UAL debt crash lands as airline warns bankruptcy possible; Nextel firms on buyback news

By Paul Deckelman and Paul A. Harris

New York, Aug. 14 - United Airlines warned on Wednesday that it could be headed for bankruptcy, officially putting into its own words what everyone in the market has been saying for a while anyway. Even so, hearing the troubled Number-Two U.S. airline itself warn of the possibility shot down its already faltering bonds and shares. Six Flags Inc. and Magellan Health Services Inc., both of Tuesday's big losers, remained weak. On the upside, Nextel Communications Inc. got a boost after it reported in its quarterly filing to the Securities and Exchange Commission that it had continued to buy back debt during the most recent quarter and sounded optimistic notes on anticipated subscriber growth and cash flow gains, while fellow telecommer Qwest Communications International Inc was also stronger.

United Airlines issued the late-day bankruptcy warning as part of a larger announcement of additional measures aimed at cutting costs and making the airline - considered by its many critics to be a bloated behemoth - leaner and more efficient. In the statement, Jack Creighton, chairman and chief executive officer of United's parent, UAL Corp., termed the changes "urgent, significant and immediate."

Creighton went on to warn that United is "facing debt payments of $875 million in the fourth quarter and we have insufficient access to the public capital markets to repay them. To avoid this liquidity crisis, Jake Brace, our executive vice president and chief financial officer, has been asked to lead the company's intensified recovery effort."

Creighton announced a 30-day deadline within which it hoped to wrap up discussions with all of its stakeholders, including lenders, debtholders and its employee unions on concessions the cash-strapped airline will ask for. At the same time, he added, "we are preparing for the potential of a Chapter 11 bankruptcy filing this fall, due to our fourth quarter debt payments. Unless we lower our costs dramatically, filing for bankruptcy protection will be the only way we can ensure the company's future and the continued operation of our airline."

United's bonds "got crushed," said a trader, who quoted the debt as having slid down to as low as ten cents on the dollar. On Monday, United's unsecured bonds, such as its 10.67% notes due 2004 had fallen on Monday to around 29 bid from prior levels of 43 on market fears that UAL might follow smaller rival US Air Group into an emergency landing in the bankruptcy courts, and they had weakened further to around the mid-20s on Tuesday.

With United finally formally acknowledging what everybody else in the debt markets and the airline industry has already been talking about, they slid further, "which should not surprise anybody," the trader said.

A distressed-debt trader characterized Wednesday's activity in United bonds "like a plane landing without its landing gear. It was like a yo-yo, one minute trading here and the next minute trading there." Continuing the very appropriate aeronautical metaphor, he said "sometimes it was taking off and sometimes it was landing." He saw the general level of the bonds swinging between the pre-news highs of around 25 bid and the post-news lows around 13, in contrast to the bonds' recent range in the 25-35 area.

United shares gyrated between morning highs at $2.89 and mid-afternoon lows around $2.08 before climbing back up to end at $2.45 - still down 29 cents (10.58%) on the session, on volume of about 9.5 million shares, six times the recent daily average. The announcement warning of the bankruptcy possibility did not hit the wires until the very end of the trading day and so had little actual impact on UAL's Wednesday NYSE dealings, although Thursday promises to be turbulent for the shareholders.

In apparent sector sympathy, Continental Airlines Inc.'s 8% notes due 2005 were being quoted down 5½ points on the session, at 67.

Elsewhere, Six Flags bonds - which had slid about 10 points on Tuesday after the Oklahoma City, Okla.-based theme park operator (the former Premier Parks) reported a sizable second-quarter net loss versus a year-ago profit as well as weaker-than-expected earnings from operations - remained around the lower levels to which they had fallen on Tuesday, with no significant movement in either direction. While one market watcher saw them strengthening about a point from Tuesday's lows, other desks saw the bonds unchanged to slightly lower, with its 8 7/8% notes due 2010 seen around 81 bid.

Six Flags shares, however, which had swooned nearly 58% in wild NYSE trading on Tuesday, inched up six cents (1.19%) to end at $5.12 Wednesday. Volume of 6.4 million shares was still eight times heavier than normal.

Re-visiting Tuesday's other big loser, a source said: "I saw no bounceback" in Magellan Health Services following the roughly 10 point slide in its bonds Tuesday on disappointing earnings data. At another desk, Magellan's 9% notes due 2008, which had been seen falling into the 30s on Tuesday, were quoted at levels as low as a 29-30 context during the session. Magellan shares, which had plunged nearly 14% in Tuesday's dealings, were down another 11 cents (11.11%) to 88 on Wednesday

Also on the downside, the distressed-debt trader quoted Kmart Corp.'s bonds as having eased into the high 20s from prior levels in the low 30s. There was no fresh negative news out on the Troy Mich.-based discount retailer, currently reorganizing under Chapter 11. On Wednesday, the company said that it was seeking to amend its $2 billion debtor-in-possession credit facility. The amendment, filed with the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, provides for an adjustment of the covenant pertaining to Kmart's cumulative EBITDA and other charges over specified periods.

It would also seek lender approval for increasing the size of the DIP facility by up to $500 million.

On the upside, Qwest Communications bonds "were much, much stronger" Wednesday, a trader said. He quoted Qwest's various types of bonds all up around four points on the session, with its strongest bonds, the short-dated operating company debt, at around 90 bid/92 offered; its intermediate operating company debt at 79 bid/81 offered; and its longer-dated operating company debt at 70 bid/72 offered. Qwest's shorter dated holding company paper was at 55 bid/57 offered and its intermediate and longer-dated Qwest holding company issues were at 46 bid/48 offered. Its subordinated bonds were at 34 bid/36 offered.

The trader saw the debt rising across the board Wednesday "simply as an asset play," rather than in response to any specific new development in its saga, although Qwest on Wednesday did say that it believed that federal prosecutors in Denver who have been investigating the Denver-based regional Bell operating company were looking into the same matters that the Securities and Exchange Commission has under scrutiny in a separate probe.

Another trader also saw Qwest debt "doing better" on the day, although he had no specific levels.

Qwest's shares were meantime up 39 cents (35.14%) in Wednesday's NYSE dealings, ending at $1.50.

Also on the telecom front, Nextel bonds were being quoted at least a point higher, its 9 3/8% notes due 2009 seen at 66 bid, while its shares gained 54 cents (10.33%) to close at $5.77 on the Nasdaq. The Reston, Va.-based wireless operator said in an SEC filing that it had it retired an additional $733 million in debt and preferred securities since June 30 by swapping cash and common stock for the bonds and preferred shares. The exchanges bring the total amount of debt and preferred securities Nextel has retired since the beginning of the year to $1.83 billion, and it said it might pursue further transactions.

Nextel also predicted in its filing that it expects third-quarter subscriber growth to continue the pace of recent strong quarters, such as the just-passed second quarter, when Nextel added 471,000 new domestic customers, bringing its total to 9.64 million.

Nextel further projected that its cash flow would continue to trend upward.

And a trader saw AT&T Canada's bonds about a point better on the session, its 7.65% notes at 12 bid/13 offered, its 9.95% notes around 9 bid/10 offered, and its 12% notes at 10.5 bid/11.5 offered. The rise follows Tuesday's second-quarter earnings report, which included a doubling in EBITDA to around C$50 million from C$25 million a year ago, and the news that the troubled Canadian telecom company plans to make the scheduled Aug. 15 coupon payment on the 12% notes.

Such a development, a trader said, would be good news indeed. "If they make the coupon payment [Thursday], that's probably half the notes' value right there."

Dynegy Inc.'s 6 7/8% notes due 2011 were being quoted about two points lower, at 26 bid, although a market observer cautioned that "not a lot of trading was going on" among such former and still investment grade merchant energy providers, a group which also includes Williams Corp. Dynegy was one of a number of companies which were unable to certify their financial results to the government by Wednesday's newly imposed deadline.

Given the paucity of real activity in the middle of the summer doldrums he opined, "there's a lot of illiquidity," sometimes leading to unexpected results in the bond trading pits. While some bonds widen out, others unexpectedly tighten, even when the news is ostensibly unfavorable. One such name in which this occurred was Duke Energy, whose 6¼% notes due 2013 were actually trading at better bid levels of 325 basis points off the comparable Treasuries, even after Standard & Poor's cut the company's corporate credit ratings to A from A+.

"It seems to be a little bit crazy," he concluded. "Everything is just out the window right now."

Although the high-yield primary market anticipated terms on URS Corp.'s deal to disrupt the otherwise unabated white noise of inactivity on Wednesday, late in the session no terms were heard.

On Tuesday the market heard price talk of a yield in the 11½% area on URS' $250 million of seven-year senior notes (B1/B) via Credit Suisse First Boston - a deal to finance the purchase of EG&G Technical Services and Lear Siegler Services, Inc. from The Carlyle Group. Although a syndicate source advised that the deal was likely to price Wednesday afternoon, as Prospect News went to press Wednesday a market source reported that no terms had been heard.

Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News Wednesday that he wasn't in the market for URS. Nor had he played any of the three junk bond offerings that priced during the week of Aug. 5: Chesapeake Energy, Newfield Exploration and MedQuest.

"At this point I don't have any desire for the new issue market," Difley said. "I would suspect that most people don't. Obviously there's money coming out of high yield accounts, and I don't think that people are as flush with cash as they used to be.

"And why buy things at par when there's so many things out there that are trading well below par?" he asked.

With regard to the money coming out of high yield accounts, the most widely-circulating figures quantifying it seem to be the ones from Arcata, Calif. financial information firm AMG Data Services, which according to sources has reported a string a nine successive outflows from high yield mutual funds that began on June 13 and continued up through the most recent week for which the firm has reported.

Earlier in the week Prospect News heard from Deutsche Bank Securities Inc. high yield analyst Hunkar Ozyasar that those outflows total $1.97 billion. That number, however, is dwarfed by the approximately $5.5 billion of inflows that high yield mutual funds were reported to have enjoyed between February and May.

Hence Prospect News inquired of American Century's Difley whether it is reasonable to assume the buy-side still has cash to put to work in spite of the nine straight outflows.

"Most people tried to get that money invested as it came in," Difley said of the incoming cash of 2002's first half.

"People aren't typically sitting on huge amounts of cash," he added. "I think the liquidity ratio was something like 7% the last time I looked.

"So if somebody had grown along with all of that money coming in, when it reverses people end up taking their money out and they end up having to sell."

Finally, in light of the Fed's decision Tuesday to stand pat on the Fed Funds rate of 1.75% while citing present economic risks as leaning somewhat toward weakness, Prospect News asked Difley whether the central bank had come to the correct decision.

"I'm not so sure that lowering short term interest rates will accomplish that much," he said. "The Treasury market has already moved to make rates pretty low. We know it's already stimulative in terms of refinancing activity and so forth.

"I don't know that it helps companies get credit any easier, which seems to be the bigger issue. The banks are very tight on their lending and the capital markets are very difficult.

"That seems to me to be the bigger problem in terms of financing companies, rather than the absolute level of rates."

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