United hits more turbulence; YankeeNets hits home run; big Adelphia deal prices

By Paul Deckelman and Paul A. Harris

New York, Oct. 19 - United Airlines debt remained in a tailspin on Friday, continuing to fall on the perception that the second-largest U.S. airline is indeed in real trouble. On the upside, YankeeNets LLC's 12¾% senior notes due 2007 behaved like a champion for their holders, jumping sharply on news the professional sports team partnership is going to tender for those bonds.

In the primary market, Adelphia Communications Corp. brought a quickly (and quietly) shopped offering of new 10¼% five-year notes to market.

UAL's bonds, which had lost ground earlier in the week on news that chief executive officer James Goodwin had sent a letter to its employees warning that the carrier could go out of business if its financial problems continued, were once again losing altitude Friday, after the letter was actually distributed.

"Before Sept. 11, we were not in a comfortable financial state, with costs exceeding our revenue on a daily basis," Goodwin wrote. "Today, the situation is exacerbated with costs exceeding revenue at four times the pre-Sept. 11 rate. Today, we are literally hemorrhaging money.

"Clearly, this bleeding has to be stopped - and soon - or United will perish sometime next year. We need to get this loss rate down to zero. ... That will give us the breather we need to regain our bearings and start crawling back to profitability and begin to rebuild our balance sheet."

United's most active issue, the 9% notes due 2003, fell as low as 74 bid from prior levels in the mid 80s; its 10.67% notes due 2004 which had dropped to around 84 at mid-week from around 90 bid, were quoted down another 10 points, to around 74 bid; and its 9 1/8% notes due 2012 dipped to 73.5 bid from 79.25 previously.

"This was a good example of how the airlines are taking it on the chin" in the wake of the Sept. 11 terrorist attack, a market source said, although he noted no real movement in the bonds of any of the other carriers.

At another desk, a trader saw United's 9% notes due 2012 having fallen to offered levels below 80.

"There's no reason why they wouldn't get hit" in the current climate, he said. "Clearly, the market believes that the guys running the airlines don't know what they are doing," as evidenced by the fact that UAL and the others were all losing a ton of money even before the Sept. 11 terrorist strikes.

He opined that a number of players who invest in the airline industry have recently been swapping out of unsecured debentures - essentially, paper backed only by the airline's good name - and into equipment trust certificates, which are secured by liens against aircraft and other tangible assets.

"That way, even if they go bankrupt, there's still an income stream."

He said the sudden popularity of such asset-backed paper was by no means limited to the airline industry. "A lot of buyside guys are looking for secured paper of whatever type. In the energy sector, for instance, they like Abraxas Petroleum's senior paper, which is backed by (liens against) its refineries. Anything backed by assets will still pay, even if the company goes bankrupt."

Elsewhere, YankeeNets appeared to be the MVP of the day's trading, after Boss George Steinbrenner's brainchild announced that it was tendering for the 12¾% notes. They jumped from around 104 bid to 126.875, 50 basis points above the call price. The tender expires on Nov. 16.

Allegiance Telecom had what a market participant described as a "pretty nice move" despite a lack of fresh news about the company; its zero-coupon/11¾% notes rose to 37 bid, up five points, while its 12 7/8% paper was quoted up eight points to 62 bid.

But Global Crossing Holding Ltd.'s bonds were off three points across the board to 17. There was no movement seen in XO Communications Inc. debt, which had firmed over the past two sessions after the former NEXTLINK announced a deal with Microsoft Corp.'s bCentral small-business unit. Thursday's rumors of a possible buyout by Sprint fizzled out.

Trading otherwise was pretty much hit-and-miss, typical for a Friday afternoon, even with the summer now over. "It was even slower than usual. There is a lot of cash around - but mostly sitting on the sidelines," the trader said.

How much cash was demonstrated by the latest mutual fund flow numbers released by AMG Data Services; they showed $470 million more came into junk bond funds than left them in the week ended Oct. 17 - the first such weekly inflow seen in the aftermath of Sept. 11. In the five weeks before that, almost $1.6 billion had fled from the funds.

In the new-deal arena, Adelphia Communications' new 10¼% notes due 2006 "never even broke" into the secondary arena after pricing at 99.039, a trader said. "Credit Suisse First Boston just did the deal and moved on."

Adelphia's $500 million via Credit Suisse First Boston brought the curtain down on a week that saw a total of $900 million, factoring in BRL Universal's $100 million add-on on Oct. 16 and Smithfield Foods $300 million, upsized from $200 million, on Wednesday.

One investment banker told Prospect News that given the present circumstances of the primary market deals might be expected to start running the course from pre-launch to pricing very quickly indeed.

"The market before (Sept.) 11th was kind of finicky, and now it's really a mess," the banker said. "The problem is that it's swinging back and forth. It's causing people to not want to play because one day bonds are trading at 8¾%, the next day they're trading at 9%, and then back.

"So they want to catch it at just the right time. And maybe these windows are only two to three days long. So everyone has to be ready: the documentation has to be ready to come to market whenever the underwriter thinks it's the right time, and the company can agree upon it.

"I think we're going to see a lot of deals coming really fast now," he added. "No announcement or price talk or anything."

That was exactly what happened with Adelphia's offering which priced quickly with no roadshow or other advance notice.

That said, all the formalities are in place for at least four deals to price during the week of Oct. 22:

--Advance Auto Stores' $150 million add-on due 2008 (B3/B-);

--Dimon Inc.'s $175 million due 2011 (BB);

--Petco Animal Supplies $200 million due 2011 (B3/B);

--InSight Acquistion's $200 million due 2011 (B3/B-).

Also, there are a couple of deals standing by to price the week of Oct. 29: Pennzoil-Quaker State Co.'s $250 million and Tesoro Petroleum Corp.'s $215 million.

And off in the distance, are issues still sidelined in the wake of the Sept. 11 attacks, including Global Auto Logistiques €125 million, Westcorp's $250 million and Philippine Long Distance Telephone's $250 million.

One syndicate official, eyeing his forward calendar, allowed that although it is not a massive amount of business for the primary, it is nonetheless an indicator that the market is in business.

"There's some liquidity out there. And the first-time jitters are out of the way, here. We'll begin to see the backlog build up. It's just that right now it is actually very, very small," the banker said.

"I think people are going into secondary trading, now. And from what I hear people are paying way too much for your brand names, your better credits. And traders are happy to supply them with that, at those prices," he laughed. "Whereas your single-B issues are trading way off, even though their actual revenues may not have been hit hard by recent events.

"I think the issue here is just making sure people keep coming to market," the banker concluded. "We'll be able to get the good credits done. And the idea is to encourage those others, who need the money, to just take a slightly higher rate but still guarantee good execution."

End

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