Airlines, cables highlight broad market advance

By Paul Deckelman and Paul A. Harris

New York, Aug. 22 - Airline industry bonds and cable-TV debt were among the sectors showing strong advances Thursday, as the overall high-yield market was broadly higher. Among the explanations offered by traders and other market watchers was CBO (collateralized bond obligation account) buying, a feeling that the junk market had been so beaten down that it was time for an upturn, the end of the corporate earnings reporting season, the continued recent strength of the overall corporate bond sector and the strong stock market advance which lifted the bellwether Dow Jones Industrial Average to its first close above 9,000 since early July. It was also possible that the reason for the advance could be a combination of some or all of these factors.

"Things felt better all over the place," a trader said, "which makes me wonder when [the market] is going to go down again. I don't know why this is happening."

He suggested that "some of the guys are getting the feeling there's cash coming into the market and maybe we'll get a positive AMG number," referring to the weekly high-yield mutual fund-flow statistics released by AMG Data Services. More money has left those junk funds than has come into them in each of the last 10 weeks, with the cumulative outflow total in that time, as of last week, standing at some $2.5 billion dollars. The fund flow numbers are seen by many observers as a reliable gauge of overall junk market liquidity trends, and the long losing streak is seen by some as an indicator that the market is due to start getting injections of liquidity again some time soon.

The trader also cited the fact that since the revelations earlier in the summer about the troubles at such well-known junk issuers as Adelphia Communications Corp., WorldCom Inc. (both now in Chapter 11), Qwest Communications International Inc. and, more recently, US Air Group and United Airlines (the former also now in bankruptcy and the latter possibly headed there as well), "there hasn't been any further [major] bad news, knock on wood" over the past few sessions, giving market players grounds for cautious hopes of an upturn. It's been so long since the market really showed any strength," he said that "I can't remember what it's like to have a rally sustainable for more than three days."

Still, he said, when asked whether the strength seen in the market Thursday as well as in some sectors earlier this week represented the end of the downturn, or at least the beginning of the end, he demurred "I'm not ready to call that yet."

"Everything was going up" on Thursday, another trader said, citing the airlines, cables, telecoms, utilities and retail as sectors which saw better bids and, in many cases, notable buying.

"There was definitely some money in the market - although how long this will last is something else." He cautioned that the better tone might be because was because "a couple of CBOs are in, and they buy, buy, buy, buy, buy and then they go away - and we're right back where we were," unless there's some positives behind particular credits."

Right now, though, it seemed to him that "there was some money in the market [Thursday], the buy programs, and that's what's going on. They're just pushing [price levels] up. But once that disappears and this isn't for real, we'll be back five or 10 points lower, where we were a week and a half ago."

From the buy-side, Tim Collins, who co-manages the Mason Street High Yield Fund with Steve Swanson, told Prospect News Thursday that in order for the new issuance calendar to begin to build, issues in the secondary market will likely need to firm by 10 or 15 points.

As with other portfolio managers who have recently communicated with Prospect News, Collins said that the present situation in high yield does not favor new issuance.

"The average bond in the index is trading for 65 cents to 75 cents on the dollar," he explained. "New issues at par look relatively unattractive.

"Even companies with relatively modest coupons, when they're traded at 65 cents to 75 cents on the dollar, start to have low-teens to mid-teens to high-teens embedded yields. Most companies that have some leverage can't price a par issue with a coupon like that and still service their debt, generate free cash flow and maintain some reasonable financial flexibility. You ruin the credit putting that sort of a coupon on it.

"But why would you want to buy a par bond with asymmetric upside-downside - maybe 10 points of upside potential and 100 points of downside risk - when you can go out and maybe buy a company you like just as well at 70 cents on the dollar, with 40 points of upside risk and 70 points of downside risk?" Collins asked.

"Just pricing a bond at par should command some yield premium. So the problem you've got is that the nominal yields are so large in the secondary market and the discounts are so large that it's virtually impossible to price par bonds - except for the very best credits - at levels that are attractive enough to cause someone to divert a new dollar to the new issue instead of something they're seeing in the secondary market.

"I think you're probably going to need to see the secondary market rally 10 or 15 points before you can sustain a good, deep, broad new issue calendar."

Investment bankers take heart, though. As the Mason Street fund manager sees it there are good reasons for believing that such a correction as that described above could take place sooner than later.

"I think we went down in this last trade-off on relatively thin volume," Collins said. "And I think there has been a lot of short-selling activity in the markets. So I do think the markets are very thin.

"The bad news when they're thin is that sellers can drive them down sharply on the downside. We're even seeing that over the past few days, with the equity market getting its sea legs. A lot of high-yield bonds are literally starting to gap up. You're seeing what borders on panic buying in some of these names - on very thin trading. And the dealers aren't even in their seats in August.

"I don't necessarily think it will take a real long time to make up that 10 or 15 points in the secondary market. But I do think you're going to need to get things trading at 80 or 85 cents on the dollar in the secondary market before you can bring the kind of traditional high yield calendar we've all been accustomed to."

Looking at specific issues, a trader said, the airlines "were up strong" for a second straight session, as junk players embraced the idea that the money-losing air carriers will try to stem their flow of red ink by cutting back on their operations, grounding planes and laying off personnel to bring their bloated operating costs down to more manageable levels. Among the carriers which have already announced such plans are industry leader American Airlines and Continental Airlines, the latter announcing plans for service cutbacks, added fees and other cost-cutting and revenue raising measures this week. Similar cuts are expected at all of the major carriers; The Wall Street Journal reported on Thursday that bankrupt US Air told employees it plans to shrink its mainline jet operations further, which will lead to unspecified numbers of layoffs.

After having risen strongly on Wednesday in the wake of the Continental announcement, the group was likewise up Thursday; the trader quoted Delta Airlines' 7.70% notes due 2005 and 7.90% notes due 2009 up five points, to bid levels at 75-76 with no bonds being offered for sale, an indication that their holders think the bonds of the Atlanta-based air carrier - considered one of the financially better managed major airlines - are likely to keep heading skyward as industry belt-tightening takes hold. He saw Northwest Airlines' 8¾% notes due 2004 going home at wide 72 bid/78 offered; those bonds had begun the week at 60 bid/68 offered, before having moved to bid levels of 68 on Wednesday and 72 Thursday.

At another desk, a market observer saw Northwest, Delta, American and Continental bonds all "a little bit better" Thursday on the heels of Wednesday's big gains, but he saw little movement in UAL's bonds, which lag the rest of the sector badly, languishing in the 20s following the Chicago-based Number-Two U.S. airline's warning of a possible bankruptcy filing this fall.

Back on the ground, investors were tuning in to the cable operators Thursday, as news of the big deal between investment-grade cable giants AOL TimeWarner, AT&T Broadband and Comcast (under which AOL will buy AT&T Broadband's 27% stake in TimeWarner Enterttainment , clearing the way for Comcast to complete its acquisition of AT&T Broadband) revived talk of industry consolidation, with the high yield cablers seen as the likely acquisition targets.

Their shares jumped on Wednesday and continued to rise on Thursday, and the bonds were up as well, with a trader describing Cablevision's debt "up strongly"; he saw the Long Island, N.Y.-based cabler's 10½% notes due 2016, which had been holding in the 62 bid/64 offered neighborhood on Tuesday and Wednesday, as having jumped to 71 bid on Thursday. Cablevision's CSC Holdings 7 5/8% notes due 2011 were five points better on the session, at 80 bid. "There was a definite move" in the credit, he noted.

Another trader saw the 7 5/8% notes at 77, up from the high 60s, just a couple of days ago. Its 7¼% notes due 2008 were also at 77, while its 8¼% notes due 2009 were being quoted at 81.50, up more than four points on the day.

The trader saw Charter Communications Holdings' bonds also better, with its 8 5/8% notes due 2009 at 62 bid, up from 59.5 bid/60.5 offered on Wednesday.

AOL is being seen as a possible would-be purchaser for either company, once it simplifies its cable holdings with the AT&T Broadband deal and then spins off a stake in the resulting cable unit. "After they tie up the loose ends with AT&T and Comcast, they're going to go hunting," the trader said.

Analysts said Cablevision, especially is an attractive target, since most of its operations are clustered in the New York metropolitan area, easily the nation's largest and lucrative TV market.

But while that kind of speculation boosted Cablevision shares $1.15 (11.92%) to $10.80 and lifted Charter 25 cents (8.68%) to $3.13, it was by no means a consensus; some industry watchers doubted that either Cablevision's founding Dolan family or Charter principal owner Paul Allen would be interested in parting with the companies which they started. There was some speculation that this might make other, smaller high-yield cable operators such as Mediacom Broadband LLC and Insight Communications possible takeover targets. Mediacom's 8½% notes due 2008 were quoted three points better, at 77 bid, while its stock was up a dime (1.71%) to $5.94. Insight's stock was up 70 cents (7.65%) to $9.85, although quotes on its bonds were hard to come by.

Even Adelphia Communications - currently mired in the bankruptcy courts - managed to get into the upside act, a trader said, its 10¼% notes due 2011 seen at 29.5 bid, up from prior levels in the mid-20s. The failed Coudersport, Pa.-based cabler's 9 7/8% notes due 2007 were seven points improved, at 32 bid, while the 8 7/8% notes due 2007 of its Century Communications Corp. subsidiary were 2½ points better at 20 bid.

Elsewhere in the communications sphere, Nextel Communications Inc. bonds continued to firm, as the wireless sector remained well bid for in the wake of renewed consolidation speculation sparked by VoiceStream Wireless' reported merger talks with Cingular Wireless. Nextel's benchmark 9 3/8% notes due 2009 were quoted as high as 76.5 bid from prior levels at 73, while its zero-coupon/10.65% notes moved up to 81 bid from 77.5 previously. Also higher was AT&T Wireless affiliate Triton PCS, whose 9 3/8% notes firmed to 76 bid from 72 previously. Its 8 ¾% notes due 2011 were seen three points better, at 73 bid.

Bonds of communications antenna tower operators such as Crown Castle International Corp., American Tower Corp. and SBA Communications Corp. - all of which derive a substantial portion of their revenues from the wireless industry's placement of its local transmitting units on their towers - were all seen up about five to six points on Thursday, with American Tower and Crown Castle in the mid-60s and SBA in the mid-50s.

Qwest Communications International's bonds "were grinding up a little higher," a trader said, continuing to firm in the wake of the announcement earlier in the week that the cash-hungry Denver-based regional Bell operating company had agreed to sell its QwestDex directories unit for $7.05 billion. Qwest's 6 7/8% operating company bonds due 2033 which had closed Wednesday at 70.5 bid/71.5 offered, got as good as 73 bid Thursday before ending at 71.75 bid/72.75 offered. Its 7¼% holding company notes due 2008, which ended offered at 52 bid Wednesday, were being bid at that same 52 level Thursday.

Nortel Networks' 2006 bonds were firm at 50 bid/53 offered, well up from Wednesday's 45 bid/47 offered, although a trader said he didn't know why the telecommunications networker's bonds were on the rise. Nortel shares were up 12 cents (10.26%) to $1.29.

In the power generating sector, Calpine Corp.'s bonds were "gapping up," a trader said, quoting its 8½% notes due 2011 at 51 bid/53 offered, up several points.

AES Corp. shares jumped 74 cents (30.7%) to $3.15, helped by the news that its Brazilian unit had made a $120 million commercial paper payment due Wednesday, but the company's bonds were not seen Thursday; its 8 3/8% notes due 2007 were recently bid around 30.

In the primary, the formidable mid-August sun shined just a little on the shadow calendar, Thursday, as high-yield primary market sources began sketching in details of bond deals that have been the sources of talk during the "no-calendar, no-roadshows" malaise that has prevailed in the run-up to Labor Day.

Sell-side sources said that Gerresheimer Glas will likely reappear in September, as will LBO deals from Brake Bros. plc, Legrand SA, and possibly Coral Group plc - all of them in the eurobond market.

Brake Bros. appears headed into the eurobond market with £175 million via JP Morgan and Credit Suisse First Boston, according to market sources. The proceeds will be used to fund the acquisition of the company by private equity firm Clayton, Dubilier & Rice, Inc.

Also anticipated to be coming into the eurobond market in September is Legrand SA with an offering in the range of €600-€750 million via Credit Suisse First Boston, Lehman Brothers and RBS, sources said. Proceeds from that deal will be used to fund the LBO by Kohlberg Kravis Roberts & Co. LP and Wendel Investissement.

Thursday also featured the foreshadowings of a resurrection story, as sources said that Dusseldorf, Germany-based pharmaceutical packaging supplier Gerresheimer Glas, which postponed its €150 million of nine-year senior subordinated notes (B3/B) via JP Morgan and Goldman Sachs on July 26, may be headed back. Here again the month of September was mentioned as the launch window.

"As of now, timing on the bulk of the forward calendar is unclear," a source in Europe told Prospect News on Thursday.

"I find this pretty surprising given that so much supply is due to hit the market in the last few months of the year," the source added. "It will definitely be interesting to see if all the rumored deals manage to clear."

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