Airlines lower as machinists sue Northwest; Charter eases on new-deal worries, number worries

By Paul Deckelman and Sara Rosenberg

New York, Aug. 6 - Airline industry debt ran into turbulence Wednesday after the union for Northwest Airlines Corp.'s mechanics took the carrier to court to force it to live up to a long-ago commitment to buy back stock issued to union members. Back on the ground, Charter Communications Inc. bank debt and bonds were quoted easier, hit by speculation that its planned new $1.7 billion note offering may be running into investor resistance, as well as a report that its subscriber losses for the most recent quarter might have been more serious than the company let on.

Northwest's 9 7/8% notes due 2007 were quoted by a trader as having fallen to about 70 bid, 72 offered from recent levels in the mid-70s.

"They were under pressure today," he said, citing the news that the International Association of Machinists was suing Northwest as one possible factor behind the slide. The IAM filed suit against Eagan, Minn.-based Northwest with the federal court in Chicago, contending in a statement that Northwest "must live up to its commitments and provide what rightfully belongs to our members."

The dispute revolves around 4.8 million shares of preferred stock which the carrier issued to its unionized mechanics, flight attendants and pilots ten years ago in exchange for cost reductions. Under terms of the agreement, Northwest must either buy the shares back for $225 million - about five times more than they are currently worth - or start paying an annual 12% dividend on the shares until they are bought back

Northwest - which is seeking $950 million a year in labor cost savings from its workers, but which also reported a $2.8 billion unrestricted cash cushion as of the end of the second quarter, opted to make the dividend payment - an annual cost of about $27 million - rather than pay more than eight times that much to redeem the stock at one fell swoop. The airline said its legal advisors said it could not legally redeem the preferred all at once, and the union took it to court.

However, the trader also acknowledged that the Northwest paper might just be down "because people are getting hit with redemptions and are selling whatever."

At another desk, Northwest's 7 7/8% notes due 2008 were quoted down more than two points at 68 bid.

Overall, the trader said, airline paper "got whacked" on Wednesday, with Continental Airlines Inc.'s 8% notes due 2005 falling to 83 bid, 85 offered from Wednesday levels around 87. A second source pegged the Continentals at 84.5 bid, down around two points.

Charter Communications' term loan B was quoted about a point lower at 92.75 bid, 93.75 offered, according to a bank debt trader. When asked what caused the drop, the trader speculated, "the bond deal must not be getting positive feedback."

The trader was referring to the $1.7 billion offering of 10-year senior notes which Charter is currently shopping via a roadshow that runs through Aug. 13. The CCC- rated deal is split between $850 million at Charter Communications Capital Corp. I LLC and $850 million at Charter Communications Capital Corp. II LLC.

Charter's existing bonds were also being quoted on the downside, with one market source guesstimating that the St. Louis-based cable operator's 8 5/8% notes due 2009 lost a point to 73 bid.

Charter bonds were "up and down a little" during the session, a distressed-debt trader opined, "but no great shakes."

Charter's once high-flying debt has been brought low in recent months by investor worries over the company's $17 billion mountain of debt, alleged accounting improprieties which recently led to the indictment of four former senior executives, and a trend of slowing subscriber growth, a key measure of performance in the cable-TV and telecom industries.

In its most recent quarterly report, Charter reported a loss of 41,300 basic-cable subscribers - but influential internet financial website The Street.com reported Wednesday that Charter may have understated its subscriber-loss in its second-quarter results.

It said that a footnote to the voluminous document Charter would seem to have "actually lost 52,400 basic subscribers in the second quarter on an apples-to-apples basis with first-quarter figures. That's to say that the company suffered 27% more departures than it reported.

"The discrepancy - a significant one, given the amount of attention Wall Street pays to subscriber gains and losses among the major cable operators - is further evidence to cable TV investors that subscriber counts involve substantial judgment calls, even when such judgments fall within the bounds of legal behavior. "

Also on the cable front, the bankrupt Adelphia Communications Corp.'s 10 7/8% notes due 2010 were seen two points lower, at 63 bid. Its 10¼% notes due 2011 were at 63.5 bid, 64.5 offered, although a distressed-debt trader said he hadn't seen that the company's notes "had done much" lately.

Elsewhere in the communications sphere, WorldCom Inc.'s debt, such as its 8% notes due 2006, were quoted half a point down at 26.5 bid, although its MCI long-distance subsidiary's bonds, such as the 7½% notes due 2004 were heard up nearly a point at 74 bid.

WorldCom on Wednesday won approval from the judge overseeing its bankruptcy case for a settlement of civil fraud charges which had been brought against the telecom operator by the Securities and Exchange Commission. The parent of MCI, the Number-2 U.S. long-distance carrier, agreed to pay $500 million in cash and $250 million in stock to settle the charges.

The settlement is seen as a key development in WorldCom's efforts to emerge from Chapter 11 this fall - although recently unearthed charges by rivals such as AT&T alleging that WorldCom rerouted calls through Canada and through smaller phone companies onto AT&T's system so that the latter would get stuck with millions of dollars of phone access charges rightfully attributable to WorldCom, have emerged as possible roadblocks. WorldCom said earlier in the week that its own internal investigation had failed to unearth such chicanery, but AT&T presented documents to the bankruptcy court on Wednesday which it said would prove its allegations.

From the power sector, Calpine Corp.'s second-lien bank debt gyrated around, rebounding to previous levels after having opened lower following the release of the company's second quarter financial results. The rebound to 89.5 bid, 90.5 offered was attributed to a positive conference call.

Bond traders also saw some initial volatility in response to the numbers, but little actual price movement when all was said and done. One - who tersely replied "not really" when asked whether Calpine had moved around in response to the numbers - quoted Calpine's 8½% notes due 2011 as having lost half a point on the session, to 69 bid, 70 offered. He saw Calpine's recently priced 8¾% notes due 2013 as having gone home at 87 bid, 89 offered on Tuesday, then having opened Wednesday at 85 bid, 86 offered, before creeping back up again to end-of-day bid levels in an 87-87.5 context.

Another market source saw the Calpine bonds quietly off a point, its 10½% notes due 2006 dipping to 89 and its 8¾% notes due 2007 closing at 74.25.

On Wednesday, the San Jose, Calif.-based power generating company announced financial results for the second quarter that included a $23.4 million net loss (six cents per share), compared with year-ago earnings of $68.3 million (18 cents a share) .

For the six months ended June 30, the company reported a loss of $75.4 million (20 cents a share), versus a $7.4 million net loss (two cents a share) for the six months ended June 30, 2002.

Calpine's announcement touted the fact that since the beginning of the year, it has either completed or announced more than $1.6 billion of "liquidity-enhancing transactions," such as asset sales, and has raised $3.8 billion to refinance and repay debt.

Meanwhile, there was a lot of market talk surrounding Calpine Construction Finance Co. LP's proposed $750 million offering, with unconfirmed rumors ranging from the cancellation of the second-lien piece to sizes of the two tranches being flip-flopped to no specific tranche sizes being set at this point.

Late in the day, a syndicate source told Prospect News the deal is expected to price Thursday. The structure is the same as previously except that the first priority loan is now sized at $300 to $350 million instead of $300 million.

The offering consists of a $300 million to $350 million six-year first priority secured term loan talked at Libor plus 500 to 550 basis points and a $450 million eight-year second priority secured floating-rate notes under Rule 144A talked at Libor plus 800 to 850 basis points, the source said. The notes are expected to price off the bank loan desk. Goldman Sachs is the lead bank on the deal.

Allegheny Energy Inc.'s second-lien loan was also quoted lower on Wednesday, with one trader putting it at 94.5 bid, 95.5 offered, a second trader seeing it trade "down significantly" at 93.75 and a third trader quoting it a day's end with a 93.75 bid. Previously, the bank paper was quoted at 95 bid, 96 offered.

The Hagerstown, Md. utility holding company's bank debt and the energy sector as a whole was said to be lower in response to Calpine's earnings news. The energy names then bounced back with Calpine, a trader explained.

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