Delta bank debt, bonds firm on financing news; Tembec bonds up

By Paul Deckelman and Sara Rosenberg

New York, March 17 - Delta Air Lines Inc.'s bank debt was seen a bit stronger on Friday and the bankrupt Atlanta-based Number-Three U.S. airline carrier's bonds were up solidly for a second consecutive session as investors had a chance to digest the company's repricing amendment request.

Elsewhere, the beleaguered Canadian forest products producer Tembec Industries Inc.'s bonds were seen improved, although nobody could cite any hard positive news that might explain such a rise.

The automotive sector was seen mostly lower on the session, after sector bellwether General Motors Corp. said late Thursday that it lost more money last year than originally reported, would have to re-state some past earnings due to accounting glitches, and would delay filing its 10-K annual report with the Securities and Exchange Commission. Even the recently robust bonds of the newly bankrupt Dana Corp. were seen having halted their meteoric post-bankruptcy rise and were off a point or more.

But the bonds of bankrupt auto supplier Delphi Corp. - a former GM subsidiary - were seen to have firmed on investor hopes that the big extra charge GM took in connection with Delphi's bankruptcy and which made up most of the extra loss might be a sign that GM's talks aimed at helping Delphi with its burdensome labor costs might be nearing a definite outcome.

Delta's term loan B tranche under its debtor-in-possession credit facility was a touch stronger in Friday's market, according to a bank debt trader.

The term loan B was quoted at 102.5 bid, 103.5 offered, up from Thursday's closing levels of 102.25 bid, 103.25 offered, the trader said.

On Thursday, Delta held a lender call to discuss repricing all three term loan tranches under its $1.9 billion DIP by 175 basis points. The $600 million term loan A (Baa3/BB) spread would drop to Libor plus 275 basis points from Libor plus 450 basis points, the $700 million term loan B (Ba3/B+) spread would drop to Libor plus 475 basis points from Libor plus 650 basis points and the $600 million term loan C (B3/B) spread would drop to Libor plus 725 basis points from Libor plus 900 basis points.

Rumors of a potential repricing had been floating around the market as early as last week, causing the term loan B to fall off to 102 bid, 102.5 offered at that time.

However, as more and more details on the amendment started to emerge over the course of this past week, the term loan B started inching its way back up.

"Maybe people were expecting a more severe repricing," the trader added.

GE Commercial Finance is the administrative agent on the airline operator's DIP and is leading the amendment.

The prospect that bankrupt Delta might get a break from its lenders and a little breathing room in the form of lower interest rates as it attempts to restructure may have also been responsible for the rise in the company's junk bonds over the last two sessions.

A trader saw Delta's bonds up "between one and two points, across the board," Friday, with its 8.30% notes due 2029 at 26.5 bid, its 9% notes due 2016 at 25.5, its 10% notes due 2008 at 26, up from 22.75, and its 10.43% notes due 2011 at 46, a point better on the day.

A trader at another desk saw the 8.30s at 26.5 bid, 27.5 offered, a point gain on the session.

Yet another trader noted that both of the bankrupt airlines were up Friday, with Delta's 7.90% notes due 2009 1½ points better at 26.5 bid, 27 offered, while rival Northwest Airlines Corp.'s 8.70% notes due 2007 were 1¾ points higher at 44.75 bid, 45.75 offered. The Eagan, Minn.-based Number-Four U.S. airline operator's 7 7/8% notes due 2008 were a point better at 45.5 bid.

On Friday, the first of two weeks of arbitration hearings on whether Delta can scrap its contract with its pilots union wrapped up on Friday, with the Air Line Pilots Association testifying in front of a panel of arbitrators that letting the airline throw out the contract it has with its 6,000 captains and impose lower salaries and benefits or more onerous work rules on them would be an unfair attempt to solve the airline's problems on the backs of the pilots. The union has threatened a strike should Delta try to unilaterally abrogate the contract.

In earlier sessions during the week, Delta officials had testified that the company was living on borrowed time and had to move quickly to lower its labor costs if it were to survive. Delta - which got $1 billion of permanent savings from the pilots in late 2004, says it needs additional concessions totaling more than $300 million. The union has offered about $140 million of givebacks.

Tembec rebounds

Elsewhere, traders saw Tembec's recently oversold bonds bouncing back, although the said they had not seen any fresh new positive news on the Montreal-based forest products company.

One saw Tembec's paper up 2¾ points on the day across the board, with its 7¾% notes due 2012 at 52 bid, its 8 5/8% notes due 2009 at 55 and its 8½% notes due 2011 at 52.5 bid.

A second trader said that Tembec's bonds were "volatile," seeing its 8 5/8s up as much as three points intraday at 56.5 bid, 57.5 offered, before it came off that peak level to end a point better at 54.5 bid, 55.5 offered. "They gave back two [points] to get one," he added.

Adelphia eases

A trader said that Adelphia Communications Corp. - whose bonds had firmed smartly on Thursday on news that the bankrupt Greenwood Village, Colo.-based cable operator's banker had agreed to a five-month extension in its DIP loan, through the end of August, with a lower interest rate - was seen giving up some of those gains on Friday.

Adelphia's 9 3/8% notes due 2009 went from 65.5 bid to 64, while most of the company's other notes, such as its 9 7/8% notes that were to have matured last year, and its 7¾% notes due 2009, dropped to 62.5 bid, from 64 previously.

Charter gains

In that same cable sector, the non-bankrupt, but debt-overburdened Charter Communications Inc.'s bonds were seen mostly higher, although traders did not have a ready explanation.

The St. Louis-based cabler's zero-coupon notes due 2011 rose to 48 bid from 46.5, and its zeroes due 2012 moved up to 40.5 bid from 39.75. One Charter issue, though, its 9.92% notes due 2011, was seen having dipped two points to 45.

Movie Gallery down some more

Movie Gallery Inc.'s 11% notes due 2012 eased for a second straight day in the aftermath of the Dothan, Ala.-based video-rental chain operator's successful effort to get its lenders to give it some breathing room on meeting its financial covenants. Expectation that such help would be forthcoming had boosted the bonds to peak levels around 56 bid by Wednesday, and they gave back part of those gains over the next two sessions on profit-taking. They finished Friday at 54 bid, 56 offered, down half a point on the day.

Solution DIP higher

Back among the bankrupts, Solutia Inc.'s recently amended debtor-in-possession financing facility found its way on the upward track during Friday's session, with levels moving to 100.875 bid, 101.375 offered from prior levels at 100.5 bid, 101 offered on better buying interest, according to a bank debt trader.

On Tuesday, the St. Louis-based chemical company completed an amendment to its DIP that increased the size by $300 million to $825 million (through an upsizing in the term loan B) and extended the maturity by more than nine months to March 31, 2007.

In addition, the DIP's $50 million delayed-draw term loan A was converted into a new $50 million portion of the term loan B, making a total size of $650 million for the tranche.

A bond trader meanwhile saw Solutia's 7 3/8% subordinated notes due 2027 at 83 bid, 84 offered, up from 80 bid, 81 offered on Thursday. On the week, he said, "they were up a lot," from their starting point last Monday at 75 bid, 76 offered.

GM leads autos down

In the automotive area, a lot of the auto stuff was down," a trader said. "It pretty much got hit right from the start."

Leading the way was GM, the proximate cause of the quick downturn, as market participants got to their desks and read Thursday night's news - that the troubled Detroit giant had revised its reported loss for 2005 upward to $10.6 billion ($18.69 a share), versus the $8.6 billion ($15.13 a share) of red ink reported in January. GM also said that it now expects a 2005 North American restructuring charge of $1.7 billion, versus the $1.3 billion it previously reported. The roughly $2 billion of additional losses are attributable to new charges related to job losses, GMAC and the bankruptcy of GM'S former parts manufacturing subsidiary Delphi.

On top of the wider 2005 loss, GM said that it would restate results for 2000 through 2004 after mistakenly accounting for cash flows from ResCap, the mortgage unit of GMAC.

Those revisions and accounting errors will force GM to delay filing its 10-K report with the SEC. Although company officials said that the annual report would be filed within two weeks, the embarrassing errors at one of the world's most closely watched companies - coming at a time when the underperforming GM is already under increased scrutiny by investors - seem to send a "Gang That Couldn't Shoot Straight" message of less-than-total competence to the financial markets, which reacted accordingly, as its bonds and shares retreated and spreads widened out on GMAC contracts in the volatile credit default swaps market.

The trader noted that the mis-step comes at the worst-possible time - as GM is trying to sell a controlling stake in GMAC in hopes of bringing in some cash and maybe raising the financial unit's credit ratings back to investment grade.

GM "definitely" was the cause of the weakness in the auto sector," he declared. "It will make it harder to sell [control of GMAC] if people think they can't get the finances right."

He saw GM's benchmark 8 3/8% notes due 2033 down 1½ points at 73 bid, 73.5 offered, while GMAC's 8% notes due 2031 tumbled 2½ points to 92 bid, 92.5 offered.

At another desk, GMAC's 8s were seen down two points to 92 bid. Its 7% notes due 2024 were around 74.25 and its 7.15% notes due 2025 were at 73.875, each "down a little under two points, across the board," a market source there said. The GM 8 3/8s were seen at 73 bid and its 8¼% notes due 2023 were at 71, each 1½ points lower.

Yet another trader said that the GM 8 3/8s "opened down three points in the morning on the accounting irregularities, then regained some composure," to end down 1½ points at 73 bid, 74 offered. Meantime, GMAC's 8s opened down two points, he said, at 92 bid, 93 offered, then came back a half point from those lows to finish at 92.5 bid, 93.5 offered, down 1½ points on the session.

In the volatile CDS market, where protection contracts that function like insurance policies to protect investors against an event of default are sold, the cost of protecting GMAC debt for five years widened out substantially in the early going, by as much as 70 basis points, or $70,000 per $10 million of debt insured, to about $470,000 from $400,000 previously; however, that figure was heard to have moderated a little later in the day to about $442,000 per $10 million, or a 42 bps widening from Thursday's levels.

GM's New York Stock Exchange-traded shares fell $1.09 (4.91%) to close at $21.13, though the 17 million share volume was only slightly higher than the usual turnover.

Moody's Investors Service said the delayed filing increases the risk of a default under the company's bond indentures and credit facility covenants, and also said it would likely further stretch out the already slow-moving process of selling the 51% controlling stake in GMAC. It warned that it could further downgrade the long-term debt ratings of GM, currently at B2, GMAC now at Ba1, and ResCap, at Baa3 the only one of the three entities now at investment grade.

Fitch Ratings, which had previously put GM's B rating under a review for a downgrade, said it would stay there for now, while GMAC's BB rating and ResCap's BBB- could either be upgraded, downgraded or affirmed where they are, depending on events.

Standard & Poor's, which currently rates GM at B, GMAC at BB and ResCap at BBB-, noted that GM had projected having its annual report filed within two weeks. Any delay beyond that could cause the agency to put the ratings on review for a downgrade. But while S&P said the filing delay would have no immediate ratings impact, it warned that it heightens concerns about the integrity of GM's financial reporting and internal controls.

Other autos lower

The latest GM imbroglio acted as a drag on the auto names generally, traders said.

A trader saw GM rival Ford Motor Co.'s 7.45% notes due 2031 open down a point, but come back to only end half a point lower at 73.5 bid, 74.5 offered, while another trader saw those Ford bonds down a point on the day at 73 bid, 74 offered, although Ford Motor Credit Co.'s 7% notes due 2013 were pretty much unchanged at 88.375 bid, 88.875 offered. The trader saw former Ford unit Viseton Corp.'s 8¼% notes due 2010 at 80.25 bid, 80.75 offered, down half a point.

And he saw Dana Corp.'s bonds lower across the board, with the bankrupt Toledo, Ohio-based components maker's 6½% notes due 2008 at 79 bid, 80 offered, its 5.85% notes due 2015 at 76 bid, 76.5 offered, and its 7% notes due 2028 at 77 bid, 78 offered, all down 1½ points across the board.

It was the first session since Dana's March 3 Chapter 11 filing in which those bonds had failed to rise. They had been rising over the prior two weeks on technical factors such as demand for Dana bonds to fulfill settlement of CDS contracts, as well as on the belief by some investors that bondholders might see a substantial recovery due to Dana's extensive portfolio of foreign and domestic assets that could be liquidated.

Delphi better on GM news

However, one automotive name which was seen solidly higher in response to the GM news was Delphi; a trader saw the bankrupt Troy, Mich.-based automotive electronics manufacturer's 6.55% notes due 2006 up ¾ point at 62.25 bid, 63.25 offered, while its 7 1/8% notes due 2029 rose half a point to 63 bid, 64 offered.

At another desk, a trader said that Delphi "was up a little bit, actually. It opened down moderately," off half a point, but came back to end up about a point or so. He saw the 7 1/8s ending a point better at 64.5 bid, 64.5 offered.

Delphi benefited from the fact that much of the extra $2 billion of losses that GM booked for the year - about $1.3 billion - was attributable to Delphi's bankruptcy; when it spun Delphi off in 1999, GM agreed to guarantee some pension and other post-retirement costs in the event of a Delphi bankruptcy or default.

Analysts and other observers suggested that the fact that GM had boosted its Delphi-related earnings charges by that $1.3 billion to some $3.6 billion, from $2.3 billion previously, could be seen as a sign that GM is finally stepping up to the plate to give its erstwhile problem child some serious help. GM, Delphi and the United Auto Workers union, representing several labor groups that cover 34,000 Delphi hourly workers - have been locked in three-way negotiations for weeks on how GM and the unions might be able to help Delphi cut its heavy labor costs without voiding the company's union contracts.

The parties are negotiating against a March 31 deadline Delphi imposed; the company says if no deal is in place by then, it will ask the bankruptcy court overseeing its restructuring to throw out the contracts and let it unilaterally impose a more manageable labor cost structure - although it should be noted that Delphi has already extended that deadline several times in hopes of making further progress.

Delphi's unions have said that throwing out the contract would lead to a strike that could destroy the stricken company, and could cause big problems for GM, which is heavily dependent on a steady flow of parts from Delphi, still its largest single supplier.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.