Airlines off as industry outlook still clouded; Gap firm on earnings; smaller Constar prices

By Paul Deckelman and Paul A. Harris

New York, Nov. 15 - Airline debt was flying south on Friday as executives from several major carriers expressed pessimism about the troubled industry's near-term prospects. Elsewhere, Gap bonds firmed a bit on the underperforming store chain operator's surprising quarterly profit. The appointment - as expected - of former Compaq Computer and Hewlett Packard Co. executive Michael D. Capellas as the new chief executive officer of WorldCom Inc. was seen having little impact on the bankrupt phone operator's bonds.

In the primary market, Constar International Inc. - being spun off from Crown Cork & Seal Co. Inc. - brought its offering of 10-year senior subordinated notes to market, although the deal was downsized and priced wide of pre-deal market price talk.

The Philadelphia container-maker priced $175 million of 10-year 11% senior subordinated notes (B3/B) on Friday at 98.51 to yield 11¼%. Talk had been for a yield of 10¾% to 11% and the deal had previously been planned at $200 million. Bookrunners were Salomon Smith Barney and Deutsche Bank Securities Inc.

The company intends to use the money raised in the registered offering to help fund its spin-off from Crown Cork & Seal, and to repay debt to Crown Cork & Seal.

Also during Friday's session terms emerged on investment-grade credit TECO Energy Inc., which priced a deal with six Bs from the rating agencies but attracted considerable attention from the world of high yield.

TECO priced $352 million of its new five-year 10½% senior notes (Baa2/BBB-) at 92.684 to yield 12½%. Price talk was for a yield in the 12½% area.

"Most of the investors in the deal were high yield," commented company spokesperson Laura Plumb during a conversation late Friday with Prospect News.

And as the high-yield primary market maintained the comparative momentum that characterized the four-day week of Nov. 11 right up to the end of the week's last session, two new offerings appeared Friday. A deal from El Paso Energy Partners LP was heard to be coming through the pipe for pricing late in the week of Nov. 18. And Swedish shipping company Stena AB pulled out of the harbor Friday with a dollar-denominated deal.

El Paso Energy Partners figures to price $150 million of 10-year senior subordinated notes (B1/BB-) on Thursday or Friday via JP Morgan, Goldman Sachs & Co. and UBS Warburg.

The Houston energy company will use the money to fund the acquisition of the San Juan assets from El Paso Corp.

Stena was heard set to start roadshowing $200 million of 10-year senior notes (Ba3/BB-) on Monday, with pricing expected on Nov. 22. JP Morgan is the bookrunner.

During a conversation Friday with investor Diane Keefe, the Pax World High Yield Fund portfolio manager told Prospect News that the high-yield market looks much improved from when in bottomed out during the first half of October.

"Besides the cash coming in there is also the Republican victory," Keefe commented. "That's making some people think that there will be a change in tax law such that there won't be the double-taxation of dividends, which would mean that debt and equity would then be considered equal from the point of view of corporate management. Right now there is a big incentive to keep debt on the balance sheet because you get to write off the interest expense, whereas you don't for dividends. If they change the tax laws - and the Republicans have often said that they have wanted to - it would be an encouragement to companies to pay more dividends and raise more equity and pay down debt.

"That would be a good thing for junk because the companies themselves would have an incentive to de-lever more than they are now. And the outstanding supply of leveraged companies would, over time, shrink.

"So besides the technicals of money coming into the market, as Treasuries are beginning to weaken you also have the possibility that the whole structure of the market will change."

Keefe, whose Pax World fund submits credits to a series of social issues screens, told Prospect News that she did not bother to submit the Constar International deal to those screens.

"I wasn't interested once I saw all the language in the prospectus about the potential asbestos carrying over from Crown Cork & Seal," Keefe said. "Forget it."

However the Pax World portfolio manager said she did play the National Waterworks Inc. deal which priced last Thursday.

The Waco, Tex. waterworks transmission products distributor priced $200 million of 10-year senior subordinated notes (B3/B) at par to yield 10½%, at the tight end of the 10½%-10¾% price talk. Bookrunners were Goldman Sachs & Co. and JP Morgan.

"Part of it is not cyclical because it's municipal, i.e. repairs," Keefe noted. "The other part is very cyclical because it's related to real estate development. So they make their good margin on stuff that is cyclical, and will slow down. That's why they had to put the coupon they put on it. But considering where homebuilder bonds are trading it was cheap. And therefore it traded to a big premium."

Keefe also expressed interest in deals positioned to price during the week of Nov. 18:

Atlanta healthcare information services company NDCHealth Corp.'s $175 million of 10-year senior subordinated notes (B2/B) looks pretty good to her. The deal is expected to price Tuesday via Credit Suisse First Boston and Merrill Lynch & Co.

"They look like they have good market positions," Keefe commented. "And providing software to health care and pharmaceutical-related businesses makes a lot of sense. Businesses like OmniCare have done fabulously well at that.

"There is a holy grail of identifying efficiencies with how patients are treated with pharmaceuticals. And if a company can really show that it adds value in that respect - that it makes it a more efficient process for the health care professionals involved - it can make a lot of money."

The Pax World High Yield Fund manager also said that the news that George Sherman, former CEO of Danaher Corp., is being brought in to run Rexnord Corp. renders the Milwaukee-based industrial conveyor equipment manufacturer's $225 million of 10-year senior subordinated notes (B3/B-) worth a closer look.

"I know Danaher was a very well-managed company," she said.

Finally Keefe told Prospect News that biggest deal on the calendar for the week of Nov. 18 - R.H. Donnelley Corp.'s $750 million to help finance its $2.23 billion acquisition of Sprint's directory publishing business, is also of interest.

"We didn't buy the Dex deal," Keefe remarked, alluding to the two-part Dex Media East LLC/Dex Media Finance Co. $975 million high-yield deal that priced on Oct. 30.

"Dex was too levered," Keefe said. "I just don't see going over six-times levered for a directories business. We're probably going to play the Donnelley deal because it's under six-times levered just by a nose: 5.9-times levered."

When the new Constar bonds were freed for secondary dealings, they were quoted in the 98.625-98.875 range, although, a trader said, "there really was not a bid around. There were more sellers involved."

Back among already existing issues, airline bonds were quoted lower, in the wake of Thursday's news that troubled United Airlines is trying to line up debtor-in-possession financing as a contingency against a possible bankruptcy filing, as well as bearish assessments about the industry's prospects.

Northwest Airlines's 7 7/8% notes due 2008 were seen at 53.5 bid, down more than five points on the session, while Continental Airlines' 8% notes due 2005 were down more than three points on the session to close at 52.

Continental's president, Larry Kellner, spoke Thursday at Salomon Smith Barney's transportation conference in Florida, and he cautioned that the already struggling airline industry faces such challenges as declining business travel and dramatic restructuring by many of the major carriers, which have been slashing routes, cutting jobs and seeking wage give-backs from their members.

On top of that looms uncertainty about whether the U.S. will go to war with Iraq - and if so, how long such a conflict might last.

Kellner told investors at the conference that while a five-day war could boost travel demand and benefit the airlines, a five-week war would be a neutral factor - and a five month-war could be devastating.

The major airlines face uncertainty over fuel prices and availability in the event of prolonged conflict in the Middle East, as well as the possibility of further terrorist assaults like those of Sept. 11, as well as government and industry countermeasures, which would likely inconvenience passengers and dampen demand.

Also speaking at that conference was Delta Airlines' chief financial officer, M. Michele Burns, who warned that ""there's nothing on the horizon that indicates that we should expect a revenue recovery in 2002, nor in 2003."

With business travel still stunted by the effects of the overall economic slowdown - industry experts say that while it's up somewhat from the very low levels of a year-ago in the immediate aftermath of 9/11, its still down 37% from the comparable period in 2000 - Burns lamented that "until we see corporate earnings show some upticks, we don't expect to see airline revenue uptick because airline revenue tends to lag."

Northwest CEO Richard Anderson sounded a similar note in speaking to the Florida conference on Friday, saying that a revenue recovery was unlikely in 2003, even though his Minneapolis-based carrier's yields, or average revenue per passenger, remained above industry levels in October, due to price initiatives.

While the bonds of such carriers as Northwest and Continental were lower Friday, little additional movement was seen in United Airlines bonds, which had swooned at least 10 points Thursday on the news that UAL was talking with banks in an effort to line up DIP financing for use in the event if has to file for bankruptcy - a scenario which the struggling Number-Two U.S. carrier has warned is quite possible if it doesn't get a $1.8 billion federal loan guarantee that would allow it to borrow $2 billion.

UAL's 10.67% notes due 2004, which had recently flown as high as 42 bid, were seen Friday clinging to the same mid-20s level to which they had fallen on Thursday.

Elsewhere, there was little negative fallout from the news that the Federal Energy Regulatory Commission had released a report indicating that Williams Cos. and AES Corp. conspired to drive up energy prices in California during the Golden State's power crunch in late 2000 and early 2001.

The agency released documents detailing conversations between employees of Williams and AES about making scheduled maintenance outages drag on longer at two California AES plants - whose power was sold in the state through Williams.

Williams and AES both contend that this is essentially old news, that no impermissible actions were actually taken, and that they settled the matter with the FERC in April, 2001.

A trader said "there really was no movement in Williams" on Friday, quoting the Tulsa, Okla.-based pipeline operator and merchant energy company's 8 ½% notes due 2012 holding steady around 70 bid/71 offered.

Meantime, a market source saw Arlington, Va.-based power plans operator AES' 9 3/8% notes due 2010 a point lower at 47.

Williams's shares lost 27 cents (9.68%) to end at $2.52. AES stock was down two cents (1.30%) to $1.52

On the upside, there was some firming in the bonds of The Gap, which "gapped up," a market-watcher quipped, after the San Francisco-based apparel retailer late Thursday reported third-quarter net income of $135.27 million, or 15 cents a share, versus its year-earlier loss of $178.8 million (21 cents a share). Gap beat Wall Street estimates by a penny per share.

Gap even exceeded its own recent forecast of earnings in the 12 to 14 cents range, which in turn caused analysts to up their projections from six cents a share to 14 cents.

The swing to a profit from a year-earlier loss dovetails with the recent turnaround Gap has seen, actually posting increased same-store sales in October - the first time in two-and-a-half years that the monthly gauge of retailing performance has been up.

Gap shares rose 92 cents (6.62%) to $14.82. On the bond side, its 5 3/8% notes due 2003 and 9.90% notes due 2005 were each half a point better, at par and 104 bid, respectively, while its 6.90% notes due 2007 closed at 95 bid and its 10.55% notes due 2008 at 106, each up a point.

"I didn't think the numbers were bad - and I didn't think they were great," a trader said. "I just figured that they would trade [unchanged] - but the 6.90s were up a point, and [investors] keep chasing the 8.80s of 2008, up around 106 bid. A month ago, they were 94-5. That's a big jump - 12 points in four or five weeks."

WorldCom bonds were seen unchanged to a little bit firmer on the not-unexpected news that Michael D. Capellas, formerly chairman and CEO of Compaq Computer and more recently, president of Hewlett -Packard, is coming aboard as chairman and CEO of the troubled Clinton, Miss.-based telecom operator, replacing John Sidgmore, who had held the job on an interim basis following the ouster this past spring of long-time WorldCom chief Bernard J. Ebbers among revelations of massive accounting problems at the company.

WorldCom's bonds were all quoted around the 23.25 bid level, up about a quarter-point on the session, while long-distance unit MCI's bonds were in the 47 bid range.

Market participants noted that the news was essentially already priced in, since the bonds of both companies had firmed smartly earlier in the week - WorldCom up about four or five points - on the news that Capellas had resigned his H-P post and the speculation that he would be tapped to head the turnaround at WorldCom, currently in Chapter 11.

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