Northwest up as Bear is bullish; auto sector bank debt, bonds rev up

By Paul Deckelman and Sara Rosenberg

New York, Aug. 18 - Northwest Airlines Corp. bonds continued to head skyward on Thursday, given wings by a bullish assessment about the company's prospects by Bear Stearns & Co., which upgraded the company's shares. Investors also were hoping that Northwest might be able to head off a threatened mechanics strike.

Delta Air Lines Inc.'s bonds were also higher, apparently pulled along by Northwest's upside momentum.

In the bank debt market, Collins & Aikman Corp.'s paper was seen to have pushed a touch higher, and its bonds also remained firm, helped by Wednesday's news that rival automotive interior components manufacturer Lear Corp. might be interested in pursuing a joint venture transaction with its bankrupt Troy, Mich.-based competitor.

Bank debt and bonds of other automotive names were also seen better on Thursday, traders in each market said.

Northwest's 7 7/8% notes due 2008 were seen by a market source to have jumped to 45 bid, up more than five points on the session, although that was about a point or so below its intra-day high.

The Eagan, Minn.-based Number-Four U.S. airline carrier's bonds "rallied quite strongly," a trader said, quoting the benchmark 8 7/8% notes due 2006 as having zoomed to 64.5 bid, 66.5 offered from 55.5 bid, 57.5 offered on Wednesday, and saw its 10% notes due 2009 up at least five points on the session, to 44.5 bid, 46.5 offered.

A second trader opined that Northwest was "up significantly, at least five points, or so, depending upon the issue," and other traders saw some of the company's bonds, particularly on the shorter side, doing far better than that, even.

Yet another trader declared that "the airlines were the big thing, especially Northwest." He saw the 8 7/8s as having jumped to 64 bid, 66 offered from prior levels at 55 bid, 57 offered, while its 9 7/8% notes due 2007 were also up nine points, to 54 bid, 56 offered, and its 10s got up to 47 bid, 49 offered, from Wednesday's levels around 40 bid, 42 offered.

Another trader exclaimed "Wow!" upon punching up the 8 7/8s and the 10s and seeing each with gains of about seven to eight points on the day.

Still another trader saw a slightly more restrained rise, pegging the 8 7/8s up five points on the day at 62, and the 10s up five points at 45.75, while the company's 7 7/8% notes due 2008 were seen up six points at 44 bid.

Northwest's Nasdaq-traded shares were up 48 cents (9.60%) to $5.48; volume of 16 million shares was four times the norm.

Northwest's bonds had been getting better already, pushed up an easing of oil prices (seen as an indicator of future jet fuel price trends) to around the $63 level from recent peaks above $67, as well as investor optimism that Northwest and the Aircraft Mechanics Fraternal Association can avert a threatened strike. Then, Morgan Stanley weighed in earlier in the week with a twin upgrade of the company's bonds and stock to "overweight," from "equal-weight" before, forecasting that Northwest can weather a strike, wring labor cost concessions from the mechanics and other employee groups, and avoid bankruptcy.

On Thursday, Bear Stearns followed suit, raising the company's stock to "outperform" from "market perform," and saying that uncertainty about the possible mechanics' strike this weekend and potential service disruptions was already priced in.

In a research note accompanying the upgrade, Bear Stearns analyst David Strine gave odds of about 55-to-45 that the mechanics will strike when the federally mandated 30-day cooling off period expires as Friday night turns into Saturday morning - but noted that with the airline having drawn up a contingency plan that involves replacement mechanics it has lined up, he believes that Northwest can "pull it off" and make good on its vow to keep flying, even if the union does strike.

Northwest claims to have the highest labor costs of any of the so-called "legacy carriers," a group that also includes rivals like Delta, industry leader American Airlines, Continental Airlines, and two currently bankrupt flyers, United Airlines and US Airways. It said it must get $1.1 billion in permanent wage concessions from its workers if it is to avoid bankruptcy, and has demanded $176 million from AMFA, which represents 4,500 Northwest employees - airline mechanics, plus custodians and cleaners. Northwest on Wednesday rejected the latest proposal from the union, saying that it only offered about $100 million in savings, falling "far short" of what the airline says it needs.

Despite that negative news, there were reports that Northwest had made a new proposal Thursday to the union, and the union said on its web site that both sides had resolved some issues related to contract language, for what it's worth.

Should Northwest successfully face down the union and keep flying with the replacement mechanics, Strine said in his research note that it then had the possibility of either making its deal with the union to get the concessions it wants, or just replacing the strikers permanently. The analyst theorized that the line's flight attendants would probably make a deal then, too.

Apart from its labor issues, Strine projected that if Congress approves pension law changes - Northwest has been a vocal advocate of such changes - and if Northwest can refinance some of its debt, it could halt its cash burn.

The analyst did caution, though that should these pieces of the puzzle fail to fall into place - "particularly the pension relief and the debt refinancing" - then its financial situation likely would "deteriorate substantially" in 2007.

Delta also higher

Also on the airline front, "there might have been some spillover to other names," a trader said, "with oil prices trending down in the past day or so," as he quoted Delta's 7.90% notes due 2009 up more than two points at 17.5 bid, while its benchmark 7.70% notes due 2005 were up some 1½ points to 25 bid, 27 offered.

Another trader saw the troubled Atlanta-based Number-Three U.S. airline carrier's 7.90s up 1¾ points on the session at 17.25 bid, 18, while a third trader pegged those notes two points better at 17 bid, 18 offered, and saw the 7.70s a point up at 26 bid, 28 offered. He saw Delta's 8.30% notes due 2029 a point better at 16 bid, 17 offered.

Delta last week was being battered by rampant financial market speculation that the problem-plagued airline would likely file for Chapter 11 sooner rather than later - maybe even as soon as next month in order to get its case in before the mid-October change in the federal bankruptcy code.

However, it seems to have recovered this week, helped by Northwest's positive momentum, Delta's own announcement that it will sell its Atlantic Southeast Airlines for $425 million, and an easing of oil prices. Light, sweet crude for September delivery, which hit record high levels above $67 a barrel earlier this week on the New York Mercantile Exchange, slid $2.83 on Wednesday. On Thursday, futures prices dipped to an almost two-week intra-day low of $62.25, before firming off that nadir to close at $63.27, up 2 cents on the day, but still well under recent highs.

Auto sector strong

Other than the airlines, the autos were showing strength on Thursday, with Collins & Aikman's bank debt still enjoying the boost it got from the Lear news. A trader saw its paper quoted at 88.75 bid, 89.75 offered, compared to Wednesday's levels of 88.5 bid, 90 offered.

The bank debt has been moving up all week as news of Lear being interested in bidding for the company emerged.

That Lear news also gave the company's bonds a jump start, and most traders saw the Collins & Aikman 10¾% senior notes due 2011 at least holding steady or gaining on Thursday. One saw the bonds unchanged at 34 bid, 35 offered, while another saw them having firmed about a point to 34.75 bid, 35.75 offered, while its 12 7/8% notes due 2012 were also up a point, at 8.

Of particular interest to Lear is potentially merging all or a part of Collins & Aikman's interior components/systems business with its own, according to a letter filed with the Securities and Exchange Commission and sent by Lear executive vice president and chief financial officer, David C. Wajsgras, to Collins & Aikman's president and chief executive officer, Frank Macher.

Also bidding for the company is Plastech Engineered Products Inc., whose billion-dollar interest was reported on all last week.

Also automotive, Delphi Corp.'s bank debt was a touch stronger Thursday, with the revolver quoted at 95.375 bid, 95.875 offered, compared to levels of 95.25 bid, 95.75 offered at the close of business Wednesday, according to a trader.

The term loan, however, was unchanged to up a quarter on the offer side, at 102.75 bid, 103.75 offered, the trader added.

Bond traders said the Troy, Mich.-based automotive electronics company's bonds were about a point firmer across the board, with its 6.55% notes due 2006 at 92 bid, 94 offered, its 6½% notes due 2009 at 86 bid, 88 offered, and its 6½% notes due 2013 at 81 bid, 83 offered, all up a point.

A trader said bankrupt vehicle frame maker Tower Automotive's 12% notes due 2013 "were up nicely, up a couple [of points]," to 88.5 bid, 89.5 offered. Dura Operating's 9% notes due 2009 were seen holding steady at 82 bid, 83 offered.

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