UAL leads airlines lower; JetBlue held firm by put; AirTran deal in rough weather; CIT takes off on debut

By Kenneth Lim

Boston, April 22 - Airlines crashed on Tuesday as oil prices hit a record high and United Airlines parent UAL Corp. reported a first-quarter loss.

AirTran Holdings Inc.'s planned $65 million offering of convertible senior notes was a victim before it even priced, with investors holding back on concerns about the company's operational viability and its credit.

By contrast, CIT Group Inc.'s newly priced 8.75% perpetual convertible preferreds took off on their first day of trading on the secondary market, easily gaining 8% outright on views that the deal came cheap.

The market in general had a lackluster session, a sellside convertible trader said.

"Everything's moving down," the trader said. "It happens. It's suppose to happen every once in a while, and today's one of those days."

UAL collapses

UAL Corp.'s 4.5% convertible due 2021 fell about 25 points outright as the common tumbled on the airline's disappointing results and concerns that high fuel costs would taint the outlook.

The convertible was offered at 76.5 against a stock price of $14.50 early Tuesday, but there were no takers. The convertible was last seen at about 67.5 versus the closing stock price of $13.55. UAL common stock (Nasdaq: UAUA) fell 36.77% or $7.88 on Tuesday.

"Nobody wants to touch them, that's the problem," a buyside trader said.

Chicago-based UAL, which controls United Airlines, reported a $537 million first-quarter loss and said it is cutting flights and about 1,100 jobs. The company blamed high oil prices, which neared a record $120 per barrel on Tuesday.

UAL chief financial officer Jake Brace told analysts that the company still has about $2.9 billion in cash and will be able to meet its debt obligations.

"I don't think it was that big of a surprise, actually," the buysider said. "Everyone knew how much oil had gone up. I think it was a combination of a few things. The loss was worse than expected, oil prices are climbing faster than people like, and there's an atmosphere of concern about the economy in general."

Despite Brace's assurance about the company's ability to service its debt, investors remain skeptical, the buysider said.

"The put's too far out to support the bond at this time," the buysider said. "UAL just came out of bankruptcy so there's still a lot of baggage and uncertainty in their credit, and by the look of things they're not out of the woods yet. I wouldn't buy these, I don't know who will."

Despite the sharp drop in the value of the convertibles, UAL convertibles saw only light trading.

"What do we mean when we say what's active?" a sellside convertible trader said. "It means that there's somebody out to sell them and to buy them. I see the stock back on April 2 this month, it was $22, it's $13 and change now...why would you want to buy airline paper?"

Another buysider said airlines were off the radar as far as he is concerned.

"We have a couple of old positions...which now we wish we hadn't had," the second buysider said. "I don't think we have any interest at all [in the sector] now."

JetBlue trades to put

JetBlue Airways Corp.'s 3.5% convertible due 2033 held steady with a put approaching in July.

The convertible was marked at 98.25 bid, 98.75 offered against a stock price of $4.90, unchanged from the previous session. JetBlue common stock (Nasdaq: JBLU) closed at $4.65, lower by 5.68% or $0.28.

JetBlue also reported a first-quarter loss of $8 million on Tuesday. The New York-based airline narrowed its loss from a year ago and actually beat estimates by about 3 cents per share.

"I wouldn't say JetBlue's come out of this unscathed," a trader said. "It's trading to put, so it's not trading to the stock. I think earnings gave a little bit of comfort, but I think the bigger issues are still there."

AirTran offering struggles

AirTran's planned $65 million offering of seven-year convertible senior notes failed to draw significant interest on Tuesday.

The deal is talked at a coupon of 5% to 5.5% and an initial conversion premium of 20% to 25% and slated to price Thursday after the market closes. AirTran common stock (NYSE: AAI) fell 20.83% or $0.95 to close at $3.61 on Tuesday.

"The sector got destroyed today, absolutely destroyed," a sellside desk analyst said. "I'd be very curious to see if this gets done at all. It's tough for any of these guys to raise capital at this time."

AirTran is offering the convertibles at par. There is an over-allotment option for a further $9.75 million.

Morgan Stanley & Co. Inc. is the bookrunner of the registered shelf offering.

There is a concurrent common stock offering of 14.25 million common shares with a greenshoe for an additional 2.1375 million common shares.

AirTran, an Orlando, Fla.-based airline, said it will place part of the proceeds from the notes offering into an escrow account to fund the first six interest payment. The rest of the proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, debt retirement and strategic investments.

"They need that much money just to pay for all that fuel for the next six months," a convertible trader said. "Unless someone comes out with a bailout plan for the entire industry or they start charging $1,000 to fly from Boston to New York, the whole industry is going to be in trouble. There's a lot of hope and prayer in that deal."

The trader said buying the AirTran convertible was essentially taking a short position on oil prices.

"This is your short oil play," the trader said. "You're shorting oil if you're buying the airline. If oil prices go down, the airlines do better...I wouldn't buy these."

A common response among market players was that the deal was suffering from an extremely low level of interest.

"You know what? I'd be actually surprised to see really big demand," the trader said. "I see all the other airline stocks getting beaten up, I'd think they might just call it off."

A Connecticut-based buysider echoed that thought: "It's kind of a small deal, I'm really not sure if we're looking at it closely. I don't think anybody is, actually."

A low stock price under other circumstances could make a new convertible's conversion premium easier to swallow, but that was not the case when AirTran's common stock crashed on Tuesday. The desk analyst said.

"Not if they think the company's going out of business," the analyst said. "Here's the thing about airlines and convertibles. Convertible paper is almost always senior unsecured. Most airlines have their assets secured elsewhere, so in a liquidation scenario, at the end there's very little for unsecured creditors."

CIT surges on debut

CIT Group's newly priced 8.75% perpetual convertible preferred gained 4 points outright on Tuesday amid strong demand for the paper.

The $500 million deal priced with an initial conversion premium of 15% over a stock price of $11 per share - the issue price of a concurrent $1 billion common stock offering.

The preferred, which was offered at par of $50, traded at 54 against a stock price of $10.90 on Tuesday. CIT common stock (NYSE: CIT) closed at $10.75, lower by $1.99 or 15.62%.

"We couldn't get any," a buysider griped.

The terms were fixed before price talk, market sources said.

There is an over-allotment option for a further $75 million.

JPMorgan Securities, Morgan Stanley & Co. Inc., Lehman Brothers Inc. and Citigroup Global Markets Inc. were the bookrunners of the registered shelf offering.

CIT Group, a New York-based commercial finance company, said it will use the proceeds for general corporate purposes. The proceeds from the common stock offering will pay for about $8 million in dividends on the company's outstanding preferred stock in the second quarter of 2008 and about $23 million in interest due on its outstanding junior subordinated notes in the third quarter of 2008.

Trading was concentrated mostly in the morning, a sellside trader said. The deal was probably not mispriced, the trader added.

"I think they don't really have much of a choice," the trader said. "The capital base is so bad that they have to 'misprice' them a little just to get them done."

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