of the union - who understood that a bankruptcy filing could put all of the provisions of their hard-won labor contract at the uncertain mercy of a bankruptcy judge - pushed themselves away from their respective Thanksgiving tables and got back to the bargaining table, negotiating over the weekend to come up with a new accord that the recalcitrant rank-and-file mechanics will vote upon on Thursday. That vote is seen by most observers as the airline's absolute last chance to avoid a Chapter 11 filing in the near-term. However, even if the mechanics - the last holdouts among all of the unionized employees - do decide to get with the program and follow the lead of the pilots, the flight attendants and the other groups that have okayed the concessions, it still might not be enough to convince the skeptical ATSB, which earlier this year indicated that the airline would have to come up with a better plan to gain its support.

But the prospect that UAL might still not be able to get the loan guarantee, even with the cooperation of all of its unions, was on Monday far from the minds of investors relieved that the final chapter in the saga - 11 - has not yet been written. United shares jumped 83 cents (33.88%) in Monday dealings on the New York Stock Exchange to $3.28, on volume of 15 million shares, almost five times the usual.

On the bond side, the trader said, the 10.67% notes, which had finished at around 22 bid on Friday, pushed up seven points Monday to end at 29 bid/29.75 offered, regaining most of their lost ground.

However, another trader said that "from what we saw, there didn't seem like a whole lot of activity" in the bonds, based on the tumultuous dealings.

With the carrier's fate still figuratively - if not literally - up in the air, pending the outcome of the mechanics' vote on Thursday and the reaction of the federal loan guarantee board, United said on Monday that it was temporarily delaying the payment of $375 million of airline equipment-backed certificates what came due Monday, instead invoking a 10-day grace period built into the notes' indenture. That failure to make the equipment certificate payment in turn triggers grace periods on a $500 million credit agreement which United negotiated last month with the German bank Kreditanstalt fur Wiederaufbau; that agreement, which pushes off repayment of that debt until 2007, consists of a $300 million bank credit revolver, which has a seven-day grace period, and $200 million of aircraft equipment certificates, which also have a 10-day period.

It is expected that if the rank-and-file mechanics ignore the advice of their union leadership and reject this deal as well, that the airline would choose not to make the required debt payments in order to conserve cash for the upcoming restructuring.

Back on the ground, Allegiance Telecom debt "was up smartly," a trader said, in the wake of the Dallas-based telecommunications company's announcement late Wednesday, after pre-holiday trading had wrapped up for the day, that it had reached an agreement with its lenders to modify the financial terms on its $500 million credit accord, and would meantime explore ways to cut its total debt load.

Allegiance said that these could include an equity-for-debt exchange, or the issuance of new equity or equity derivative securities, with the proceeds used to pay down debt. Under terms of the amendment reached with the lenders, Allegiance must shave its debt burden from the current $1.2 billion level to $660 million by this coming April 30.

As could be expected, the prospect of new debt issuance sent its existing shares into the tank, down 25 cents (16.67%) to $1.25 Wednesday, on Nasdaq volume of 5.2 million shares, five times the usual turnover.

But on the bond side of the ledger, the trader said, Allegiance's 12 7/8% notes were "up significantly," to 24.25 bid/26 offered, from levels "just north of 20" before Wednesday's announcement.

Also on the telecom front, Level 3 Communications Inc. - which emerged last week as the buyer for the assets of troubled telecommer Genuity Inc. - was firmer, with its benchmark 9 1/8% senior notes due 2008 pushing up to 65.5 bid/67 offered from prior levels around 63. Time-Warner Telecom's 10 1/8% notes were "moving up," the trader said, rising to 57 bid/60 offered from previous levels in the lower 50s.

Nextel Partners Inc. shares rose nearly 22% on the session, on the news that an investment company controlled by Microsoft Corp. kingpin Bill Gates had raised its stake in the Kirkland, Wash.-based company - which markets Nextel Communications Inc.'s services to medium and small-sized markets - to 5.2%.

A trader said that Nextel Partners' 11% notes were "very well bid for," at levels "just south of 90." He also saw firmness in the regular Nextel debt.

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