Calpine better; Northwest flies; Delta skids; Delphi better as deal with GM, unions seen nearing

By Stephanie N. Rotondo

Portland, Ore., Jan. 17 - Bankrupt airlines Northwest Air Corp. and Delta Air Lines Inc. saw mixed moves amid continuing flux in oil prices and the announcement of competitor profits.

Against a background of American Airlines Inc. and Southwest Airlines Co. announcing fourth quarter profits and a rise in oil prices after the recent sustained decline, merger talks fueled Northwest's bonds but Delta's continued attempts at independence seemed to be hurting the airline's debt.

In what was a relatively slow day in the distressed bond market, Calpine Corp. edged up again Wednesday following news from the company that it will soon seek equity investors for its plan to emerge from Chapter 11 protection.

Auto parts suppliers Delphi Corp., and Tower Automotive Inc., saw little activity as well. Delphi edged up a bit amid reports that it is closer to inking a deal with its unions and General Motors Corp., while Tower trades were small, though its prices stayed stable.

"It's been very inactive," said one trader of Tower bonds. "Nobody seems to care."

Meanwhile, Adelphia Communications Corp. saw a slight increase in its 9 3/8% bond, despite a delay in the effective date of the company's reorganization plan. The company announced Tuesday that the deadline, previously Jan. 12, was extended to Jan. 19.

Elsewhere, a trader saw Sea Containers Ltd., better with its 10¾% bonds due 2006 up 4 points at 84 bid, 86 offered, and its 7 7/8% bonds due 2008 and 10½% bonds due 2012 each up 3 points to 81 bid, 83 offered and 82 bid, 84 offered, respectively.

Threats of default have had little affect on Spectrum Brands Inc., as one trader indicated the 8½% bond was trading "close to par." Insiders on both sides have kept mum on the allegations that the company incurred debt not covered under the credit agreement, and speculation that bondholders want something in return.

Rumors are circulating again that Movie Gallery Inc. will file for bankruptcy in three to six months, when the company's relaxed debt covenants expire. The movie rental-retailer has seen lagging sales in the face of online competition such as NetFlix Inc. and Blockbuster Inc., but some say speculation of bankruptcy is just rumor.

"[Bankruptcy] has been rumored for the last several months," for Movie Gallery, one trader said, adding he was hesitant to believe it now.

Calpine better again

On a report that Calpine has submitted a business plan to creditors and is seeking new equity investors, its 9 5/8% bond went up once again, rising a point to better than 92. A coupon payment Tuesday left the company's pre-bankruptcy second-lien term loan lower, but traders said that excluding the impact of the interest payment it was effectively unchanged Wednesday.

According to a filing with the U.S. Bankruptcy Court for the Southern District of New York Tuesday, the company, which has been laboring under Chapter 11 protection since December 2005, will in the near future ask judge Burton R. Lifland in Manhattan to allow it to expand Miller Buckfire Co.'s role to include helping it raise equity financing for its emergence from bankruptcy.

Meanwhile, in the bank debt market the San Jose, Calif.-based energy company's pre-petition debtor-in-possession paper was unchanged. Market rumors on Tuesday put the company seeking to reprice its DIP financing in the near future.

The pre-bankruptcy second-lien term loan traded lower on Tuesday as a result of a coupon payment, according to a trader, closing out in the 112 area, down about 3 points from previous levels. The first-lien DIP loan closed out Tuesday at 100.75 bid, 101.25 offered and the second-lien DIP loan closed out at 101.25 bid, 102 offered, with both tranches basically unchanged from last week's levels after allowing for the interest.

Northwest flies, Delta slides

Northwest continued to improve Wednesday, increasing as competitors American and Southwest Airlines announced marginal profits for the fourth-quarter. American Airlines, a subsidiary of AMR Corp., was expected to report a loss, and some believe the modest profits are good news for the industry as a whole.

"The thing they've got in their favor is oil being close to $50 a barrel," one trader said, adding that rumors of mergers have also fueled the trades. However, a "merger for merger's sake" is something to be concerned about, as issues such as flight routes and capacity should be considered.

"Otherwise, what have you really accomplished?" the source asked. If a recession hits, a merger could negatively affect both airlines. Speculation on a takeover bid for Northwest was fueled by the company's pre-deadline filing of its reorganization plan, though many specifics were not released. The airline has until Feb. 15 to file its disclosure statement, which will include the plan's details.

Northwest's 9 7/8% notes due 2007s were up 2 points or more at 107 bid, 109 offered while the 10% notes due 2009 gained similarly to 106 bid, 108 offered, according to one trader. He saw the Northwest 7 7/8% bonds due 2008 up just 1 point at 103 bid, 105 offered.

Meanwhile, Delta weakened, landing 1 point below Tuesday's closing at 70 bid, 71 offered. Reports indicate Delta is considering reviving its New York-Tel Aviv flights, which were cancelled after 9/11 but otherwise there was no fresh news on the name.

Though pleased with the current activity in the bankrupt airlines, some worry that the time has passed for future investment in those companies. One trader said his prior investments in Northwest 10½% notes were doing well, but he had no plans to increase his position in the company. He noted that, while money is currently being made, the risk might not be worthwhile as the economy slows down.

Fluctuating oil prices are also a factor in the airlines' story. On Wednesday, crude oil futures fell to nearly $50 a barrel before rebounding to end with the February contract advancing $1.03 to $52.24 a barrel on the New York Mercantile Exchange.

Delphi deal with GM, unions close

Meanwhile in the auto sector, Delphi's bonds gained after GM's chief executive officer Rick Wagoner told reporters at the Automotive News World Congress in Detroit, Mich., that the auto maker, bankrupt auto parts supplier Delphi and its union are close to signing a deal that would cut benefits and wages at the former subsidiary.

Delphi's 6.55% notes climbed just over a point on the coattails of the announcement, closing at 111.375.

Delphi was spun off by GM in 1999 but in October 2005 the partsmaker filed the biggest bankruptcy in U.S. automotive history in hopes of cutting wages and benefits. Delphi also aimed to close some operations in an effort to reorganize its lagging domestic unit.

The company is one of many suppliers that have been hurt by rising steel prices and production cuts in the U.S. auto industry.

Other companies, such as Tower, have seen worse effects. A recent pullout by investors expected to participate in Tower's reorganization plan caused the bond to dive. But in trading Wednesday, its notes stayed somewhat stable, according to one trader, in the 7 to 8 range.

Adelphia up as emergence looms

Adelphia, which filed for bankruptcy in June 2005, saw slight gains Wednesday, though amid sporadic activity. One trader pegged its 9 3/8% bonds due in 2009 as jumping 1.5 points to 104.25 bid, 104.5 offered.

Another trader remarked that Adelphia paper "was trading, but we didn't see any change," quoting its 10¼% bonds due 2006 at 100 bid, 102 offered and its 10¼% bonds due 2011 at 104 bid, 106 offered.

However, another trader saw Adelphia "way up for cash settlement," noting "this was about the last day to settle," while a second trader at that same shop agreed that Adelphia was up.

The latter said "higher-claim" paper such as the 101/4s of 2011s and the 9 3/8s of 2009 were up at 104.5, while the "lower-claim" paper like the 101/4s of 2006s were around 101 bid, 101.5 offered.

"The plan is supposed to go into effect tomorrow where you lose the bonds and get the new Time Warner [Cable] stock," the last trader said.

"There might be a delay of another week from the judge, but that's really not a big deal - they're still net-net buyers [of the bonds]. If you have bonds, they're to be turned into the new Time Warner [Cable] stock - which everybody wants."

Of note, Time Warner Cable shares, which trade on the Pink Sheets on a when-issued basis, climbed as high as $43.75 on Wednesday before falling back to close at $42.75. Since trading began in the when-issued market on Jan. 5, the stock has traded in a band of $40 to $44.

Yet another trader saw Adelphia higher, but "just half a point," with the 2011s at 104 bid, 105 offered.

Very late Tuesday, Adelphia announced that the judge in its Chapter 11 case extended the temporary stay of the confirmation order until early next week to give the district court enough time to rule on a pending motion for a stay of the confirmation order pending appeal.

Spectrum, bondholders mum

Spectrum is still performing well, according to one trader, despite the allegations of default by some of its bondholders. The 8½% notes currently under fire rang in at 94.50, while the 7 3/8% notes hit 88.50.

Bondholders Sandelman Partners, Castlerigg Master Investments and Xerion Partners claim that Spectrum violated the terms of a credit agreement when that loan was refinanced last year. A letter in response by Spectrum filed with the Securities Exchange Commission called the claims "baseless."

An attorney representing the bondholders declined to comment, saying the situation was "sensitive." A spokesperson for Spectrum also declined to comment, saying that the company's response to the bondholders' assertions, filed with the SEC, said it all.

Movie time bomb ticking

A time bomb is ticking for Movie Gallery with a fuse of maybe three to six months, a bond trader said Wednesday, noting that the 11% bonds traded steady to a little higher Wednesday, while the Dothan, Ala.-based movie rental store's stock took a dive.

He pegged the 11% bonds due 2012 closing out the day at 75.5 bid, 76.5 offered, up about ½ point from Tuesday, but another trader put the issue ending basically unchanged at 75 bid, 77 offered.

"A lot of people are short the bonds, so that little spike was probably a bit of short covering," the trader said, noting also that there is a big short position in Movie Gallery shares, which came off the day's low Wednesday to close with a 4% loss.

Many in the market have considered for months that online movie rentals from the likes of Netflix Inc. and more recently rival Blockbuster Inc. would be the death of Movie Gallery. But there has been a run-up in Movie Gallery securities attributed to speculation that a White Knight private equity firm would step in to rescue it.

However Movie Gallery's coffin probably will be nailed shut by the expiration of the relaxed debt covenants that Movie Gallery got about six months ago, in this bond trader's view. When that waiver expires, he sees the company headed for serious trouble.

"The death knoll is if they don't get another waiver for the debt covenants," he said.

"We think it's a zero - they will go into default on the debt and have to file bankruptcy. We have been warning people about the bonds for a while now, but there are a lot of people short the bonds that are having to cover, or will be."

As for rumors in recent months that Movie Gallery may be a takeover target of movie rental rivals Blockbuster or Netflix, an equity trader said that speculation seems to have fizzled on the thinking that those competitors would just starve out Movie Gallery as a non-threat in the new online operating environment. As for chatter that a private equity firm or big hedge fund might step in to rescue Movie Gallery, again, he said it seems that talk has died down on thinking that it would have happened by now if it were being considered. Others are wary of any talk regarding the future of Movie Gallery, and warn against acting on the renewed buzz.

Rumor or not, traders remarked that players were stepping out of Movie Gallery all together.

Ronda Fears, Paul Deckelman and Sara Rosenberg contributed to this article.

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