Mirant bank debt up on planned lawsuit; Northwest Air lower on failed fare hike, higher oil

By Paul Deckelman and Sara Rosenberg

New York, June 17 - Mirant Corp.'s 2003 bank debt was very active on Friday at higher levels, traders said, after the company announced that it would be suing its former parent company Southern Co. for $2 billion.

In bond trading, United Airlines parent UAL Corp.'s bonds were seen little changed, despite important news out on the bankrupt airline company - but Northwest Airlines Corp. bonds were seen lower in unusually brisk activity for a normally lethargic near-summer Friday session, falling in tandem with the Eagan, Minn.-based air carrier's shares as oil prices - an indicator of what direction jet fuel prices will take - spiked up to all-time high closing levels, and Northwest was forced to back off a planned fare increase.

Mirant's '03 bank debt was seen trading up about a point in the 76.5 bid, 77.5 offered context, a trader said.

The $2 billion sought by the Atlanta-based energy company - now restructuring in Chapter 11 - is related to transfers made to Southern prior to Southern's spin-off of Mirant in April 2001.

"As detailed in the complaint, Southern Co. caused Mirant to incur a mountain of debt and then stripped out approximately $2 billion in payments and transfers in anticipation of Mirant's April 2001 spin-off, even though Southern knew or should have known that Mirant had been left with inadequate resources to meet the obligations that its former parent had caused it to incur," said Thomas E. Lauria, lead attorney for White & Case in Mirant's Chapter 11 case, in a news release.

"The Special Committee's investigation revealed that Southern had been advised as early as 1997 that its fledgling merchant energy subsidiary was undercapitalized and was creating potential regulatory issues for the utility giant. Without informing Mirant's management, Southern developed a strategy to capitalize on the then white-hot merchant energy sector to raise billions of dollars of financing, much of which Southern caused Mirant to flow upstream, only to then spin-off the debt-burdened subsidiary before its latent problems could come home to roost," Lauria added in the release.

The lawsuit was filed in the U.S. Bankruptcy Court for the Northern District of Texas, in Ft. Worth, where Mirant's Chapter 11 reorganization case is being heard.

Mirant's bonds were also higher in response to the lawsuit news, with a market source quoting the Mirant Corp. 7.40% notes that were to have matured last year at 80 bid, up from 78.5 previously, and its 7.90% notes due 2009 at 81.5 bid, up from, 80 bid on Thursday.

The company's Mirant Americans Generating Inc. (MAGI) 8½% notes due 2021 likewise moved up to 107 bid from 105.75 bid previously.

Federal-Mogul loans higher

Elsewhere in bank debt dealings, Federal-Mogul Corp.'s paper was also somewhat active on Friday at levels that were higher by about half a point on all tranches, although no specific news was seen as sparking the momentum.

The bankrupt asbestos-challenged Southfield, Mich., auto parts manufacturer's revolver and term loan A was quoted at 89.5 bid, 90.5 offered and its term loan B was quoted at 90 bid, 91 offered, according to a trader.

UAL bonds unchanged

Back in the bond pits, the airlines seemed to be about the only game in town where anything was really going on in the distressed world, traders said - and the action wasn't even universal there.

A trader noted that there was "nothing going on today" in UAL Corp.'s bonds despite plenty of news out. For one thing, the Chicago bankruptcy judge overseeing the Elk Grove Village, Ill.-based carrier's Chapter 11 reorganization granted the company's request for an extension of its exclusive right to file a reorganization plan, to Sept. 1, from the previous July 1 expiration.

And the union representing 20,000 of United's employees, the International Associations of Machinists and Aerospace Workers, reached agreement with the airline on a new five-year contract which includes major concessions - but also includes a new pension plan that the airline can't terminate unilaterally.

Published reports said that the contract grants United about $176 million in permanent annual cost savings.

The union said that it will divulge details of the contract next week.

Despite that news, however, the trader saw "no movement" in UAL's bonds, pegging them in the 13 bid, 15 offered area. Another trader also quoted them unchanged on the day, although he saw them at 13.5 bid, 14.5 offered. The bonds - which had been languishing in the single digits most of the year - recently pushed back into double-digit territory after UAL chief executive officer Glen Tilton expressed optimism that UAL - in bankruptcy since December 2002 - would emerge from Chapter 11 later this year, and would actually get back in the black in 2006, after years of red ink. The bonds recently peaked around 14.5 before easing back to present levels.

Northwest plummets

While Friday's news for UAL was all good - even if nobody in the bond pits chose to act on it - the news for Northwest Airlines was all bad.

Northwest "got killed," a trader said, blaming the downturn in its bonds on "insider selling [of the stock], oil back up at $58 and labor issues.

"I think they meet on the 20th with their unions again and who knows how that will go - there'll be some more bad headlines and the bonds will trade down" again.

They were already trading down Friday, he said, with the 10% notes due 2009 falling to 45.5 bid, 47.5 offered, down a point from Thursday's levels, and its 8 7/8% notes due 2006 half a point lower at 67 bid, 69 offered.

Another trader also saw the 8 7/8% notes at 67 bid, 68 offered, which he estimated was down a point, blaming the retreat on "a lack of any buyers, plus negative news," which he said "caused the paper to sell off huge."

Northwest's Nasdaq-traded shares dropped 36 cents (6.69%) to $5.02, although volume of 3.7 million was only slightly above the norm.

One factor being blamed was Northwest's failure to make a $10 per trip fare increase instituted Thursday stick.

After rival Delta Air Lines Inc. announced earlier this year that it would cap one-way fares at a maximum of $499 - well down from over $1,000 previously - Delta competitors like Northwest were forced to lower their own prices on many routes to stay competitive.

Trying to boost revenues, Northwest announced on June 9 that it would increase business fares by $50 each way - but it had to back off just three days later after Delta and American Airlines, failed to match it.

Northwest tried again to take fares up on Thursday, this time a more modest $10 rise over the $499 cap - but the result was the same. Northwest was forced to beat a hasty retreat just a day later, abandoning the fare hike. America West Airlines also raised fares and backed off - while bankrupt US Air Group and United, and Continental Airlines Corp. are still sticking - for the moment - to their $10 increase.

Northwest's failure to effectively break out of the straight jacket into which Delta's fare cut program placed it looms especially large as rising fuel prices continue to eat away at the bottom lines of Northwest and all the airlines.

Crude prices for July delivery jumped $1.89%, or 3.3% on the day and 9.2% on the week to close Friday on the New York Mercantile Exchange at $58.47 per barrel, easily eclipsing the previous all-time high close of $57.27, set back on April 1. During Friday's session crude also reached a new all-time intraday high of $58.60, blasting away the old peak of $58.28, set on April 4.

Crude oil prices are seen as a reliable indicator of probable future jet fuel price trends.

Delta's 8.30% notes due 2029 were steady Friday at 26.4 bid, 28 offered, although the struggling Atlanta-based carrier's benchmark 7.70% notes due 2005 gained a point to 87 bid, 88.5 offered on Delta's announcement it will swap equity for some of that '05 debt.

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