Atlas Air bonds fly south on credit line problem, downgrade; market awaits Ball, IMC deals

By Paul Deckelman and Paul A. Harris

New York, Dec. 4 - Atlas Air Worldwide Holdings Inc. bonds ran into some turbulence Wednesday after the air cargo company said that its failure to provide timely audited financial statements constituted an event of default under its credit facility and related inter-company aircraft leases, which in turn triggered a ratings downgrade by Standard & Poor's. Elsewhere in the air carrier sector, United Airlines bonds were heard easier during the session; after the markets had closed for the day, the federal board examining the troubled carrier's application for a government loan guarantee weighed in, rejecting the application, meaning that a bankruptcy filing for the nation's second-largest air carrier is now considered a virtual certainty.

In the primary market, activity continued apace as two new deals surfaced. Chesapeake Energy Corp. lit the burner on a 12-year offering, while IMC Global Inc. is doing a $100 million add-on that figures to price Thursday.

Meanwhile price talk of a yield in the 6 7/8% area (not a misprint!) emerged on an upsized offering of 10-year notes deal from Ball Corp.

"There's a lot of cash out there," one sell-side source commented during a Wednesday conversation with Prospect News, noting seven straight weeks of reported inflows to high-yield mutual funds.

"People are getting invested," the source added. "Yields have been driven down. Everything that has come, pretty much, has traded up. The market is kind of resetting itself."

On Wednesday, Chesapeake Energy of Oklahoma City announced a new offering of $150 million of 12-year senior notes on Wednesday via a management team that will include Bear Stearns & Co., with other institutions to be announced.

Also on Wednesday, Lake Forest, Ill.-based agricultural products producer IMC Global set in motion a $100 million add-on to its 11¼% senior notes due June 1, 2011 (expected ratings Ba2/BB). The deal will price Thursday via Goldman Sachs & Co. Price talk is 108-109.

Finally on Wednesday price talk of 6 7/8% area emerged on Ball Corp.'s deal, which was upsized to $300 million from $200 million. The 10-year senior notes (Ba3/BB) are set to price Thursday via Lehman Brothers, Deutsche Bank Securities Inc. and Banc of America Securities.

One buy-side source said that high-yield investors might participate in a deal with such rich price talk but they won't like it.

"Price talk of 6 7/8% for a low double-B without any particular prospects of reaching investment-grade anytime soon," the investor commented. "Swell!

"People will buy it but nobody will think they're going to get much performance out of it.

"When interest rates rise 150 basis points won't this be trading in the 80s?

"And it won't be called either," this buy-side source added, "because at that point 6 7/8% will be what they would pay on the investment grade side.

"We heard from somebody on our investment grade side that a lot of the old Ball Corps are put away in investment grade CDOs that have a slight bucket for high yield because to them a tight Ball looks like a nice safe thing to put in an investment-grade CDO. But our high yield person said 'I would never put that in my CDO, it's too tight.'"

Counter to this view, however, a source from an investment bank not participating in the Ball Corp. deal told Prospect News Wednesday that the talk on Ball Corp. is in line with recent high yield performance.

"Ball's been a great credit even though it's not an investment grade credit," the sell-side official said.

"However," the source added, "it's kind of priced like an investment-grade credit.

"There are a couple of guys out there that price like that. Look at the E&P bonds. It doesn't surprise me that Ball Corp. is in the sixes.

"Some people have a fundamental problem with that because you're talking high yield and a six-handle doesn't float anybody's boat. You're not a high yield investor buying paper to get a six-handle return.

"But that's where the market has pushed pricing to. If you look at some of these E&P names, they're in the sevens. So 7% for something that's got a little more volatility versus 6 7/8% for something that's a lot more stabile - on a relative value basis I think you can make a case for it.

"That 6 7/8% price talk is the right area although psychologically it's tough for high yield people to sign off on."

Back in the secondary sphere, Atlas Air's 10¾% notes due 2005 swooned to 25 bid from prior levels at 35 and its 9¼% notes due 2008 dropped five points on the session, to end at 20, after S&P cut the bonds to CCC from CCC+ previously, and cut the company's corporate credit and the ratings on its equipment trust certificates as well.

The Purchase, N.Y. based air cargo operator had said last month that its form 10-Q quarterly report to the SEC will be delayed until the ongoing re-audit of its financial results for fiscal years 2000 and 2001 has been completed.

That, it said, triggered an event of default - meaning its lenders could now accelerate repayment of approximately $246 million of outstanding debt, should the holders of at least 50.1% of the debt choose to do so.

S&P, in downgrading the company's debt ratings, said that the move reflects Atlas' default under its credit agreement, and "continuing concerns about near-term liquidity and the company's ability to meet debt service requirements as they come due over the near term. " S&P credit analyst Lisa Jenkins further noted that the company "is in discussions with its banks and is attempting to negotiate a waiver of the default."

Atlas Air shares lost 30 cents (14.35%) in Wednesday dealings, to close at $1.79.

Atlas Air's troubles pale in comparison to the problem that United faces Thursday morning, now that the Air Transportation Stabilization Board has shot down its request for a $1.8 billion federal loan guarantee. Without that backing from Washington, lenders are almost certain to reject the carrier's efforts to borrow $2 billion that it needs to stay out of bankruptcy.

The board said that despite UAL's efforts to pare costs-which on Wednesday included the announcement of the layoff of eight out of 44 of its top executives and an 11% paycut for the rest - "the business plan submitted by the company is not financially sound."

The board further warned that United's plan for $14 billion in cost cuts and revenue enhancements over the next five and a half years "does not support the conclusion that there is a reasonable assurance of repayment and would pose an unacceptably high risk to U.S. taxpayers."

United's bonds, such as its 10.67% notes due 2004, had traded into the lower 30s last week on expectations that it would get the necessary concessions it needed from its unions and that the feds would go along with the plan, but the debt had fallen back to the 20s when the mechanics refused to go along, at least initially. The 13,000 mechanics are scheduled to vote on a revised $700 million five-year concession package Thursday, although the vote seems academic in the wake of the federal refusal to extend the loan guarantee.

In dealings before the announcement came from Washington, a trader quoted UAL's notes down two points on the session, to 26 bid/27 offered. The bonds are expected to fall considerably in Thursday's dealings in the wake of the rejection of the loan guarantee.

UAL shares, which had gained seven cents (2.30%) in regular trading Wednesday to end at $3.12, nosedived down to $1.40 in after-hours trading Wednesday on news to the ATSB decision.

Elsewhere, a market source quoted Nortel Networks Corp. bonds "off a lot," its 6 1/8% notes due 2006 falling to 65.5 bid/66.5 offered from prior levels at 70 bid/72 offered, while rival telecom equipment maker Lucent Technologies, whose bonds and shares move pretty much in tandem with Nortel, was also notably lower; Lucent's 7¼% notes due 2006 fell to 63.5 bid/64.5 offered from prior levels in the 69-70 area, a trader said.

News that R.H. Donnelley is tendering for its 9 1/8% senior subordinated notes due 2008 had little impact on the bonds, which had already moved up to the par price at which they are to be taken out after the directory publisher's announcement last month that it was intending to tender for them (see "Tenders and Redemptions elsewhere in this issue for full details).

A trader quoted XM Satellite Radio's 14% notes as having pushed up to 42 bid/45 offered from prior levels around 40; meantime, the satellite broadcaster's shares jumped 49 cents (21.30%) to end at $2.79 on volume of 5.3 million shares, more than double the usual.

There was no news out on the company Wednesday, but investment-oriented bulletin boards buzzed with speculation and rumors that the company might announce new financing to carry it through until it reaches break-even status, with an announcement possible as early as Thursday. The company has already indicated that it hopes to have new financing lined up by mid-month at the latest.

Other unsubstantiated rumors said to be driving the stock Wednesday included the possibility that Dick Clark Productions - a major radio program syndicator - might take a stake in the company. There was even talk that Microsoft founder Bill Gates might decide to buy in, with one version having the billionaire software king taking as much as a 52% stake in the company. That caused one wag to suggest jokingly - or perhaps not - that OEMs (original equipment manufacturers) producing the XM receivers for installation in cars would then have to put three more buttons on the sets - for "Control-Alternate-Delete."

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