Northwest gyrates on strike countdown jitters; Delphi better as Lehman touts stock

By Paul Deckelman and Paul A. Harris

New York, Aug. 19 - Northwest Airlines Corp. bonds were seen bouncing around at mostly lower levels Friday as the hours before its mechanics' strike deadline dwindled, but traders said those bonds came off their intra-day lows and ended the session only modestly lower.

On the upside, Delphi Corp.'s bonds gained, in line with strength in its stock, after Lehman Brothers raised its rating on the troubled Troy, Mich.-based automotive electronics maker's shares, predicting that former corporate parent General Motors Corp. would eventually ride to the rescue of its erstwhile subsidiary, much the same way Ford Motor Co. recently threw a lifeline to its former problem child, Visteon Corp.

Primary market activity was virtually non-existent.

"Northwest and Delphi were pretty much the two names du jour," a trader said, seeing the Eagan, Minn.-based Number-Four U.S. airline carrier's benchmark 8 7/8% notes due 2006 as having moved down to about 62 bid, 63 offered, from Thursday's closing levels at 64 bid, 66 offered.

"That was a wild ride," he said.

But the two-point drop doesn't begin to tell the whole story. The trader said that when the session began, "the first news out of the gate this morning was that the union talks hadn't gone anywhere, and there were actually a few prints in the high 50s."

Northwest had resumed talks with the Airline Mechanics' Fraternal Association late Thursday in hopes of averting a Saturday morning strike by some 5,000 mechanics, custodians and cleaners.

Northwest is seeking $1.1 billion in pay concessions from its various employee groups, including $176 million from AMFA - givebacks it says it absolutely must have to avoid bankruptcy. The airline rejected a union's offer on Wednesday, saying it only offered about $100 million of concessions.

After that initial bearish news, however, "the talks were back on, and we found out there was a counterproposal" by the company, and the bonds went back up to around a 62 bid level.

"So day-over-day, they were off about two or three points, but they were certainly up from their lows early, early this morning, when there were a couple of round-lot trades just south of 60." Northwest on Friday presented what it called its "last and best offer" to the union, in hopes of avoiding the threatened walkout at 12:01 a.m. ET Saturday - even though the airline formulated a contingency plan that would let it keep flying by using replacement mechanics.

The trader saw Northwest's 9 7/8% notes due 2007 holding to "a similar pattern" - they traded off a few points, down to 51 bid in early dealings from Thursday's close around 54, and then moved back up toward the end of the day to 53.5 bid.

He said that the 9 7/8s were "less liquid and not as volatile" as the 8 7/8s. "There was not as much trading - and plus, it's probably not going to move as much as the '06s."

Another trader saw the 8 7/8s close at 60 bid, 62 offered - but he had only had them going home Thursday at 61 bid, 63 offered.

The trader also saw Northwest's 10% notes due 2009 likewise ending down a point, at 43 bid, 45 offered.

Northwest was "volatile going into the possibility of a strike," yet another trader said, quoting its 8 7/8s opening down three points at 60 bid, 61 offered, but then, "the day progressed, and there were rumblings [the two sides] were talking again," pushing the senior bonds to 63.5 bid, 64.5 offered - off about a half point from Thursday's levels, "but a decent rebound from the lows."

Delta little changed

A trader saw Delta Air Lines Inc.'s bonds - which had risen in step with Northwest's over the previous session or so - "kinda unchanged," with the benchmark 7.70% notes coming due Dec. 15 around the same 26.5 bid, 27.5 offered level at which he had seen those bonds finish Thursday, even though he saw a few small odd-lot trades as low as 24.5 bid, which he said were not representative.

Another trader saw Delta's bonds "all relatively steady," with the 7.70s continuing around 26 bid, and its other bonds, such as the 7.90% notes due 2009 and the 8.30% notes due 2029 all in a 15-18 context.

However, yet another trader saw the 7.70s up two points on the day at 27 bid, 28 offered, although he did see "all the other maturities unchanged," in the upper teens.

The bonds got a little bit of a boost from the news that J.P. Morgan is keeping its recommendation on Delta's stock at "overweight" - essentially a buy signal - even though market speculation is that the troubled Atlanta-based Number-Three U.S. airline carrier will probably be filing for bankruptcy soon, driven there by sky-high fuel costs, heavy debts, big pension obligations and an extremely competitive environment in the airline business. Those market fears have beaten the company's stock down to around the $1.50 per share level, and have likewise sunk its once high-flying 7.70% notes to around a quarter on the dollar, well down from highs in the 80s just about a month or so ago.

A trader, noting JP Morgan's continued bullishness on Delta, wondered aloud "why does UAL stock trade where it does, and it's been operating in Chapter 11 for a few years now?" He said that - without having read Morgan analyst Jaime Baker's report, he could "understand" the logic behind the recommendation - at $1.50, how much lower can the stock go, and what does an investor with a taste for risk have to lose?

Earlier in the week, Baker, noting Delta's planned sale of Atlantic Southeast Airlines Inc. to SkyWest Inc., one of its regional partners, for $425 million, said in a research report that while that deal by itself would not be enough to keep Delta from sliding into bankruptcy, "If this is the first in a series of potential liquidity transactions, as we believe it is, Delta may ultimately make it out of the [emergency room]."

However, late Friday - well after trading had wrapped up - Delta warned its pilots union that its cash reserves have fallen to the point Delta might seek to revise the agreement the carrier and the union reached last year to avoid a bankruptcy filing at that time.

The pilots - Delta's highest-paid non-management employees - agreed to $1 billion in annual concessions, and Delta said it would not seek more givebacks from them unless its cash level fell below a certain point.

The pilot's union, ALPA, said Friday in a membership memo that Delta has informed it that the company's cash level has fallen below that point, which was not formally spelled out.

While Delta could seek more cuts, so far it has not. Analysts believe that negotiations to seek more pilot concessions would be a long and painful process - and Delta would not have time for such protracted talks.

A company spokesman said Friday night that "the liquidity shortfall notice does not mean the company has decided to pursue any particular course of action at this time,"

Also in the airline sector, a trader said Continental Airlines' 8% note coming due in December "doesn't move"; those bonds were last seen hovering around their expected takeout price at maturity of par.

Delphi better on Lehman comment

In the automotive sector, a trader saw Delphi's 6.55% notes due 2006 firm to 94 bid from 92 bid, 93 offered on Thursday, and its 7 1/8% notes due 2029 up about a point at 75.5 bid, 76.5 offered, after Lehman Brothers upped its rating on the company's shares to "overweight" from "underweight" previously, citing an expected bailout of Delphi from its top customer, GM.

The trader said that "they [Lehman] see a restructuring with GM a la Visteon," which earlier this year got its former parent, Ford, to take some two dozen unprofitable factories off its hands, taking some back directly and putting others into a trust that is expected to be sold. That step will help Van Buren, Mich.-based Visteon to lower its labor costs, by getting out from burdensome union contracts at the plants it is giving up.

"He [i.e. the Lehman analyst] also sees an upturn in GM orders [to Delphi]. I'll believe that when I see it."

At another desk, a trader - also attributing the rise to the Lehman equity upgrade - pegged the 6.55s two points higher at 94 bid, 96 offered, while the company's other bonds were all up a point, to 87 bid, 89 offered for the 6½% notes due 2009, 82 bid, 84 offered for the 6½% notes due 2013, and 75 bid, 77 offered from the 7 1/8% notes.

Another trader saw the 6.55s up two points at 94 bid, 95 offered, while the 6½% 2013s got up to 81.5 bid, 82.5 offered from prior levels at 80 bid, 81 offered.

Delphi's New York Stock Exchange-traded shares were up 44 cents ($7.43%) to $6.36 on volume of 7.6 million, not quite twice the usual turnover.

Beverly steady on bidding war

Beverly Enterprises Inc.'s bonds were seen little changed, even as a second potential buyer for the Fort Smith, Ark.-based nursing home operator emerged, just days after it announced that it had agreed to be acquired by North American Senior Care Inc. for $12.80 per common share in a $1.9 billion deal that includes repayment of Beverly's $224 million of outstanding net debt.

A trader quoted the company's 7 7/8% notes due 2014 at in a 112-112.5 context - little changed from the levels to which they had risen around mid-week on the news of the North American Senior Care deal. Those bonds had risen about three points in Wednesday's dealings in response to the North American news.

Beverly said Friday that it had received a new merger proposal of $12.90 per share from Formation Capital, LLC, Franklin Mutual Advisers, LLC, Appaloosa Management, LP and Northbrook NBV LLC - the investor group whose original unsolicited $11.50 per share offer for the company back in January, which was rejected by Beverly, caused the nursing home company to put itself up for sale.

Published reports put the cash value of the Formation consortium's offer at $1.64 billion, slightly better than the reported $1.63 billion cash value of the North American deal, and some estimate the total value of the new bid at $1.91 billion - again, slightly above the $1.9 billion North American offer, although Beverly's announcement of the Foundation bid did not specifically indicate whether debt repayment was included in the Foundation bid. It did, however, say that the new offer is "on terms and conditions that are substantially equivalent to, and in certain respects more favorable than, those contained in the NASC merger agreement."

Under those circumstances, Beverly said its board - acting to fulfill its fiduciary obligations to the company's shareholders - had officially concluded that "the terms of the Formation Capital Consortium's proposal are superior to those in the NASC merger agreement and has notified NASC to that effect." While Beverly's board and outside legal and financial advisors, "will work promptly and diligently towards arriving at a definitive agreement with the Formation Capital Consortium," the prior agreement with North American Senior Care has not been terminated and remains in effect, at least until noon ET on Tuesday, and North American has the right to come back any time before that deadline with a better offer that Beverly would have to consider.

"Nothing traded today," the trader said about the 7 7/8% notes. "I think they're probably going to hang around this 112 handle. Everybody thinks that whoever takes them over" - whether it's North American Senior Care, the Foundation consortium, or any other suitor who may emerge - "is going to have to tender for the debt. So there was no move on the new bid."

Another trader agreed that Beverly's bonds are "trading to a tender [price], regardless of who buys the company." He quoted the bonds unchanged at 111.5 bid, 112.5 offered, the anticipated tender price "trading 100 basis points over. I don't see them going much higher, till this gets done."

Crown unchanged

The late-Thursday announcement that Crown Holdings Inc. plans to sell its global plastic closures business for approximately $750 million to European private equity firm PAI Partners and could use the money for debt repayment produced "nothing" in the way of bond price movement," a trader said, quoting the Philadelphia-based packaging company's 7 3/8% notes due 2026 at 96 bid, 98 offered and its 9½% notes due 2011 at 110.25 bid, 111.25 offered, essentially unchanged with "no trading seen, not on Bloomberg, not on Trace. Nobody seems to be motivated on those by the news."

However, at another desk, a trader saw subsidiary Crown Cork & Seal's 9½% notes due 2011 up ¾ point at 110.5 bid, 111 offered, and its 8% notes due 2023 a point ahead at 100.5 bid, 101.5 offered.

Syniverse up again

Among newly priced issues, the new Syniverse Technologies 7 ¾% notes due 2013 - which priced Thursday at par and then pushed up to 101.5 bid, 102 offered on the break - were seen Friday up to 102.25 bid, 102.5 offered.

Primary quiet

A high yield sell-side source said that Friday's market was generally flat on extremely thin volume.

The official added that judging by the number of players out of the office - some of them expected to be gone through Labor Day, two weeks hence - the remainder of August figures to wind down much the same way as Friday, with little or no activity in the primary market.

The source did allow, however, that during the course of the next nine full market sessions and one abbreviated one (Friday, Sept. 2) the prospect of some roadshow activity should begin to materialize.

$800 million week

Factoring in Friday's goose egg the week of Aug. 15 came to a close having seen slightly less than $800 million price in five dollar-denominated tranches. That compares to the previous week's $1.7 billion in nine tranches.

At Friday's close, year-to-date issuance stood at $66.3 billion in 259 dollar-denominated tranches. At the same point in 2004 the market had seen nearly $95 billion in 381 tranches.

Cash catching up to junk, says Merrill

In Friday's edition of EuroHYLights, Merrill Lynch's high yield strategist M. Christopher Garman along with research analyst Oleg Melentyev examined the implications for junk of the widely anticipated continuation of short-term interest rate hikes by the Federal Reserve.

The scenario they paint is one in which cash figures to trump junk by the end of the present year.

"Cash begins to give high yield a run for its money when Fed Funds is within 425 basis points of the average high-yield coupon," Garman and Melentyev assert.

"When cash becomes competitive, high yield spreads begin widening. Two more Fed tightenings (50 basis points) would likely put high yield markets over the top."

They go on to say that history shows that whenever fed funds draws to within 425 basis points or less of high yield's promised coupon, spreads tend to widen, and add that it happened that way in 1985, 1989, 1995, 1998 and 1999-2000.

"The excess return performance gap between these cash-attractive periods is a significant 11% since 1985," they add, "a 5.7% high yield underperformance of Treasuries when fed funds is relatively high, and 5.1% outperformance when a low short end feeds the coupon carry trade."

Garman and Melentyev go on to say that the average high yield coupon has steadily trended lower over the past 20 years, and is fairly knowable in advance.

"This leaves fed funds as our main mover in this relationship," they assert. "Merrill Lynch estimates that short-term rates will hit the high yield-damaging zone by the end of the year, at 400 basis points."

Still cash to put to work

A high yield syndicate source hearing this market commentary late Friday said that it does not paint a very hopeful picture, but quickly added that there is a lot of cash which people appear eager to put to work in high yield.

The source added that in late July and early August, amid volatility in Treasuries and a sideways-moving stock market, the high-yield primary market tended to see good executions, with bonds that most often seemed to be pricing with terms friendly to issuers, suggesting that demand for high-yield bonds remains strong.

"The last deals we brought were very well received," the official said.

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