Delta Air steps up second-lien notes interest after S&P's CCC+ rating

By Paul Deckelman

New York, Sept. 24 - In an unusual move, Delta Air Lines Inc. will have to pay bondholders an additional 50 basis points of interest on its new second-lien senior secured notes due March 15, 2015 that priced on Wednesday afternoon, due to a stipulation buried deep in the new issue's pricing terms calling for that additional interest payment in the event that Standard & Poor's would rate those bonds at CCC+ or below - an event which did in fact come to pass on Thursday.

A sharp-eyed junk bond trader noted that a news-service listing for the new bonds described them as 12¼% notes, rather than the 11¾% coupon widely reported late Wednesday and early Thursday, and commented that "they may have raised the coupon on this thing," adding that "it looks like they are CCC+." The trader could not recall any recent similar circumstance.

Atlanta-based airline major Delta priced $600 million face amount of the 2015 bonds on Wednesday as part of a two-part, $1.35 billion mega-deal that also included $750 million face amount of 9½% first-lien senior secured notes due Sept. 15, 2014. The second-lien notes, initially carrying an 11 ¾% coupon, priced at 95.288 to yield 13%.

The Rule 144A deal came to market via bookrunners J.P. Morgan Securities, Inc., Barclays Capital Inc. and UBS Investment Bank.

At the time the deal priced, Moody's Investors Service had rated the first-lien piece at Ba2 and the second-lien piece three notches below that at B2, while S&P had rated the first-lien notes at BB, but had not yet assigned a rating to the second-lien notes.

A market source said that as part of the deal terms, Delta would pay an additional 25 bps of interest on the latter bonds if S&P were to initially assign them a B- rating - and that would go up to an extra 50 bps if the agency assigned the bonds a rating of CCC+ or lower, or if it did not assign any rating by Oct. 28, one month after the settlement date.

S&P, in fact, did announce on Thursday that it had assigned a CCC+ rating and a 6 recovery rating to the second-lien notes, with the 6 recovery rating indicating S&P's expectation of minimal recovery at best - in the zero to 10% range -- in a payment default scenario.

In assigning those ratings, S&P credit analyst Betsy R. Snyder cautioned that "our ratings are based on our modeling of estimated recovery in a default scenario, which concluded that the second-lien notes would receive no value after the senior claim of first-lien lenders and noteholders is satisfied."

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