United Airlines bonds nosedive after federal rejection; primary stays busy as Ball yields 6 7/8%

By Paul Deckelman and Paul A. Harris

New York, Dec. 5 - United Airlines bonds were sharply lower Thursday in the wake of the rejection by the federal board examining the troubled carrier's application for a government loan guarantee - a decision which makes it considerably more likely that the troubled carrier will make an emergency landing in Chapter 11, probably sooner rather than later.

In the primary sector, Ball Corp. and IMC Global Inc. were heard by syndicate sources to have brought upsized bond offerings to market with Ball sealing its upsized notes deal at a yield that one source claimed was the lowest in the history of the market.

Meanwhile, Hollywood Entertainment Corp. announced plans to sell $200 million of notes due 2011 as part of a larger financing package.

And high-yield mutual funds saw another sizable chunk of cash come in; sources told Prospect News that Arcata, Calif.-based AMG Data Services had reported an inflow of $600.8 million for the week ending Dec. 4.

An analysis of the statistics by Prospect News shows that over the past eight weeks in which inflows have been seen, some $4.51 billion more has come into the market than has left it, and overall cumulative net inflows for the year fattened to approximately $7.876 billion from $7.275 billion.

"Money is still coming in but our market is starting to feel a little bit of the equity weakness," one source commented shortly after news of the inflow - the eighth consecutive - began circulating.

"You can see the weakness in equities reflected in the secondary trading levels of high yield," the source added.

"I think that represents a lot of rebalancing," this sell-sider added, "people just choosing not to be involved."

Another sell-side source said that the investment banks, aware of the building cash position of high-yield mutual funds, will undoubtedly begin to come with deals that would have had poor prospects in the choppy markets of late summer.

"You have to be really really prudent if you're on the buy-side right now," this source admonished. "You have so much cash coming in the transom and you've got to be really responsible in what you buy."

Back in the secondary market, United Airlines "was the big collapse of the day, no question about it," a trader said, after the federal Air Transportation Stabilization Board turned thumbs down on UAL's request for a $1.8 billion federal loan guarantee, without which it cannot - in its current condition - borrow $2 billion that it says it needs to avoid going into bankruptcy.

He quoted UAL's 10.67% notes due 2004 as having careened down to bid levels around 11-12 from the 26-27 area on Wednesday (the loan guarantee decision was announced Wednesday evening, after the financial markets had wound down for the day).

The trader saw all of United's debt quoted around that same 11-12 mark - an indication that the bond market already considers a bankruptcy filing to be essentially a fait accompli, since the bonds of bankrupt companies generally all trade on top of one another, regardless of coupon or maturity, since all have the same claim on the company's assets in a restructuring.

He said that UAL's 9% notes due 2003 had fallen to the 11-12 level from bid levels around 28-29, while the longer-dated paper "didn't have as far to fall," with the airline's 10¼% notes due 2021 having retreated from Wednesday's 16 bid/17 offered levels.

A distressed-debt trader said that the United bonds "were up a point or two from their bottom - but down 10 points or more from yesterday, up 20% or down 100%" agreeing with the characterization of "one step forward - and five steps back."

Activity in the distressed credit was fairly brisk, with "a lot of transactions in the 10-12 area, mostly short-covering" pulling the bonds up from their lows by the day's end.

UAL bonds "were all over the map," said another trader, who quoted the company's 9 1/8% notes due 2012 at 11.375 bid/11.5 offered, but said all of its bonds were in that same 11-12 context.

"I think some people were just panicked," he observed, "trying to figure out what the hell to do next." He said that investors would now "have to do the workout analysis on this stuff" to better determine what kind of a recovery they could expect in the event that the airline heads for the courts, as now appears increasingly likely (the junk bond holders rank below bank debt and notes backed by liens on the company's aircraft, but ahead of the stock, which on Thursday tumbled $2.12, or 67.95%, to an even $1, on volume of 45 million shares, more than 11 times the usual).

The federal panel had previously questioned United's bid for the loan guarantee, forcing the carrier to go back to its unions over the past few months to try to cajole them into a package of wage cuts and other concessions, while it made other belt-tightening moves, including reductions in its top management cadre and pay cuts there as well. While UAL managed to get most of its unionized workers on board, most of its 13,000 mechanics voted last week not to go along with the program, which forced United to make changes in its proposal to wring $700 million in concessions over five years from that group. Even though the leaders of the mechanics' union finally agreed to put the revised concession package to a vote Thursday, the die had already been cast, and the ATSB said late Wednesday 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."

Standard & Poor's reacted Thursday by downgrading United's debt ratings to a defaulted D from CCC previously. Even though UAL's recently appointed CEO, Glenn Tilton was still insisting that a bankruptcy filing was not "a foregone conclusion," S&P analyst Philip Baggaley declared that "the ATSB's decision will almost certainly lead to a Chapter 11 bankruptcy filing by [corporate parent ] UAL and United as soon as United has completed arrangements" to fund operations while in bankruptcy; the airline has recently been in contingency talks with a group of banks on a $1.5 billion debtor-in-possession credit facility that would become effective were United to file for bankruptcy.

News reports quoted sources close to the airline as indicating that a bankruptcy filing, possibly with the U.S. Bankruptcy Court in Chicago, United's home base, could come as early as the weekend. Meantime, the grace period clock continues to tick on about $920 million of overdue debt, with United facing the prospect of a default on some of it as soon as Dec. 9.

The trader meantime saw "pressure on all of them" - i.e. the other airline bonds - in the wake of United's troubles; Delta Airlines' 6.65% notes due 2004, which on Wednesday had closed at 82 bids/84 offered, dipped to 78 on Thursday, while Delta's 7.70% notes due 2005 backpedaled to 79 bid.

"Some of the other airlines with lower cost structures (than United's), such as Delta, and Northwest and Continental, I saw people trying to take advantage of the panic" by buying on the dip. "There was some trading on [the Delta bonds] in the high 70s, versus yesterday.

"There was some weakness in the other [airline] stuff - three, four points - but there were some buyers in there."

Another trader quoted American Airlines paper "still hovering around 50." At another desk, Delta's 7.70% notes due 2005 were seen having initially fallen three points to around 76 before firming slightly to 76.5 bid/78.5 offered. A trader said, whoever, that trading in Delta and other airlines "was pretty isolated - the bulk of it was United."

Also in the airline sector, no further deterioration was seen in the bonds of Atlas Air Worldwide Holdings Inc., whose bonds languished at the sharply lower levels to which they had fallen on Wednesday, its 10¾% notes due 2005 to 25 bid and its 9¼% notes due 2008 to 20 bid.

Those bonds had fallen after the Purchase, N.Y. based air cargo operator had said that its decision to delay filing its financial reports to the Securities and Exchange Commission until the ongoing re-audit of its financial results for fiscal years 2000 and 2001 has been completed had triggered an event of default. That puts Atlas in danger of having its lenders possibly decide to accelerate $246 million of debt, which in turn caused S&P to cut the bonds to CCC from CCC+ previously and to cut its other debt ratings as well.

Back on the ground, little movement was seen in the debt of Qwest Communications International Inc., whose rebellious bondholders filed suit in federal court in New York to block the proposed $12.9 billion debt-swap which the Denver-based telecommunications company unveiled last month; the bondholders called the offer "inadequate" in their papers.

Qwest's operating company 7 5/8% notes due 2003 were seen at 98.25 bid/99.25 offered; its 5.20% notes due 2004 were at 95 bid/97 offered; and its 5 7/8% notes due 2004 were offered at 86. Qwest's holding company 7% notes due 2009 were at 63 bid.

The distressed-debt trader said that Qwest's bonds "should be rallying" on the prospect that the legal action might force the company to sweeten its offer to the noteholders for their existing bonds, "but they're not doing anything. There were a lot of different quotes - but I haven't seen any change in prices really."

When Qwest first came out with the deal, he continued, "I know of a few people who sold them. When they're senior bonds, they don't like to be made junior bonds. I don't give a damn what kind of interest they're offering (the Qwest offer essentially doubled the coupon on the bonds being tendered for, in exchange for the bondholders extending the maturities and taking a sizable haircut in terms of principal amount) - they're making them worthless if they file for bankruptcy. So who cares? We [the bondholders] would rather have you file now than after you've made us junior," the trader said.

Elsewhere, Gap Inc. bonds were quoted unchanged to up half a point after the San Francisco-based apparel retailer reported a 9% rise in November same-store sales - the retailing industry's key performance measure - from year-ago levels. Overall, it said, that sales, including new stores which were not open a year ago, were up 14% from the 2001. It was the second consecutive month in which the Gap has reported higher sales from the year-earlier period, following two-and-a-half straight years on monthly declines from the year-earlier results.

But a trader said that Gap bonds have recently "run up so much already that it's hard to see them moving much higher." He quoted Gap's 6.90% notes due 2007 98.5 bid/99.5 offered, while its 5 3/8% notes due 2003 were at par bid/100.5 offered.

"They were already high, and got maybe half a point better."

In the primary, as investment bankers continued to mind their Advent calendars, sizing up time frames circumscribed by the holidays and perhaps by the pending threat of war, the high-yield primary market continued to move ahead at its purposeful post-Thanksgiving pace.

In addition to the deals from Ball and IMC Global Inc., roadshow start dates were heard on Del Monte Foods Co.'s deal, which has been anticipated since Labor Day, and on an issue from Hollywood Entertainment Corp., which postponed an offering last spring.

Also Allbritton Communications Co. beamed in with a drive-by deal.

The big - in fact "history-making" - story on Thursday came when terms were heard on Ball Corp.'s upsized 10-year senior notes (Ba3/BB). In addition to being increased to $300 million from $200 million, the deal priced at par to yield 6 7/8%, spot on to the 6 7/8% area price talk.

The bookrunners were Lehman Brothers, Deutsche Bank Securities Inc. and Banc of America Securities

One sell-side source said Ball's yield was the tightest in the history of the junk bond market - although numerous inquiries by Prospect News produced general agreement that the claim was likely true but no definitive confirmation.

And this official summed up what sources from both the buy- and sell-sides began telling Prospect News before the roadshow started on Ball: "People just seem to like this company."

In secondary trading the new Ball Corp. bonds were little changed from their par issue; a trader quoted them at 100.25 bid/100.375 offered.

Terms also emerged Thursday on IMC Global Inc.'s drive-by add-on to its 11¼% senior notes due June 1, 2011 (Ba2 expected/BB). The deal was increased to $117.5 million from $100 million and priced at 108.5 - in the middle of the 108-109 price talk - for a yield to worst of 9.463%. Goldman Sachs & Co. was the sole bookrunner on the Lake Forest, Ill. agricultural products producer's offering.

Thursday also brought word of new issuance.

Washington, D.C. broadcaster Allbritton Communications figures to price a rapidly marketed offering of $275 million 10-year senior subordinated notes (existing ratings B3/B-) on Friday via Deutsche Bank Securities. Price talk on the Rule 144A deal is for a yield in the 7¾% area.

Meanwhile the roadshow is set to start Friday on Del Monte's deal, which is being issued through SKF Foods Inc. and Del Monte Corp. The $300 million of senior subordinated notes due 2012 (B2/B pending closing of the merger) will come via bookrunners Morgan Stanley, JP Morgan, Banc of America Securities and UBS Warburg.

The San Francisco-based processed food company will use proceeds to help finance the acquisition of HJ Heinz assets including U.S. Starkist, the North American food and pet snacks, U.S. private label soup, College Inn broth and the U.S. baby food businesses. The deal figures to price next Friday, Dec. 13.

In addition to Allbritton and Del Monte, Hollywood Entertainment announced an off-the-shelf offering of $200 million nine-year senior subordinated notes (B3/B-) that will begin roadshowing on Tuesday and is expected to price early in the week of Dec. 16 via bookrunner UBS Warburg.

The Portland, Ore.-based video store chain owner-operator postponed an offering of $275 million eight-year senior subordinated notes (Caa1/B-) on April 30.

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