Delta, airlines lower as oil prices surge; ThermaClime restructures deal

By Paul Deckelman and Paul A. Harris

New York, June 1 - Bonds of Delta Air Lines Inc. were down two to three points across the board Tuesday amid a generally softer airline sector spooked by a sharp rise in oil prices following the weekend terrorist attack on oil facilities in Saudi Arabia.

The primary sphere was relatively quiet, with no new deals having priced by the time trading rolled up. However, market participants heard that ThermaClime Inc's planned senior secured note issue had been downsized and restructured. Meanwhile, price talk emerged on several upcoming deals, notably Celanese's massive $1.315 billion equivalent three-part offering, which is scheduled to price on Thursday, Appleton Papers Inc.'s $350 million two-tranche offering, and E*Trade Financial Corp's offering of seven-year notes.

Much as market watchers anticipated in the run-up to the three-day Memorial Day break, the first session of June 2004 saw what promises to be a "reasonably busy" four-day week start to take shape in the primary market.

"Reasonably busy," that is, in light of seven consecutive outflows from high-yield mutual funds.

Celanese talks 3-part megadeal

News came on what is to date the week's biggest offering by far - BCP Caylux Holding (Celanese AG)'s $1.315 billion equivalent of 10-year notes that are expected to price in three tranches on Thursday.

Price talk is 9½%-9¾% on a tranche of U.S. dollar-denominated Rule 144A/Regulation S notes.

Meanwhile, talk on a U.S. dollar-denominated off-shore Regulation S tranche is 25-50 basis points behind the on-shore U.S. dollar tranche.

And talk on the euro-denominated off-shore Regulation S tranche is 50-75 basis points behind the U.S. dollar on-shore tranche.

Tranche sizes remain to be determined.

Morgan Stanley, Deutsche Bank Securities and Banc of America Securities are joint bookrunners on the LBO deal from the Kronnberg, Germany industrial chemical company, which was spun off from the former Hoechst AG in 1999.

On May 25 the issue was downsized by $250 million while the company increased its second lien term loan by the same amount.

One market source late Tuesday took note of the Celanese dollar-denominated offshore tranche, and mentioned that it is interesting that even though the notes have the same denomination and structure as their on-shore counterparts the off-shore notes are talked at 25-50 basis points behind the on-shore notes.

The source said that it sometimes occurs that U.S. accounts with off-shore subsidiaries invest in Regulation S deals, although this tendency in and of itself would not explain why the Regulation S dollar-denominated notes are talked behind their Rule 144A counterparts.

Talk on E*Trade, Appleton

Price talk is 7½%-7¾% on E*Trade Financial Corp.'s planned $400 million of seven-year senior notes (B1/B+), which are expected to price Wednesday afternoon via Morgan Stanley.

Meanwhile price talk emerged Tuesday on Appleton Papers Inc.'s $350 million two-part high yield bond offering, expected to price on Wednesday afternoon via Bear Stearns & Co. and UBS Investment Bank.

Talk is 8%-8¼% on Appleton's planned $150 million of seven-year non-call-four senior notes (Ba2/BB-).

And price talk on its $200 million of 10-year non-call-five senior subordinated notes (B3/B+) is 125 basis points behind the seven-year senior tranche.

And the market heard news - although no price talk - on ThermaClime Inc.'s high-yield offering.

The wholly owned subsidiary of Oklahoma City-based climate control products manufacturer LSB Industries downsized and restructured its deal (B3/B-). It now totals $78 million, decreased from $90 million.

The company intends to sell $40 million of seven-year non-call-two first priority senior secured floating-rate notes and $38 million second priority seven-year non-call-four fixed-rate senior secured notes.

The issue had previously been in the market as a single 10-year non-call-five offering.

Jefferies & Co. is the bookrunner for the Rule 144A/Regulation S offerings. Guggenheim Capital Markets is co-manager.

Pricing on ThermaClime is also expected to take place on Wednesday.

Adesa, US Unwired to hit the road

Timing was heard Tuesday on a pair of debt refinancing deals now in the U.S. pipeline.

A June 3-15 roadshow will be conducted for Adesa Inc.'s $125 million of eight-year senior subordinated notes (B1/B+) via UBS Investment Bank and Merrill Lynch & Co.

The Carmel, Ind. operator of used vehicle and auto salvage auctions will also conduct a 6.25 million share IPO at $23-$25 per share.

And a June 2-10 roadshow is set to run for US Unwired Inc.'s $285 million offering of bonds in two tranches via Lehman Brothers and Banc of America Securities.

The Lake Charles, La.-based Sprint PCS affiliate will offer $125 million of six-year non-call-two first priority senior secured floating-rate notes, and $160 million of eight-year non-call-four senior secured fixed-rate notes.

Junk gains despite 7th outflow, says Deutsche

In the May 28 issue of Deutsche Bank's One-Stop Weekly, the institution's high yield research organ, co-heads of high yield research David Bitterman and Andrew W. Van Houten confirm what other market sources have lately told Prospect News - that the market has recently been seen higher even though cash has been notably draining out of high-yield mutual funds.

"Despite the seventh consecutive outflow, which also marks the ninth outflow in 10 weeks, the Deutsche Bank Global High Yield Index was up sharply, gaining 1.28% during the seven-day period between May 20-27," Bitterman and Van Houten comment.

"All 13 major sectors were up with energy, industrial goods/services, media, telecom wireless and wireline, transportation and utilities all outperforming the composite index. Telecom wireline returned almost a full percentage point more than the composite index, advancing 2.2%. CCC rated bonds as a whole were up 2.02%, B's rose 1.2% and BB's gained 0.96%.

"A full 23 basis points of the gain in the composite index was due to currency fluctuations. Non-U.S. dollar denominated bonds returned 3.14% but they would have gained only 0.15% if all of the currency risk had been hedged.

"Issuance was slightly up versus the [May 17] week - $2.1 billion compared to $1.7 billion - but remains well below the 2004 average of $3.2 billion."

The Deutsche Bank Securities high yield researchers also note that the most recent spate of seven consecutive outflows represents "the second longest streak of outflows," with the worst stretch having been recorded between June and August 2002 when mutual funds had 11 consecutive outflows.

"We believe the high yield market can quickly erase the dismal year-to-date loss of 18 basis points and swing into positive territory if the fund flow figures turn around over the coming weeks," Bitterman and Van Houten conclude.

Delta down again

In secondary trading, Delta's debt - which had firmed in light pre-holiday trading during Friday's abbreviated session - was once again losing altitude Tuesday.

Delta was "down a couple of points," a trader said, estimating that the Atlanta-based air carrier's bonds were "off two to three points, depending on their coupon and maturity,"

He quoted Delta's 7.70% notes due 2005 as having fallen to 60 bid, 62 offered from prior levels at 63 bid, 65 offered, and saw Delta's 10% notes due 2008 falling back to 49 bid, 51 offered from 52 bid, 54 offered on Friday.

At another desk, a trader - who like many market participants skipped Friday's half-session - saw Delta's 8.30% bonds due 2029 dropping to 37.5 bid, 39 offered from 41 bid, 43 offered on Thursday, the last full trading session of last week. He said that Delta's 7 7/8% notes due 2005 were being offered around the 61-62 area, versus 65 last Thursday.

Another trader - who saw little happening in the junk market, with most financial market attention focused on strong economic numbers out of Washington and the jump in oil prices - acknowledged that the airlines were softer, with Delta leading the way downward.

He saw the 7.70% notes at 61 bid, 63 offered, off from 64.5 bid, 66.5 offered last week, while the 8.30s were had dropped to 37.5 bid, 39.5 offered, "quite a lot lower" than Friday's close at 41.5 bid, 43.5 offered. He saw Delta's 10 3/8% debentures dropping to 40 bid, 42 offered from 43 bid, 45 offered Friday, while the 7.90% notes due 2009 fell to 47 bid, 48 offered from 50.5 bid, 52.5 offered.

Delta had been roiled last week, he said, by rumors of "an imminent [Chapter 11] filing," after the carrier for the first time officially warned that it might have to take such a step should it not be able to convince its pilots union to sign off on steeper cost-cutting concessions - Delta wants a 30% cut, while the captains are staying put at an offer of 9%. This was followed by news reports that Delta had hired The Blackstone Group, a frequent player in corporate restructurings, as an advisor, and later reports that it had retained the Davis Polk & Wardwell law firm to help with the restructuring.

The bonds had bounced during Friday's half session from a major drop seen on Thursday on investor bankruptcy fears, but those gains proved to be short-lived in the wake of the weekend news of Al-Qaeda's bloody attack on a Saudi oil complex, as part of an effort to destabilize that country's government and throw the world petroleum markets into chaos.

On Tuesday, light crude for July delivery hit a record high of $42.33 per barrel on the New York Mercantile Exchange, up $2.45 on the session, in response to the weekend's events. That is expected to weigh heavily on the airlines, particularly on carriers such as Delta, which are not hedged against rising fuel oil prices.

On Tuesday, Prudential Equity Group analyst Dan Hemme increased his estimate of likely Delta losses for the second quarter and full year 2004 to $1.34 a share for the quarter, down from the $1.31 Wall Street expects, and $6.84 a share for the full fiscal year, much more than the current analyst consensus of a $4.89 loss. Despite his bearishness, he doesn't see a bankruptcy filing any time soon, given Delta's more than $2 billion cash cushion, but he sees the coming summer negotiations with the pilots' union as crucial - and also notes that without having hedged for fuel price increases, every penny per gallon that jet fuel prices increase will cut Delta's earnings (effectively deepening its losses) by 15 to 20 cents per share.

The deepened loss estimate and lowered stock price target, to $4 a share from $7, pushed Delta's shares down Tuesday in tandem with its bonds; the New York Stock Exchange-traded shares finished off 41 cents (6.72%) to $5.69, although volume of 7.5 million shares was only slightly above normal.

Also on the airline front, Continental Airlines Inc.'s 8% notes due 2005 were seen down 1½ points around the 88 level.

Quiet trading

Back on the ground, there were "not a lot of players," a trader said, with "many people still drifting in" after what was, for some, a four-day holiday weekend.

"It was a very, very boring day," another trader said, "If it could be worse than [last] Thursday or Friday - well, maybe it wasn't as bad as that - but it came close."

Even with not much trading going on, the first trader said, "the overall tone seemed better."

Trump AC rises

One name he saw higher was Trump Atlantic City Associates' 11¼% first mortgage notes due 2006, which had also risen on Friday after the debt-laden Atlantic City, N.J.-based gaming company said that it had made a scheduled $73.125 million interest payment that was due May 1 on the $1.3 billion of bonds, narrowly avoiding a default. On Friday, those bonds were seen having pushed up to around 85 bid from prior levels at 82; the trader said that they were "still trading up" on Tuesday, quoting them as having firmed up to 87 bid.

Nortel gains

The trader also saw Nortel Networks Corp.'s 6¼% notes due 2006 pushing up to 98.25 bid from opening levels around 97.25 bid, 97.75 offered, while another trader saw the bonds as high as 98.5 going home.

At another desk, Nortel's 6 7/8% notes due 2023 were seen a point better, at 82 bid.

The Brampton, Ont.-based telecommunications equipment maker announced Friday, after the market's early close that it had obtained a key waiver from Export Development Canada, which will allow it to continue to access a $750 million credit support facility with the government agency. Although EDC said that it was in effect not issuing Nortel a blank check - it will issue its loan guarantees on a case-by-case basis, tightening up its previous standards - the news that the agency will continue to stand behind the embattled telecom equipment company at least through Aug. 30 is seen as reassuring to lenders and other creditors unnerved by recent company announcements of accounting problems, including the stunning April 28 announcement that then-chief executive officer Frank Dunn and two other senior executives had been fired "for cause" in the wake of in the wake of the company's independent internal review of its accounting practices.

Nortel may shed some light on the status of that internal probe when it holds an early-morning (8:45 a.m. ET) conference call with analysts on Wednesday, during which the company's new CEO and new chief financial officer will discuss Nortel's upcoming financial restatements and the status of its business.

Hasbro gains on S&P upgrade

Elsewhere, a trader said that Hasbro Inc.'s 6.15% notes due 2008 were about a point higher on the bid side at 106 bid, 108 offered, versus 105 bid, 106 offered Friday, after Standard & Poor's restored the Pawtucket, R.I.-based toy and game maker to investment-grade status, as it raised its corporate credit rating to BBB- from BB+. Moody's Investors Service had taken a similar step in March, upping the company's senior unsecured rating to Baa3.

A ratings upgrade did not seem to do much for Vivendi Universal, whose 9¼% notes due 2010 were seen unchanged at 117.5 bid, and whose 6¼% notes due 2008 were steady at 104.5 - about the levels at which they would be taken out under the Paris-based international media giant's pending tender offer for those bonds.

On Tuesday, S&P returned Vivendi to investment grade, raising its credit rating two notches to BBB- from BB previously. Moody's meantime upped Vivendi one notch, but kept its bonds at a junk-rated Ba1 from Ba2 previously.

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