Rotech, Movie Gallery bonds continue gains; Delta, Northwest fly on takeover news

By Paul Deckelman and Sara Rosenberg

New York, Nov. 15- Rotech Healthcare Inc.'s bonds moved up for a second consecutive session as did those of Movie Gallery Inc., with some traders believing that the bonds are going up despite no real positive news as investors reach down into the distressed precincts for yield.

But while those issues were heading upward, the really big movers were in the airline sector, where Delta Air Lines Inc.'s bonds shot skyward after the bankrupt Atlanta-based Number-Three U.S. airline carrier got an unsolicited takeover offer from smaller rival US Airways Group Inc. That Delta rise also brought the bonds of bankrupt carrier Northwest Airlines Corp. higher as well, as analysts and other airline industry watchers speculated that US Air's gambit could kick off a consolidation binge in the battered airline industry which could include the Eagan, Minn.-based Number-Four U.S. carrier as well.

Rotech looking healthier

A trader saw Rotech's 9½% seniors subordinated notes due 2012 jump to 86 bid, 88 offered - a 5 point gain on the session, on top of the 4 point gain seen in those bonds on Tuesday.

He saw no news out on the Orlando, Fla.-based healthcare services provider on Tuesday or Wednesday and opined that "this is just distressed-land. Investors have nowhere else to go" if they really want to pick up yield, since recent spread-tightening among non-distressed high yield issues, and their consequent moves up to around the par bid area, have left many junk bonds trading with not that much more yield than many high-grade issues.

"What else are you going to buy" to get yield, he asked, noting that the distressed bonds, at least, still trade at attractive discounts to par, making yield possible.

Calpine bonds keep moving up

This was also the case in Calpine Corp. notes, which have been rising by multiple points over the past few sessions, including a 4 or 5 point rise on Wednesday, he said.

Another trader agreed that Calpine "was really up some," seeing the bankrupt San Jose, Calif.-based power producer's 8½% notes due 2008 up more than 3 points on the day at 75.5 bid, 77.5 offered, while its 7¾% notes due 2009 were likewise up a trey at 82 bid, 84 offered.

More applause for Movie Gallery

The first trader said the phenomenon was also boosting Movie Gallery's 11% notes due 2012 - which on Tuesday had jumped to 66 bid, 68 offered, up 4 points on the session, and which continued to head upward on Wednesday, with those bonds seen pushing up another 5 points on the day to 71 bid, 73 offered.

The notes rose even though the Dothan, Ala.-based video rental chain store operator said on Tuesday that it would delay filing its results, citing possible accounting issues, specifically concerning the treatment of its store lease obligations. The company is reviewing end-of-lease requirements on about 5,000 stores with an independent auditor to ensure it is appropriately accounting for them.

In the interim, it did release some preliminary figures which showed stronger performance. Total revenue in the quarter hit $583 million, up from $572.4 million a year ago. On a same-store basis, revenue declined 0.4% - with a 3% increase in same-store sales at its eponymous Movie Gallery stores, partly offset by a 1.9% drop at its Hollywood Video outlets.

Delta zooms on US Air offer

Easily the most widely followed name of the day was Delta Air Lines, whose various bonds boomed more than 20 points, with its 8.30% notes due 2029, for instance, seen ending the day at around 62 bid, about a 23 point jump from its closing price at 39 on Tuesday. A trader said the company's other bonds, such as its 7.90% notes due 2009, also rose to around that same 62ish area from around 39-40.

Delta's shares were meantime up a nickel (3.40%) to end at $1.52, although volume of 27 million was about nine times the norm.

The bonds and shares headed for the wild blue yonder after US Air offered to acquire Delta for $8 billion in cash and stock. The unsolicited offer envisions paying Delta's unsecured creditors $4 billion in cash and 78.5 million US Air shares, whose estimated value as of Tuesday, the day before the merger was announced, was $4 billion.

Delta said that it would consider the offer - but the bankrupt carrier has said in the past that it is not interested in being acquired, preferring to restructure and emerge from Chapter 11, which it entered over a year ago. Delta has said, for instance, that it had received expressions of interest in a possible merger a year-and-a-half ago from the second-largest U.S. carrier, United Airlines, a unit of UAL Corp., but had rejected them.

Delta's chief executive officer, Gerald Grinstein, reiterated Wednesday that "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, standalone carrier."

In a memo sent to Delta's employees, Grinstein declared that "while Delta is obligated to review this proposal carefully, we remain skeptical that it would make sense to deviate from our plan."

Delta was not the only one expressing skepticism about the plan, in view of the fact that US Air - created just last year when America West Airlines acquired US Airways out of bankruptcy, taking the larger carrier's more familiar name - has still not finished fully integrating its own two component parts.

A trader opined that he would "expect that thing [i.e. a Delta-US Air merger] to go belly up in 14 months - if they're even allowed to do it."

A combination of the two carriers would produce the largest U.S. air carrier by sheer gross revenues, vaulting it ahead of the current top-spotter, AMR Corp.'s American Airlines, although the combination would likely have to divest some routes and other parts of its operations to not run afoul of regulators from such agencies as the Federal Aviation Administration, the Federal Trade Commission and the Justice Department's anti-trust division. The combination would likely also come under hostile scrutiny from the incoming Democratic-controlled Congress, suspicious that such a combination would likely lessen competition, push up air fares, and could result in many employees of the two companies losing jobs as they seek to realize merger synergies by cutting overhead costs.

The trader said that he could see a merger possibly succeeding "if it were Southwest Airlines or JetBlue," since both of the low-cost carriers seem to have established a more efficient business model than the old-line carriers like Delta, US Air, United, Northwest and American. All of the latter, with the exception of American, are either currently bankrupt or have emerged from reorganization in the last year or two. And American avoided bankruptcy only by winning substantial concessions from its employees to allow the carrier to keep operating in an unfavorable environment.

"Something that large" and combining two such old-line operators like Delta and US Air "is bound to fail," the trader said, while he noted that Delta bondholders didn't share that view.

The bonds "rallied all day and didn't stop until the market closed down." He saw the Delta 8.30s going home at 61.5 bid, 62.5 offered, up 20 points on the day.

Northwest also flies high

And the trader saw Northwest's bonds also stowing away on that upside ride, with the carrier's 8 7/8% notes that would have come due this year at 76 bid, 77 offered, a 12 point gain on the session. Another trader saw its 7 7/8% notes due 2009 jump a full 13 points on the session, to closing levels around 79 bid, 80 offered.

Published reports said that some industry-watchers believe that US Air's move on Delta might encourage other industry players to step up, including United. In such an environment of consolidation - which has long been predicted by analysts who say the industry has too much capacity and that one or more of the weaker existing companies must "go away" in order for the rest to survive profitably - Northwest, which filed for Chapter 11 on the same day in October 2005 as Delta did, might also be a takeover target.

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