Airlines continue climb in otherwise earthbound market; Buffett bails out; LIN prices 10-year deal

By Paul Deckelman and Paul A. Harris

New York, May 5 - Airline bonds - still riding high after their big move upward on Friday - continued to hold the interest of high yield secondary players Monday, with not much else really going on other than legendary investor Warren Buffett raining on the junk bond market's recently boisterous parade.

Meanwhile the primary got off to a news-heavy start Monday with terms emerging on three deals - one a late-Friday pricing - and five more offerings taking their places on the forward calendar.

Flextronics International Ltd. priced $400 of new 10-year paper (Ba2/BB-) to yield 6½%, the same yield that was printed on new 10-year paper from LIN Television Corp. which sold $200 million in a drive-by.

Flextronics' deal came at the wide end of the 6¼%-6½% price talk. Citigroup, Credit Suisse First Boston and Goldman Sachs & Co. were joint bookrunners.

Meanwhile LIN's senior subordinated notes (B2/existing B) were at the tight end of the 6½%-6¾% price talk. JP Morgan, Deutsche Bank Securities and Bear Stearns & Co. were joint bookrunners.

And Prospect News learned that late last Friday Continental Airlines, Inc. sold $100 million of five-year floaters at 95, with a coupon of three-month Libor plus 750 basis points, via Morgan Stanley.

The road into the high yield market was traveled, Monday, by Avaya Inc., which plans to sell a $175 million add-on to its 11 1/8% senior secured notes due April 1, 2009 on Tuesday. Joint bookrunners are Citigroup and Credit Suisse First Boston.

Also on Monday the market learned that McMinnville, Ore. air cargo firm Evergreen International, which began roadshowing $225 million seven-year senior secured second lien notes Thursday, will conclude marketing its deal this Thursday. Morgan Stanley is bookrunner.

Muzak Holdings LLC and Muzak Finance Corp. will begin soothing the high yield accounts on Tuesday when they start roadshowing $200 million of seven-year notes - not flats and sharps but the high yield variety. The deal, via Bear Stearns and Lehman Brothers, is expected on May 13.

Royal Caribbean Cruises Ltd. launched a quick-to-market $250 million of seven-year paper that is talked at 8 1/8%-8 3/8% and is expected to price Tuesday morning.

Italian eyecare firm Safilo started marketing its €225 million of 10-year senior notes Monday and is set to conclude on May 12, with pricing on May 13.

And the green flag goes down Tuesday on the Speedway Motorsports Inc.'s $210 million 10-year deal.

Meanwhile, one sliver of news that the market seemed to be digesting on Monday involved a CNBC interview with billionaire investor Warren Buffett, who said it was no longer a good time to buy junk bonds, and that he has not significantly increased his holdings in the area this year.

This news follows Buffet's March 2003 pronouncement that he had played high yield extensively in 2002.

In the wake of Buffett's March admission that he had played junk in 2002 several sources attributed some of the gathering inflows to high yield to the influence that the head of Berkshire Hathaway wields upon the investment world.

So now that Buffett has somewhat reversed himself, on junk bonds, will funds start to flow the other way Prospect News inquired of its sources on Monday

"I don't know whether it's going to be a big negative, in terms of the funds that have been flowing into this asset class," one sell-side official responded.

"For one thing, when people found out he had been playing high yield, it was already old news, so I suspect that today's news is old news as well.

"Buffett seems to influence a lot of people but I think we're going to have to wait and see whether this will have a big impact upon our market."

Secondary traders said the tone on their desks was pretty restrained.

"Nothing's going on," one trader said. "There's no evidence of anything trading." Other traders pretty much shares that assessment, one noting that he "didn't really see a lot in the low-grade stuff (as opposed to high grade) after a little bit of flurry; then everything just kind of died down."

He suggested that one drag on market activity Monday might have been the comments made by Buffett. The billionaire investment ace - known as "the Oracle of Omaha" because of his years of savvy stock-picking - said that while his Berkshire Hathaway Inc. had invested more than $8 billion in junk bonds and loans last year, and had made nice money doing so, the times had changed since then.

""We have not bought anything this year [in junk bonds] to speak of because the prices are different," the widely followed Wall Street guru said, and he further cautioned that "it is not a field that the average investor ought to fool around with at all."

That kiss-off from someone who has been proven right so often - and has the second-largest personal fortune in the U.S. to show for it, exceeded only by the cash wad of his friend and sometimes bridge partner, Bill Gates - might be the kiss of death for the resurgent rally, which has been going on at a rapid-fire pace since mid-October.

Or maybe not.

No one else whom Prospect News spoke to Monday even mentioned Buffett; the trader meantime opined that "I think it has more to do with the flow of funds and looking at those AMG numbers" every Thursday evening, when the Arcata, Calif. -based company releases its statistics on the flow of money into the high-yield funds - numbers which are considered by many in the market to be a reliable proxy for overall junk market liquidity trends.

Sizable inflows have been seen in each of the past 10 consecutive weeks, with more than a billion dollars of new cash going into the funds in six of those weeks, and more than $950 million in a seventh week. In the latest week, ended last Wednesday, $1.09 billion more came into the funds than left them, bringing the net inflow for the year-to-date up to $11.95 billion, according to a Prospect News analysis of the AMG figures (excluding distributions and those funds which do not report on a weekly basis). The 10 week streak is part of a larger liquidity surge which has been going on since mid-October - not-so-coincidentally beginning around the same time that the formerly sedated primary market began to come back to life and the formerly beleaguered secondary began its turnaround.

"If money keeps pouring in there, you're going to continue to see prices go higher," he said. "The stock market [meanwhile ] seems to be just kind of treading water here (both the Dow Jones Industrial Average and Standard & Poor's S&P 500 index were lower Monday; stocks' inability over the past few months to gain any traction has been seen as another positive for junk, with money diverted out of sagging equities and into high yield.)

But against that backdrop of restrained trading - one market source echoed the general consensus that "we hardly saw any trades at all" - it was the airlines which once again stood out.

The bonds and shares of the major air carriers had soared heavenward on Friday, after Merrill Lynch & Co. announced in a research note that it was upgrading its rating on the stocks of Continental Airlines, Northwest Airlines, Delta Airlines, Alaska Airlines and Frontier Airlines to "buy" from "neutral," feeling that the worst may be behind the badly battered sector, and that further bankruptcies (in addition to those of UAL Corp.'s carrier, United Airlines, and US Air Group) were now less likely.

In Monday's dealings, the rise was much less pronounced than it had been on Friday - but there was some upside nonetheless, with Continental's 8% notes due 2005 seen having climbed as high as 83 bid from prior levels around 80, and Northwest Airlines' 7 5/8% notes due 2005 rising to 81 bid/83 offered from 75 bid/77 offered on Friday.

"Northwest was the big gainer, and there was not much else," said a trader, who also quoted the Minneapolis-based carrier's 8 7/8% notes due 2006 as having likewise firmed to 76 bid/78 offered from Friday's 71 bid/73 offered.

He did not see much movement in the Continentals - at his desk, they had been quoted going home at 82 on Friday, and only showed a one-point further gain to 83 on Monday. But he saw American Airlines parent AMR Corp.'s 9% notes due 2012 two points better, at 54 bid/55 offered.

Airline shares continued to gain as well; AMR's were up 77 cents (14.08%) to $6.24 in New York Stock Exchange dealings, on volume of 15.6 million shares, versus the usual 11.9 million-share turnover.

But while the shares of cargo carrier Atlas Air World Wide jumped 55 cents (26.19%) to $2.65 on volume of 1.7 million shares - about six times the norm - its unsecured bonds remained mired deep in distressed territory, unmoved, with its 10¾% notes due 2005 and 9¼% notes due 2008 languishing at 16 bid/18 offered. The company's 6.88% equipment trust certificate due 2009 - secured by liens against aircraft - were quoted considerably higher, at 73 bid/76 offered, although no movement was seen in any of the Atlas bonds. No fresh news was seen on the name.

Back on the ground, Lucent Technologies Inc.'s benchmark 7¼% notes due 2006 were seen having moved up to 94.625 bid from prior levels at 93 bid, after the Murray Hill, N.J.-based telecommunications equipment maker announced that it had signed a distribution and joint development agreement with Juniper Networks Inc, a maker of telecom network gear. The pact targets big telephone companies as likely buyers. Lucent executive Janet Davidson, in charge of her company's dealings with wireline telecom operators, was quoted in news reports as having declared that "Juniper brings us everything we need in this area and nothing we don't." Lucent shares rose 19 cents (10.27%) to $2.04 on the NYSE, on very heavy volume of 88 million, more than double their usual daily handle.

Elsewhere, a market observer quoted WestPoint Stevens Inc.'s 7 7/8% 2005 and 2008 notes having traded up to around a 23-23.5 bid context from prior levels around 20. Tyco International's 6 3/8% notes due 2006 were seen a point better, at 102.5 bid/103.5 offered, despite a Wall Street Journal story suggesting that further accounting problems may pop up to bedevil the embattled Bermuda-based industrial conglomerate - despite CEO Edward Breen's assertion last week that it had uncovered all of its outstanding accounting problem issues.

Calpine Corp.'s 8½% notes due 2011 were a point-and-a-half better at 73 bid/74 offered, while Fairfax Financial Corp.'s 7 3/8% notes due 2006 went to 95.5 bid/97.5 offered, up from 93 bid/95 offered Friday. The company's shares appreciated $10.26 (11.97%) on the NYSE to $96, buoyed by favorable earnings released Friday.

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