Bounces partly off lows, but airlines, hotels, Finova struggle; Fleming firm

By Paul Deckelman

New York, Sept. 21 - Wall Street continued to reel Friday in the face of war jitters stoked by the expected impending confrontation with Afghanistan and fears about what the recent terrorist attacks will do to the U.S. economy, and high yield bonds were quoted down at least one to two points across the board, market-watchers said.

But just as stocks managed to come up from their lows - the bellwether Dow Jones Industrial Average, down more than 300 points at one point in the morning, closed off 140, or 1.7% - some bonds manged to come back, at least part of the way, after being quoted much lower earlier.

A trader said that Nextel Communications Inc.'s 9.375% senior notes due 2009, a bellwether telecom coupon bond, traded all the way down to around 63 bid early in the session, "but then worked it's way back up to close around 66.5, almost unchanged from Thursday."

He also saw another telecom benchmark, Level 3 Communications Inc.'s 9.125% senior notes due 2008 offered around 40 earlier in the day, with bids presumably a point or two lower, but then "catch a better bid, in size by the end of the day" to close at 42 bid/44 offered. While the telecoms would seem to have little real linkage to the sectors of the financial markets which have been hardest hit in recent days, notably the airlines and the vacation-dependent hotel and gaming credits, many of the more well-known telecom issues are large, extremely liquid and widely held, with many dealers making markets in them. They thus are prime targets for selling on shifts in market sentiment or on a need by accounts to raise cash.

Another trader saw the Level 3s, which at $2 billion is one of the most liquid of all junk bonds, "looking really ugly earlier," down to around 39 before springing back to around the 42-43 bid area, which he called down a point.

"This morning, there were just offers all over the place," he said of the market in general and the tech and telecom names in particular. Bids were 10 or 15 points below Thursday's levels, but there were no real trades at those levels, which improved as the day wore on and as stocks seemed to work their way at least partially out of their funk.

But one area which didn't see very much improvement was in the badly battered airline industry, which continued to be buffeted by bad news on Friday, as Northwest Airlines Inc. became the latest major carrier to announce wholesale layoffs as a way of stemming the sudden flow of red ink, with 10,000 employees slated to get the ax.

Meanwhile, Continental Airlines Inc., which had earlier in the week announced that it would cut 12,000 jobs, actually began handing out the pink slips to many of its U.S. employees. America West Airlines, mentioned by some industry experts as a possible candidate for a Chapter 11 (as both Continental and Northwest have been), felt compelled to issue a statement aimed at reassuring customers that it will continue to operate its scheduled service in spite of the difficult financial situation currently facing the airline industry.

While Continental was among a number of airline stocks which staged a modest rebound from their lows Friday after nearly a week of bloodletting (others included Delta, US Air, United Air Lines parent UAL and Southwest Airlines), on the bond side, "the airlines got beat up again," a trader lamented. "This morning, it was Northwest taking the lumps, after news of their layoffs," although he quoted the whole sector down at least three to four points on the day to the mid 60s.

"Pre-September 11, most of those bonds were in the 90s and hard to find. Now, they're all pretty ugly." He quoted Northwest's 8.875% notes around 64 bid/68 offered, down about four points on the session and well down from the mid-90s level they held before the terrorist attacks.

He saw UAL's 9% notes due 2003 at 81 bid/83 offered and newly-downgraded junker Delta Airlines' 8.30% notes due 2029 at 69 bid/72 offered. But late in the session, he saw "bottomfishing" in Delta and in American Airlines parent AMR Corp., the latter also a recent downgradee. AMR and Delta, he said, were the two best credits in the whole sector, and interest in them "reflects a market view that the government will help out the airline industry, particularly those companies that were in fairly good shape to begin with, but that it wouldn't be able to save those carriers which were already in trouble before all of this.

As has been the case ever since the airlines began nosediving in response to having been grounded for several days after the terrorist strike, the hotel and gaming sectors continued to get pounded. While Host Marriott, a big loser on Thursday, "was beginning to stabilize Friday," a trader said, at a spread over Treasuries of about 775 to 750 basis points, Trump Atlantic City Associates' 11.25% first mortgage bonds due 2006 closed at 59 bid/62 offered, down about two points on the session and well down from their levels in the low-to-mid 70s before the terrorist outrage.

"It looks as though perhaps people (from outside the New York/New Jersey area) are fearful of flying in here" to come to Trump's three Jersey shore casinos, he opined.

Another trader who saw the Trumps down "a heck of a lot" to around the 58 level agreed that "you would think that the really big losers wouldn't be an Atlantic City name, which depends a lot on day trippers coming down from New York by bus, but the big Las Vegas destination resorts (he acknowledged, though, that the latter are losing money at a horrendous clip, even though it really hasn't shown up much in the bond market). "Maybe people are just not traveling or spending anywhere."

He said however, that the very liquid Trump bonds, which traded in the mid-70s not long ago, "might be poised for a comeback before Las Vegas. The economic fundamentals are the same as they were a week ago."

FINOVA Group, already reeling from the decision by Warren Buffet's Berkshire Hathaway to pull out of a $500 million deal to buy some of the financial services company's new 7.5% notes, said Thursday that it expected to incur unspecified losses as a result of the Sept. 11 terror attacks. Scottsdale, Arizona-based FINOVA, which recently emerged from Chapter 11 with Buffet's help, said the attacks would cause losses related to its lease and loan portfolios in the transportation, resort and hotel industries. The 7.5% notes, which had traded in the mid 70s before Berkshire's pullout, had dropped to 47 bid by Thursday and slid another five points Friday to 42 bid.

On the upside, Fleming Companies benefited from a defensive move by investors, a trader said, noting that no matter what happens in Afghanistan, "people still have to eat." Its 10.5% notes due 2004 ended at 99 bid/par offered, down a point on the week but up from 98 earlier in the week.

"In this kind of market, to be down only a point while everyone else is way down is a real sign of strength."

He also saw Remington Arms' 9.5% notes due 2003 at 95 bid/96 offered, "right were they were all week."

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