Delta jumps in line with stock rise; UAL bonds little impacted by board's rejection

By Paul Deckelman and Paul A. Harris

New York, June 28 - Delta Air Lines Inc.'s bonds were seen by traders to have firmed smartly - at least two points or more on some issues - in Monday's trading, in line with a sizable move up in the troubled Atlanta-based air carrier's New York Stock Exchange-traded shares. There was no firm news out during the session on the company that would seem to neatly explain such a gain, causing some market participants to chalk it up to short-covering. However, after the market had closed for the day, news hit the tape that Delta creditors had formed a committee to pursue restructuring talks.

Elsewhere in the air, news that the federal Airline Transportation Stabilization Board had turned down United Airlines' downsized request for federal loan guarantees for the third consecutive time - and in effect told United not to bother coming back for a fourth crack at it - was seen having little impact on the bonds of the bankrupt Elk Grove Village, Ill.- based carrier's corporate parent, UAL Corp., which were seen unchanged to even a bit higher on the day.

In bank debt dealings, the only real feature seen was Leap Wireless Inc.'s paper, which has recently been coming off the highs of above 126 bid, seen earlier in the month.

"It was kind of a quiet day," a bank loan trader opined.

"The only thing that really moved was Leap Wireless, and even that was not much. It's off of its lows from Friday morning and trading on top of the 124 context."

San Diego-based telecommunications operator Leap's bank paper had jumped to above 126 from levels around 110 early in the month, in a series of moved that participants said had been driven by expectations that debtholders would profit handsomely when the company finally emerges from bankruptcy - since they will own almost all of the revamped company's shares.

But after pushing skyward on anticipated equity valuations, the bank debt last week came off those recent highs after a research report put out by Imperial Capital was said to have thrown cold water on such rosy expectations. That report was described by one market player who had seen it as "not very favorable."

Still, in Monday's dealings, Leap was up, although the trader dismissed the move as "just up on technicals, in my opinion."

He noted the issue's volatility over the past couple of days.

"If there is any news driving it," he declared, it's "old news on [sector peer] Metro PCS's IPO."

Mission Energy loan rises

Elsewhere in bank debt trading, Mission Energy Holdings' CCC-rated term loan paper was seen half a point up at 99.92 bid, and Calpine Corp.'s non-rated term loan was seen up around a point-and-a-third at 100.41. Steelmaker Citation Corp.'s term loan was down nearly a quarter point to 85.5 bid.

Delta rising

Back among bond investors, Delta's paper were clearly better, with a trader quoting its 7.70% notes due 2005 at 67 bid, 69 offered, its 10% notes due 2008 at 55 bid, 57 offered, its 7.90% notes due 2009 at 50 bid, 52 offered, and its 8.30% bonds due 2029 at 41 bid, 43 offered.

There was no firm really positive news on Delta seen out during the session that would seem to justify such a large move.

On Friday, the airline had announced that it had found a way to cut the carrying costs on its spare parts inventory by turning supply over to Boeing Corp., which built about 500 planes in Delta's fleet. Under the new arrangement, rather than Delta buying expendable aircraft parts - nuts, bolts, hoses, clamps and other small components - and holding them, the parts will actually belong to Boeing. Delta will get them and pay for them on an as-needed basis. Initially, the arrangement will cover proprietary Boeing-made parts - but may then be expanded to other makers.

Neither Boeing nor Delta put a price tag on the arrangement. While anything that saves the airline money now tied up in spare parts inventory certainly can't hurt, spare parts are not Delta's main cost challenge, that of bringing down the amount of money it pays to its unionized pilots, who are the best paid captains among the major old-line air carriers.

Delta and the pilots are scheduled to set down for hard bargaining on a new contract sometime next month and it is expected that at that point the pilots are likely to have to make large concessions in order to keep the airline flying and out of bankruptcy.

News that the federal ATSB had turned down UAL's request for $1.1 billion of federal backing as it tries to line up as much as $2 billion to complete its restructuring was seen by some on investment-oriented internet boards Monday as a potential positive for Delta's shares, and by extension, its bonds - since it makes it more likely that UAL will not be able to emerge from bankruptcy in its current form, without large cuts in operations, which could mean more market share for Delta, the nation's Number-Three air carrier, just behind UAL and industry leader American Airlines.

According to published reports, the federal rejection may also lead to UAL having to demand further cuts from its pilots and perhaps even reduce their pensions as a price of getting a private equity investor to come aboard without the federal guarantees. The significance of such an occurrence would not be lost on Delta's pilots, so the theory goes, who may then be more amenable to making the kinds of concession that the airline has asked for - and that impartial industry analysts say would be needed.

The pilot's have offered wage and rule concessions of around 13.5% - well below the 34.5% Delta has been asking for.

While investor optimism about the ultimate success of Delta's labor machinations could be helping to push the stock and the bonds up (the shares rose 42 cents, or 6.35%, to $7.03 Monday, on volume of seven million, about a million more shares than usual), other players, particularly among the bond traders, have a simpler explanation - short covering after recent downward moves.

One trader espousing this theory saw the 7.90% notes due 2009 as high as 52.5 bid, 53 offered, from 50 bid, 51 offered previously, and saw the 8.30% bonds at 42 bid, well up from 39.5 bid, 40 offered.

Another trader pegged the Delta long bonds even higher, at 43.5 bid, 44.5 offered, up two points on the day, and saw the 7.70s at 67.5 bid, 68.5 offered, also up a deuce.

On Monday evening, well after the markets had closed up shop for the day, The Wall Street Journal's online edition was reporting that Delta creditors had formed a committee to pursue restructuring talks with the airline, although no other details were immediately available. Talk that such a committee was being formed is another possible explanation for Monday's gains.

The trader also saw Northwest Airlines' 7 7/8% notes due 2008 two points better, at 67.5 bid, 69.5 offered, but saw no movement in the Eagan, Minn.-based Number-Four air carrier's shorter paper like the 8 7/8% notes due 2006, which he said were unchanged at 84 bid, 85 offered.

UAL moves higher

And, contrary to expectations that UAL's deeply distressed bonds might have fallen back with the federal rejection of its loan guarantees, the trader actually saw UAL "a little higher," going to 8.5 bid, 9.5 offered from 7.5 bid, 8.5 offered previously.

A distressed-debt trader at another shop saw the UALs even higher than that, around the same 9 bid, 10 offered levels they held last week, with the market apparently not surprised that the feds had turned UAL down for a third time, saying that it really didn't need the loan guarantees.

Last week, the company reported a loss of $93 million in May, well below the red ink it had shown a year earlier.

UAL chief Glenn Tilton, in response to the third federal turndown, said that the company would move forward with its efforts to drum up private financing.

Rally in asbestos bonds stalls

Elsewhere, bonds of asbestos-challenged companies - which had firmed smartly on Friday, amid news reports that Senate Democrats had proposed a $141 billion payment fund for people lodging medical claims related to their past exposure to the once widely used fireproofing material - stalled out, with no further positive news coming out of Washington. Senate Republicans are pushing a $131 billion fund and it's thought that the two sides might eventually split the difference.

But with momentum temporarily halted, Friday's heady gains were not repeated. Armstrong World Industries bonds were seen steady at the same 61 bid, 62 offered level that the Lancaster, Pa.-based floorcovering maker's notes had moved to - up several points - on Friday. And a trader saw Owens Corning "a little easier," quoting the Toledo, Ohio-based insulation maker's bonds dipping to 46 bid, 48 offered from prior levels at 49.

One upsider Monday, a trader said, was Mississippi Chemical Corp., which got a commitment for $182 million of new debtor-in possession financing. The Jackson, Miss.-based chemicals maker's 7¼% notes due 2017 firmed to 59 bid, 61 offered, three points above recent levels.

And at another desk, bankrupt Houston-based metals maker Kaiser Aluminum & Chemical Corp.'s 10 7/8% notes due 2006 were quoted up nearly two points, at the 105 level. Kaiser got a favorable court ruling in connection with its efforts to sell assets in the Baton Rouge, La. area (see related stories elsewhere in this issue).

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