Federal-Mogul bank debt off on U.K. pension plan news; Delta bonds off

By Paul Deckelman and Sara Rosenberg

New York, Dec. 7 - Federal-Mogul Corp.'s bank debt was heard by market participants to have come under some pressure on Tuesday as news reports surfaced that the company had withdrawn its offer to continue the pension scheme for its U.K.-based Turner & Newall subsidiary.

However, the company's bonds, and those of other asbestos-challenged companies such as Owens Corning, Armstrong World Industries and USG Corp. were seen generally little changed. Bond traders said that Delta Air Lines Inc.'s notes seemed to ease several points.

Federal-Mogul's decision to withdraw the pension plan offer pushed both the company's revolving credit loan and the term loan A paper down by about a quarter of a point, with the revolver quoted at 93.5 bid, 94.5 offered and the term loan A quoted at 93.75 bid, 94.25 offered, a trader said.

The latest development in the case followed by a day the Southfield, Mich.-based auto parts manufacturer's announcement late Monday that it had postponed a hearing to confirm its plan to exit bankruptcy, which was to have started on Thursday. The company instead said that it would move forward with an estimation of asbestos personal injury claims against its U.K. unit, starting Thursday. Once the company has those estimates, it will amend its reorganization plan and then move forward with the confirmation hearing for its plan, aimed at getting Federal-Mogul out of bankruptcy, where it has been since October 2001.

The court appointed administrators for Turner & Newall meantime called the planned U.S. liability hearing irrelevant, and said they would still proceed with previously announced plans to sell the business and its assets.

Interestingly, Federal-Mogul's $1.418 billion exit facility broke for trading on Tuesday, with the $828 million senior secured seven-year term loan B (B1/B+) quoted at 100.25 bid, 100.75 offered by the end the day. The tranche priced with an interest rate of Libor plus 300 basis points, up from original price talk of Libor plus 225 to 250 basis points.

The company's exit facility also contains a $500 million asset-based five-year revolver (Ba2/BB) with an interest rate of Libor plus 225 basis points, and a $90 million synthetic letter-of-credit facility (B1/B+), downsized from $105 million, with an interest rate of Libor plus 300 basis points. The synthetic letter of credit facility was also flexed up from original price talk of Libor plus 225 to 250 basis points.

Citigroup is the lead bank on the deal.

While Federal-Mogul's bank debt was easing, bond traders said that the company's bonds were little changed, still holding around 32.5.

Among other bankrupt companies bedeviled by massive asbestos liability claims, Toledo, Ohio-based insulation maker Owens Corning's bonds were seen "down a little," a trader said, quoting them at 79 bid, 80 offered. However, at another desk, a market source quoted the bonds actually slightly firmer on the day, at 79.75.

He meantime saw Lancaster Pa.-based floorcovering maker Armstrong World Industries' bonds down ¼ point to 70.25

Chicago-based building products maker USG Corp.'s bonds were seen continuing to hover around the 130 bid level. USG - like the others in bankruptcy for several years - said that it expects to pay all asbestos and other creditor claims in full and anticipates exiting bankruptcy with "substantial" equity, assuming the court approves its preferred method of calculating its asbestos liability.

The bonds, shares and bank debt of the asbestos-challenged companies have fattened up handsomely since last month's elections, on the assumption by investors that tightened Republican control of the House and, especially, the Senate, is likely to lead to an end to the legislative gridlock that stymied congressional efforts all this year to craft a claims-paying mechanism that would also shield the companies from further lawsuits brought by people claiming damages due to their exposure to asbestos

The process may go even more speedily than had been expected; news reports said Tuesday that incoming Senate Judiciary Committee chairman Arlen Specter (R.-Pa.) told lobbyists for the various sides involved in the negotiations that he wants a bill before the full Senate by Jan. 29.

However, representatives of the insurance industry expressed their concerns at a provision in a bill Specter unveiled last week, which would, among other things, call for all claims to revert to the tort system - i.e. the courts - if the trust fund to be established by the asbestos companies and their insurers runs out of money and can't pay any legitimate claims within 300 days of submission.

The insurers and the companies want the trust-fund claims mechanism to take the place of the current arrangement, which has seen thousands of claims filed in the courts, including some on behalf of plaintiffs who as yet have suffered no harm but argue they might develop medical problems down the road because of past exposure to asbestos, which had been widely used in industry as a fire retardant, until it was discovered about 20 years ago that it was a potent carcinogen.

Specter is expected to introduce his bill Jan. 4, hold hearings in the committee the following week, move the bill through his committee in another week, and have it ready to go to the Senate floor by the week of Jan. 29.

Delta lower

Elsewhere, Delta bonds were "down a couple" of points, a trader said, even with a continued retreat in world crude oil prices, seen a key indicator of likely future energy costs for the airline industry.

He quoted the Atlanta-based carrier's benchmark 7.70% notes due 2005 as having fallen to 88 bid, 90 offered from prior levels as high as 91 bid, 93 offered, while the 8.30% notes due 2029 were down a point at 43 bid, 45 offered. He saw the company's 7.90% notes due 2009 unchanged at 58 bid, 60 offered.

Even though crude prices - considered a leading indicator for prices of distillates such as jet fuel - were down for yet another session, falling 58 cents on the New York Mercantile Exchange to end at $42.40 a barrel, well down from recent peaks above $55, shares of Delta and other carriers such as American Airlines parent AMR Corp., Northwest Airlines and Continental Airlines Corp. were seen losing altitude Tuesday, as Lehman Brothers equity analyst Gary Chase downgraded the whole sector to neutral from positive and specifically cut ratings on Continental, Northwest, JetBlue and Alaska Air.

Chase said in a research note that even with crude prices having slid some 23% from their mid-October peak of $55.17, "the fundamental position of the industry is still precarious ... We don't see meaningful improvement in marginal revenue (read liquidation of a major carrier) or equity-friendly ways to drive material declines in absolute cost, the only two factors that we believe can drive a positive inflection point for airline fundamentals."

He said that his long-term forecasts and price targets for airline equities assume oil prices around $30 a barrel in 2006 and beyond. "While oil prices have declined markedly in recent weeks, they are still a long way from $30, yet airline shares have largely reached our upside targets," the Lehman analyst concluded.

Oxford unchanged

Oxford Automotive Inc. - whose bonds had firmed smartly on Monday in the wake of news that the troubled Troy, Mich.-based automotive components maker had sold an Alabama metal stamping plant and was looking to sell others, were seen essentially unchanged, the 12% notes due 2010 hanging in at the higher 53 bid, 56 offered level to which they had moved from 46 previously.

Oxford formally filed for Chapter 11 protection from its bondholders and other creditors Tuesday, its second trip to the bankruptcy courts this decade.

It plans to sell its North American operations, to focus on its European business, which accounts for around 60% of its annual sales (see related story elsewhere in this issue).

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