Northwest Air bonds bounce, Delphi better; European deals join calendar

By Paul Deckelman and Paul A. Harris

New York, July 8 - Northwest Airlines Corp. bonds - perhaps the biggest loser Thursday in the junk bond market's immediate reaction to the London terrorist attacks - bounced back smartly Friday, traders said, recovering its lost ground with the help of a generalized market upturn, as well as a sharp drop in world oil prices, which are seen as a harbinger of future airline energy price trends.

Also on the upside was Delphi Corp., helped by a general upturn in the automotive supplier sector in the wake of the hefty incentive programs announced by the Big Three, as well as by reports that the Troy, Mich.-based automotive electronics manufacturer has held talks with former corporate parent General Motors Corp. on a possible bailout, the way GM rival Ford Motor Co. recently agreed to help out its one-time subsidiary, Visteon Corp.

Primary market activity remained quiet, although several prospective European issuers stepped forward to put upcoming deals on the forward calendar - British plant equipment rental company Ashtead Group plc and U.K.-based children's TV production company HIT Entertainment Ltd. - the people who give the world the iconic purple dinosaur Barney.

Overall it was a quiet Friday that brought to a close a quiet week in high yield.

One source said that although there was an impressive rally in the stock market, junk seemed little changed on the session. However, the source added, in the face of Thursday's terrorist attacks on London's public transportation system the capital markets, including the junk bond market, have held in impressively.

In the secondary market, Northwest Airlines was seen winging back upward after having lost anywhere from two to four points in the immediate aftermath of Thursday's London atrocity, which got investors worried about the likely impact on transatlantic travel. The latest worries come on top of prior market concerns about the Eagan, Minn.-based Number-Four U.S. airline carrier's unsettled labor situation vis a vis its mechanics' union, and the recent spike upward in world crude oil prices, which breached the $61 mark in New York Mercantile Exchange trading this week.

However, on Friday, the Northwest bonds recovered their lost ground, helped by analysts' estimations that any damage to the airline industry from the London attacks would likely not be long-standing - indeed, Standard & Poor's said that it was keeping the ratings and outlooks for Northwest and such competitors as Delta Air Lines Inc., Continental Airlines Corp. and AMR Corp., the parent of industry leader American Airlines, at current levels. Also helping out was a steep fall in crude prices, which after ticking as high as $61.90 on an intraday basis for a barrel of August delivery light, sweet crude on the NYMEX, tumbled to a close at $59.63, down $1.10 on the day, as players took profits on recent gains.

Those factors - as well as a generally stronger junk market, in line with a strong equity performance on a relatively benign June jobs creation report - lifted Northwest's 8 7/8% notes due 2006 to 60 bid, 62 offered from Thursday's close at 57 bid, 59 offered, a trader said. He also saw the company's 9 7/8% notes due 2007 four points better at 47 bid, 49 offered, its 7 7/8% notes due 2008 five points up at 41 bid, 43 offered, and its 10% notes due 2009 likewise five points ahead at 42 bid, 44 offered. Despite the favorable market conditions and oil price news, he saw other airline bonds little changed on the day.

Several other traders also quoted those bonds at similar levels, although one saw the bonds in general at somewhat lower levels, with the 8 7/8s moving up to 57 bid, 59 offered from prior levels at 55 bid, 56 offered.

Delphi on the rise

In the automotive sector, Delphi Corp.'s bonds "continue to ratchet up a little bit on rumblings that they will reach some kind of consensual labor-cost reductions with their unions," a trader said, quoting its 6½% notes due 2009 as having firmed to 87.25 bid, 88.25 offered from prior levels at 85.5 bid., 86.5 offered, while its 7 1/8% notes due 2029 jumped to 73.25 bid, 74.25 offered from 70.5 bid, 71.5 offered.

On Thursday, Merrill Lynch & Co. automotive analyst John Casesa said in a research note to clients that Delphi's newly appointed chairman and chief executive officer, Robert S. Miller, recently met with GM chairman and CEO Rick Wagoner and the president of the United Auto Workers union, Ron Gettelfinger, and told them Delphi urgently needs help in cutting costs, and hopes to get a deal done this summer.

The analyst, who indicated that he had spoken to Miller, said the Delphi chief warned his company's former parent and the union boss that "bankruptcy is a real possibility" if the talks fail to yield results - but he said that Miller expects a deal to emerge from the three-way talks.

He further opined in the piece that it is in GM's interest to help Delphi - because if Delphi should file for Chapter 11 any time before September 2007, when GM's contract with the union expires, the giant carmaker, which spun Delphi off in 1999, could be left holding the bag when it comes to some of Delphi's considerable legacy costs for veteran employees.

Among those expenses is healthcare; in March, Delphi cut health care benefits for current and retired salaried workers, but the firm still expects health care expenses this year to rise to $874 million from $792 million in 2004.

Delphi, which also hopes to sell or close several unprofitable plants in the United States, is clearly seeking to emulate its Van Buren Township, Mich.-based rival, Visteon, which earlier this year reached an agreement with its former corporate parent, Ford, under which the Number-Two U.S. carmaker would take some two dozen unproductive Visteon plants in the United States and Mexico off Visteon's hands and try to sell them. Ford will also advance its former unit money to pay off a maturing bond issue, among other benefits.

Visteon's bonds were meantime firmer, in line with the auto sector's better tone, its 8¼% notes due 2010 moving up a point to 93 bid, 94 offered, while its 7% notes due 2014 were 1½ points better at 84 bid.

Collins & Aikman resume gains

Collins & Aikman Corp.'s bonds - which had jumped around at higher levels Wednesday before moderating its gains and ending up only a couple of points, and which had then retreated about a point Thursday, were back in positive territory Friday - but not by much, with the bankrupt Troy, Mich.-based automotive components supplier's 10¾% senior notes due 2011 up perhaps half a point, a trader said, at 27.5 bid, 28.5 offered.

Another trader saw the bonds up ¾ of a point at 27.75 bid, 28.75 offered.

Collins & Aikman announced Friday that the U.S. Bankruptcy Court for the Eastern District of Michigan had given its OK to a $165 million emergency aid package offered the company by its six biggest customers - the Big Three, plus the three top Japanese automakers. Under the terms of the agreement, which was approved at a hearing Thursday afternoon before judge Steven W. Rhodes in Detroit, the customers will loan Collins & Aikman $82.5 million, have agreed to price increases amounting to 15%, which will provide the cash-trapped company with another $82.5 million of new revenue, and will directly absorb $140 million of capital costs related to existing product lines as well as new-product launches.

The company was forced to turn to its customers for the funds when its J.P. Morgan-led bank group balked at providing the second $150 million installment of its $300 million debtor-in-possession financing after Collins & Aikman burned through the first $150 million tranche too quickly and was left with an insufficient borrowing base to support the full $300 million loan. However, the bank group took part in the negotiations that led to the latest financing, and supported the deal approved by Rhodes.

GM, Ford higher

Elsewhere in the sector, a trader said that GM's benchmark 8 3/8% notes due 2033 were seen up perhaps half a point at 83 bid, 84 offered. Ford's bellwether 7.45% notes due 2031 were also up half a point, at 81.5 bid, 82.5 offered.

Portola gains on earnings

Outside of the automotive realm, Portola Packaging Inc.'s bonds were seen up for a second day in the wake of favorable fiscal third-quarter earnings from the San Jose, Calif.-based maker of plastic containers and closures for the food and beverage industries.

A market source saw the company's 8¼% notes due 2012 up a point to 73.5 bid, although a trader at another shop saw the bonds going out at 72.5 bid, 73.5 offered - but noted that the bonds were up about six points on the week from prior levels around 66 bid, 68 offered.

Portola reported sales of $70.5 million for the 2005 fiscal third quarter ended May 31, up from $62.3 million a year earlier.

Operating income of was $2.8 million, up from $1.2 million a year ago. Portola continued to show a net loss for the quarter, of $3.2 million, but that was an improvement from a $4.5 million deficit a year earlier.

InSight finds interest

A trader saw "buyers out there" for InSight Health Services Corp.'s bonds, with the Lake Forest, Calif.-based diagnostic center operator's 9 7/8% notes due 2011 firming to 84.25 bid from 83 previously.

A source at another shop only saw those bonds at 82 bid, but indicated they were up four points from previous levels.

On Wednesday, the parent company, InSight Health Services Holdings Corp., announced that Bret W. Jorgensen had been appointed president and chief executive officer, and will join the board of directors. Michael N. Cannizzaro, who had been president and CEO of InSight since his appointment last August, will remain chairman of the board.

Overall, market participants reported being encouraged by the tone of junk trading, as the market did not sell off in the wake of the London attacks as it had in the wake of 9/11. There also seemed to be more money floating about, as exemplified by the $80.77 million inflow seen to high-yield mutual funds in the week ended Wednesday - the second inflow in three weeks, and fourth in the last six weeks. The fund flows are seen by some as a guide to overall market liquidity trends.

"It was a very slow week," a trader said, "it was a holiday week, and you had the terrorism, and the employment number [146,000 new non-farm jobs created last month, somewhat below analyst's projections] was kind of ho-hum. [It was a] pretty decent environment for high yield, I think - not much excitement, mind you, but a good environment none the less."

A week of no bonds

No issues priced during the Friday session which brought the four-session week of July 4 to a close having seen no junk bond deals priced in the United States market.

Although no one expressed outright astonishment, one sell-side source who spoke late Friday did say that the fact that nothing priced is a little surprising.

"I frankly expected to see one or two drive-by's," the official said.

Hence year-to-date issuance at Friday's close remained at $52.3 billion in 210 dollar-denominated tranches, exactly where it stood seven days previous.

Slight build-up

The terrorist attacks in London may have registered one impact upon the primary market, sources said.

German regional cable services provider Iesy Repository GmbH, in the market with a downsized €360 million equivalent offering of 10-year senior notes in dollar- and euro-denominated tranches (expected ratings Caa1/CCC+), is expected to price Monday afternoon in London.

The deal, which had been pulled in the May sell-off, is being led by Citigroup, Deutsche Bank Securities and JP Morgan. Some observers had anticipated seeing terms emerge Friday.

Price talk is for a yield in the 10¼% area.

Also from Europe, Leatherhead, U.K.-based equipment rental company Ashtead Holdings plc will start a roadshow Monday for its $250 million offering of 10-year second-priority senior secured notes via Citigroup, JP Morgan and Deutsche Bank Securities.

The proceeds will be used to refinance debt.

And a source in the bank loan market told Prospect News on Friday that London-based HIT Entertainment plans to sell $172 million of eight-year senior subordinated notes as part of the financing for a leveraged buyout.

The company is also in the bank loan market with a proposed $453 million credit facility via Merrill Lynch and Deutsche Bank. The bank meeting is scheduled to take place Wednesday.

The London-based company is a producer of children's television programming, including Barney and Friends and Bob the Builder.

Continuing saga of SunGard

Another capital markets buy-side source told Prospect News on Friday that the SunGard bond deal does indeed appear on track to launch this month.

The $11.3 billion LBO financing contains a $3 billion bridge to high yield.

This source reported attending the bank loan roadshow in the July 4 week, where the company's $4 billion 7.5-year term loan via JP Morgan and Citigroup was launched at Libor plus 250 to 275 basis points.

"At the roadshow they said that they were going to bring [the bond deal] this month, although our high yield trader said that next week is expected to be relatively quiet," the source said.

"Some people are thinking that they might bring something smaller than $3 billion," the investor added.

"But I think it makes sense to do the high-yield deal, either the whole thing or in bits. And July is the right month to do it. August gets a little funky."

Even if it does come at $3 billion, buy-side sources are saying that the present junk bond market can digest it.

"It's a solid story," the investor said. "Management presents well. The bank loan is going to do pretty well, even though it's the biggest bank loan in the world" [$5 billion total].

"Given that it's a decent company with a decent spread I think they can get the high yield done."

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