L-3 Communications deal on tap; Manor Care issue trades to 102.5 bid; Delta Air dives to mid-20s

By Ronda Fears

Nashville, July 27 - Delta Air Lines Inc. convertibles traded down to the mid-20s on a rumor that the company's board met and, as one trader put it, "people started to freak" that a bankruptcy filing was imminent. Also pressuring the Delta bonds, he said, was a letter from management to employees in which the company talked of being concerned about interest expense.

Meanwhile, it was very quiet in issues of Northwest Airlines Corp., which is considered to be under even more pressure than Delta because of an impending strike by union mechanics as well as financial strain from pension funding liabilities and other matters such as high fuel costs.

Elan Corp. plc also was quiet ahead of earnings scheduled to be reported Thursday. Elan securities were slightly higher Wednesday, but analysts are skeptical that Elan's multiple sclerosis drug Tysabri, in development with big biotech Biogen Idec Inc., will ever return to the market. The two companies pulled the drug in February after some patients in trials contracted a potentially fatal brain condition.

In primary action, convertible players were awaiting final terms on L-3 Communications Inc.'s convertible and looking for FTI Consulting Inc. to price a new issue on Thursday, following a trio of deals earlier in the week.

Manor Care climbs out of gate

Manor Care Inc.'s new issue was a home run, buyside sources said, and the issue traded up to 102.5 bid, 102.75 offered from par.

The Toledo, Ohio-based nursing home operator sold $400 million of 30-year convertible noted at par that will pay a 2.125% coupon for five years, then 1.875% through maturity, with a 20% initial conversion premium - at the middle to rich end of yield talk of 1.875% to 2.375% but the cheap end of premium guidance of 20% to 25%.

Hedge transactions effectively moved the conversion premium to 60%, Manor Care said. The stock gained 70 cents on Wednesday, or 1.88%, to close at $37.99.

Barnes Group Inc. also priced a small deal, printing the $85 million of 20-year convertible notes with a 3.75% coupon and 23% initial conversion premium - at the cheap end of yield talk for a 3.25% to 3.75% coupon and at the cheaper end of premium guidance of 20% to 25%.

L-3 junk bonds price at 6.5%

After Wednesday's close, L-3 Communications Holdings Inc. was at bat with $500 million of 30-year convertibles talked to yield 3.0% to 3.5% with a 30% to 35% initial conversion premium, after pricing $1 billion 10-year junk bonds at 99.09 to yield 6.5% - at the aggressive end of guidance for a yield of 6.5% to 6.625%

Proceeds are going toward its $2 billion acquisition of The Titan Corp., which excludes the assumption of about $750 million of Titan debt.

On Tuesday, L-3 reported quarterly profit rose a better-than-expected 36% on rising military demand for its secure communications equipment. The defense contractor posted second-quarter net income of $119.4 million, or 99 cents a share, up from $88.1 million, or 78 cents a share, in the year-ago period. Revenue rose 24% to $2.08 billion.

CreditSights analyst Brian Studioso said in a report that L-3's credit metrics will weaken as a result of the Titan acquisition, but strong cash flows and prudent financial management will create favorable credit trends going forward. Moreover, the analyst noted that L-3's credit has deteriorated in previous times and the company was able to repair the damage, and second-quarter results were solid before factoring in the Titan business.

FTI junk bonds seen at 7.75%-8%

On Thursday the market is looking for FTI Consulting Inc.'s $125 million convertible bonds but clarity on a coupon range was lacking, although market sources in the high-yield market told Prospect News that the $175 million of junk bonds slated to price alongside the convertible are talked to yield 7.75% to 8%.

The convert has been talked since last week to price with an initial conversion premium of 27.5% to 32.5%. FTI Consulting shares closed Wednesday off 20 cents, or 0.84%, at $23.66.

The six-year convertibles will be non-callable for life.

In late April, the Annapolis, Md.-based consulting firm amended its credit facility, adding a $50 million term loan B due Sept. 30, 2008 to the previously $225 million credit structure. Those proceeds were earmarked to repay revolver borrowings, and the balance may be used for future acquisitions, stock repurchases and general working capital purposes. FTI Consulting focuses on three areas - forensic and litigation matters, corporate finance/restructuring and economic consulting services.

Delta convertibles slide 2-4 points

In yet another bankruptcy scare, which sparked a massive selloff in the stock, Delta Air Lines convertibles took a dive Wednesday to the mid-20s to high 20s neighborhood.

"The rumor was that the board of directors met and news was imminent. People started to freak that they might file [bankruptcy]," said a sellside convertible trader. "There was a sell out of the stock and the bonds traded down to the high 20s, the mid-20s area, between 26 and 29."

The 8% convertibles were pegged by another sellside trader at 28.5 bid, 30.5 offered, lower by about 2 points from Tuesday. He put the 2.875% issue at about 29.25 bid, 30.25 offered, down by 4 points or thereabouts.

"The high price of fuel, the interest expense on our debt, and other factors have significantly outpaced our transformation initiatives and masked our progress," Delta chief executive Gerald Grinstein said in the employee memo dated Tuesday, which was obtained and released in full Wednesday by The Associated Press.

Delta still hopes to avoid filing

Grinstein said Delta is on track with its restructuring initiative but with high fuel costs working against it, the company is having to aggressively pursue ways to further reduce costs and increase revenue to avoid filing bankruptcy.

"Preserving sufficient liquidity - meaning enough cash to run our operation, meet the financial covenants in our financing agreements, pay our bills, and protect our assets - is crucial to our ability to survive and compete over the long-term," Grinstein said in the letter.

"As many of you are aware, given our financial situation, there is renewed speculation about bankruptcy. We have been candid about the risk that a number of factors, some of which are beyond our control, will affect our ability to avoid a Chapter 11 filing. However, we are still working to pursue an out-of-court solution, even as we face increasing financial pressures."

Last week Delta posted a second-quarter net loss of more than $380 million. The company is working toward more than $5 billion in annual cost-cutting measures by the end of 2006, with $2.7 billion of that accomplished to date.

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