Asbestos bonds better as Armstrong emerges; Transeastern bank debt holds higher levels

By Paul Deckelman and Sara Rosenberg

New York, Oct. 3 - Bonds of asbestos-challenged issues like Armstrong World Industries Inc. and Owens Corning were seen trading higher apparently given a boost by the news that Lancaster, Pa.-based floorcovering maker Armstrong had finally emerged from Chapter 11, six years after being forced to seek protection under a floodtide of asbestos damage lawsuits.

Also in the junk bond market, airline issues - particularly Delta Air Lines Inc. and Northwest Airlines Corp. - were seen reaching for the skies, given a boost by the continued fall in world crude oil prices, which nosed below $59 a barrel Tuesday, a potentially positive sign for industry investors about likely future price moves for jet fuel.

Troubled Transeastern hangs in

In the bank loan market, Transeastern's paper was very active, though at unchanged levels of 70 bid, 71 offered, with no new information seen sparking the flow, traders said.

All last week, the company's bank debt had been tumbling, dropping from trading levels around the 98/99 context to as low as 66 bid, 68 offered this past Friday, due to worries over the company's financials.

Then finally, on Monday, the trend reversed slightly, with levels moving up to 70 bid, 71 offered, where they remained throughout Tuesday's trading session, a trader remarked, although adding that nothing in particular was seen sparking the couple of points gain.

Transeastern, a joint venture between Technical Olympic USA, Inc. and Falcone Group, announced last week that because of weak demand, an over-supply of new and existing inventory homes and increased competition in the Florida housing market, its main base, it cannot support its existing capital structure.

The company is exploring various options to fix the liquidity problem, including requesting waivers from its lenders regarding potential defaults and permitting future advances under the revolver, and restructuring land bank obligations.

On Friday, Technical Olympic, a Hollywood, Fla.-based builder and seller of single-family homes, released additional information about the joint venture's finances - and about its own exposure to Transeastern's problems.

It said that its total exposure to the joint venture is approximately $141 million. The joint venture's assets totaled $963.8 million as of July 31, and its debt was approximately $600 million.

Technical Olympic said Transeastern and its lenders are currently working together to quantify the joint venture's future prospects, and to determine an action plan. It cautioned that the outcome of these efforts are "currently unknown and will likely remain unknown for some period of time."

It also outlined its worst-case scenario, which would result in the loss of Technical Olympic's $92.6 million investment in the joint venture, and which would create "significant doubt" about the eventual recoverability of $48.5 million of loans and receivables which Transeastern owes Technical Olympic.

In the event such a worst-case scenario came to pass, it would require Technical Olympic to take an after-tax charge of some $89 million ($1.50 per share).

Armstrong emerges - at last

In the junk bond market, a trader in distressed issues said that Armstrong World Industries' bonds pushed up 2 points on the session to 66 bid, 68 offered.

He also saw a rise in the bonds of bankrupt Toledo, Ohio-based insulation maker Owens Corning - which, like Armstrong, was forced to seek Chapter 11 protection in 2000 to save itself from a deluge of asbestos lawsuits. The Owens and Armsstrong bonds frequently move up and down in tandem. He quoted Owens' 7½% notes due 2018 up by as much as 4 points on the session at 52 bid, 54 offered.

However, another trader saw the Owens Corning bonds down 3/8 point at 51.5 bid, 52.5 offered, while pegging the Armstrong notes up ½ to ¾ point at 65.5 bid, 66.5 offered.

A market source at another desk saw the Armstrong bonds actually slightly easier, at 65.875, down from 66.5, while the Owens Corning 71/2s were ½ point better at 52.875.

Market participants digested the long-awaited news that Armstrong had finally emerged from Chapter 11 on Monday. Over the summer, the U.S. Bankruptcy Court in Wilmington, Del., which had overseen the company's reorganization - and which is also handling Owens Corning's case, plus those of other companies pushed into bankruptcy by asbestos problems - approved Armstrong's amended plan of reorganization, the fourth one that the company submitted, after lengthy negotiations with its asbestos claimants and other creditor groups. That plan officially was effective on Monday.

Under the terms of the plan, the company is setting up a trust fund to deal with all present and future asbestos claims. General unsecured creditors, including bondholders, will receive a combination of cash and common stock of the reorganized Armstrong on account of their allowed claims. Distributions to unsecured creditors are expected to begin on Oct. 17.

Armstrong has obtained $1.1 billion of exit financing to fund its emergence.

Sea Containers sinks further

A trader saw the bonds of Sea Containers Ltd. "looking lower," amid continued market worries that the troubled Bermuda-based maritime and railroad transportation company will not be able to pay off its 10¾% notes slated to come due on Oct. 15.

Those bonds, and its 10½% notes due 2012, which had fallen into the upper 70s last week, continued to slide Tuesday to levels around 74 bid 76 offered from 77 bid, 79 offered last week.

He also saw the company's 7 7/8% notes due 2008 at 75 bid, 77 offered, down from 78 bid, 80 offered last week.

Lower oil fuels airline rise

Elsewhere, traders saw the bonds of bankrupt Atlanta-based Number-Three U.S. air carrier Delta Air Lines up about a point or two, with one quoting its 8.30% notes due 2029 two points higher on the day, at 31 bid, 32 offered.

He also saw Northwest Airlines' paper up by around the same amount, with the bankrupt Eagan, Minn.-based Number-Four carrier's 8 7/8% notes due 2006 advance to 56 bid, 57 offered.

At another desk, a trader saw both of those issues up about a point on the day, with the Delta 8.30s ending at 30.5 bid, 31.5 offered, and the Northwest 8 7/8s at 54.75 bid, 55.75 offered.

He also saw the bonds for Fort Worth, Tex.-based AMR Corp. - the parent of top carrier American Airlines - having "inched up," with the company's 9% notes due 2012 seen around 99.625 bid.

Airline bonds have been firming gradually over the past several weeks, in line with the fall in world crude prices, which is seen in some quarters as a sign that jet fuel prices may come down over time. Sky-high fuel prices helped to push both Delta and Northwest into Chapter 11 last year and hurt the finances of many other airline operators, including AMR.

In Tuesday's New York Mercantile Exchange dealings, crude for November delivery slid $2.35 to settle at $58.68 a barrel, the lowest close since Feb. 16. That slide follows a $1.88 drop on Monday.

Airline investors were also heartened a bit by Northwest's forecast Monday that it expects to record a "modest" profit for the full year 2006, excluding reorganization costs, even though revenue weakened last month and the fourth quarter is not expected to be profitable.

Northwest projected a full-year pretax profit margin of about 2% on revenue of more than $12 billion, excluding reorganization items.

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