Northwest jumps on Bear Stearns report; upsized Syniverse deal prices; funds see $197 million outflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 18 - Northwest Airlines Corp. bonds were flying high on Thursday, traders said, helped by a confluence of factors, including an equity upgrade from Bear Stearns, continued relatively softer oil prices and investor optimism that the Eagan, Minn.-based Number-Four U.S. air carrier and its mechanics' union will be able to avoid a 12:01 a.m. ET Saturday strike - and that it can weather such a work stoppage if the union members do walk off the job.

Delta Air Lines Inc.'s bonds were also seen higher, despite that carrier's own serious problems, apparently pushed up in sector sympathy with Northwest.

Back on the ground, the news that Washington Redskins owner Daniel Snyder wants to oust the current management of Six Flags Inc., of which he owns about 12%, may have driven the theme park operator's shares sharply higher, but the gains seen in its bonds were considerably more modest. And the news that fashion house Tommy Hilfiger Corp. is putting itself up for auction pushed its bonds about a point or so lower, although trading in the name, as usual, was sparse.

Overall, one source marked high yield a quarter of a point better Thursday on the back of firmer equity prices and an improving Treasury market.

Another source said that junk was slightly better on the day but still off a point to 1½ points over the past two weeks.

In the secondary market, Syniverse Technologies priced an upsized issue of eight-year notes, which were heard to have done well when they were freed for secondary dealings.

And late in the session, CitiSteel USA Inc. Was heard to have come to market with a five-year issue of secured floating-rate notes.

After trading had wound down for the day, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $196.8 million more left the funds in the week ended Wednesday than came into them - the sixth straight week in which an outflow had been seen, on the heels of the $475 million outflow seen in the previous week, ended Aug. 10.

Since that six-week retreat began in early July, a total of about $844.5 million in net outflows has been seen, according to a Prospect News analysis of the AMG figures, although for the first few weeks of that stretch, the outflows were small - in one particular week, they totaled just $3 million - indicating a lack of conviction.

It would now appear, however, that after nearly three months in which there was no discernable trend - for a few weeks in June, inflows essentially alternated with outflows in a zig-zag pattern, which was followed by several weeks in July and early August of only modest outflows - these last two weeks have definitely established and strengthened a negative pattern in the widely followed market liquidity gauge. They also represent a reversion to the trend seen for most of the first half of the year, including one 15-week stretch, from mid-February through late May, in which outflows totaled some $6.776 billion, according to the Prospect News analysis.

Breaking out of that negative gridlock in early June sparked a revival of both the junk primary and secondary market from the doldrums seen at the tail end of the losing streak in late May, although things seem now to have calmed down again as liquidity has leaked from the market.

Taking a longer-term approach, outflows have now been seen in 26 weeks of the 33 since the start of the year, against only seven weekly inflows. Cumulative net outflows for the year total around $7.884 billion, according to the Prospect News analysis, up from about $7.687 billion last week.

While the mutual funds only comprise between 10% and 15% of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Northwest strong

Among the existing issues, Northwest was "up significantly, at least five points or so, depending upon the issue," a trader said, and other traders saw some of the company's bonds, particularly on the shorter side, doing far better than that, even.

"The airlines were the big thing, especially Northwest," said another trader, who saw the company's benchmark 8 7/8% notes due 2006 as having jumped to 64 bid, 66 offered from prior levels at 55 bid, 57 offered, while its 9 7/8% notes due 2007 were also up nine points, to 54 bid, 56 offered, and its 10% notes due 2009 got up to 47 bid, 49 offered, from Wednesday's levels around 40 bid, 42 offered.

Another trader exclaimed "Wow!" upon punching up the 8 7/8s and the 10s and seeing each with gains of about seven to eight points on the day.

Yet another trader saw a slightly more restrained rise, pegging the 8 7/8s up five points on the day at 62, and the 10s up five points at 45.75, while the company's 7 7/8% notes due 2008 were seen up six points at 44 bid.

Northwest's Nasdaq-traded shares were up 48 cents (9.60%) to $5.48; volume of 16 million shares was four times the norm.

Northwest's bonds had been getting better already, pushed up an easing of oil prices (seen as an indicator of future jet fuel price trends) to around the $63 level from recent peaks above $67, as well as investor optimism that Northwest and the Aircraft Mechanics Fraternal Association can avert a threatened strike. Then, Morgan Stanley weighed in earlier in the week with a twin upgrade of the company's bonds and stock to "overweight," from "equal-weight" before, forecasting that Northwest can weather a strike, wring labor cost concessions from the mechanics and other employee groups, and avoid bankruptcy.

On Thursday, Bear Stearns followed suit, raising the company's stock to "outperform" from "market perform," and saying that uncertainty about the possible mechanics' strike this weekend and potential service disruptions was already priced in.

In a research note accompanying the upgrade, Bear Stearns analyst David Strine gave odds of about 55-to-45 that the mechanics will strike when the federally mandated 30-day cooling off period expires as Friday night turns into Saturday morning - but noted that with the airline having drawn up a contingency plan that involves replacement mechanics it has lined up, he believes that Northwest can "pull it off" and make good on its vow to keep flying, even if the union does strike.

Northwest claims to have the highest labor costs of any of the so-called "legacy carriers," a group that also includes rivals like Delta, industry leader American Airlines, Continental Airlines, and two currently bankrupt flyers, United Airlines and US Airways. It said it must get $1.1 billion in permanent wage concessions from its workers if it is to avoid bankruptcy, and has demanded $176 million from AMFA, which represents 4,500 Northwest employees - airline mechanics, plus custodians and cleaners. Northwest on Wednesday rejected the latest proposal from the union, saying that it only offered about $100 million in savings, falling "far short" of what the airline says it needs.

Despite that negative news, there were reports that Northwest had made a new proposal Thursday to the union, and the union said on its web site that both sides had resolved some issues related to contract language, for what it's worth.

Should Northwest successfully face down the union and keep flying with the replacement mechanics, Strine said in his research note that it then had the possibility of either making its deal with the union to get the concessions it wants, or just replacing the strikers permanently. The analyst theorized that the line's flight attendants would probably make a deal then, too.

Apart from its labor issues, Strine projected that if Congress approves pension law changes - Northwest has been a vocal advocate of such changes - and if Northwest can refinance some of its debt, it could halt its cash burn.

The analyst did caution, though that should these pieces of the puzzle fail to fall into place - "particularly the pension relief and the debt refinancing" - then its financial situation likely would "deteriorate substantially" in 2007.

Delta higher also

While Northwest was gaining altitude Delta - recently bedeviled by bankruptcy buzz - was going along for the ride. A trader saw the troubled Atlanta-based Number-Three U.S. airline carrier's 7.90% notes due 2009 up 1¾ points on the session at 17.25 bid, 18 offered, while another trader pegged those notes two points better at 17 bid, 18 offered, and saw its flagship 7.70% notes coming due on Dec. 15 a point up at 26 bid, 28 offered. He saw Delta's 8.30% notes due 2029 a point better at 16 bid, 17 offered.

Six Flags higher on stock tender

Apart from the airline issues, there was some interest in Six Flags, after football team owner Snyder announced a blitz aimed at sacking the company's current management for a major loss.

Snyder, who owns 11.7% of Six Flags - making him its largest single shareholder - is mounting a $6.50 per share tender offer that he hopes will give him 34.9% of the shares. Snyder wants to wants to permanently bench chief executive officer Kieran Burke and chief financial officer James Dannhauser, whom he blames for the company's lackluster performance over the last several years, and wants to put himself and two allies on the Six Flags board and start making changes in the company's operations.

A trader said that Six Flags' bonds "were up as much as two points early in the day on the news, but ended up about one point" across the board, with its 8 7/8% notes due 2010 and 9¾% bonds both straddling par.

Another trader, though, saw the bonds actually up almost two points going home, quoting the 8 7/8s having gone to 99.625 bid from 97.75 previously, and its 9 5/8% notes due 2014 traveling to par bid from 98.875.

Six Flags' New York Stock Exchange-traded shares were up $1 (18.21%) to $6.49; volume of 15.5 million shares was more than 15 times the usual turnover.

Tommy Hilfiger flat to weaker

Another big stock market gainer Thursday was Tommy Hilfiger, on reports that it will put itself up for sale, although traders saw the apparel company's 6.85% notes due 2008, if anything, lower; one estimated they had fallen to 101.5 bid from prior levels around 103-104, although like several other traders, he had no exact prior levels, since the bonds are usually not seen trading around.

"It's a pretty illiquid issue," said a trader, who quoted the bonds at 101 bid, without an offering. "No one is sure where they've been."

Crown Holdings Inc.'s announcement that it plans to sell its global plastic closures business for approximately $750 million to European private equity firm PAI Partners came too late in the session to affect trading in its Crown Cork & Seal bonds, a trader said. The Philadelphia-based packaging company said that the net cash proceeds from the sale, expected to be about $650 million, would be used for corporate purposes, including debt repayment.

Overall, a trader said, "the tone is still somewhat positive," even with the six weeks of outflows, "but trading is a little on thin side."

2 new deals

Meanwhile in the primary market a pair of Thursday transactions - one tranche apiece from two different off-the-run issuers - priced, and cleared the forward calendar.

And again on Thursday, high yield syndicate officials warned that it will not be too surprising if the primary market remains ultra-quiet until Labor Day.

Between now and then, however, there are still 10 full sessions and one abbreviated one left to play out.

A solid book for Syniverse

Tampa, Fla.-based provider of wireless telecom technology services, Syniverse Technologies, Inc., priced an upsized $175 million issue of eight-year senior subordinated notes (B2/B) at par on Thursday to yield 7¾%, right on top of the price talk.

Lehman Brothers ran the books for the debt refinancing deal that had been upsized from $150 million.

One informed source told Prospect News that the deal played to a very solid book and added that the bonds traded up on the break.

In secondary dealings, a trader saw those bonds having pushed up to 101.5 bid, 102 offered.

CitiSteel prices floater

Elsewhere on Thursday, Claymont, Del., carbon steel plate mill operator CitiSteel USA, Inc. priced a $172 million issue of five-year senior secured floating-rate notes (B3/CCC+) at 99.00, with coupon that will float at six-month Libor plus 750 basis points.

That print came 25 basis points beyond the price talk of Libor plus 700 to 725 basis points at a price of 99.00.

Jefferies & Co. ran the books.

Empty calendar

Trailing the terms on Syniverse and CitiSteel, one sell-side official said late Thursday that the junk calendar is cleared out, with no deals in the market.

The source went on to profess the expectation that there will not be much activity in the primary market between now and Labor Day.

"After Labor Day things should pick up," the source added.

"It seems like there is a decent pipeline building for September."

Gamestop in the shadows?

One name that market observers have batted around in Gamestop Corp.

The Grapevine, Tex., electronic game retailer, which is in the process of merging with EB Games (Electronic Boutique), has received ratings of Ba3 from Moody's and B+ from S&P on $950 million senior unsecured guaranteed notes in two parts: $300 million of six-year senior unsecured guaranteed floating-rate notes and $650 million of seven-year senior unsecured guaranteed fixed-rate notes.

In mid-July a market source told Prospect news that Banc of America Securities LLC, Citigroup and Merrill Lynch & Co. would be involved in the bond deal.

Although the subject of the merger was extensively discussed during Gamestop's Thursday earnings conference call, no financing particulars were mentioned.

The company did say that the merger is expected to close in late September or early October.

One market watcher professed the belief that the deal is out there on the "shadow calendar."

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