Airline bonds gain altitude on cost-cutting moves; Williams Cos. firmer also

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - Airline industry bonds were flying a little higher on Wednesday, as those companies' battered stocks bounced on indications that the carriers would cut operations to cut costs. Also on the upside was Williams Cos., which held a conference call during which it sought to reassure investors and analysts that it would be able to meet its debt obligations.

The airlines - whose shares and bonds had taken a pounding over the last several weeks in the wake of US Air's recent bankruptcy filing and warnings from Number-Two U.S. carrier United Airlines that it might have to do likewise - were higher Wednesday, a day after Continental Airlines announced plans to tighten its corporate belt in an effort to get its finances to straighten up and fly right.

Houston-based Continental said that it would cut flights and park aircraft, reducing capacity by 4% next year, and said it would charge low-fare customers new fees. All told, Continental hopes to nickel-and-dime its way back to financial health with over 100 small cost-cutting moves, which are expected to generate pretax gains of about $80 million for the rest of 2002 and $350 million annually once fully in place, the company said.

Those Continental cuts follow industry leader American Airlines' announcement last week that it would cut 7,000 jobs - and that may not be the end of it. Chairman/CEO Donald Carty of American's parent company, AMR Corp., said late Tuesday that it would likely make further cost-cutting moves, warning that "if our major competitors go bankrupt, we may well find ourselves competing against airlines who could use the bankruptcy process to take a huge chunk out of their costs," a clear reference to US Air and, potentially, UAL.

The prospect of airline cutbacks to stem the flow of red ink clearly did not have Wall Street seeing red; Continental's shares jumped $1.42% (15.60%) to $10.52, while AMR's were up an even stronger $1.88 (20.17%) to $11.20. Delta Airlines, already considered one of the better-managed major air carriers, was up $2.49 (14.97%) to $19.12.

On the debt side of the ledger, the bonds were likewise pushing toward the wild blue yonder after having been recently beaten down. The sector was "up strong, and continuing strong," a trader said, while another was quoting Delta's 7.70% notes due 2005 as having moved up to 75 bid from prior levels at 70- bid/75 offered. He saw Northwest Airlines' 9 7/8% notes due 2007, which had gone home Tuesday offered at 58, trading Wednesday at 62 bid, although he didn't see very much activity in Continental. At another shop, however, Continental's 8% notes due 2005 were being quoted up a deuce at 59 bid, 61 offered.

At yet another desk, Delta was seen up about three to four points across the board, with Continental and Northwest "also up, but not as much." The general consensus on UAL's bonds - beaten down into the single digits on the company's bankruptcy warning and then having bounced back a bit into the teens and lower 20s - was that they're so far down, relative to everyone else, that "nobody's doing anything in them."

A trader noted that in a sort of aeronautical version of the old saying that "a rising tide lifts all boats," the bonds of companies whose business depends on the airlines were also up. He quoted B/E Aerospace's 9½% notes as having pushed up to 84 bid/86 offered from recent levels around 80 bid, while Sequa Corp.'s 9% notes due 2009 rose to 95.875 bid from 92 earlier. Both manufacture airplane components.

Also in the transportation sphere, he saw Sea Containers Ltd.'s debt "up strongly today," citing unconfirmed market rumors that the Hamilton, Bermuda-based shipping and hotels concern might be buying back debt.

He saw Sea Container's 10½% notes due 2003 a point better at 99 bid, its 12½% notes due 2004 ending at 96.5 bid, up from 95, its 10¾% notes due 2006 going out at 89.25 bid, versus 87 on Tuesday - although "not on big size" - and its 7 7/8% notes due 2008 firming smartly to 76 bid from recent levels as low as 71 bid/72 offered.

Elsewhere, Williams Cos.' bonds "were better bid" a trader said, after the Tulsa, Okla.-based pipeline operator discussed its financial projections with investors and analysts on a conference call. He quoted Williams' 7 1/8% notes due 2011 as having improved to 62 bid.63 offered from pre-conference call levels at 60 bid/63 offered.

Trading, he said "was spotty, with not much trading really going on," but the bonds "were definitely better bid after the call."

At another shop, a trader said the Williams bonds "took off," initially improving three to four points after the conference call, although they surrendered some of those gains later to close up only modestly.

He quoted Williams' 6¾% notes due 2006, which were trading at 63.5 bid/65.5 offered before the conference call, as having moved up as high as 67.5 bid/68.5 offered afterward, before easing back to end at 64.5 bid/65.5 offered, up a point on the day when all was said and done.

Williams, seeking to assuage investor concerns that it might not be able to generate enough income after having sold one of its pipelines recently as part of a $1.8 billion asset-sale package, said that it expects $630 million to $660 million in the coming year from its three remaining interstate natural gas pipeline operations and $780 million to $850 million from its energy services business. Williams shares rose 80 cents (28.47%) to $3.61.

Williams' confident-sounding projections helped lift other companies in the merchant energy power generation and energy trading sector, including Calpine Corp., whose debt was described by a trader as "a lot stronger" after having dipped for several days; he quoted the San Jose, Calif.-based power generating company's 8½% notes due 2011 as having firmed to 47 bid/49 offered by the end of the session, well up from 44 bid/45 offered previously. Calpine's 8 5/8% notes due 2010 were up nearly two points on the session, at 43.5 bid. Calpine's shares rose 39 cents (9.87%) to $4.34.

Also getting a bit of a sector boost was AES Corp., whose 8 3/8% notes due 2007 ended at 30 bid, up two-and-a-half points, and whose stock was up 21 cents (9.55%) at $2.41. AES firmed despite cuts in the debt ratings of its AES Drax Holdings unit, which operates in Britain; AES said on Wednesday that it planned to help fund an interest payment due to AES Drax noteholders on Aug. 30 because the unit could not make the entire payment itself. However, the Arlington, Va.-based corporate parent warned that it could give no assurance that it would continue to provide funding for future AES Drax interest payments.

Meanwhile, squeeze as hard as you please, as the Dog Days of August begin to wind down it remains difficult to wring a drop of hard news out of the high-yield primary market, as was the case on Wednesday.

Nothing on the calendar, nothing on the road, sell-side sources reiterated, adding that it would be a mistake in any case to read too much into those circumstances no matter what the condition of the other capital markets.

It was the buy-side Wednesday that sounded an upbeat note on high yield. Prescott Crocker, portfolio manager of the Evergreen High Yield Bond Fund told Prospect News that the bleeding from high-yield mutual funds will come to an end in short order.

"High yield's getting moving again," Crocker stated.

"The stock market rallied on July 24 and it's still rallying. The high-yield market, as of yesterday, started to rally again. What you'll see is a renewal of cash flows into the market, which is the reason for the rally."

Crocker specified that the vaunted string of successive outflows form high-yield mutual funds, reportedly amounting to approximately $2.5 billion, will cease in the present week. He added that based on evidence he has seen he anticipates an inflow of $100 million or more to be announced.

"I see bids coming in on Nextel," the Evergreen fund manager added. "I see bids in areas where we didn't have bids before.

"The good news is in the wireless sector. You're having mergers. VoiceStream and Cingular are talking. The market's realizing that we can actually lower the competition."

When Prospect News last spoke to Crocker on July 16 he disclosed that his interests as an investor were solely in the secondary market. On Wednesday, when the subject of new issuance came up, he emphatically reiterated this stance.

"I don't like forward calendar," he said. "I don't think they're going to be able to build it as fast as they'd like to.

"The best stuff is in the secondary market. When you can buy AT&T for a 9.40% (yield) you're going to have to look long and hard to be able to get a new issue investment opportunity that is equivalent.

"The new issue market does not have the kinds of opportunities that I want."

Crocker said that he paid "82, 83" for AT&T paper on June 26, and reported that its current price was 91.3.

"We paid 62 for short-duration Sprints," he added.

"The reason that we bought Sprint is that everybody was convinced that the banks weren't going to finance them or were going to finance them on a secured basis. So the stuff crashed. It was a good buy.

"And there's a lot more out there. The problem if you like it is getting it delivered to you. There may be only four or five bonds, in some cases even less than that."

Crocker also expressed the opinion that recovery is underway in the U.S. economy.

"We're in a surprisingly strong recovery," he said. "The market is going to have to learn that and will be surprised when it does.

"Until something bad happens in the Middle East, in Iraq, we're in a positive environment for the economy and for the markets."

Hard news from the sell-side remained in scarce supply, Wednesday. One source said yes, QwestDex would likely emerge with substantial new high-yield issuance as part of the debt financing for the $2.75 billion first stage (of an eventual $7.05 billion) the LBO of Qwest Communications' yellow pages operations. Sources told Prospect News on Tuesday that "Dex" is likely to be October business and that Banc of America Securities, Deutsche Banc Securities, JP Morgan, Lehman Brothers and Wachovia Securities are the underwriters.

When pressed for the likely size of the QwestDex deal, however, the official would only say: "Stay tuned."

The Burger King LBO by a group of investors lead by Texas Pacific Group will also probably bring junk bonds, the source added, although whether or not the deal will be a whopper remains to be seen. A sell-side source from a different institution advised Prospect News on Tuesday to expect Burger King to come before the end of 2002.

Finally Prospect News put the arm on Wednesday's source, pressing to learn what kind of talk circulates in his investment bank about the buy-side's liquidity at present, given the above-mentioned string of reported outflows.

This official responded that new issuance has been notably limited for much of the duration of those negative flows.

"Obviously with the money flowing out some accounts are losing money," the source said.

"But there hasn't been a lot of deals. The new issue market has been kind of light, even in July."

When asked if the forward calendar can be expected to build meaningfully in the wake of the Labor Day holiday, this source alluded to the outflows, to volatility in the stock market and the headlines on the financial pages.

If those factors turn around, the source said Wednesday, the calendar will begin to build.

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