American Airlines bid up after stock upgrade; WorldCom, Adelphia still active

By Carlise Newman

Chicago, June 18 - Airlines were back in the picture Wednesday after Merrill Lynch & Co. upgraded the stock of AMR Inc., parent of American Airlines, elevating the sector.

Merrill Lynch analyst Michael Linenberg upgraded AMR to buy from neutral, citing the carrier's turnaround plan, its focus on liquidity and modest capital expenditure requirements for the next several years.

American's 9% notes due 2011 were quoted at 62.75 bid, 64.75 offered, a trader said, two points higher than Tuesday and a "good four points better than last week."

Linenberg noted that AMR's May revenue was up 4% and narrowed his June quarter loss estimate to $2.75 a share from a loss of $4. His full-year 2003 estimate goes to a loss of $12.50 from a loss of $15, and for 2004 he estimates a loss of $4.50, down from his original expectation of a loss of $7.25 a share.

Analysts are looking for a loss of $3.54 per share in the current quarter, a loss of $14.13 in 2003 and a loss of $4.42 in 2004. Linenberg's 12-month price target is $13.

UAL Corp., parent of bankrupt United Airlines, rose in sympathy. The Chicago-based airline's 9¾% notes due 2021 were quoted at 20 bid, a trader said, noting that they had been trading in "the high teens for a week or so" and were now a point and a half higher than Monday.

Atlanta-based Delta Airlines Inc.'s 8.18% notes due 2017 were quoted at 88 bid, 90 offered, a trader said, one point higher than Tuesday's levels of 87 bid, 88 offered, and three points higher than Friday's levels.

"We're still trading Delta but it looks like it'll be out of distressed levels soon," a trader said.

HealthSouth Corp.'s 7 5/8% notes due 2012 were quoted at 72 bid, 73 offered, "about a point and a half lower" than Tuesday, a distressed debt trader said.

The company, struggling with defaulted debt and criminal charges against former executives, now faces a legal battle from Richard Scrushy, its ousted chairman and chief executive.

Scrushy filed a lawsuit on Tuesday in Delaware against the company's board for excluding him from meetings and not updating him on the company's performance, his attorneys said.

Scrushy was removed as chairman and chief executive of HealthSouth, a physical therapy, outpatient surgery and diagnostic imaging business, after the Securities and Exchange Commission accused him and the company of accounting fraud, but he remains on the board of directors.

Scrushy is also facing insider trading charges from the SEC. No criminal charges have been filed against him, but 11 former HealthSouth accounting and finance executives, including all five former chief financial officers, have pleaded guilty to fraud charges.

HealthSouth, based in Birmingham, Ala., is required by law to inform its directors in advance of board meetings so they can attend, Scrushy's lawyers said in a statement.

"HRC has been steadily lower," a trader said, referring to the company's former stock symbol before it was placed on the Pink Sheets. "All the bad news, all the crap they've been going through, and more of it today, just keeps it underwater."

WorldCom Inc. was slightly higher Wednesday, even after the company on Tuesday said its revenue slipped in April - although operating revenue rose from the previous month.

WorldCom's 7½% notes due 2011 were up a point Monday to land at 27 bid, 28 offered a trader said. The bonds had been trading around 26 bid Tuesday, and 32 bid last week.

The company said revenue in April totaled $2.05 billion, down 2.4% from $2.1 billion in March. Operating income rose 36% to $114 million from $84 million.

The long-distance telephone and internet data company ended April with $3.7 billion in cash on hand, an increase of approximately $400 million from the beginning of the month.

WorldCom said its reorganization costs rose to $117 million in April from $48 million in March. These costs, which fluctuate monthly, were due to expenses for international lease rejections, severance and professional fees.

"There's no real reason for the bonds to trade higher. Actually it doesn't make that much sense," a trader said of WorldCom's move. "It's not much of a move though."

Elsewhere, the debt of two units of Adelphia Communications Corp. was active. Adelphia's Arahova Communications saw some movement in its 8 7/8% notes due 2007, which rose to 60 bid Wednesday from 58.5 bid Tuesday. Another trading desk quoted those bonds up 2.5 points from Tuesday to 62 bid.

Adelphia's Frontiervision unit bonds were unchanged; its 11% notes due 2006 were seen at 95 bid.

"There was no reason for a move today, no news on them. They've just been really active lately," a distressed debt trader said

The Greenwood Village, Colo.-based cable company has been wallowing in Chapter 11, and has faced numerous fraud allegations.

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