Airlines continue to slide; energy off on profit-taking; National Steel shines as bid deadline looms

By Carlise Newman

Chicago, April 10 - Airlines and energy stood out as the weakest areas in distressed debt trade Thursday, even as the war with Iraq continued to show critical signs of abatement. Delta Airlines, Continental Airlines and Northwest Airlines all coasted lower after downgrades by Moody's Investor Service. Not to be left out, American Airlines fell slightly lower, even after news late Wednesday that the bankrupt carrier had reached a deal with a union representing one-third of its workers.

Energy companies Mirant Corp. and Calpine Corp. were also mired in the red, with no explanation other than profit-taking, although Mirant's recent ratings downgrade may have kept a damper on things.

National Steel Inc., rising Wednesday on news that United States Steel Corp. had reached an agreement with labor unions and would resubmit a bid for the troubled steel company on Thursday, continued to creep higher.

Moody's took the ax separately to three major air carriers Thursday. Moody's cut Continental's senior unsecured rating two notches to Caa2 from B3 and its implied senior rating one notch to B3 from B2, with a negative outlook. A distressed trader quoted the Houston-based carrier's 8% notes due 2005 at 50 bid/51 offered, down from levels of 51.5 bid/52.5 offered Wednesday.

Moody's cut Atlanta-based Delta's senior unsecured rating to B3 from Ba3 and its senior implied rating to B1 from Ba3, while Northwest's senior unsecured rating was lowered two notches to Caa1 from B2 and its senior implied rating to B2 from B1.

Eagan, Minn.-based Northwest's 7 7/8% notes due 2008 were seen at 48 bid/50 offered, dropping two points from Wednesday. Delta Airlines' 6.65% notes due 2004 were seen bid at 74, offered at 75, dropping "about a point, a point and a half" from Wednesday's close, a trader said.

Moody's cited weak demand in its explanation for all three rating cuts. In its comments on Continental, Moody's said the ratings acknowledge the probability of government assistance to the airline industry, including Continental, an increase in demand as the most active period of the war in Iraq comes to a close, and a potential reduction in the current high level of passenger concern regarding SARS.

"I get tired of these downgrades," grumbled a trader. "They just trail each other."

American Airlines' bonds were also lower Thursday. The Fort Worth-based air carrier's 9% notes due 2012 were seen losing another point to 30.5 bid/31.5 offered, after having risen to levels in the mid-30s in recent days on good news about government financing and labor contracts.

After market close Wednesday, American said it reached a deal the Transport Workers Union, which represents one third of its employees, that could provide union workers with higher pay if the airline returns to strong profitability.

Reports from Reuters on Thursday said the company's chief executive, Donald Carty, warned employees that bankruptcy is still a possibility for the company.

"Airlines aren't going to see any pickup until after the war is really over, and even then there will be some pressure," said a distressed trader. "Their problems are deeper than slow air travel. It's been going on too long to clean up fast."

National Steel, active again after U.S. Steel reaffirmed it would submit a bid for the bankrupt company Thursday, was seen trading at slightly higher levels Thursday. Pittsburgh-based National's 9 7/8% notes due 2009 were quoted at 72 bid/74 offered, two points higher from Wednesday's levels of 70 bid/72 offered, in turn a couple of points better than Tuesday's close.

United States Steel Corp. said Wednesday its bid for the assets of National was given a shot in the arm by reaching a tentative labor contract with the United Steelworkers of America union.

Rival bidder AK Steel said Thursday that it had not reached agreement with USWA on a new contract, but also supported its bid for National Steel for $1.125 billion.

AK Steel said it is still interested in acquiring the assets under conditions submitted today to National Steel and its creditors. In a news release Thursday, AK Steel said the labor approach it is taking, under sections 1113 and 1114 of the U.S. Bankruptcy Code, would yield the savings necessary for the company to realize some of the cost-based synergies for its acquisition of National to be successful.

Thursday was the deadline to submit bids in National Steel's bankruptcy auction and late in the day the Mishawaka, Ind. company said it had received bids from AK Steel and U.S. Steel for substantially all its principal steelmaking and finishing assets and iron ore pellet operations.

AK Steel reaffirmed its $1.125 billion bid, consisting of $925 million in cash and the assumption of $200 million of liabilities, National Steel said, but added that because AK has not reached agreement with the USWA its bid is conditional on the rejection of National Steel's collective bargaining agreements with the union and the termination of retiree benefits.

National also said U.S. Steel bid $975 million, consisting of $775 million in cash and $200 million of liabilities.

On the weak side, but treading water, was Calpine. Its 7 7/8% notes due 2008 were quoted bid at 60 and offered at 61, "close to previous levels." Calpine's 8½% notes due 2011 fell a half point to 61bid/62 offered, after Wednesday's levels of 61.5 bid/62.5 offered, and prices as high as 67.5 bid/66.5 offered in recent days.

The San Jose, Calif.-based energy company had risen along with other energy names Dynegy Inc., Reliant Resources and AES Corp. as the latter three announced significant refinancing agreements. Talk circulated that Calpine and Mirant were both planning refinancing announcements of their own.

Mirant's 7 5/8% notes due 2006 were seen bid at 67 and offered at 68, a point lower than Wednesday. On Wednesday, Standard & Poor's downgraded Atlanta-based Mirant's debt three notches to B from BB.

"It's the same story it's been all week. They ran up too high on the refinancing and they're coming down now with profit-taking," said a distressed trader, referring to the energy sector's downslide.

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