Adelphia bonds continue retreat; Continental off on warning; asbestos bank debt firmer

By Paul Deckelman and Sara Rosenberg

New York, Jan. 6 - The bonds of Adelphia Communications Corp. continued to retreat on Thursday despite a lack of fresh negative news about the bankrupt Greenwood Village, Colo.-based cable operator.

Airline bonds remained under pressure, led by Continental Airlines Corp., which warned in a Securities and Exchange Commission filing that it absolutely had to have $500 million of employee wage and work-rule concessions in place by Feb. 28 or it would be facing a grim financial picture.

And bank loan players saw some gains in the paper of bankrupt asbestos-challenged companies such as USG Corp.

Adelphia "definitely traded lower today, mostly in the afternoon," a trader said, quoting the company's 10¼% notes due 2011 as having fallen to 98 bid from par previously, its 10¼% notes due 2006 as having dropped to 93 bid from 99.5, its 8 3/8% notes due 2008 backpedaling to 91.5 bid from 94, and its 9 7/8% notes due 2007 ending at 94, well down from prior levels around par.

At another desk, the 10¼% notes due 2006 were pegged down 2½ points on the day at 94.5, while its 10¼% notes due 2011 were seen two points lower at 98.25. That desk had the company's zero-coupon notes due 2008 down a point at 69 bid while its zero that was supposed to have come due in 2003 was 12½ points down at 104. And the trader there saw even bigger losses in the 7¾% notes due 2009, down 3½ points at 91, while its 7 7/8% notes due 2009 lost four points on the day to 90.

One trader suggested that the market was perhaps reacting to the Adelphia offer to the SEC several days ago to pay $300 million to resolve its legal problems, although it was pointed out elsewhere that this was essentially stale news. Another trader linked the retreat to investor angst as the deadline approaches for final bids in the bankruptcy auction though which Adelphia is offering its units - or the company itself - for sale.

Continental down sharply

Elsewhere, Continental Air's 8% notes due 2005, "which had been as good as the 98.5-99 area," a trader said, "had a meltdown" to 96-97, before ending at 96.75 bid, 97.25 offered.

That followed the company's warning in an SEC filing that if it did not get $500 million in annual wage and benefit cost reductions by Feb. 28, it "could ultimately result in the company having inadequate liquidity to meet its obligations."

The Houston-based carrier, the fifth largest in the United States, noted in its filing that using current numbers, its cost per available seat mile (CASM, a key airline industry financial metric) related to labor works out to be the second-highest among the major domestic airlines, after figuring in labor cost savings announced by such competitors as Delta Air Lines Inc., which got its pilots to agree to $1 billion of cost savings and otherwise further reduced employee costs, and those announced by carriers currently in bankruptcy, such as US Airways Group Inc. and United Airlines.

Even if it does get the $500 million of concessions it is seeking, Continental estimates that its labor CASM "would continue to be higher than many of our competitors," - but without that half-billion-dollar reduction, "we expect to lose hundreds of millions of dollars in 2005 under current market conditions."

Continental further pointed out that it has some $984 million in debt and pension payments coming due this year, about $500 million more in the way of obligations than it had to pay in 2004.

"Without the reduction in wage and benefits costs and a reasonable prospect of future profitability," Continental cautioned, "we believe that our ability to raise additional money through financings would be uncertain." It also projected that without the cost cuts, it might be forced "like many of our struggling competitors, to reduce our fleet, furlough more employees, and obtain larger wage and benefit reductions, and may potentially lose customers and revenue." It further said that without achieving the timely reductions, the airline probably won't get the approval from its board of directors to take the recently announced delivery of additional aircraft.

AMR Corp.'s long-dated bonds were seen offered at 70.5, with "not much change there," a trader said. He also saw the Number-One U.S. carrier's shorter stuff, like the 9% notes due 2012 and 2016, offered around 80, around where they went out Wednesday. AMR said Thursday that it would match the steep fare cuts and streamlined procedures that Delta Air Lines Inc. announced on Wednesday.

Also in the airline sector, the bankruptcy judge overseeing US Airways' reorganization agreed to a company motion to cancel the collective bargaining agreement between the Alexandria, Va.-based carrier and the International Association of Machinists, which could result in the loss of thousands of union jobs and pay cuts for the remaining union workers of up to 35%. He also permitted the company to terminate pension plans covering the mechanics and its flight attendants. However, the rulings by judge Stephen Mitchell would be nullified if the IAM members agree to a company-proposed package of more than $300 million in wage concessions and pension givebacks. The union agreed to put the plan up for a vote, with results expected later this month.

The provisional contract cancellation was opposed by the union, but the judge ruled that the IAM had not demonstrated that the massive and drastic relief sought by the company in canceling the contract and terminating the pensions was necessary to avoid imminent liquidation.

Asbestos loans gain

In bank loan dealings, asbestos names continued to move, with continued talk on legislation floating around. Both USG and Owens Corning were active with a stronger tone, according to a trader.

USG was quoted at 117½ bid, 118¼ offered, up about a half to three quarters of a point, the trader said. Owens Corning was quoted at 91 bid, 92 offered, pretty much unchanged to maybe up a touch on the bid side.

A trader in distressed bonds saw Chicago-based building products maker USG's bonds "moving up a little" to 132 bid, from prior levels around 130. Other asbestos bonds, he said, remained unchanged, with Toledo, Ohio-based insulation maker Owens Corning hovering around 85 and Federal-Mogul Corp. at 32 bid, 34 offered.

Washington is apparently making progress on crafting a claims payment mechanism that would stem the flood of asbestos lawsuits, with Senate Judiciary Committee chairman Arlen Specter (R.-Pa.) planning on holding a hearing on a draft proposal next week and aiming to wrap up action by the end of the month.

Gate Gourmet trades

Elsewhere, Gate Gourmet Inc.'s bank debt traded around 97, with a lot of dealers who were previously uninvolved in the name now quoting the paper, according to a market source. Surprisingly, the paper was pretty much unchanged, even though the company's interest payment was due, and although nothing definitive was heard day late day, lenders were not expecting the payment to be made.

"The group is taking appropriate actions in anticipation of the payments not being made," the source said. "Various things have been discussed. I can't really say anything on it. Nothing has been ruled out but nothing has been finalized."

Just what those options might entail is still unclear but the company may need to completely amend and restate its credit facility, get an equity infusion, or, worst case scenario, be forced into Chapter 11, a source previously explained.

A call for bank lenders - not held by the company - should take place some time early next week to discuss the situation, the source said, adding that originally the call was expected to occur on Friday but notices have not gone out yet so it probably won't happen until after the weekend.

There was call for mezzanine lenders earlier this week "but I'm not a part of that group so I don't know what was discussed", the source added.

In December, the company approached lenders, asking to defer loan amortization payments due Dec. 31 (although the company technically had until Thursday to make the payment) until April 1, 2005 and waive financial covenants for Dec. 31 due to liquidity concerns. The company had also asked mezzanine lenders to defer interest payments.

However, lenders did not sign off on the waiver, which means that if the Zurich, Switzerland-based airline catering company did indeed miss the payment deadline, then it has defaulted on its credit facility.

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