Tower 5.75s drop; Delta off, buying seen in Continental, Northwest; drillers surge

By Ronda Fears

Nashville, Oct. 20 - With the default of Interstate Bakeries Corp. fresh on investors' minds - the Twinkies maker filed bankruptcy just 40 days or so after selling a $100 million convertible in the private placement market - there is heightened anxiety over other new issues that have rapidly turned into distressed situations. Among them is Tower Automotive Inc.

Tower Automotive's 5.75% convertible plunged 3 to 4 points Wednesday to 41 bid as a big position was sold out, according to a sellside trader. Meanwhile, a buyside observer questioned the likelihood of Tower making the first coupon on the issue as it comes due in mid-November.

A big source of activity on lots of convert desks, though, was airline paper. Delta Air Lines Inc.'s earnings showed no surprises but the convertibles drifted lower, about 0.625 point, as the airline's bankruptcy is seen ever nearer. The exodus in Delta's converts, however, led to buyers for Continental Airlines Inc and Northwest Airlines Corp. convertibles.

Buying in the oilpatch stepped up Wednesday, too, as Diamond Offshore Drilling Inc.'s earnings provided enthusiasm for the entire drilling sector, spelling out gains for peers like Pride International Inc. and Grey Wolf Inc. Amerada Hess Corp., a major player in the oilfield, also was higher.

Oilfield services participated in the enthusiasm, too, with Halliburton Co., BJ Services Co. and Schlumberger Ltd. convertibles all higher.

Lucent Technologies Inc. posted its first annual profit since 2000, so the stock gained sharply on heavy short covering, and traders said the convertibles followed suit but with less volume.

Not all was rosy Wednesday. There was heavy selling in some interest rate sensitive names like Countrywide Financial Corp. and Palm Harbor Homes Inc. The converts in both names "whiffed" lower, as one sellside source put it, as Countrywide's quarterly earnings dropped 47% and Palm Harbor's swung from a profit to a loss.

Tower 5.75s may be "cursed"

Halloween is just around the corner, so maybe goblins and scary things like curses more readily come to mind. Indeed, the theory of a curse surrounding Tower Automotive's newest convertible was tossed around by a buyside source Wednesday.

Tower Automotive sold the $125 million issue in May and the first coupon - due Nov. 15 - is already in question. Joint bookrunners on the deal were JPMorgan Securities and Morgan Stanley & Co.

"The bonds [issued at par of 100] are trading in the 40s Will the coupon be paid? Will Tower be an NCAA [no coupon at all]? How can we guess? ... Who was the underwriter? Answer: JPM," whose convertible group is housed at 277 Park Ave, said the buyside source, who moved out of the sellside within the past year or so.

"Here is a theory - the curse of 277 Park Ave. Let's talk NCAA bonds - that is, a coupon paying bond that defaults before it pays its first coupon, hence No Coupon At All (i.e. NCAA). These are rare.

"The last one was IBC [Interstate Bakeries], last month. The one before that was Fine Host, all the way back in 1998. What do these bonds have in common? Well, 277 Park Ave. The Fine Host bonds were issued by DLJ [Donaldson Lufkin Jenrette], which was housed at 277 Park, and where its convert department resided.

"IBC was issued by JP Morgan in August. Well, it turns out that DLJ was bought by CSFB in 2000, which then sold the 277 Park lease to JPM, and JPM moved its convert department into the space in 2001 (both trading and origination) from the Wall Street location."

An odd line of thought, perhaps, but Tower Automotive's troubles are anything but imaginary, the sellside trader said. The company has warned of severe losses due to the production cuts by its customers - Ford Motor Co. and General Motors Corp. - as well as the skyrocketing steel prices used for the auto parts and components Tower makes.

Delta paper drifts lower still

Delta "probably didn't change anyone's mind with that huge quarterly loss," a sellside market source said Wednesday, with more than a hint of sarcasm. He said the Delta convertibles didn't move much, off by 0.625 point or so, and pegged the 8s around 28.5 and the 2.875s around 30.

Delta's junk bonds were bigger losers, with the short-dated 7.7s dropping to 44 bid, 47 offered from 49 bid, 51 offered. The stock also lost big, dropping 6 cents on the day, or 2%, to $2.93.

Delta reported a heavy net loss of $646 million for third quarter, in line with guidance provided last week but far deeper than the $168 million deficit in third quarter 2003 and seen as the worst to be reported for the quarter by U.S. airlines suffering from high fuel prices and eroding profit margins.

Given Delta's heavy losses and dwindling liquidity - $1.45 billion of unrestricted cash at Sept. 30 - the company will likely have to decide whether to seek bankruptcy protection within just a matter of weeks, onlookers expect.

In order to avoid bankruptcy, Delta must quickly secure a concessionary agreement with its pilots and complete the exchange offer with holders of $680 million of debt, each of which hinge on the other's completion. Delta is also in negotiations with holders of $325 million of the 7.7s due 2005, seeking an extended maturity.

The threshold acceptance rate in the exchange offer was changed and the deadline extended to Nov. 18 from Oct. 14, but Standard & Poor's credit analyst Philip Baggaley said Wednesday that the incentives relating to early tendering of bonds and Delta's shrinking cash reserves indicate that the airline may not be able to remain outside of bankruptcy that long.

Delta management has acknowledged that, even if the airline secures concessions sought from the pilots and is able to complete the bond exchange and defer the 7.7% bond maturities, it would need $800 million of new financing in 2005.

Delta CDS holders holding out

There are signs that Delta debtholders with credit default swap positions are a critical obstacle in its out-of-court restructuring effort, a sellside market source said Wednesday.

A buyside source had pondered the matter Tuesday, although sellside traders said the Delta CDS had not been seen trading recently. It would be similar to rumors that abounded in the market as Mirant Corp.'s efforts toward an out-of-court restructuring last year soured and the Atlanta-based power firm filed bankruptcy.

The sellside market source Wednesday said there has been some indication that "more and more holders of ETCs [equipment trust certificates] that are long credit protection" are unwilling to negotiate a restructuring, or block the exchange offer by Delta, as they would profit more from a default situation.

Merrill Lynch's weekly report on credit spreads among convertible names showed this past week that the top performer by change in the five-year CDS spreads was Delta, narrowing a whopping 1,562 basis points to 5,252 basis points.

Continental, Northwest bids hit

As more traditional convertible investors bail out of the Delta situation, however, fans of airline paper were looking around, and traders said bids tossed out for Continental and Northwest converts on recent weakness in the issues were finding hits Wednesday.

Continental gained after reporting "pretty decent" third quarter results Tuesday "for an airline," a sellside source said, and its 4.5s traded at 69.25, which he said equates to a 22.5% yield to maturity.

Northwest, too, gained on results that were "not that bad, given the recent agreement with pilots and $2.4 billion cash position," he added, pegging the 6.625s at 70.375.

The Continental and Northwest convertibles were fairly steady to slightly lower, alongside the underlying stock, convert traders said. But the junk bonds of both airlines took a dive Wednesday, with the Northwest 9.875s due 2007 down 1 point to 75.5 and the Continental 8s due 2005s down 1.5 point to 91.25.

While Delta is still seeking wage concessions, Northwest has inked a deal with pilots and even some management for wage cuts and Continental has said it may need to seek concessions from its employees, a step that it has not yet taken, in contrast to most of the other major carriers.

Oilpatch paper in high demand

Oil drillers were all up big, taking a cue from Diamond Offshore as to what could be in store for upcoming earnings in that group.

After Thursday's closing bell, the Houston deep-water drilling company reported third-quarter net income of $2.9 million, or 2 cents a share, reversing the net loss of $11.5 million, or 9 cents a share, a year ago. Revenue gained to $208.2 million from $183.9 million, and Diamond Offshore said it has received contracts and letters of intent for nine of its rigs for work in the Gulf of Mexico and the North Sea and at much higher rates.

Diamond Offshore's 1.5% convertible gained about 2 points to 101.5 bid, 101.75 offered as the stock surged $2.50, or 7.61%, to $35.36.

Other drilling names were higher as well, with Pride's convertibles up 2 to 3 points and Grey Wolf's issues gaining 2 points, as traders bid up the drilling paper. Oilfield services participated, too, as Halliburton's convert added about 2 points, BJ Services gained about 1.25 points and Schlumberger's issues were both up 1.75 points.

Amerada Hess, one of the few majors with convertible paper in play, saw a little buying in its 7% mandatory due 2006, which shot up 1.5 points to 79.75.

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