Airlines retreat on Delta cash flow warning; iStar, Moore price deals; Trump launches offering

By Paul Deckelman and Paul A. Harris

New York, March 11 - Airline sector bonds were pushed down on Tuesday, after Delta Air Lines Inc. released bearish first-quarter guidance and an airline trade group warned that a war with Iraq could cost the already ailing industry an additional $4 billion and lead to thousands of additional layoffs. Fleming Companies Inc. continued to retreat, with its subordinated issues dropping well into the teens.

In the primary sector, iStar Financial Inc. was heard by syndicate sources to have priced its $150 million offering of five-year senior notes while Moore North America Finance Inc. brought $400 million of ten-year senior notes to market, with both deals pricing at the tight end of pre-deal price talk. And Trump Hotels & Casino Resorts Inc. launched its long-awaited bond offering, which is expected to price Thursday - although with a substantially higher coupon than the gaming operator originally envisioned, a concession to investor reluctance to blindly sign onto the deal.

With two new deals pricing during Tuesday's session in the high-yield primary market new issuance was seen to pull ahead of the total new issuance that came during the first quarter of 2002. According to statistics gathered by Prospect News, year-to-date new issuance for 2003 at the close of Tuesday's session was $18.67 billion in proceeds, topping the 2002 first quarter number of $18.33 billion of proceeds.

In addition to being at the low end of talk, the 7% yield on iStar's $150 million offering hovers just 25 basis points north of the historically tight print of 6 7/8% achieved by Ball Corp. last December. Meanwhile, Moore North America Finance Corp. priced slightly over $400 million proceeds in a deal that came with an 8% yield.

Talk on the New York City-based finance company's deal (Ba1/BB+/BBB-), which came via bookrunner Deutsche Bank Securities, was 7%-7 1/8%.

In a press release issued shortly after the terms emerged, Catherine D. Rice, iStar's chief financial officer, commented: "We are pleased with the amount of interest we received in both the offering and the company. The offering was heavily oversubscribed, with significant participation from investment-grade buyers, enabling us to price the bonds at the tight end of the expected range."

Although the two offerings have different maturities, the 7% yield on iStar's new notes is the lowest the market has seen since Dec. 5 when Ball Corp. priced its upsized $300 million of 10-year senior notes (Ba3/BB) at par to yield 6 7/8% via Lehman Brothers, Deutsche Bank Securities and Banc of America Securities. Sell-side sources expressed confidence, at the time that the Ball Corp. deal priced, that it was a historically low yield for high yield.

Also pricing at the tight end of its talk on Tuesday was Stamford, Conn. digital information management company Moore North America's $403 million ($400,174,970 proceeds) of 7 7/8% eight-year senior notes (B1/BB-), which priced at 99.299, to yield 8%, at the tight end of the 8%-8 ¼% price talk. Salomon Smith Barney, Deutsche Bank Securities and Morgan Stanley were joint bookrunners.

"This was a 'middle-of-the-fairway' double-B deal, and people liked it," one informed source told Prospect News shortly after the Moore Corp. terms circulated the market.

Meanwhile having postponed an offering in May 2002, Trump had been rumored to be coming back to high yield since just before the new year.

The new deal, to be marketed Tuesday and Wednesday, is expected to price Thursday. The first tranche will be comprised of $400 million proceeds of first priority mortgage notes due 2010, non-callable for four years. The first priority mortgage notes will be sold at a discount. Price talk is for an 11 5/8% coupon and a 12¾% yield. The second tranche is comprised of $65 million of second priority mortgage notes. The second priority notes are anticipated to pay interest at the same rate as the first mortgage notes and additional interest in kind at a total rate to be determined. Donald J. Trump, may acquire up to $15 million of the second mortgage notes.

According to a press release issued Tuesday by the company the notes will be guaranteed on a secured basis, subject to certain exceptions and exclusions, by the subsidiaries of the issuers, which will include Trump's Castle Associates, LP, the owner of the Trump Marina Casino Resort in Atlantic City, N.J., Trump Indiana, Inc, the owner of the Trump Indiana Riverboat Casino in Gary, Ind., and THCR Management Services, LLC, which manages a casino owned by the Twenty-Nine Palms Band of Luiseno Mission Indians of California located near Palm Springs, Calif.

Deutsche Bank Securities, Credit Suisse First Boston and UBS Warburg are joint bookrunners on the Trump deal. Jefferies & Co. is co-manager.

Finally on Tuesday price talk of a yield in the 10½% area emerged on The Shaw Group's $250 million of seven-year senior notes (Ba2/BB). The Rule 144A deal, via Credit Suisse First Boston and UBS Warburg, is expected to price Wednesday afternoon.

When the new iStar Financial bonds were freed for secondary activity, they were heard to have firmed to 100.75 bid/101.25 offered, while the new Moores got as good as 102.25 bid/102.75 offered, both up from their par issue prices earlier in the session.

"Both did quite well," a trader said.

Meanwhile, Trump's existing Atlantic City Associates 11¼% first mortgage bonds due 2006 were up half a point at 76.5 bid/77.5 offered, after the launch of its parent company's new deal, although a trader said that he had seen odd-lot trades in the Trump A.C.s all over the place at levels ranging as low as 74.75 and as high as 81 bid.

At another desk, a trader quoted the Trump's Castle Funding 11¾% notes due this November, which are to be taken out with a portion of the new deal's proceeds, at 97.5 bid/99.5 offered. "It had a bid to it," he said, "but not much trading."

Back among already established bonds not being redeemed any time soon, airline industry debt "was rockin' and rollin," a market source quipped, as sector bonds and shares got clobbered on the latest salvos of bad news to hit the already reeling industry.

The source pegged American Airlines corporate parent AMR Corp.'s 9% notes due 2016 at about 15.5 bid, down from 18 on Monday, a day after bankruptcy talk swirled around the beleaguered carrier - the world's largest airline - amid reports that Dallas-based AMR had put out feelers on Wall Street about lining up as much as $2 billion of debtor-in-possession financing that it could draw on in the event it were forced into a crash landing in Chapter 11, the way rivals US Air Group and United Airlines were last year. Moody's Investors Service cut AMR's debt ratings, dropping its senior unsecured bonds to Caa2 and its senior implied rating to B3.

On the equity side Tuesday, AMR's New York Stock Exchange-traded shares - which had already lost 14% of their little remaining value on Monday - swooned another 82 cents (34.02%) Tuesday to end at $1.59 on the bankruptcy buzz, registering a five-fold jump in activity to 13.8 million shares. And they're likely to remain in their earthward nosedive on Wednesday, on the news - released after the market had closed - that Standard & Poor's will drop AMR from its prestigious and widely followed S&P 500 Index.

But the immediate disaster du jour for the airline sector on Tuesday was Delta, which warned that it will likely report a negative cash flow from operations for the current quarter. That represents a turnaround from the previous guidance coming from the Atlanta-based carrier, third largest in the U.S. behind American and United. In January, Delta had forecast that cash flow from operations would probably be slightly positive for the quarter. Delta blamed the worsened guidance on "depressed customer demand" in the face of a possible Mideast war, resulting in "soft traffic and bookings" .

Delta's 7.70% notes due 2005 fell to 56 bid/58 offered from previous levels around 61, while its shares lost $1.91 (22.06%) to close at $6.75 on NYSE volume of 9.7 million shares, about five times the norm.

The airlines "were sucking wind," a trader said, quoting Northwest Airlines Corp.'s 8 3/8% notes due 2004 as having fallen to 65 bid/67 offered from previous levels around 70 bid/71 offered.

At another desk, Northwest's 7 7/8% notes due 2008 were a point lower at 49.5 bid, while Continental Airlines Inc.'s 8% notes due 2005 were off nearly two points at 48 bid.

Northwest's shares lost 74 cents (10.57%) in Nasdaq trading to close at $6.26 on volume of 2.8 million shares, more than four times the average turnover. Continental's NYSE-traded shares were down 75 cents (15.06%) to $4.23, as volume about tripled to 3.2 million.

Besides the company-specific woes of AMR and Delta, the sector was also dragged lower on news that the Air Transport Association, an industry trade group, warned that the carriers - already wallowing in red ink - could lose up to $4 billion a quarter and be forced to slash another 70,000 jobs on top of the 100,000 lost in the wake of 9/11, should there be a war with Iraq and if the federal government does not give the industry more help.

Elsewhere, the bonds of the petroleum refining companies - which have been lately fattening up, at least in part, on the higher prices they are able to charge for jet fuel sold to the airlines - now over $1 per gallon - as well as rising gasoline prices - $2 per gallon at the pumps in some markets - continued to rise on Tuesday. Giant Industries' 11% notes due 2012 were seen three points better at around 88 bid, while Tesoro Petroleum Corp.'s 9 5/8% notes due 2012 were quoted by a market source to have moved as high as 88 bid/89 offered from prior "85ish" levels.

And while war jitters have affected the whole of the travel and leisure industry, non-airline segments seem to be feeling the pinch far less. Cruise ship operator Royal Caribbean Cruises' 8¾% notes due 2011 were seen up around two points at 91, while its 6¾% notes due 2008 continued to hover around 87 bid.

Fleming Companies Inc. bonds "were getting murdered," a trader said, quoting the Dallas-based grocery products distributor's 10 1/8% notes due 2008 as having dropped to 47 bid/49 offered and its 10 5/8% subordinated notes due 2007 as having plunged to 15 bid/17 offered, both levels about six points down from Monday's close, even though he said there was no fresh news out on the troubled company, which is currently under investigation by the Securities and Exchange Commission for accounting irregularities and which was forced to terminate its supply contract with its largest single customer, the bankrupt Kmart Corp., last month.

Another trader also noted Fleming's continued weakness, seeing its 9 7/8% subordinated notes at 15.5 bid/17 offered and its convertible bonds at 15 bid/18 offered. Fleming's NYSE-traded shares were off 21 cents (13.64%) to $1.33 as volume doubled to 2.5 million shares.

Market participants did not note any movement in the bonds of troubled international supermarket giant Royal Ahold NV, even though the Dutch based Ahold - which operates the Giant, Bi-Lo and Stop & Shop chains in the U.S. - named an interim chief financial officer, filling a post which was recently vacated, along with the CEO's office, when the company acknowledged accounting problems at its U.S. Foodservice unit.

Ahold's senior bonds, such as its 8¼% notes due 2010, had last been quoted around 80 bid, while its 6 7.8% notes due 2029 were last seen about 10 points lower.

Among other issuers, Level 3 Communications Inc.'s zero-coupon discount notes due 2010 were seen having traded up to 49 bid/50 offered from prior levels at 46 bid/47 offered. Revlon's 9% notes due 2006 were two points better at 65 bid/68 offered.

U.S. Steel's 10¾% notes due 2008 dropped to 98 bid/par offered from prior levels around 101.5 bid/102.5 offered, after the Pittsburgh-based steel giant cautioned that it expects to report both net and operating losses for the first quarter. Analysts had been looking for a profit of about 13 cents per share for the quarter. The company noted higher pension and other post-retirement benefit costs and a rise in natural gas prices.

From the distressed-debt desks, traders said that Magellan Health Services bonds were flat Tuesday, even as the company announced that it would make a prepackaged Chapter 11 filing. Magellan's 9% senior subordinated notes due 2008 were seen around 87 bid/89 offered, unchanged from Monday.

The news, he said, had been "widely anticipated."

Magellan said its restructuring has been agreed to by creditors holding 52% of its senior notes, 35% of its senior subordinated notes, 45% of Magellan's senior secured bank debt, and the company's largest customer, Aetna.

The reorganization plan includes a $50 million equity investment in reorganized Magellan through a rights offering to unsecured creditors. The company has obtained a commitment from holders of its senior subordinated notes to purchase any portion of the $50 million offering not subscribed to by other creditors.

Junk traders were also eyeing the nominally borderline investment-grade credit Bombardier, a Montreal-based transportation and aerospace group, whose bonds fell six to seven points.

S&P cut Bombardier's long-term corporate credit rating two notches to BBB- from BBB+ previously, the lowest rating of all the three major rating agencies. S&P also warned that Bombardier's credit rating would stay on its CreditWatch list with negative implications.

The ratings agency cited Bombardier's recent earnings warning, and the potential for significant charges relating to a change in accounting policy as evidence to a weakened financial state. The company warned last week its profit for the latest fiscal year would be less than forecasted by at least half.

"(Bombardier) was a palpable story and kept us busy," said a distressed debt trader. "Otherwise it was fairly quiet."

Another high-grade name warranting a look this week has been Ford Motor Co., after a Goldman Sachs analyst said March auto sales appeared to be running at a weak pace.

Ford's bonds had widened out about 80 basis points last week, and on Tuesday, its Baa1/BBB rated 7.45% notes due 2031 were seen having deteriorated another 20 basis points, to bid levels about 480 bps off comparable Treasuries.

"We may be welcoming Ford pretty soon," a junk market observer noted.

Ford shares lost 38 cents (5.44%) to close at $6.61.

(Carlise Newman contributed to this report.)

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.