Airlines continue to retreat; Fleming flaming out; Unisys, Shaw, William Lyon price new deals

By Paul Deckelman and Paul A. Harris

New York, March 12 - Airline sector bonds continued to nosedive on Wednesday amid investor angst over the possible coming Mideast war and rising fuel costs; also continuing to skid lower was Fleming Companies debt and shares.

In the new-deal arena, Unisys Corp. brought a quickly-shopped and upsized $300 million offering to market - making it the second straight day high-yield had seen a transaction price with an "un-junk-like" yield of 7% - while William Lyon Homes, Inc. upsized its deal to $250 million and The Shaw Group, Inc. also was heard to have priced $250 million.

The trader said that he would categorize Wednesday's market as "a very cash-filled, nervous market." He said that the activity level was relatively light "because people are very much afraid. You're getting closer and closer to potential hostilities."

It was his impression that "desks are being told to not be too long" so as not to be holding a lot of bonds that may suddenly drop in price if and when the balloon goes up. "Accounts are saying 'we don't like this market, but we keep on getting in cash', so the activity level is very, very sketchy. I think that everybody thinks the market is going lower, and they're trying not to get caught up here."

"I'm busy but no one else is," said one trader. "You can see people starting to seize up in front of the war. No one wants to do anything."

One of the most vulnerable sectors in the event of any kind of a war is the airlines, and investor concern about the beleaguered industry's prospects is reflected in the slide that the bonds and shares of the major carriers such as American Airlines and its parent, AMR Corp., Delta Air Lines Inc., Continental Airlines Inc. and Northwest Airlines Corp. have recently taken. That slide continued for a third straight session on Wednesday.

A trader said that AMR's 9% notes due 2016 retreated to 13 bid/14 offered from prior levels around 15 bid.

Another trader pegged the 9s slightly higher than that level, but agreed that "they've been hit bigtime this week."

The Dallas-based carrier - the largest in the world - has already been battered by bankruptcy talk making the rounds of the financial markets, especially since AMR was reported to have been talking to possible funding sources about a $2 billion debtor in possession facility it could draw on in the event it does go bankrupt. In addition, on Monday, an official of its flight attendants union surmised that industry leader AMR might go bankrupt "sooner rather than later."

Standard & Poor's, noting that the company is in talks for the DIP financing at the same time it is also in negotiations with its labor unions in the hopes of staving off a bankruptcy, said Wednesday that the B- credit rating on both AMR and American - which were lowered to current levels as recently as Feb. 28 - remain on CreditWatch with developing implications.

"The current airline industry environment, with weakening traffic (particularly on trans-Atlantic routes, which account for about 11% of American's revenues) and very high fuel prices is deepening AMR's cash drain ($5 million daily in January and probably more now)," S&P warned.

"A potential attack by the U.S. and its allies on Iraq would worsen this situation, though the threat of war has also raised the sense of urgency and could speed resolution of labor talks. Still, there is a risk that mounting cash losses in a war scenario could force a bankruptcy filing, even if the unions agree to concessions (which would take time to provide their full benefits)."

Not everyone was necessarily sour on AMR debt, however; one market observer opined that at the current prices, heading for 10 bid: "I would buy that bond; you could get 50 bonds ($50,000 face value) for $5,000" and likely get equity in the event of a reorganization, in or out of court. However, he agreed that people still trading AMR shares would likely be left out in the cold.

Those shares meantime sank another 18% (11.32%) to $1.41 on New York Stock Exchange volume of 16.3 million shares, more than five times the norm; S&P kicked AMR out of its prestigious and widely followed S&P 500 equities index.

Other airline issues were likewise seen taking it on the chin, with Continental's 8% notes due 2005 quoted four points lower, at 41 bid, while Delta's 7.70% notes due 2005 were also down four, at 53 bid/56 offered; Air Canada's 10¼% notes due 2011 were at 24 bid.

While both Delta and Continental's shares were up Wednesday (11.11% and 9.69%, respectively) after a slide on Tuesday, Air Canada was heard continuing to struggle; its Toronto-traded shares fell as much as 14% on Wednesday on news that Onex Corp. has delayed its C$245 million (US$165 million) purchase of a 35% stake in the airline's frequent flyer points program Aeroplan. Canada's Globe and Mail newspaper reported that the airline was in "dire straits," citing a document prepared by management for its unions which asks for cuts of more than 20% in labor costs.

Meantime, United Airlines corporate parent UAL Corp. - already forced into Chapter 11 last year by too-high labor costs and other factors - was said by a distressed-debt trader to be "on its ass, as you know."

He quoted UAL's 10.67% notes due 2004 at 12 bid/15 offered, falling from previous levels of 15 bid/18 offered.

Outside of the airline industry, Fleming Cos. paper "got killed" again a trader said, with the Dallas-based grocery wholesaler's 10 1/8% senior notes due 2008 falling six points on the session to 38 bid/40 offered, while its subordinated 10 5/8% notes due 2007 and 9 7/8% notes fell to bid levels as low as nine cents on the dollar before closing only a little above that, at 10 bid/12 offered. Fleming's credit rating was cut Wednesday by independent rating agency Egan-Jones Ratings Co., which lowered the rating to C from CC, one notch above its lowest grade.

"Our concern is that suppliers won't ship without being paid in advance and grocery stores shift more of their orders to other suppliers," Egan-Jones said. Fleming shares were down 19 cents (14.29%) to $1.14 on the NYSE.

Fleming rival Nash Finch Co.'s shares zoomed $2.98 (59.36%) to $8 on Nasdaq volume of 2.25 million shares, more than 10 times the usual, after the Minneapolis-based food distributor said that Securities and Exchange Commission regulators would not object to how it accounts for certain vendor charges.

But its 8½% notes due 2008 were seen unchanged at 67 bid; a trader said the bonds "were getting bid up a week, or 10 days ago, prior to all of this."

No further movement was seen in Royal Ahold NV's debt, with its 6¼% notes due 2009 quoted holding steady at 75.5 bid/77.5 offered, and its 6 7/8% bonds due 2029 at 69 bid/70 offered.

Elsewhere, cable-sector traders saw bankrupt Adelphia Communications Corp. bonds rally. Adelphia's 10 7/8% notes due 2010 were higher at 42.5 bid/43.5 offered, while its 10¼% notes due 2006 were also up three points at 46.

The Coudersport, Pa.-based cable company's bank paper began moving higher last week, with some attributing the gains to market participants becoming more comfortable with co-borrower issues that the long-troubled company has been facing.

Following suit, Charter Communication's 8 5/8% notes due 2009 were higher, at 48 bid/50 offered, up from Tuesday's closing price of 44 bid/36 offered.

In primary action, Unisys priced its upsized drive-by offering of $300 million seven-year bullets at 7%, the same yield printed Tuesday on iStar Financial Inc.'s new five-year senior notes.

And the investment banks appeared determined to wind the spring tighter still, as price talk of 6 7/8%-7 1/8% was heard on the new 10-year notes from Peabody Energy, expected to price Friday.

However the "tightness" of Unisys was by no means uniform to the market Wednesday.

Shaw Group priced $250 million of seven-year notes (Ba2/BB), to yield 11%, wide of the 10½% area price talk. And William Lyon Homes sold investors $250 million of 10-year notes (B3/B-) yielding 11%; talk on that deal was for a yield in the 10¾% area but it was upsized from $200 million.

Trailing an investor conference call Wednesday morning, Blue Bell, Pa.-based Unisys upsized its deal to $300 million from $250 million and priced the 6 7/8% of seven-year senior unsecured notes (Ba1/BB+/BBB-) at 99.319 to yield 7%, at the tight end of the 7%-7¼% price talk via Salomon Smith Barney and Banc of America Securities.

The quick-to-market Unisys transaction came just one day after iStar, the New York-based finance company, sold investors $150 million of five-year senior notes (Ba1/BB+/BBB-) which also came with a yield of 7%, at the tight end of the 7%-7 1/8% price talk, via Deutsche Bank Securities.

"People feel like they need to put their cash to work before the war," one sell-side official commented in the wake of the Unisys transaction, Wednesday afternoon, explaining the "un-junk-like" yield of Unisys.

The source pointed to the fresh 6 7/8%-7 1/8% price talk on Peabody Energy's $500 million of 10-year senior notes (Ba3/BB-/BB), set to price Friday via Lehman Brothers and Morgan Stanley and stated that right now because of all of the cash said to be in the market issuers and the investment banks seem to be holding most of the cards. The talk, the sellsider noted is just "slightly behind" last December's 6 7/8% area price talk on Ball Corp.'s deal, which led to a record low yield of 6 7/8%.

"If the market stays like this everything will be pricing at the tight end of the range," the source said.

"If a deal seems to be coming together you know it's going to price tight just because you know there is enough leverage for the underwriters to really push it."

When the newly issued bonds were freed for secondary, a trader pegged Unisys' debt at 99.375 bid/99.625 offered, not much changed from its 99.319 issue price.

"It isn't blowing the doors off," he said. He had not seen the Shaw bonds, but another trader suggested that they were "at or close to their issue price," of 98.80. The William Lyon bonds appeared too late in the session to warrant meaningful secondary activity.

One new issue boarded the forward calendar on Wednesday. Nyco Holdings was heard to be coming €225 million of 10-year senior notes (B3/B-) via Credit Suisse First Boston. The Norweigian pharmaceutical firm's deal began roadshowing on Tuesday and is expected to price late in the week of March 10 or early in the week of March 17.

In addition to the Peabody Energy price talk, the market on Wednesday heard talk of 10¾% on AmeriPath Inc.'s upcoming sale of $210 million of 10-year senior subordinated notes (expected ratings B3/B-). It is expected to price Thursday afternoon via Credit Suisse First Boston and Deutsche Bank Securities.

And talk of 9¾%-10% emerged on General Maritime Corp.'s $250 million of 10-year senior notes (B1/B+). The New York City-based crude oil transporter's notes are expected to price on Friday, via JP Morgan.

Although some market observers had anticipated hearing terms Wednesday on Global eXchange Services, Inc.'s $175 million of five-year senior secured floating-rate notes (B1/B+) via Credit Suisse First Boston, no terms emerged. One informed source advised Prospect News after Wednesday's close that the GXS floaters, talked at three-month Libor plus 750 basis points, are now expected to price Thursday at the earliest.

(Carlise Newman contributed to this report.)

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