Remy issues may face huge short squeeze; Rotech higher amid rising chatter; Delphi bonds climb big

By Ronda Fears

Memphis, Dec. 7 - The big mover on distressed desks Thursday was bankrupt auto parts maker Delphi Corp., continuing to coast on news the day before of $3.3 billion of new business contracts for its steering shaft unit, which the company has earmarked for divestiture.

Bondholders were "very excited" about the news, traders said, as the revenue stream of the unit is a fair gauge of what it would bring in a sale.

Delphi's 6.55% notes due 2006 gained to 110 bid, 111 offered from 106 bid, 107 offered while a similar gain was seen in the 6½% notes due 2009 and 2013, which were pegged at 109.25 bid, 110.25 offered. The 7 1/8% notes due 2029 were the biggest gainer, moving to 111.25 bid, 112.25 offered from 104 bid, 105 offered.

Elsewhere among auto names that have so far escaped the bankruptcy route, Remy International Inc.'s bonds were better. And whether it was due to outright buying or short covering was unknown, but one holder of the issue foresees a devastating short squeeze coming for those shorting the bonds - a position he described as huge - if the company forestalls a bankruptcy filing with an asset sale.

In another refinancing story, the Movie Gallery Inc. bonds also continued to gain ground as refinancing chatter leans toward reworking the bank debt over a debt for equity swap out, along with some lingering speculation of a merger with competitor Blockbuster Inc. and/or online movie retailer Netflix Inc. The 11% notes due 2012 added another point to 78.25 bid, 79.25 offered, after a 3-point gain Wednesday.

"There's still a buyer for the Movie bonds," said one trader. "I thought we might see some heavy profit taking but that wasn't the case. There is still plenty of room for this one."

Among bankrupt names, Winn Dixie Stores Inc. bonds apparently have no ceiling, with the bonds gaining another 2 points to a "mind numbing level" of 102 bid, 102.5 offered, as one bond trader put it. Fueling the price on the bonds is the rise in Winn-Dixie shares, which gained more than 4% to $15.99 on Thursday, as bondholders will get public stock in the Jacksonville, Fla.-based grocery chain's post-bankruptcy distribution, which is expected by year-end.

Power bank paper pushed up

Once again it was all about the power project names in the distressed loan market Thursday as the sector continues to rise on better valuations, according to a trader.

For example, Machgen's bank debt closed the day up by about a point at 157 bid, 158 offered, the trader said.

Cottonwood's bank debt also closed the day up by about a point with levels going out at 94 bid, 97 offered, the trader continued.

Another project financing deal - Redbud - saw its bank debt end the day at 92 bid, 94 offered, up about a point from previous levels.

And, lastly, Magnolia's bank debt rose about a point to close the session at 75 bid, 78 offered, the trader added.

Meanwhile, Wellman Inc.'s second-lien term loan bounced around during the session, with levels ultimately ending up lower on a day-over-day basis, according to a trader.

The second-lien closed the session at 76 bid, 80 offered but was seen quoted as low as 72 bid, 74 offered and as high 80 bid, 85 offered during the day, the trader said. On Wednesday, the paper went out at 80 bid, 82 offered.

Wellman is a Fort Mill, S.C.-based manufacturer and marketer of polyethylene terephthalate packaging resins and polyester staple fibers.

In bankrupt bonds, another power name - Calpine Corp. - also continued to climb in the wake of a power plant sale through the bankruptcy auction process that fetched more than anticipated. The 8½% notes due 2011 were pegged up 1 point at 76 bid, 78 offered by one trader, who marked the 8¾% notes due 2007 better by 2 or 3 points at 94.5 bid, 95.5 offered.

Rotech gaining on merger buzz

Back to distressed bond desks, one trader said the recent rise in home health care concern Rotech Healthcare, Inc. was largely fueled by merger chatter. He said the 9½% notes due 2012 gained another 2.5 points Thursday to 94.5 bid, 95.5 offered but with only one trade seen.

"Buyout rumors are circulating around," the trader said. He said the scuttlebutt on Thursday put a Rotech "merger with American Homepatient supposed to take place early next month."

That could be just "wild talk," however, according to the trader. He noted that Rotech has a market cap of $42.5 million against that of $25.5 million for Brentwood, Tenn.-based American Homepatient Inc.

Yet, he noted that American Homepatient shares, which trade over the counter, were up nearly 7% on Thursday and Rotech's Nasdaq-traded shares settled higher by 1.22% at $1.66.

Orlando, Fla.-based Rotech provides home medical equipment and related products and services in the United States. It offers respiratory therapy, and durable home medical equipment and related services. American Homepatient is focused on products consisting primarily of respiratory and infusion therapies, and home medical equipment and home health care supplies.

Remy shorts bet on bankruptcy

In Remy International Inc., the traffic remained heavy, however, amid the ongoing two-pronged debate about whether it will file bankruptcy and, if an asset sale is made regardless of a filing, what debt issues might be taken out.

Remy's floaters and the 8 5/8% notes due Dec. 15, 2007 gained Thursday - with the floaters adding a half-point or so at 95.5 bid, 96 offered and the 8 5/8s up 1.5 point to end at 86.5 bid, 87 offered - but an important caveat is the hefty short positions in those bonds.

Both are said to have big short positions among holders, many of which are betting that even if the company uses proceeds from an asset sale to pay down one of those issues, the company will eventually file bankruptcy.

"We think that even if they make an asset sale, they will file bankruptcy later on down the road," said one trader.

"I mean the company is not in good condition and one asset sale is not going to save it. But if they were to pay off the 8 5/8s instead of the floaters that would be very bad for the floaters."

Tennenbaum Capital Partners, LLC recently establishing a big position in Remy bonds has driven all the Remy paper higher in the past week or so, and traders said Thursday there continues to be buying interest in Remy bonds. But one holder surmised there could be a dramatic surge if short covering sets in.

"A significant, no huge, amount of the bonds are shorted, betting against Tennenbaum" and the other handful of holders with a big stake, remarked a buysider.

"The guys shorting the bonds are betting on an imminent [bankruptcy] filing. There is not an imminent filing. But we are coming to a place where something is about to happen."

He estimated those shorting the bonds are paying as much as 30 points on their position.

"It will be a disaster for the shorts if there is an asset sale with the proceeds to take out the December 2007 bonds," he said.

Remy hired Rothschild Inc. in Nov. 10 to lead a refinancing effort, which instead of appeasing bondholders rather accelerated market chatter that the Anderson, Ind.-based manufacturer of automotive electrical systems is on the verge of bankruptcy.

Remy trigger is after Dec. 15

The holder chatting with Prospect News on Thursday, however, sees an asset sale more likely than a bankruptcy filing, but he doesn't know of any deal on the table and does not expect any news on that front until after Dec. 15. And he thinks the 8 5/8% notes have a better chance of getting taken out ahead of the floaters.

"The easy math tells you that they would get a lifeline with an asset sale," and the 8 5/8% notes would be mostly likely targeted for a take out with any proceeds, he said.

"The floaters don't have much skin in the game as to the use of proceeds, despite being senior, but the 8 5/8s could easily be paid off."

Besides, the floaters come due in 2009, whereas the 8 5/8% issue is the nearest maturity, Dec. 15, 2007. Remy also has a 9 3/8% note due 2012 in play, trading in the 37 context with far less interest.

Remy would likely wait until there is less than a year, or 365 days, to the maturity of the 8 5/8% bonds in order to orchestrate a payoff and manage interest payments on the other bond issues.

Citicorp Venture Capital Ltd., the controlling owner of Remy, will probably not abandon Remy with a complete sale of the company, onlookers said, although that also is a possibility in the Rothschild effort.

"CVC, the big equity holder, I don't see them bailing," the buysider said.

"The PE [private equity] group could kick the can down the road a little longer, and that would not be in the interest of the bondholders, but I don't see that happening."

General Motors Corp. spun off partial ownership in Delco Remy America to Citicorp Venture Capital, MascoTech and a private investor group in 1994 and the name was changed to Remy International. Remy went public in 1997, and CVC took it private with an $8-per-share buyout in 2001.

Remy bank debt a target spot

There could be a reworking of the bank debt in the works, too, as the buysider sees it.

"Given the players who are in the bonds, there could be willing parties to refinance the bank debt," he said.

"Are the banks going to be happy about that? No. For one thing the bank debt is money good. For another, this is the best paper in the capital structure to have in any portfolio. I mean, it's Libor plus 600 [basis points]."

But if an asset sale is not consummated, or perhaps even with an asset sale, he reckons Remy and Rothschild might look to rework some of the bank facilities.

Level 3 bonds spike 1-2 points

Elsewhere in distressed paper, Level 3 Communications Inc. bonds jumped alongside the equity Thursday, buoyed by improved financial results lately and sporadic takeover talk, along with comments from the company recently about refinancing near-term debt issues, according to a trader.

The 6% notes due 2009 and 6% notes due 2010 are seen as the best candidates for refinancing, according to one market source, although Level 3 chief financial officer Sunit Patel said Monday at the Bank of America credit conference in Florida that the Broomfield, Colo., internet services provider would be looking to refinance debt maturities due in 2010 and 2011.

The 2009 issue gained to 93.75 bid, 94.75 offered from 92 on Thursday, one trader said, who added that he saw the issue trade as high as 96. The 2010 issue went to 91.75 bid, 92.75 offered from 90.5 on Wednesday, he said.

Another source, on the buyside, however, said he expected there would be selling into any rally seen in Level 3 paper because even with improving financials the name "has left a bad taste" with many bondholders.

"Come on! It's a whole lot of hullabaloo," the buysider said.

"Does anyone remember the bath we took on this one back in 2000? We were all buying into the streaming video hype back then. Whereas it may appear to be finally coming around, it's still a little early for this kind of exuberance. If I was going to get in it would just be opportunistic, to take advantage of any blips."

FrontierVision votes Adelphia

Back to bankrupt issues, Adelphia Communications Corp. bonds also were better on news Thursday from a bankruptcy court hearing in which a lawyer for creditors said those blocking Adelphia's plan - FrontierVision - had conceded to vote for the plan, clearing a path for the defunct Greenwood Village, Colo.-based cable company to exit bankruptcy.

At issue is the $12 billion cash distribution from the sale of Adelphia's cable assets to Time Warner Cable, a unit of Time Warner Inc. and Comcast Corp., in July.

The Adelphia 10¼% notes due 2011 were quoted at 93 bid, 95 offered versus 91.25 on Wednesday, one trader said. He saw the 10¼% notes due 2006 at 88.875, about pat with the day before. Another trader saw the Adelphia 2011 notes up a half-point at 92.5 bid, 94.5 offered and the 2006 notes also up a half point at 88.5 bid, 89 offered.

Delphi doesn't disappoint

Another distressed name seen as a big mover was Delphi Corp., whose bonds rose solidly for a second consecutive session, pushed up by the news that the bankrupt Troy, Mich.-based automotive components supplier had inked contracts for a robust $3.3 billion of steering and halfshaft sales during the first half of the year - and fully expects to record even more sales by year's end.

Bondholders were "very excited" about the news, traders said, as the revenue stream of the unit is a fair gauge of what it would bring in a sale.

Delphi's 6.55% notes due 2006 rose to 110 bid, 111 offered from 106 bid, 107 offered while a similar gain was seen in the 6½% notes due 2009 and 2013, which were pegged at 109.25 bid, 110.25 offered.

The 7 1/8% notes due 2029 were the biggest gainer, moving up to 111.25 bid, 112.25 offered from 104 bid, 105 offered - astonishing levels for the bonds of a company in the throes of Chapter 11 with no clear emergence date in sight.

Sara Rosenberg contributed to this article.

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