Delta, other airlines easier as oil jumps; Owens Corning bank debt continues to feel firm

By Paul Deckelman and Sara Rosenberg

New York, Nov. 19 - Delta Air Lines' bonds and those of most other air carriers were seen a bit lower Friday against the backdrop of a hefty rise in world crude oil prices, spurred by concerns about tight winter fuel supplies as well as speculation that OPEC may scale back its output later this year.

Trading in the bank loans of distressed companies was meanwhile generally quiet; the only real features traders noticed was Owens Corning's bank debt, which continues to feel very firm despite a lack of fresh positive news out about the bankrupt Toledo, Ohio-based insulation maker, which was one of the dozens of companies forced to seek Chapter 11 protection to escape being wiped out by asbestos-claim lawsuits.

Delta's benchmark 7.70% notes due 2005 were quoted by one market source as down 1½ points at 85.5, while its 7.90% notes due 2009 and 8.30% notes due 2029 were both seen unchanged at 55 and 42.5, respectively.

At another desk, the Delta 8.30s were seen at 42.5 bid, 43.5 offered.

However, another source saw the bonds unchanged at the somewhat lower levels to which they were seen falling on Thursday, with the 7.70s in the 84 area and the 8.30s around 42.

The Delta bonds have come down from their recent highs, which saw the 7.70s get as good as bid levels around 87.5-88, while the 8.30s had recently hovered as high as 46 bid. The bonds had reached those levels after most of Delta's more than 7,000 pilots voted to approve a $1 billion paycut package that the troubled Atlanta-based carrier said was absolutely necessary to keep it out of Chapter 11.

But that's rapidly becoming old news, and even though it got its billion-dollar boost from the captains, Delta continues to face major challenges as it tries to avoid bankruptcy, including its struggle to get its debt holders to go along with company initiatives to trim its more than $20 billion total debt load down to size. One such initiative is the company's pending offer to exchange $680 million of new debt for as much as $2.6 billion of unsecured notes and secured passthrough certificates, which was to have expired Thursday. Delta has now extended that exchange offer to Tuesday, and reports that more holders of each of its three categories of notes - short-term, intermediate, and long-term - have signed on to the offer (see "Tenders and Redemptions" elsewhere in this issue for full details).

On top of that, oil prices - which have recently pushed down to as low as the $46 per barrel range, from recent highs above $55, are poised to begin heading back upward, which could translate to higher prices for distillate products such as jet fuel. Falling oil prices, along with Delta's success in wringing the needed concessions from its pilots, have recently been underpinning the rise in both the bonds and the shares of Delta and such rivals as Continental Airlines Inc. and Northwest Airlines Inc.

In Friday's trading on the New York Mercantile Exchange, light sweet crude for December delivery rose $2.22 to $48.44 per barrel, while Brent crude gained $2.17 to $44.89 per barrel on London's International Petroleum Exchange.

Even so, a trader said, "the airlines seemed to hold in pretty strong, even though oil was up as much as it was," posting only relatively small losses despite the big oil jump.

For instance, he saw Continental Airlines' 8% notes due 2005 going home at 94.5 bid, 96.5 offered, off about a quarter-point on the bid side from Thursday's close at 94.75 bid, 95.75 offered.

However, at another desk, Continental's bonds were being quoted up half a point to the 95 range.

While being buffeted by fuel costs and other problems common to the airline industry, Houston-based Continental said late Thursday that it would seek $500 million of employee pay and benefit cuts by Feb. 28. The airline noted that it has "lost hundreds of millions of dollars since 2001, and expects to lose hundreds of millions of dollars more in 2004. Continental must adjust its costs to a level that will let it survive and grow; otherwise, it will have no prospect of returning to profitability under prevailing market conditions."

Northwest Airlines' 7 7/8% notes due 2008 were being quoted a point lower at 77.80. The shares of all of the major airlines were also losing altitude on Friday.

UAL waiver seen passing

In other airline news, UAL Corp.'s waiver regarding possible non-compliance with the EBITDAR covenant in its bank loan agreement is expected to pass, and in fact, seems to have gotten enough consents ahead of Friday's deadline to make signing off on the proposal just a matter of collecting a fee at this point.

"There's a 12½ basis points fee. It only requires 51%. And I think they've already got enough people on board to do that so you've got to be a fool not to get your signature page in on it and pass up the amendment fee," an informed source told Prospect News.

The Elk Grove Township, Ill.-based parent of bankrupt air carrier United Air Lines Inc. was worried about missing the covenant requirement because of high fuel prices coupled with weak revenue.

Owens Corning loans seen firm

Also on the bank loan front, Owens Corning's bank debt felt stronger Friday, a trader said, although the bid side continued to be quoted at 81.5 with not many offers seen.

"I don't know if you can buy anything there," the trader remarked.

Along with other asbestos names, both the bank debt and the bonds of Owens Corning has been firmer and more active since the election results came in with what is viewed as a more favorable Senate seat structure for asbestos litigation resolution. Even the company's stock has gotten into the act, with the shares having quintupled in value since Election Day (54 cents to a high of $2.78 Thursday), jumping nearly 21% on Thursday alone - even though shareholders are scheduled to get nothing under the current terms of the company's proposed plan of reorganization.

The bonds have also done well, with Owens Corning's 7½% notes due 2005 and 7% notes due 2018 having firmed to 67.5 bid, up a quarter point on the session, and well up from the 49 bid, 51 offered level they held on Nov. 2.

That day, of course, there was a seismic shift in the Washington balance of power, with the Republicans not only retaining the White House, but deepening their control of Capitol Hill. Besides the general prospect of a more pro-business climate in Washington with the re-election of president George W. Bush, the strong gains notched by the Republicans in the U.S. Senate - including the defeat of their main nemesis there, Tom Daschle (D.-S.D.) - was seen by observers as making more likely a congressional solution to the asbestos liability crisis that has bankrupted Owens Corning and numerous other companies over the last several years, including Lancaster, Pa.-based floorcovering maker Armstrong World Industries, Chicago-based building materials company USG Corp., Columbia, Md.-based chemical manufacturer W.R. Grace & Co. and Southfield, Mich.-based auto parts maker Federal-Mogul Corp.

There were several congressional attempts this year to craft a multi-billion-dollar claims mechanism that would dispense monetary awards to people who say they are suffering as a result of their exposure to asbestos - once widely used as a fire retardant, until it was found to be a carcinogen. An important subsidiary issue is protecting the companies from further lawsuits. The various plans all envision the defendant companies and their insurers paying the cost of funding the claims machinery.

Those efforts went nowhere, chiefly due to the legislative gridlock in the Senate. Daschle had been the point man for the Democrats in negotiations with his Republican opposite number, majority leader Bill Frist (R.-Tenn.). The two clashed all year over the size of the planned claims funds, with the Democrats pushing for a larger fund. The two leaders finally agreed last month on a sum of $140 billion, but remained far apart over other issues, including how many of the hundreds of thousands of existing cases would be allowed to go forward to their conclusion in the courts once the fund was established. The GOP is looking to limit court action on existing claims and bar future suits, with the Democrats looking to keep as many of the current cases alive as possible and to protect potential plaintiffs' future rights to sue. Daschle's narrow defeat by John Thune and the increased GOP majority are seen as strengthening Frist's hand in future negotiations with whomever emerges as Daschle's successor, probably senator Harry Reid (D.-Nev.)

Along with Owens Corning, the bonds and bank debt of the other asbestos companies have boomed since the day after Election Day, although the rise seems to have plateaued for now.

In Friday's dealings, Armstrong's 6½% notes due 2005 and 9¾% notes due 2008 were seen at 71 bid, Federal-Mogul's 7½% notes due 2009 and 8¼% notes due 2005 were quoted around 31 bid and USG's 8½% notes due 2005 and 9¼% notes that were to have matured in 2001 were pegged around 129 bid, all about the same levels they've held for the past few sessions.

Elsewhere, a distressed-debt trader saw Pathmark Stores' notes due 2012 ending at 95.5 bid, 97 offered, after the Carteret, N.J.-based supermarket operator's bonds "bounced around during the week," before ending a little higher.

On the downside, he saw Troy, Mich.-based automotive cast metal components maker Intermet Corp.'s 9¾% notes due 2009 ending the week at 32 bid, 34 offered, and Lake Forest, Ill.-based small appliance producer Salton Inc.'s 12¼% notes finishing at 81 bid, 82 offered, "both lower on the week."

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