Armstrong bonds continue rise; Calpine banks debt off; Dana volatile after going flat

By Paul Deckelman and Sara Rosenberg

New York, March 1 - Armstrong World Industries Inc.'s bonds were seen continuing their upward climb Thursday, although traders didn't know what was propelling the bankrupt Lancaster, Pa.-based floorcovering maker's notes upward.

On the downside, bank debt traders were equally puzzled about an easing in Calpine Corp.'s second-lien paper.

But the major news of an otherwise unremarkable session came out of the automotive sector, where Dana Corp's bonds jumped wildly around within about a five-point range as market players tried to determine the true value of its bonds, now that the troubled Toledo, Ohio-based automotive components maker has failed to make the March 1 coupon interest payment on two series of bonds.

A trader in distressed notes saw Armstrong's bonds - which on Wednesday had moved up about three points to the 66 bid level -continuing that climb, adding on another two points to close at 68 bid, 69 offered.

However, he saw "nothing" going on in the bonds of fellow asbestos-challenged name Owens Corning; the bankrupt Toledo-based insulation maker's bonds held steady at 78 bid, 79 offered.

One possible explanation for Armstrong's sudden strength: better results. Late last week the company said that fourth-quarter net sales of $861.7 million were up 0.7% from $855.3 million in 2004, and excluding the unfavorable effects of foreign exchange rates of $10.3 million, net sales actually increased 2%.

The company's operating loss of $10.1 million was an improvement over the operating loss of $134.8 million in the fourth quarter of 2004.

Despite the relatively better results, holders of Armstrong's bonds, and those of Owens Corning, have been holding their collective breath ever since mid-February, when the Senate failed to overcome procedural objections to a controversial bill that would set up a $140 billion industry- and insurance-financed mechanism to deal with the hundreds of thousands of asbestos-related medical injury claims filed against companies like Armstrong and Owens, which forced them and several dozen other companies into Chapter 11 earlier in the decade. At this juncture, the bill seems lost in limbo on Capitol Hill. While it could be brought back for another vote on the procedural delaying tactics used by its opponents, Senate leadership is anxious to actually line up the votes of the 60 senators it would take to break the deadlock before it commits to bringing the bill up for a revote.

Calpine second-lien loans weak

Elsewhere, Calpine's second-lien bank debt was lower on the day by about half a point on the bid side, with no particular news seen pushing the paper down, according to a trader.

The bankrupt San Jose, Calif.-based power generating company's second-lien debt closed out the session quoted at 92.5 bid, 93.5 offered compared to previous levels of 93 bid, 93.5 offered, the trader said.

A trader saw Calpine's 8½% notes due 2008 half a point lower at 44.75 bid, 45.75 offered, while at another desk, Calpine's 8¾% notes due 2007 languished at 49 bid, down a point.

But Calpine and the asbestos issues were clearly a sideshow Thursday, with most of the market's attention focused on the latest trials and tribulations of Dana.

A trader declared that as far as the junk bond market was concerned, "Dana was about it." Apart from the movement in that name, he said, "not a whole lot was going on."

He saw Dana's 6½% notes due 2008 - probably its most volatile and widely traded issue - all over the place, starting out at about 67 bid and then "bouncing around within a 64-69 range," before ending at 66.75 bid, 67.75 offered. Its 5.85% notes due 2013 "were a couple of points back of the '08s," starting out around 64 bid, 65 offered, then sinking to 62 bid, 63 offered, before closing at around 65.5 bid, 66.5 offered.

The company's 7% notes due 2028 and 2029 traded in a range of 62 to 67 before ending more or less in line with the '15s, a "kind of wild ride in a five-point range." All of the bonds were trading flat, or without their accrued interest, after Dana's late-Wednesday announcement that it had not made some $21 million of interest payments that were due March 1 on its 6½% notes due 2009 and its 7s of 2029. Dana invoked the 30-day grace period, meaning it has until March 31 to pay the coupon in order to prevent a default on the bonds, which could in turn trigger cross-defaults on its other notes and its bank facilities.

Dana "was certainly the main driver of activity" on a day when aside from that, "not much was going on," another trader agreed. "There was some back and forth on how they were supposed to trade, now that they've missed the coupon payment on the two issues. I think the consensus is now that they're going to be trading flat of accrued, with no language - meaning no stipulation as to which participant in a trade will be receiving the coupon payment if and when the company makes it."

He saw the 6½% 2009s at 66 bid, 67 offered, and the 7% 2029s at 65 bid, 66 offered, adding that "its kind of hard to say whether they're up or down [from Wednesday's pre-news levels] but they're probably close to flat, in terms of no change," with the loss of the accrued interest effectively offsetting any changes in the bonds' nominal prices, "because they are trading with no accrued."

Yet another trader scoffed at some of the goings on he heard about in Dana - trades that his shop did not participate in. "We're not trading them," he said, adding "they're all idiots out there - the sellers want to keep the interest. They'll say 'I trade 'em flat - but I keep the interest.' Well if that's the case, you're not really trading them flat."

He saw the 6½% 2008 bonds at 67 bid, 68 offered, the 2009 61/2s at 66 bid, 67 offered, the 5.85s at 64 bid, 65 offered, and both the 2028 and 2029 7% bonds at 65 bid, 66 offered and trading flat.

Still another trader simply pegged the bonds' nominal prices about two points higher, with the '08s at 67 bid, 68 offered, the 5.85s at 64.5 bid, 65.5 offered, and both 7% bonds at 65.5 bid, 66.5 offered, which he said was up 1½ points on the session.

In the credit default swaps market, which trades derivative contracts that act like an insurance policy against a default on a company's debt, the cost of insuring $10 million of Dana debt for five years ballooned out to $3.7 million upfront plus $500,000 per year from $3.4 million on Wednesday. A week earlier, the cost of such protection had been about $2.3 million upfront, plus the $500,000 - before bankruptcy rumors and talk that Dana's efforts to line up secured financing were in trouble began making the rounds of the debt markets.

Other auto names lose

The ongoing Dana debacle continued to cast a pall over other automotive issues - both Dana's competitor parts suppliers and its customers like General Motors Corp. and Ford Motor Co.

Among the parts suppliers, Rochester Hills, Mich.-based Dura Automotive Systems' 9% notes due 2009 were three points in the hole at 47 bid, 48 offered, with a trader saying he could not explain that fall in terms of any hard news.

Former Ford unit Visteon Corp.'s 8¼% notes due 2010 were seen down 2½ points, a trader said, to 77 bid, 78 offered.

However, a trader saw the bankrupt Troy, Mich.-based Delphi Corp's bonds actually up two points, at 55 bid, 57 offered. He saw bankrupt Novi, Mich.-based vehicular frames maker Tower Automotive's 12% notes due 2013 unchanged at 63 bid, 65 offered.

GM's 8 3/8% notes due 2033 were seen by a trader down ¼ point at 69.75 bid, 70.25 offered, while its General Motors Acceptance Corp. financing unit's 8% notes due 2031 were down ¾ point at 89.25 bid, 89.75 offered. Besides the fallout from Dana's downward spiral, the GMAC bonds have now been falling for two straight sessions, perhaps in response to comments GM's chief executive officer made Wednesday in Europe which seemed to indicate that GM - which since October has been shopping a 51% interest in GMAC around to potential buyers, though with not much interest expressed - now seems resigned to the idea that such a sale is not going to happen soon. CEO Rick Wagoner tried to put the best face possible on the situation, saying GM has very strong liquidity, so it does not have to urgently do the GMAC deal right now.

Ford's 7.45% notes due 2031 were meantime seen down half a point at 70.5 bid, 71 offered, while its Ford Motor Credit Co. 7% notes due 2013 were also down half a point at 87.5 bid. Ford said late Wednesday in its annual report filed with the Securities and Exchange Commission that it expects to spend $1 billion before taxes this year restructuring its North American and European operations - and warned that it doesn't expect to make a profit in 2006 as it continues to struggle with declining U.S. market share and rising costs.

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