Granite inches higher on earnings outlook; American Airlines slides on labor talk

By Carlise Newman

Chicago, April 7 - A handful of names, some frequent visitors and some not, graced distressed debt trading desks Tuesday. Granite Broadcasting Corp. moved a little higher after backing its first-quarter earnings outlook, jarring its paper into action. American Airlines' bonds fell after union leaders suggested labor contracts were not sufficient. Delta Airlines and Continental Airlines were also weaker.

Granite Broadcasting said it has been able to offset some weakness in advertising and consequently still expects first-quarter same-station net revenue to increase between 2% and 5% to $24.2 million to $24.9 million, excluding the sale of San Francisco-based KNTV. In the year-ago first quarter, the company posted same-station net revenue of $23.7 million, excluding KNTV.

The New York-based television station operator continues to expect first-quarter broadcast cash flow of $1.5 million to $2.6 million, compared with year-ago broadcast cash flow of $4.2 million, excluding KNTV.

Granite's 12¾% preferred stock was quoted at 66.5 bid/69.5 offered, about a point higher from Monday.

Union leaders at American Airlines said on Tuesday they have asked the carrier to shorten the duration of wage concession deals struck last week, once again raising the chance of an imminent bankruptcy filing at the world's largest airline. The tentative agreements, struck on March 31, are aimed at saving $1.8 billion in annual labor costs at American, a division of AMR Corp. The deadlines for the members' votes are next Monday and Tuesday, depending on the labor group.

Union members have expressed anger at the deals that will cut pay for several major groups between 15% and 20%, according to published reports. But some union leaders said that while the concession deals would entail painful cuts, without approval the company would likely head to bankruptcy court, which could prompt even deeper cuts for labor.

American's 9% notes due 2012 were seen at 33 bid/34 offered earlier in the day, similar to Monday's close, but fell about a point by the end of the session. Another desk saw the 9% notes at 32 bid/35 offered.

"American has never been off the radar screen for bankruptcy, but it's definitely back on now," said a trader. "Still we didn't see a lot of activity in the airlines today. They're just always there."

Other airlines in the distressed sector also trickled downward Tuesday.

One trader said an equity downgrade on the sector by Salomon Smith Barney to market weight from overweight, based on the recent stock rally, may have pressed down on the debt as well. The investment bank told clients much of the war rally and government aid expectations are already priced into stocks.

Delta Airlines' 7½% notes of 2009 fell to 53.5 bid/54.5 offered, compared to 54 bid/55 offered Monday. Continental Airlines' 8% notes due 2005 were seen falling a half-point to 54 bid/55 offered.

Air Canada's 10.25% notes were quoted at 25 bid/30 offered, compared to 26 bid/28 offered Monday. The company filed for bankruptcy protection in Canada last week.

HealthSouth Corp., tangled in accounting fraud charges, said on Tuesday it was adopting new rules to make its directors more independent of management, addressing concerns the old board was indebted to founder and former Chief Executive Richard Scrushy. HealthSouth said it was changing the structure of the board, mandating that directors meet independently of management at least twice a year and that each director own at least $100,000 of HealthSouth's shares within three years of being named to the board.

"I think it's a little late for these rules, isn't it?" said a trader.

As part of the rules, non-management directors will name one of the independent directors as presiding director, HealthSouth said. The company is requiring that a majority of the board remain independent from management and their activities remain consistent with conflict-of-interest policies.

The Securities and Exchange Commission has accused HealthSouth and Scrushy of accounting fraud. Eight HealthSouth employees, including two former CFOs, agreed to plead guilty to fraud charges that earnings were inflated by $2.5 billion since 1994. Another ex-CFO, Michael Martin, delayed his plea on Tuesday.

The Birmingham, Ala.-based hospital operator's 7 5/8% notes due 2012 were quoted bid at 46, offered at 48, only about a half point lower than levels earlier in the day of 46.5 bid/48.5 offered.

"Oh, that one's a mess, only baby steps away from bankruptcy," said a distressed trader.

In other news, WorldCom "went down a little" a trader said, quoting the company's bonds at 26.5 bid/27 offered after Monday's levels of 27.5 bid.

In addition, Calpine's bank debt was quoted as falling over two points. Calpine traded at 96, but then fell to 93.5 bid/94.5 offered by day's end. Last week, Reliant Resources, Dynegy and AES completed refinancing deals considered critical to the survival of each, and Calpine had been basking in the afterglow of the energy rally.

Also in bank debt activity, Huntsman paper was seen trading in the "upper 80s"

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