Spectrum stirred by default allegation; Calpine shrugs off DIP limits; Delta, Northwest up; Six Flags gains

By Stephanie N. Rotondo

Portland, Ore., Jan. 16 - Threats of default sent Spectrum Brands Inc. 8½% bonds higher Tuesday as the situation was regarded as bondholders seeking "their pound of flesh" rather than seriously contemplating a more dire situation that could lead to a bankruptcy filing.

In another troubled name, theme park operator Six Flags Inc. gained as market participants digested favorably news from last week that it had sold seven parks, which was initially seen as a disappointment in terms of the price. But one trader said "the jury is still out" on this turnaround story.

Elsewhere, news that bankrupt independent power producer Calpine Corp. could not use DIP revolver funds to make second-lien adequate protection payments did little to cause concern among bondholders. Traders described Calpine bonds as staying firm with some issues moving into the low 90s, extending fairly steady gains that have been seen for several weeks now.

"Everybody seems pretty convinced they [Calpine bondholders] are going to get par or better," one trader said, adding that Calpine's Pink Sheets-traded stock was up slightly as well on Tuesday.

In bankrupt airline paper, falling oil prices triggered increases for Delta Air Lines, Inc. and Northwest Air Corp. as there was no fresh news on either of those situations, but one trader said if there is an intervention by producers to prop up oil prices there could be some profit taking in that paper.

To the downside, Tower Automotive Inc. plunged into single digits Tuesday in the wake of its rights offering - key to emerging from bankruptcy - falling apart.

Spectrum up on fee prospects

Holders of Spectrum Brands' 8½% notes claimed the company has incurred debts not covered under the credit agreement and those debts have caused the company to breach the 2:1 limit on the fixed charge coverage covenant.

The Atlanta-based company, formerly known as Rayovac Co., which manufactures batteries, lawn and garden supplies including Cutter insect repellant, Remington electric shavers and more, denied the claim, calling the allegations "baseless."

Despite the news, the 8½% notes fared well, rising to 95.5 at the close of the market Tuesday, up 1 point from Friday's close. One trader speculated that the increase occurred because the bondholders "want a pound of flesh," and would seek consent payments to modify the covenants to allow the current level of the fixed charge ratio.

The impact on Spectrum Brands' 7 3/8% notes was less clear; one trader stated it was up ½ point from last week to 88, while another said it was down almost 2½ points from last week, closing at 87.75. The company has said that a default on the 8½% notes due 2013 could result in a mandatory acceleration of the 7 3/8% notes due 2015.

Despite Spectrum denying that there is a problem, traders expressed concern over the level of debt being carried, noting that "the company is leveraged to the max," and calling the situation "scary."

Northwest, Delta better

In the face of a continuing decrease in oil prices, Delta bonds regained the point they lost Friday, closing at 71.5 while Northwest Airlines also gained, rising to 104.

"With oil prices falling lately the buying frenzy for airlines will grow," said one trader. "Earnings in models will ramp up and buyers will overpay. Soon [it will be] time to take profits in Delta and Northwest, then beware of [the] groups all together."

Oil futures fell Tuesday by $1.59 to settle at $51.21 on the New York Mercantile Exchange - a new 19-month low - on a report that OPEC powerhouse Saudi Arabia said further production cuts are not necessary right now. Experts note crude oil has fallen more than 16% so far in 2007 in a sell-off triggered by an unseasonably warm winter in the Northern United States and by large funds taking short positions in the market.

But the trader said developing nations inside and outside of OPEC will be working to keep the commodity's price elevated and a rebound would hurt airlines as fuel prices closely track crude.

"You have to believe Russia [and] Iran will do something to get prices higher and keep populations happy," the trader said.

In addition to the impact of oil prices, bankrupt Delta is continuing to fight a hostile bid from US Airways Group Inc., choosing instead to submit a stand-alone reorganization plan, giving the carrier a post-bankruptcy value of $9.4 to $12 billion.

Last week's ahead-of-schedule filing of Northwest's reorganization plan caused speculation that the company was also fighting a takeover bid, although some believe a rival plan could still emerge. Northwest's plan did not specify any major supporter in its plan, or many details. The company requested and received an extension until Feb. 15 to file a disclosure statement, which will include all details of the plan.

Six Flags better but jury still out

Though some were surprised at the relatively moderate price tag of $312 million for the seven parks that Six Flags announced it would sell last week, the company's bonds continued to gain on buying interest.

The biggest gainer was the 9 5/8% bond due in 2014, increasing 3.25 points to 98.25. The 8 7/8% note due in 2010 followed, closing at 102.25, while the 9¾% bond jumped about 1 point to 99.5.

The sale is part of the New York-based regional theme park company's overall plan to reduce debt. According to Jeff Speed, chief financial officer, the company ended 2006 with $105 million drawn on its revolving credit facility. A pay down of the debt from the sale proceeds could be reflected as early as the first quarter of 2007.

"I think that the price was good given the class of assets they sold," one trader said, adding that the retention of Magic Mountain, which would have doubled the sale price, was the biggest factor in the disappointing price tag for the assets.

But, he said the overall turnaround story faces a pivotal year in 2007. The key will be to increase attendance, which saw a double-digit decline last year.

"They have to get the headcount going through the turnstiles up," he said.

"The wheels are definitely turning. But the jury is still out."

Even if the economy takes a downturn, though, he said Six Flags could be a winner as its parks could be touted as the alternative to the higher-priced Disney resort parks. He noted the average cost at Six Flags of $40 per head per day is half or a third less than Disneyland or Disneyworld.

"That is entirely what they are positioning themselves to be, an alternative destination to Disney," he said.

"I don't think they will buy many bonds back with this new capital but it will allow them to pay down some debt and it gives them some operating capital."

Tower bonds drop to 8

Tower Automotive continued to drop after last week's announcement that the sponsors of the $250 million rights offering to help the company exit bankruptcy had pulled out, with the bonds of R.J. Tower closing at an offer of 8, down from around 10 on Friday.

Traders said there still are no bids coming in for the paper in light of the development, which casts an uncertain light on the Novi, Mich.-based auto parts supplier's exit from bankruptcy.

Tower filed for bankruptcy in 2005, an early casualty among the many auto parts companies hurt by increasing steel prices and production cuts at U.S. automakers General Motors Corp. and Ford Motor Co.

The company announced Dec. 20 that three bondholders - Strategic Value Partners LLC, Wayzata Investment Partners LLC and Stark Investments - would support $225 million of the proposed $250 million rights offering, a crucial part of the company's reorganization. Although those companies have backed out, Tower said other proposals are being evaluated, and added that it is following through with the plan to complete the first task of reorganization in the first half of 2007.

Ronda Fears contributed to this article.

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