Junk response to stock surge restrained; battered airline bonds up

By Paul Deckelman and Paul A. Harris

New York, Sept. 24 - The bulls were back in force on Wall Street on Monday for the first time since the terrorist attacks which crippled the New York financial district earlier this month. Stocks surged, aided by positive comments from President Bush touting the economy's strong basic fundamentals, and, perhaps just as importantly, a bullish signal from closely followed Goldman Sachs market strategist Abby Joseph Cohen, who increased her recommended stock allocations to 75% from 70% and cut bonds back to 22% from 27%.

But while equity investors took the opportunity to party hardy, boosting the Dow Jones Industrial Average 367 points, the junk bond secondary market for the most part did not immediately hop on the bandwagon, traders said. Primary-side activity meantime remained quiet.

"It's funny," one secondary source noted, "we expected that we'd be busier, but there seemed to be more quoting than trading going, on. It looked as though people were catching their breath and regrouping after a truly horrendous week."

He said people "were digging, looking for new ideas and safer sectors to rotate into, especially people who had been long airline and casino paper. They're looking for better stuff, for strong 4-B credits."

But while airline bonds remained sharply below the levels they had held prior to the terrorist seizure and destruction of four U.S. jetliners Sept. 11, along with the World Trade Center and part of the Pentagon, they were improved Monday from the levels at which they had ended last week.

They were helped by a surge in all of the major airline stocks Monday, after Congress moved with near-record speed Friday to enact a $15 billion aid package for the carriers, which President Bush signed into law on Saturday. The battered sector was further helped by announcements during the day by Northwest Airlines Inc and United Airlines parent UAL Corp. To the effect that load factors - i.e., the percentage of seats filled - were back around the 50% level. In this case, it truly means the glass is more half full than half empty, because a week earlier, the airlines were flying about one-third full.

A trader said most of the airline bonds "were up at least one to two points Monday, with Northwest leading the pack."

The Minneapolis-based No. 4 U.S. carrier on Friday announced that it would have to lay off 10,000 people. On Monday, aided by the news of the government bailout of the industry and its own improved performance, the trader saw its 8.875% notes due 2006 improved to 71.5 bid from a close Friday near 70, while its 7.625% notes due 2005 moved up to bid levels around 70-70.5 from 68-69 bid levels Friday.

Meanwhile, he quoted Continental Airlines' 8% notes offered at 65 with no bids late Friday, finished bid at 67 Monday, "a pretty sizable move. The whole sector had gotten crushed, but then it looked like they settled into a range and began to firm from there."

The lodging and gaming industries have been affected by many of the same market factors as the air carriers - "possible fears of vacationers to fly as long as terrorists remain at large, as well as an anticipated economic downturn, and their paper has recently been pounded. Quotes were few and far between Monday, but the industry's worsening situation apparently claimed at least one victim, as the markets digested the late-Friday announcement that FelCor Lodging Trfust and MeriStar Hospitality Corp., the nation's second- and third-largest lodging based real estate investment trusts (REITs), had called off their planned merger.

There didn't seem to be that much immediate reaction to the news among debt investors, with one desk quoting MeriStar's 9% notes due 2008 at 99 and its 9.75% notes at 98, around their recent levels. FelCor's 9.5% notes due 2008 were likewise quoted unchanged at 83. A trader elsewhere cautioned that "these are not the kind of bonds you see trading around a lot."

One name which does trade around a lot is Charter Communications Inc., which announced that Jerald Kent had resigned, effective Friday. His employment contract with the St. Louis-based cable giant was to have run out in December anyway.

Kent's sudden departure sparked market scuttlebutt that he had had a falling out with the real power behind Charter, billionaire investor Paul Allen; stories making the rounds indicated that Kent may have opposed a purported plan by Allen to combine Charter with telecommunications operator RCN Corp. as part of Allen's "wired world" strategy combining cable and telecom assets to present a seamless package of communications services to customers.

But despite the sudden loss of the well-regarded Kent, "some Charter bonds were up a few (points) and some down, but it was nothing major," a market source said.

A trader said "Charter's stock got crushed, but their bonds were all over the place." He saw its 8.625% notes due 2009 fall to 91 bid from prior levels around 94 bid/95 offered, but allowed as how that might have been due merely to investors rotating out of the fragile communications sectors and into something safer. At another desk, Charter's 10% notes fell to 97 bid, down two points on the session, but its 11.125% paper was actually up a half point at 102.5.

In the primary market meantime, Sweetheart Cup Co.'s $275 mln senior notes due 2007 appears set to price soon after the conclusion of the roadshow Friday, according to market talk. Jefferies & Co. is the bookrunner.

Meanwhile, ALARIS Medical Inc.'s approximately $150 million of senior secured notes due 2006 is headed for a mid-October pricing, a source close to the deal told Prospect News. The offering's bookrunner could not be confirmed at press time. According to an announcement released Sept. 7, the company will use the proceeds to replace its existing bank credit facility.

With regard to other deals slated for the high yield market in September, no new details on likely pricing dates emerged Monday.

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