U.S. Timberlands up on buyout plan, Sirius higher too; UAL lower on big loss

New York, Oct. 18 - U.S. Timberlands Co. L.P. bonds were quoted solidly higher on Friday on news that the company's management will take the company private. Sirius Satellite Radio Inc. also rose in response to the company's planned $1.2 billion debt-for-equity recapitalization. On the downside, United Air Lines bonds lost altitude after the troubled air carrier reported a yawning third-quarter loss.

In the primary arena, Friday's session was reported as generally quiet. The only exception was price talk from Nevada Power Co., which seemed to nearly jolt one investor from his seat.

U.S. Timberlands' 9 7/8% notes due 2007 were quoted around 60 bid, up about 12 points on the session, in response to news announced Thursday that the forest products concern has signed a definitive agreement to be acquired by an acquisition company formed by its management at a price of $3 per common unit.

The company's Nasdaq-traded stock jumped from prior trading levels under $1 to above $2.60 in Thursday's action, and edged up another two cents (0.76%) to $2.64 on Friday, on volume of 202,000 shares, nearly 12 times the average turnover.

Its bonds - normally not an issue seen trading around very much - were seen by one trader as having moved as high as 63 during the session, after opening around the 60-62 level.

The company said that the first step in the buyout transaction will be a stock tender offer, which is scheduled to begin within 15 business days. It said that consummation of the tender offer is subject to the completion of financing and the settlement of all outstanding class action litigation relating to the proposed going-private transaction.

Timberlands said a tentative settlement of the class action lawsuits has been reached, subject to court approval and other customary conditions.

Also on the deal front, the junk market - which on Thursday was largely unmoved by the news that Sirius Satellite Radio had reached agreement with its debtholders and other investors on a restructuring that will see $700 million of debt and $525 million of preferred stock exchanged for most of the company's equity - decided that it likes the plan and took the satellite radio broadcaster's bonds sharply higher.

A market watcher said that Sirius "moved up quite a bit" Friday. He quoted its 14½% coupon notes due 2009 as having jumped to around 45 bid from prior levels in the lower 20s, while its zero-coupon/15% discount notes due 2007 moved up to around 40 bid from previous levels in the upper teens.

He said he heard from a couple of sources on the street that "it looks like a straight arb play, based on where the stock is."

But while the bonds were up, the shares, which on Thursday had jumped 57% on initial news of the recapitalization deal, tumbled on Friday, as realization sank in that the deal will essentially wipe out current common and preferred stockholders. They each will get just 8% of the recapitalized company, versus 62% for the bondholders and 22% for an investment group putting in $200 million of fresh cash. The stock ended down 43 cents (32.58%) at 89 cents on the Nasdaq on volume of 15.4 million shares, about 10 times the norm.

United Air Lines bonds flew south Friday, after the carrier's parent, UAL Corp., reported a third-quarter loss of $889 million - its second-biggest quarterly deficit ever - and it warned that fourth-quarter results would likely be even worse.

Speculation mounted in the markets and the financial press that the troubled Number-Two U.S. air carrier might have to make an emergency landing in the bankruptcy courts sooner or later, although recently appointed CEO Glen Tilton declared in a statement that "at this point, nobody should consider a Chapter 11 filing inevitable."

The latest quarter's loss, amounting to $15.57 per share, was dwarfed only by the $1.16 billion ($21.23 per share) of red ink United recorded a year ago, as it reeled from the impact of the Sept. 11 terrorist attacks (which included the seizure and destruction of two UAL planes with all aboard). While less than last year's loss, the latest loss was larger than analysts had been anticipating.

UAL's shares, which had closed Thursday at $1.73, swooned as low as $1.42 during the session before recovering from those depths to end only two cents lower (1.16%) at $1.71. The late revival was spurred by the declaration by the Airline Pilots Association that four of the carrier's five unions - all but the International Association of Machinists - had reached an agreement in principle to cut wages by "well over" $1 billion yearly as part of a $2.5 billion cost-cutting package, including concessions from suppliers and other parties, that UAL hopes will convince Washington to give it $1.8 billion in loan guarantees. The machinists' union later said that it was in separate talks with the airline about participating in a $5.8 billion five-year labor savings plan.

On the bond front, a trader pegged the airline's bonds "down a couple of points" at 10 bid/12 offered from prior levels around 14 bid/17 offered.

Another trader said the bonds "were pretty abysmal as it was" even before the numbers came out. He quoted UAL long paper offered around 12 and short-dated paper offered at between 10 and 12.

An analyst said that he had heard the bonds quoted as high as 15 and as low as 10 during the session, with the quotes coming "very fast and furious."

He said he had heard "a lot of banter all day" about UAL, "just non-stop" following its earnings announcement, although he said it was uncertain whether there actually was a lot of trading going on or just quotes.

"There are a lot of people who want to know what it means, as well as the statement from the pilots union," which expressed optimism that the cuts the four unions had agreed to would go a long way toward helping pull United out of its financial hole.

The pilots' statement is "something which I think that some people would view as being somewhat of a potential bright light - but it's still far, far away," given that the federal loan guarantees are by no means assured - while United faces a $300 million debt payment due Nov. 17, a $575 million debt payment due Dec. 2 and a $70 million payback due to its mechanics in December.

"I think right now, most investors believe that [a bankruptcy filing] is kind of a fait accompli, that they are going to file," the analyst said. "I think that generally speaking, it would be a surprise if they did not file."

He refused to characterize Tilton's statement as just so much whistling past the grave yard, saying instead that "I would think that at least most of the people I talk to and most bondholders would say that the complexity of this is so much more enormous than US Air [which filed for bankruptcy earlier this year] and the time frame is so very short, [so] that it's very difficult to see them come to a reasonable conclusion, particularly when you have all of the inherent conflicts you have with the mechanics."

He noted that the IAM right now represents the United mechanics but a rival mechanics union, the Aircraft Mechanics Fraternal Association, which represents mechanics at Northwest Airlines, is breathing down the IAM's neck and could try to lure United's mechanics away from the Machinsts.

"AMFA is in various domiciles and certainly they're causing a lot of noise just about everywhere, so the IAM is really quite under the gun from their own membership. If they do give in [to the airline's demand for wage cuts], they could find themselves pretty much out of a job and they might find that there's another union representing the mechanics. So that makes the negotiations a little more complex and a little bit tougher than they were at US Air."

The analyst said that the existence of a rival mechanics' union pushing IAM to take a more militant stance or risk losing member support "increases the complexity of the situation and increases the odds of a bankruptcy. It's hard for the mechanics to go in lockstep with the other unions, when you have those kind of outside pressures."

He further pointed out that the retroactive pay matter "is a huge issue also. Remember, everybody else has already put the retroactive pay in their pocket, except for the mechanics," who are slated to get the first of several payments they are owed in December. "If they were able to put all that money in their pocket now, today, I think that you'd really have the foundation for an agreement. But that's a big chunk of change too, a lot of liquidity [for United] that's going to go away in a very short period of time, and that's what makes everything very, very tough."

Elsewhere, Lucent Technologies Inc., whose shares face a delisting by the New York Stock Exchange as its stock continues to languish under $1, said it would ask its shareholders to okay a reverse stock split aimed at boosting the company's share price to between $15 and $25. The idea failed to help the stock Friday, when it lost seven cents (9.33%) to end at 68 cents, and the bond market didn't seem very impressed with the scheme either.

A trader said Lucent bonds "actually traded up; they were up a couple of points [Thursday, before the stock-split plan was floated] and were up a couple of more points [Friday]."

He saw the company's longer-dated bonds as having moved up to about 31 bid/33 offered on Thursday from prior levels at 29 bid/30 offered, and as having added to those gains Friday, closing at 33 bid/35 offered. "And there were buyers around," he said.

The trader was not at all impressed with Lucent's plan for a reverse stock offer. "I don't know what a reverse stock split does for the bondholders," he said, adding that "in 95% of the reverse stock splits we've seen, the stock [eventually] goes back to the price it was trading at before it split. Go though history - that's what happens. I don't know why these people do it. It's silly - and the stock exchange is silly for letting it happen. What the hell difference does it make?"

A market observer called the move cosmetic, "smoke and mirrors to befuddle the rubes in the audience," and another market source agreed.

"I don't know if that's going to help the bonds. If anything, it probably hurts the bonds. It doesn't change the economics of the company. If they have cash problems, if they have revenue problems, the reverse split is not going to change that. Every reverse split I've ever seen has gone back down to the levels they were trading at, and went bankrupt. If it's a bankrupt company [Lucent is not, although there has been market speculation that it is headed in that direction], that's where they're going to go."

He quoted Lucent's 7¼% notes due 2006 at 41 bid and most of the company's other issues around 30 bid, little changed.

Another trader scoffed at "a reverse split for a 60 cent stock," calling Lucent's shares "a piece of crap."

He said that the bonds "had been better bid, even [Thursday]." In Friday's dealings, he saw the 2006 bonds as having opened at 39 bid/40 offered and then having moved up to bid levels around 41-42.

He noted that Lucent stock had moved up from bid levels around 36 at the beginning of the week, calling it "a pretty good move" but said that "it was a slow grind, not because of the [reverse stock split] news."

Among other issues, traders said that Charter Communications Holding Inc. was "up a bit, little today, up a couple of points," in the words of one trader, its 8 5/8% notes remaining in their recent 53-55 context. He called Nextel Communications Inc. paper "kind of static, moving sideways," with the 9 3/8% notes due 2009 still holding in the high 70s.

He saw Qwest Communications International Inc.'s operating company bonds down a point, while its holding company debt was up a point or so. "But it's just sideways trading," he lamented. "That could be just a buyer coming in, there's not that much offered out there. The dealers' shelves are pretty light, so if a buyer comes in, it moves the market."

A trader saw AES Corp. 9 3/8% notes as having opened and closed around 38-40. "I don't think they ran today. Today was pretty much a quiet day, with not a lot of participation in the street."

Meanwhile sell-side sources seemed to be demonstrating a mood that was if not jubilant then at least congratulatory with regard to the reported $206.7 million inflow into high-yield mutual funds for the week ending Oct. 16. According to sources Arcata, Calif.-based AMG Data Services reported that number, which stemmed three successive weeks of outflows that included the record-setting $1.4 billion outflow that was reported during the last week of September.

The inflow brings the total net inflow for the year to approximately $3.571 billion, according to a Prospect News analysis of the AMG figures, with inflows having been seen in 23 of the 42 weeks since the start of the year.

One sell-side official might have suspected divine provenance with regard to the reported inflow: an e-mail message conveying the number came beneath a subject box that read "Hallelujah!!!."

David Eshnaur, portfolio manager of the Buffalo High Yield Fund, seemed not to suspect a force from outside the field of time regarding the recent ebb and flow of cash in and out of high-yield mutual funds.

Rather Eshnaur suspects "timers."

"In August you saw a lot come in," he told Prospect News Friday.

"Before this week you saw three or four consecutive weeks of outflow," he added. "Then this week there were inflows.

"My guess is that you had people come in in August to capture the dividends that were paid in September. If you look at that one week back in August I think you had approximately $1.56 billion come in. And shortly after the dividends were paid in September you saw the $1.4 billion outflow.

"To me that would be timer money trying to capture the dividend."

Eshnaur added that while he could not vouch for market timing as an effective investment strategy this go-around it was conceivably effective. "It worked because the market rallied a couple of percent in that time period," he said.

There was little response to the AMG numbers in secondary trading.

"A $200 million inflow is not a staggering number," a trader said, "but hey, it's better than an outflow. And you could see there was a better bid to the market this week once the equity market took off. There's a correlation."

However, he added, "if the equity market takes off like that, it slows down our activity because [investors] focus on the equity portion, not the bond side, even though it drives the [bond] prices up. It's kind of like a Catch 22.

"Volume was down this week" as equities boomed, he concluded, "but definitely there was a better bid this week compared to last week across most of the sectors."

When Prospect News ran past Eshnaur a sell-side source's estimate that accounts are currently positioned at around 9% cash he seemed to think that figure was not entirely unreasonable.

"We're a little bit higher than that," he said. "Typically I like to keep 3% to 5%. But with the market as crazy as it is we haven't done anything except add to our cash."

Not long before the phone call to Eshnaur the day's sole shred of primary market news - price talk on Nevada Power's - had circulated and been confirmed by a syndicate source.

The $250 million of seven-year general and refunding mortgage notes series E (Ba2/BB) are talked at a yield in the 12% area. The Las Vegas-based public utility's Rule 144A deal via Lehman Brothers is expected to price Tuesday.

This time it was the buy-sider who seemed to be invoking divine provenance. "Holy smoke!" Eshnaur exclaimed when he heard the Nevada Power Co. talk.

When Prospect News suggested that in the current market investors may have issuers "over a barrel," he allowed that as far as it went that might be true.

"I'm not sure that the barrel's ready to be gotten over yet," he added. "I'm still pretty conservative on the market right now."

As to what he might be eyeing on the forward calendar, Eshnaur said that his fund would have a look at Ball Corp.'s approximately $200 million of senior notes (Ba3) via Lehman Brothers, Banc of America Securities and Deutsche Bank Securities Inc.

"It's a solid company," he commented. "That might be something we'd think about."

Prospect News also mentioned to Eshnaur a deal heard headed for transaction in November: Rexnord Corp. of Milwaukee, which will bring $225 million in bonds alongside a $435 million credit facility to be led by Deutsche Bank and Credit Suisse First Boston, according to an informed source.

Tom Jansen, chief financial officer of Rexnord Corp., told Prospect News on Friday that he hopes it can happen in November.

Jansen said that the company has no outstanding bonds but had issued high-yield notes back in 1987 and again in 1992.

"Nobody ever lost any money on our bonds," Jansen commented (see related story in today's issue).

As the week of Oct. 21 gets underway two deals are stationed on the forward calendar as business to be transacted. In addition to Nevada Power, Wynn Las Vegas, LLC/Capital Corp.'s $340 million of eight-year second mortgage notes (B3/CCC+) via joint bookrunners Deutsche Bank, Banc of America Securities, Bear Stearns & Co. and Dresdner Kleinwort Wasserstein, is scheduled to wrap up its roadshow on Tuesday. Proceeds from the public offering are slated to design, construct and equip the Le Rêve casino in Las Vegas.

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