Delta bonds up as bondholders mull US Airways bid; Calpine retreats; Hooters may face trouble

By Ronda Fears

Memphis, Nov. 22 - In an otherwise quiet pre-holiday shortened session, Delta Air Lines Inc. paper was higher as bondholders formed a group to support the $8 billion takeover bid from US Airways Group, Inc. That, in turn, propped up the bonds of Northwest Airlines Corp.

On bank debt desks a trader noted a block of Technical Olympic USA Inc.'s revolving credit facility move Wednesday in an otherwise quiet market. The block of paper traded around the 95½ bid, 96¼ offered context, the trader said.

Prior to Wednesday, the revolver hasn't really been trading since "there have been no sellers up until this point," the trader added. Technical Olympic is a Hollywood, Fla.-based designer, builder and marketer of single-family residences, town homes and condominiums.

Back to bond desks, the airlines were consuming the market's attention, although auto-related names accounted for a modest amount of traffic as well.

Delta bonds add 2 points

Delta bonds were seen better by 2 points Wednesday with the 8.30% notes due 2029 at 62/63 after reports hit the wires saying an ad hoc group of bondholders was forming, possibly to support the US Airway takeover bid for the bankrupt No. 3 domestic carrier.

"So many people are gone today it's hard to get a sense of what is going on and what will really happen. We saw the Reuters story, and the bonds are up a couple of points to the low 60s," said a distressed bond trader at one of the bulge bracket firms.

"You have to think that probably there are a handful of big guns, the biggest bondholders, involved in these talks, right. They will carry some weight, and it seems like the best bet is that they are going to go for the cash, the more the better. On that, the bonds will be better."

Airline union workers also are a wildcard in the situation.

"Unions will play hard ball with these potential mergers," said another source. "It won't be so rosy after all."

According to a Reuters report, some Delta bondholders have begun organizing an informal group to support US Airways' $8 billion takeover bid for the Atlanta-based carrier. The bid emerged a week ago as a $4 billion cash offer with the remainder consisting of US Airways stock, which has since risen to make the offer worth around $8.78 billion.

Since the US Airways bid, there has been speculation that a competing bid might surface, with considerable focus on UAL Corp., parent to United Airlines, which emerged bankruptcy last year. Delta management has vowed to fight the US Airways bid, wanting to remain independent, and has said it will present a reorganization plan in bankruptcy court by mid-December.

Reportedly, the Delta bondholder group is considering all options but could end up pressing Delta creditors to accept the US Airways bid. In conference calls yesterday with Deutsche Bank AG and Lehman Brothers Holdings Inc., bondholders were urged to band together to pressure Delta to fully consider the bid from US Airways and any other offers that arise, according to the Reuters report.

Northwest gets lift from Qantas news

Northwest's bonds, meantime, were up even more than the Delta bonds on Wednesday, lifted by a confluence of factors. One was the rise in the Delta notes, since the bonds of the two bankrupt airlines now seem to rise and fall sort of in tandem.

Another, a trader said, was the news that Qantas - the Australian-flag carrier perhaps best-known in the U.S. for its memorable TV commercials starring a cute, though melancholy little koala bear complaining that the airline had spoiled his peace by bringing too many tourists to the Land Down Under - has received a $7.77 billion acquisition bid from Australia's Macquarie Bank and buyout specialist Texas Pacific Group.

The trader saw Northwest's bonds up as much as 5 points on the day, with its 8 7/8% notes that were to have come due this year rising to 86.5 bid, 87.5 offered, citing the Qantas story as a catalyst for renewed speculation about possible consolidation in the airline industry. Analysts have said there are too many carriers with a total of too many seats chasing too few travelers, and that some of the weaker names in the fragmented industry would have to disappear, allowing for capacity cuts that would bring revenues and costs more closely into line. Northwest - the Eagan, Minn.-based Number-Four U.S. carrier - would probably qualify as one of those weaker names, having filed for Chapter 11 protection last year - ironically, on the same day and at the same Manhattan bankruptcy court as competitor Delta did.

A market source saw Northwest's 7 7/8% notes due 2008 up 4 ½ points on the session, at 88 bid.

A trader at another desk saw the Northwest bonds up about two or three points on the day, with the 8 7/8s at 87, and its 10% notes due 2009 also at 87, but cautioned that pre-holiday trading was "so thin, it's tough to tell what's really happening. There was not a whole lot of volume to justify such a move. If there were more people in, you could see what was really happening."

Another had Northwest reaching similar levels but called it a smaller rise, saying the 8 7/8% notes due 2006 hit 86 and the 8 7/8% notes due 2006 went to 87, both gaining 1 to 2 points.

Doral holders expect little cash

As feared, holders of Doral Financial Corp.'s $625 million of floaters said Wednesday they are not expecting the company to get much cash from asset sales and they are looking at a payoff offer of a little more than half the issue in stock they see worth more like 50 cents, versus the $4-plus area where it is trading.

"Large holders of the FRN due '07 are saying they feel common only worth around 50 cents," said a market source. "The NY Bank is or will be sold probably only netting $125 million, so the bondholders may get only around $275 million in cash and the rest in equity of the company."

The Doral floaters were pegged at about 94, up from the 93.875 area earlier in the week.

Puerto Rico-based Doral hired Bear, Stearns and JPMorgan last week to evaluate alternatives for refinancing the $625 million issue that comes due July 2007 and restructure its balance sheet to reduce interest rate risk exposure and improve performance. The company also is working to get an FDIC cease-and-desist order lifted as it continues to convert operations from a mortgage company to a full-service bank.

Buzz began circulating earlier in the week that Doral will be offering equity and proceeds from the sale of assets, and hedged noteholders were wanting to pressure the stock lower so as to get a bigger equity distribution. Then, if the stock got a bounce on its other restructuring efforts, there would be better profits.

Doral shares on Wednesday were up slightly in the $4.20 area.

The Doral 4.75% preferred shares, seen as a sweet spot in the capital structure, shot up $4.12, or 3.73%, on Wednesday to $114.75 versus a par of $250.

Delphi bonds zigzag

Delphi Corp. bonds were seesawing Wednesday with the 6½% issue due 2013 off about a half-point to the 103 area while the 6.55% due 2006 edged up about 0.75 point to 106, according to one trader. On the news front, United Auto Workers president Ron Gettelfinger was telling union members that the UAW had reached a deal with Delphi to "convert supplemental temporary employees hired Nov. 20, 2006 or earlier to permanent status."

He said some contract employees and others would be excluded and that full details would be announced Wednesday.

The trader said the entire labor situation was perplexing, insofar as Delphi's attempts to appease the union.

"We're talking about 5% of their employees, or a small portion, being problematic," he said. "If it was my business and, say I have 16,000 employees and 8 of them are giving me grief, I'd just fire them and move on."

Gettelfinger said there has been little discussion with Delphi on the company's request to cut wages and benefits in an effort to trim costs, however. Delphi is seeking to void its labor contracts. The next meeting in bankruptcy court is slated for Nov. 30, with a Jan. 31, 2007 deadline set to rule on the labor contract request.

"Delphi is a rogue company that used the unfair bankruptcy laws to take advantage of their workers," Gettelfinger said. "Once again, in the final analysis an agreement has to be reached that our membership is willing to ratify. Our union has been available to meet with the corporation at any time, day or night, but honestly, at this time there has been very little discussion."

Manufacturers have said that the union jobs bank puts them at a competitive disadvantage with their Asian counterparts who make cars in the United States. The number of workers in jobs banks is likely to fall next year as more workers leave GM and Ford Motor Co. through buyout and early retirement offers.

Calpine active

Meanwhile, Calpine Corp.'s bonds were in retreat on profit taking, traders said, after a nice run earlier in the week.

The 8½% parent bonds due 2011, one of the more liquid issues of the bankrupt San Jose, Calif., independent power producer, dropped about a point to 65, one trader said, and the 8½% bonds of the Canada Energy Finance unit due 2008 also were off about a point to 82.

"The 8.50s of '11 have been on a steady climb from the lower 60s on Monday into the upper 60s yesterday, so we saw some people pocket a little profit," the trader said, noting a correlative decline in Calpine shares Wednesday, which dropped about 7% amid heavy volume.

However other traders had a different view, with one likening them to "a helium balloon."

He said the company's 10½% notes that were to have come due this year were up 1½ points at 89.5 bid, 90.5 offered, as were its other "pre-2000" bond issues, like the 8¾% notes due 2007, the 7¾% notes due 2009, the 7 7/8% notes due 2008 and the 7 5/8% notes due 2006.

Among the post-2000 bonds, the 8½% notes due 2011 and 8 5/8% notes due 2010 were seen a point better at 67.5 bid, 68.5 offered, while the 8½% notes due 2008 of the company's Calpine Canada Energy Finance II unit were seen up 2 points to 84 bid, 86 offered, in fairly active dealings for a pre-holiday market.

The trader added that over the past two weeks or so, those bonds were up "more than 20 points," with no real reason for the rise seen.

"Something is going on" - but what it is not clear, the trader said, dismissing the notion that the company's recent report of its first quarterly profit in two years may have been the catalyst.

"It was only $1.6 million. That's nothing to move 20 points over many sessions."

That trader noted that Calpine's Pink Sheets traded shares have recently jumped to around 75 cents from prior levels around 25 cents - indicating that "maybe someone over there [in the equity markets] has an inkling that something is going on."

Hooters trouble may be looming

Hooters Casino Hotel bonds, formally known as the 155 East Tropicana LLC bonds, with only a single coupon payment behind, could already be headed for trouble as the off-strip Las Vegas casino struggles to capitalize on the Hooters brand to draw in gamers, as one fixed-income analyst sees it.

The Hooters bonds (B3/B-), a $130 million issue sold in late March 2005, were quiet Wednesday along with most of the market, but on Tuesday a distressed bond trader saw them open strong at 87.5 and then trade down to end the day at 85.

"They could be headed for a restructuring early next year," said Jeff Laverty at JGiordano Securities Group in Stamford, Conn., in a recent chat with Prospect News. "I think we'll be hearing about this one."

155 East Tropicana - formed in 2004 by the amalgamation of the Hooters restaurant chain and the old Hotel San Remo in Las Vegas - has not gained a footing to date, having opened in November 2005 and after just a couple of months of operations launched into a full-blown remodeling of the casino floor. Then, Laverty noted, the company was lax in marketing and just in recent times began to use the Expedia and Travelocity formats.

After generating second-quarter results that were below expectations - a decline in net revenue to $17.7 million from $18.3 million - Hooters Casino Hotel management announced it would concentrate on increasing slot revenue, boosting room occupancy and cutting costs. Management reduced room rates and got onboard with Expedia and Travelocity.

Hooters second-quarter room occupancy of 73.9% and slot win per unit per day of $67 were respectively below industry norms of 94.7% reported by the Las Vegas Conventions and Visitors Authority and $113 reported in the Gaming Revenue Reports published by the Nevada State Gaming Control Board.

For the nine months ended Sept. 30, Hooters Casino Hotel posted a net loss of $16.1 million, widened from a loss of $6.5 million in the year-ago period, while net revenue jumped to $50.8 million from $5 million. The company posted an operating loss of $7 million for the nine-month period, versus operating income of $2 million in the period a year before.

The Hooters Casino Hotel features a casino floor with 660 slot and video poker machines, 33 table games, 696 newly renovated hotel rooms including 17 suites, a tropical pool area, retail outlets, a day spa, and dining and entertainment options which include, of course, a Hooters restaurant, Dan Marino's Fine Food, a coffee shop restaurant and several bars.

But Laverty sees Hooters' best asset its real estate holdings - nine acres just off the strip, seven as a complete parcel.

The bond trader agreed, saying the bonds hold appeal for speculators that another big casino operator might snap up 155 East Tropicana "if for no reason other than the real estate."

Bank covenant waivers pending

In its 10-Q filed last week, 155 East Tropicana said that it is in negotiations with bankers to get waivers on its credit facility and expects to reach a formal amendment by the end of the year.

The company entered into a $15 million credit facility - a revolver that matures in 2009 - concurrently with the bond offering and, as of Sept. 30, the company reported having drawn $700,000.

Covenants on the credit facility require a rolling 12-month adjusted EBITDA that increases periodically and a senior debt to EBITDA ratio also adjusted periodically.

At Sept. 30, the company was required to maintain a rolling 12-month adjusted EBITDA of $2 million and a senior debt to EBITDA ratio of 11-to-1, and was in compliance with both covenants. But, the company said it has agreed in principle to amend the credit facility to eliminate the minimum EBITDA and senior leverage ratio financial covenants. The company said as of Sept. 30, the amendments were being drafted and awaiting an appraisal of its property. 155 East Tropicana said it expects to have a signed agreement before the end of the year.

Dole numbers satisfy

Dole Food Co.'s fiscal third-quarter figures, while not hearty, were satisfying to the extent that the 8 7/8% bonds due 2011 moved up to the 95.5 context, or about 1.5 points, on Wednesday, according to a trader.

"There were only a few trades," said a trader. "But I guess the numbers were OK."

Dole's 7¼% bonds due 2010 were seen steady at 96 and the other bonds unchanged with the 8 5/8% due 2009 at 98.375 and the 8¾% due 2013 at 94.75.

The Westlake Village, Calif., producer of fresh fruit, fresh vegetables and fresh-cut flowers, reported the numbers Tuesday for third quarter ended Oct. 7, posting a net loss of $56.1 million versus profits of $17.6 million a year ago as net revenues grew to $1.8 billion from $1.65 billion.

Operating income dropped to $22 million from $26.7 million, which the company attributed to lower earnings in the fresh-cut flowers, packaged foods and fresh fruit operating segments. As a result of disappointing returns in the flowers segment, the company initiated a plan to restructure its fresh-cut flowers business and as of Oct. 7 recorded a charge of $28.2 million related to that effort.

The company also has been plagued by food recalls such as the tainted spinach scare that resulted in a Food and Drug Administration recall in early October.

Tembec in retreat

On the downside, Tembec Inc.'s bonds were seen down about a point to 1½ points across the board, giving up the gains that the Montréal-based forest products company's paper had notched on Tuesday, in advance of its quarterly numbers - an apparent case of the old market saw "buy the rumor, sell the news."

A trader saw its 8 5/8% notes due 2009 at 65.25 bid, "a little lower," while its 8½% notes due 2011 ended at 58.5 bid, and its 7¾% notes due 2012 were at 56.5.

Tembec reported that it lost C$54.5 million ($47.8 million), or 64 Canadian cents a share, for the three months ended Sept. 30, narrowing from its year-earlier red ink of C$134.9 million, or C$1.58 a share.

However, the company expressed concern about softening demand for newsprint, its key product, and the U.S. housing downturn, which depresses demand for lumber.

Apart from the names which had news out, traders saw virtually no activity in other issues - and even the names with news saw limited activity.

"If anything really traded all day, I'd be surprised," was how one put it. "It was a nothing day - a complete waste of time."

Paul Deckelman and Sara Rosenberg contributed to this report.

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