Six Flags, Magellan debt slides on quarterly results

By Paul Deckelman and Paul A. Harris

New York, Aug. 13 - Theme park operator Six Flags Inc.'s website describes the Nitro roller-coaster ride at its Great Adventure amusement park in New Jersey as "the most explosive coaster on the planet, blast[ing] off to an unbelievable 230 feet with a 215-foot dive back to Earth at hyper-speeds approaching 80 m.p.h." Investors in the company's shares and debt could be forgiven if they thought they were riding the downward leg of the Nitro on Tuesday, or perhaps, the Medusa ("first floorless coaster in the world! Riders are strapped into a flying chair - with no floor under foot") as the securities slid wildly after the company released disappointing second-quarter results. Magellan Health Services debtholders were likewise riding the Great American Scream Machine as their company also issued negative results for the fiscal third quarter.

Six Flags had released its second-quarter results on Monday, reporting a net loss applicable to common stock of $11.5 million (12 cents a share), versus the year-ago profit of $7.7 million (8 cents a share). Excluding a one-time $18.5 million charge for early retirement of debt and other unusual items, Six Flags actually had a second-quarter profit of $12.6 million (8 cents a share) - but that was half of the 16 cents per share that Wall Street analysts had been projecting.

Second-quarter revenue fell about 2% to $347.8 million, versus $356.5 million a year earlier. The Oklahoma City, Okla.-based theme park company blamed the fall-off in attendance and profits on rainy and cool weather, economic uncertainties and potential terrorism fears.

After Prudential Securities downgraded Six Flags stock to "hold" from "buy", Goldman Sachs downgraded it to "market perform" from "trading," Salomon Smith Barney lowered it to "neutral" from outperform" and Lehman Brothers cut it to "equal-weight" from "overweight," Six Flags shares careened downward Tuesday like a runaway coaster, plummeting $6.80 (57.34%) to end at $5.06. New York Stock Exchange volume of nearly 24 million shares was about 40 times the usual 600,000-share turnover.

On the bond side, "Six Flags got killed [Tuesday]," market watcher said, quoting the company's 9¾% notes due 2007 as having plunged to 87.5 bid from prior levels around 99.625. Its 9½% notes due 2009 finished at 85 bid, well down from 98.625.

A trader at another desk agreed that Six Flags "was getting killed" on the earnings data, quoting the 93/4s at an 89-91 context and its 8 7/8% notes at 82 bid/84 offered, both down at least 10 to 12 points on the session.

Elsewhere, Magellan Health Services reported fiscal third-quarter earnings of $4.3 million (8 cents per share), versus $6.5 million (15 cents per share) a year earlier. While the Columbia, Md.-based provider of employee assistance programs and mental health benefits did say that net revenue increased slightly to $437 million from $432.8 million a year ago, it acknowledged that sales growth was slowed as membership failed to meet projections.

Among the factors it cited for its lower results were higher than anticipated Aetna membership losses, as well as higher care costs in one contract in its public sector division.

Magellan stock dropped 16 cents (13.91%) in NYSE dealings to 99 cents on volume of 855,000 shares, over four times normal.

Moody's Investors Service put the company's ratings, including the B3 rating on its senior unsecured notes and the Caa1 rating on its senior subordinated notes, under review for a possible downgrade.

The ratings agency said its review was "prompted by heightened concerns regarding the financing capabilities of the company, the near term potential for a covenant breach on Magellan's bank facility, as well as membership declines which have been slightly worse than anticipated."

Moody's added that while the existing ratings "assume that the company will successfully complete the refinancing of its bank facility," based on management's revised expectations for year-end 2002 EBITDA, "there is likely to be a covenant breach by September 30, 2002 under the existing agreement. While the company is actively pursuing refinancing alternatives, we believe the timing between potential completion of this refinancing and breach of covenants is extremely tight.

Magellan's 9 3/8% notes due 2008 were quoted 10 points lower, at 31.75 bid, while its 9 3/8% notes due 2007 were likewise down 10 at 64.5 bid. At another desk, Magellan's 9% notes due 2008 were seen down a more conservative two points, at 38 bid.

After the airline industry stock and bond debacle Monday, which saw United Airlines debt slide all the way down to about 29 bid from prior levels in the lower 40s on market fears that the nation's number-two air carrier could follow US Air into the bankruptcy courts if it didn't get federal approval on a $1.8 billion loan guarantee, UAL's bonds were seen having retreated a bit further, to the mid-20s, although traders said the airline group's fall was mostly a Monday story, with little other follow-through on Tuesday. However, Northwest Airlines' 8 3/8% notes due 2004, which had lost five points on Monday to close at 68 bid/71 offered, were seen down another five on Tuesday, to 63, while its 9 7/8% notes likewise dropped back to 61 bid. Air Canada's 10¼% notes due 2011 were seen eight points down, at 60 bid, essentially catching up to the rest of the pack.

Also from north of the border, a trader said that troubled AT&T Canada reported earnings late in the session, after trading had wound down, and that the figures "looked good" and should help the company's bonds firm on Wednesday.

The telecom operator saw a gain in revenues to C$384.8 million from C$375.167 million a year ago. While it posted a C$1.353 billion loss (C$9.30 per share) in the latest quarter versus a C$174.7 million loss (C$1.78 per share) a year ago, the company said that most of that was due to $C1.27 billion restructuring and long-lived asset write-down charge. EBITDA for the period was C$50.5 million.

The trader saw the company's 7.65%, 9.95% and 12% notes all recently trading in a 12-12.5 bid context and said they "should be better" on the company news - especially, he said, because the company plans to make the scheduled coupon payment on the 12% bonds, a subject of some concern recently to investors.

Overall, however, a trader said that "it was just very quiet, even with the Fed not doing anything on interest rates. There just was not much going on."

Reached before the shades went up on Tuesday's session one high yield buy-sider correctly predicted the action that would eventually be taken later in the day by the Federal Reserve's Federal Open Market Committee (FOMC), which voted unanimously to hold the fed funds rate at its four-decade low of 1.75%.

"What they should do is cut another quarter point, but they probably won't do anything," forecast the portfolio manager.

"Our outlook hasn't changed," the source added. "We've still got another rough quarter to go. That's when we'll get into the easy comps."

In the near term this investor does not look for meaningful improvement in the equity markets and concedes that such being the case it bodes ill for the high yield.

"I think it's going to be soft for a while," the buy-sider said.

"That's going to make it difficult for us," the source added. "It's going to keep issuers weak. It all depends on how accommodating banks are going to be, and right now I don't think they're too accommodating."

Finally during the brief early morning conversation with this portfolio manager Prospect News brought up the "funds flows" color heard Monday from Deutsche Bank Securities, Inc. co-head of high yield research Andrew W. Van Houten. With respect to the nine successive reported outflows from high-yield mutual funds, Van Houten told Prospect News that although the flows show no specific signs of turning around in the near term there is evidence that volume of cash flowing out of high yield is tapering off.

Perhaps and perhaps not, the buy-side source commented.

"The outflows might be diminishing, but how long will that continue when people get their September statements and see that their month is down another 4% or 5%?

"The outflows definitely concern me," the investor added.

Meanwhile in the high-yield primary market one single unit of news - price talk on URS Corp.'s deal - sent ripples across an otherwise still pool.

Meanwhile, with one and possibly two deals parked on the new issuance calendar for the week of Aug. 12, the high yield plowed ahead. Price talk of a yield in the 11½% area emerged on URS Corp.'s $250 million of seven-year senior notes (B1/B). The San Francisco engineering services firm's deal via Credit Suisse First Boston figures to price Wednesday afternoon.

However there was no news Tuesday on the other offering - Chukchansi/Gold Resort & Casino's $135 million of seven-year senior notes via Dresdner Kleinwort Wasserstein. The first-time issuer's deal, which is set to finance the Chukchansi tribe's new casino and resort complex in Coarsegold, Calif., will likely not be rated, according to an informed source who added that the deal started roadshowing late in the week of Aug. 5, and could price during the week of Aug. 12.

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