Delta bonds seen firmer on pilot progress possibility; asbestos names up on payout fund developments

By Paul Deckelman and Paul A. Harris

New York, Sept. 15 - Delta Air Lines Inc. bonds were seen gaining some altitude Wednesday on investor optimism that the troubled Atlanta-based air carrier and its pilots might yet reach an agreement on the thorny question of early pilot retirements, which threaten to disrupt Delta's operations and possibly plunge it into bankruptcy. However, that optimism may prove to be short-lived, overtaken by other Delta developments after the financial markets had ended trading for the day.

Also up were the bonds of some asbestos-challenged companies, buoyed by the news that the months-long Capitol Hill logjam over a proposed claims payout scheme might finally be breaking up. That raises the possibility that the plan might actually be approved before Congress goes home to campaign for the fall elections, which would remove a major source of uncertainty from over the heads of the companies, many of which are in bankruptcy as a result of a flood of asbestos-related lawsuits.

A trader in distressed bonds saw the notes of bankrupt Lancaster, Pa.-based flooring maker Armstrong World Industries as having firmed to 64 bid, 66 offered from prior levels at 62 bid, 64 offered, while bankrupt Toledo, Ohio-based insulation maker Owens Corning's bonds were at 46 bid, 47 offered, from 44 bid, 46 offered previously. Bonds of the bankrupt Southfield, Mich.-based auto parts maker Federal-Mogul Corp. were seen a point better at 31 bid, 32 offered, although the trader said that he hadn't seen "any real activity" in the sector names.

"It wasn't dramatic," another trader said in the upside move, even as he quoted the Federal Mogul bonds up nearly a point at 31 bid, 31.5 offered.

"There's still the whole question of whether they can even get this legislation passed in this election year," he said.

A third trader said he had actually seen non-bankrupt companies with asbestos issues unchanged to off slightly, with Philadelphia-based packaging maker Crown Cork & Seal's bonds a bit lower and its Toledo, Ohio-based rival, Owens Illinois, unchanged.

The bankrupt asbestos names were pushed up on the news that Senate leaders had agreed on the size of the payout fund - which had been a sore sticking point for months between Republican and Democratic negotiators.

According to news reports, Senate Democratic leader Tom Daschle agreed to $140 billion in overall funding, the sum proposed by his Republican counterpart, Bill Frist. Daschle had previously sought a $145 billion fund, to be paid for by the companies with asbestos liabilities and their insurers. Earlier this year, a $125 billion fund proposal went nowhere, as critics called it "inadequate."

But while Frist and Daschle now agree on the size of the plan - and Daschle has additionally softened his earlier insistence that existing asbestos claims should be allowed to work their way through court if the plaintiff does not want to turn to the new fund for payment - there are still obstacles to be overcome, including differences between the two leaders on the projected lifespan of the asbestos fund and other issues.

And a key Democratic ally in the asbestos fight, organized labor, is not thrilled with Daschle's compromise. The AFL-CIO wants to see a fund of at least $149 billion, with no limitation on plaintiffs' right to take their cases into the courts - the outcome that the plan is intended to curb.

"We can't support something we think will fail the victims. At the end of the day, it isn't about reaching agreement, it's about putting in place a program that compensates victims with asbestos disease," the union group said in a statement.

Even so, Daschle wrote in a letter to Frist that "too much progress has been made to let this issue go unaddressed in this Congress," which is scheduled to head for home several weeks before the Nov. 2 elections.

Daschle told Frist that if Congress cannot reach agreement this year, the Senate should make a thorough review of new information on asbestos, including data on projected claims.

Delta higher on pilots' move

Elsewhere, Delta's bonds were seen up after the Air Line Pilots Association ordered its negotiators to try to reach an agreement with the company on the thorny issue of early pilot retirements. It has been feared that if many senior pilots - fearful of sticking around and taking a giant-sized pay cut - choose instead to retire and begin drawing the pensions they have built up, the disruptions to the carrier's flight schedule might wreck its plans to stay out of bankruptcy.

The union posted a statement on its Web site saying the negotiators had been directed to try to mitigate the problem of early pilot retirements, "with the goal of preventing a substantial disruption of operations."

The hope of an agreement soon between the airlines and its 7,500 pilots pushed Delta's benchmark 7.70% notes due 2005 up to 44 bid, 46 offered, traders said, from 42 bid, 44 offered, while its 8.30% notes due 2029 were seen a point better at 26 bid, 28 offered.

However, one trader saw the 8.30s unchanged at 25 bid, 27 offered, and said the gain in the 7.70s was only around a point, with the bonds ending at 45 bid, 46 offered, having weakened from their earlier peak level at 46 bid, 47 offered.

Delta's convertibles were easier by about 1 point each during the regular session Wednesday with the 8s at 35 and the 2.875s at 36, but headlines after the closing bell sent those bonds lower along with the stock, which fell more than 6% in after-hours trading, traders said.

Delta bears note that the airline and the pilots are unlikely to be able to smooth over the differences and reach an agreement before the end of the week at the earliest, despite hopeful earlier projections by CEO Gerald Grinstein that such a deal could be in place. The also note that late in the day, the airline announced that its auditors had expressed doubt about Delta's ability to continue as a going concern - a development usually seen as a prelude to a bankruptcy filing.

And Delta announced that as part of its effort to restructure without the courts, it was beginning an offer to exchange up to $680 million principal amount of three series of newly issued senior secured notes for outstanding unsecured debt securities and enhanced pass through certificates (see related story elsewhere in this issue) . Still to be seen is whether the holders of the existing notes go for the plan - which involves a severe discount to the face value of their current holdings.

Adelphia convertibles see buyers

Adelphia Communications Corp. convertibles were better to buy Wednesday, with the 6% convertibles offered at 33.25, but supply was short for that paper.

A buyside market source said the 33.25 asking price was down about 2 points, but a sellside distressed trader said he hadn't seen the converts any higher recently. The trader noted Adelphia's 10.875% bonds were in the 94 area and the 9.875% bonds in the 92 neighborhood. Adelphia shares Wednesday lost a penny, or 2.5%, to end at 39 cents.

Late Tuesday, Adelphia announced that the bankruptcy court had approved UBS Investment Bank and Allen & Co. LLC as financial advisers for the Adelphia auction process, which was no surprise, and otherwise, there was no new developments on the Greenwood Village, Colo.-based cable company's sale, which is slated to begin later this month and extend through the remainder of the year.

Among potential buyers for the Adelphia assets, which analysts estimate could fetch up to $20 billion, are cable giants like Comcast Corp., Time Warner Inc. and possibly Cox Communications as well as Charter or top executives at some of those cable companies.

Last week, Time Warner chief financial officer Wayne Pace said at a Morgan Stanley investor conference in Washington, D.C., that it could finance such a deal via a reverse merger with its own cable unit. In a reverse merger, Adelphia would offer to buy Time Warner's cable division and the two companies would merge with Time Warner retaining a majority but smaller stake in the new company.

Most onlookers feel that is not a reasonable probability, however, the distressed trader said.

Foster Wheeler threat falls flat

Foster Wheeler Ltd.'s convertibles dropped about 3 points Wednesday on fears that its debt-for equity exchange will not get done, but there was some optimism in the situation. Yet, Foster Wheeler again extended the exchange, warning of severe consequences if it fails, which many interpret to mean that bankruptcy would follow a failure.

Foster Wheeler said the participation threshold for its 9% convertible preferreds had still not been met, and issued a sharp warning of the consequences if the exchange fails.

"Let me be perfectly clear," said Raymond J. Milchovich, chief executive of Foster Wheeler, in a prepared statement. "Unless the tendered amount of preferred securities meets or exceeds an acceptable minimum threshold, this exchange offer will fail. If it does fail, all of the company's stakeholders will suffer."

The Foster convertibles dropped 3 points on Wednesday to 87 from 90 on Tuesday, a buyside market source said, "due to the fear of the deal not closing."

"Apparently, the company only needs another 800,000 convertible trust preferred shares to close the deal and is asking the preferred holders to tender a pro rata amount of the preferreds they hold, up to 800,000, so the holders can preserve the balance of their preferred position and not make the company file Chapter 11 [bankruptcy]," the buyside source said.

"The preferred holders' feeling is that there isn't any chance of the company filing Chapter 11 because of 800,000 shares of preferred not tendering their shares. It's kind of interesting."

Thus far, only 49.3% of the preferreds have been tendered, up from 48.7% at the last report on Sept. 10 but still shy of the 60% threshold, which was amended Sept. 2 from the previous 75% threshold and down from an original target of 85%. The exchange offer, which also includes the 6.5% convertible bonds and three series of "Robbins" bonds, now expires at 5 p.m. ET Sept. 17.

A sellside trader said the Foster Wheeler convertible bonds traded lower out of a fear that the convertible preferred holders could in fact force the company into bankruptcy by refusing to go along with the exchange. Nearly all, or 99.97%, of the $210 million 6.5% convertible bond issue has been tendered for the exchange.

"It has been a game of chicken that has just gone too far for a lot of people; they were ready to bail out," the trader said.

Foster Wheeler has been trying to accomplish the debt exchanges since July 2003.

Atkins concerns

In trading in distressed bank debt, meantime concerns continued over Atkins Nutritionals Inc.

One trader told Prospect News on Wednesday that news that Atkins had hired a turnaround specialist amid its struggles with competition from rival food companies and declining consumer interest in low-carb diets is "making people nervous.

"That's been a story for the last few days," the trader added. "Definitely everything is down. I heard the first lien was trading in the low 80s. The second lien is a big mystery.

"I hear they had a bank meeting to try to change the covenants and the pricing."

On Monday, a trader told Prospect News the first-lien paper was thought to be in the 80 bid to 83 offered area and the second-lien paper in the 60s. He added that some had mid-to-high 70s on the first-lien debt but he disagreed with those levels.

By comparison, at the start of last week, the first-lien bank debt was in the mid-to-high 80s area and the second-lien paper was in the low 80s, the trader added.

The fall has been influenced by meetings that have been taking place between Atkins - a Ronkonkoma, N.Y. -based provider of food, nutritional and information products for controlled carbohydrate lifestyles - and its bank lenders regarding concerns about financial numbers.

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