Telecoms, airlines gain from upgrades; Kmart's bonds jolted, but end at a.m. levels

By Carlise Newman

Chicago, May 6 - Telecommunications companies WorldCom Inc. and Qwest Communications International Inc. continued to be at the hub of activity in distressed debt trading Tuesday, enjoying a mild but steady rally for the second day in a row.

The rise in telecom interest was partly due to an upgrade on the sector from Merrill Lynch & Co. equity analysts, said a trader, but also "just a not-so-new wave of confidence" in distressed telecom names.

On Tuesday Merrill strategist Richard Bernstein raised the rating of the sector to equal weight from underweight. Merrill Lynch analyst Adam Quinton said the sector's first-quarter results generally met or slightly topped Wall Street expectations.

A trader quoted WorldCom Inc.'s bonds at 32 bid/33 offered, two points higher than Monday's levels of 30 bid/31 offered.

Denver-based Qwest's 7% notes due 2009 climbed to 76 bid/77 offered from 70 bid/71 offered at Monday's close. The company's bank debt, "rising slowly but steadily" the past few days, was seen rising a ½ point to 97¾ bid/98½ offered, according to a trader.

In the report, Bernstein said he is moving the sector to equal weight because of changing quantitative attributes like improvements in the value of assets, the cost of capital and dividend payouts. Bernstein said he is stopping short of recommending an overweight rating in telecom because the sector still hasn't worked out all of its operational problems, and that could put some pressure on dividend payments.

Qwest had moved higher Monday after a long-awaited recommendation Friday from the Justice Department that the Federal Communications Commission approve Qwest's application to provide long-distance telephone service in Minnesota.

The Justice Department said Qwest has opened the local service market in Minnesota to competitors - the step required for incumbent phone companies like Qwest to be allowed to offer long distance.

Qwest got in trouble with Minnesota regulators for crafting what they said were illegal secret agreements with two local phone competitors that helped those rivals while hurting others. The utilities commission fined Qwest $26 million and ordered the company to extend 18 months of discounts to local competitors.

The airline sector saw "decent" gains Tuesday, also boosted by a sector upgrade, a trader said. Bear Stearns' equity analysts raised the sector to market weight from market underweight. Investors "have an opportunity to participate in the beginnings of a turnaround," wrote analyst David Strine in a research note.

Merrill Lynch upgraded the sector to buy from neutral on Friday.

American Airlines parent AMR Corp.'s 9% notes due 2012 were up three points Tuesday, to 57.5 bid/58.5 offered, after levels of 54.5 bid and 55.5 bid Monday, according to a trader.

"It's hard to believe they were in the teens so recently. But then it's hard to believe they'll stay where they are," one market source commented.

Continental Airlines 8% notes due 2005 were also higher, to 86 bid/88 offered, a full three points higher than Monday's levels of 83 bid/85 offered. United Airlines' parent UAL's 9¾% notes due 2021 were seen as high as 11 bid at one desk, while another quoted the notes at 9¾ bid/10 offered, up from levels around 6½ bid/7½ offered Monday.

Kmart Corp.'s bonds "were all over the place" said one trader. He said the 9 3/8% notes due 2006 opened at 16 bid/18 offered, then "dropped two, maybe three points" before ending the session back at opening levels.

"There was some news that they weren't going to emerge today, but then everyone settled down and they were bid back up," the trader said.

Indeed, on Tuesday morning, CNBC reported that Kmart may have to delay exiting its more than 15-month long bankruptcy proceedings due to one client's objections to the reorganization plan. Citing sources, the television network said that Eastman Kodak Co. continues to object to the plan and would try to solve the issues in court Tuesday.

Kmart announced its emergence later in the day, with no reports of Kodak's objections or plans to resolve the issues.

The Troy, Mich.-based retailer now has 600 fewer stores and new leadership since filing for protection from its creditors in early 2002. It also has a $2 billion loan to help it compete against rivals like Wal-Mart Stores Inc. and Target Corp.

Investor Edward Lampert's company, ESL Investments, is converting $2 billion in financial claims against Kmart into stock and will own a 49% stake in the firm.

In other news, Owens Corning Inc.'s bank debt was reportedly "very active," falling to 50 bid from 53 bid Monday, according to a market source.

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