Delta flies on sweetened takeover bid; Kodak firms on asset sale; Chaparral Energy prices upsized deal

By Paul Deckelman, Paul A. Harris and Ronda Fears

New York, Jan. 10 - Delta Air Lines Inc. bonds were heading skyward on Wednesday, propelled by a combination of merger and acquisition news - specifically, a sweetened bid for the bankrupt Atlanta-based airline operator from rival US Airways Group Inc., as well as a news report that Delta has been talking with another bankrupt competitor, Northwest Airlines Corp., about a possible tie-up - and a continued retreat in world oil prices, which hit a 19-month low on Wednesday.

Northwest's bonds were also seen several points higher, apparently on the Delta talks story and the oil price slide, which has raised investor hopes of a moderating trend down the line for jet fuel prices.

While lower oil prices might be good for industries that use a lot of petroleum products, such as the airlines, it's definitely bad news for the companies that pull energy out of the ground, such as Chesapeake Energy Corp., which led the sector lower Wednesday.

Elsewhere, Eastman Kodak's announcement that it will sell its health-imaging operations for as much as $2.55 billion - exiting a business it's been in for over 110 years - helped push the Rochester, N.Y.-based photographic giant's bonds up. Kodak plans to use some of the money to pay down debt, and the rest could be invested in its digital photography business, on which the venerable company has staked its future.

A sell-side source who spoke well after the Wednesday close said that it had been a good day in the junk bond market, and marked it ¼ to ½ point higher.

In the primary market Chaparral Energy, Inc. priced the session's sole issue. However it was upsized to $325 million from $275 million, and priced at the rich end of price talk.

Chaparral tight to talk

Chaparral Energy priced its upsized $325 million issue of 8 7/8% 10-year senior notes (Caa1/CCC+) at 99.178 to yield 9%, at the low end of the 9% to 9 1/8% price talk.

JP Morgan, Banc of America Securities LLC and RBS Greenwich Capital were joint bookrunners for the quick-to-market debt refinancing deal that generated approximately $322.33 million of proceeds for the Oklahoma City-based energy exploration and production company.

One market source told Prospect News that the deal, which was announced Tuesday, had initially been expected to price on Thursday, but was "moved ahead."

Meanwhile a sell-side source who was not in the deal said that investors were probably not inhibited by the triple-C ratings on Chaparral's new paper from both Moody's and S&P, given the present shortage of paper in the market and the fact that the buy-side still likes the energy sector, declining crude oil prices notwithstanding.

And given the market's strength on Wednesday, the source added, it was "a good day to price a deal."

Ahern talks add-on

After Tuesday's flurry of drive-bys and deal announcements the Wednesday session came and went in a ghostly quiet, apart from the Chaparral deal.

Ahern Rentals talked a $75 million add-on to its 9¼% second priority senior secured notes due Aug. 15, 2013 (B3/B) at the 103.75 area.

The books close at noon ET on Thursday.

CIBC World Markets is leading the Las Vegas-based equipment rental company's debt refinancing deal.

The original $175 million issue priced at par on Aug. 11, 2005.

The rest of the week

Beyond Ahern, the remainder of the week's announced primary market business is euro-denominated.

Iron Mountain Inc. plans to price a €175 million add-on to its 6¾% senior subordinated notes (B) due Oct. 15, 2018 on Thursday via Bear Stearns, with proceeds to be used to repay debt and for general corporate purposes.

The Boston-based information storage and protection services provider priced the original €30 million issue of 6¾% notes due 2018 in "a true private" placement last October, according to market sources.

Then on Friday, Germany-based plumbing fixtures manufacturer, Grohe Holding GmbH, is expected to price an €800 million offering of seven-year senior secured floating-rate notes (B2) - a debt refinancing being led by Credit Suisse and Lehman Brothers.

Intelsat up in trading

The new Chaparral Energy 8 7/8% notes due 2017 priced too late in the session for any aftermarket activity.

Traders saw Intelsat (Bermuda) Ltd.'s new floating-rate senior guaranteed notes due 2015, which priced at par on Tuesday, were being quoted at 101.125 bid, 101.5 offered by a trader, who called that an improvement from levels Tuesday at 100.75 bid, 101.25 offered, adding "they got better, but they certainly didn't break out really high."

Another trader, however, said they didn't break out at all, pegging the new paper at that same 101.125 bid, 101.5 offered level, saying that was "pretty much where they were."

Delta soars on sweetened bid

Delta Air Lines bonds, particularly its 8.30% notes due 2029, the company's most widely-quoted issue, "were up quite a bit, then down quite a bit, and then back up in the middle," a trader said, moving from levels in the low-to-mid 60s to peaks in the 72 area, before dropping off those heights to end in a 68-69 bid context - still up about 4 points on the session.

"They certainly did jump right out of the gate," the trader continued, and despite the midday pullback from the highs, "still ended up having a pretty nice day."

Another trader said that the 8.30s and the company's 7.90s due 2009 traded in tandem, with all of the other Delta bonds about a point behind that - but all of them up by that same 4 to 6 point context. He saw the 8.30s up half a dozen points, ending at 69 bid, 70 offered, versus a close at 63 bid, 64 offered on Tuesday.

Delta's Pink Sheets-traded shares also jumped 10 cents (7.69%), to $1.40, on volume of 9.7 million shares, nearly double the norm.

The Delta bonds initially took off in heavy morning trading as the market digested the news that US Airways - whose original $8 billion-plus takeover bid Delta had rebuffed - had raised its cash-and-stock offer by 20% to $10.3 billion.

That translates to about $1 billion more in cash and 11 million additional shares of US Airways.

US Airways originally offered $4 billion in cash and 78.5 million shares of its own stock. Under new terms, Delta creditors would get $5 billion in cash and 89.5 million shares of US Airways stock, currently valued at $5.3 billion, for a total deal value of roughly $10.3 billion based on Wednesday's market.

Delta creditors would hold a 49% stake in the combined airline versus 45% previously.

Market-watchers said that based on the wild swing in the value of its bonds in heavy trading Wednesday, with the representative 8.30s gyrating between lows around 66 and highs around 72, the Delta bondholders seemed to be waffling between exuberance because of the prospects of an extra $1 billion cash distribution in a US Airways deal on the one hand, and less enthusiasm about holding securities of a "new" debt-laden airline after the Delta bankruptcy case is concluded on the other.

Tempe, Ariz.-based US Airways was created from a merger of that eponymous airline, then in the throes of its own Chapter 11 reorganization struggle, with the smaller but more financially solvent America West Airlines in September 2005. The Delta offer would more than double the company's shares outstanding, which stood at 88.2 million at the end of September, and the new debt to be assumed by America West or borrowed to help fund the takeover would also far exceed its current market value of $5.1 billion.

Northwest along for the upside ride

Delta rebuffed the initial US Airways offer, instead insisting, as it has all along, that it would emerge from its restructuring as a leaner, less-indebted stand-alone company. It recently filed a plan of reorganization with the U.S. Bankruptcy Court in New York envisioning such a transformation, much to the chagrin of some Delta debt-holders, who organized their own unofficial rump creditor's committee - in addition to the officially sanctioned creditors' panel - whose goal it is to get Delta management to give the US Airways plan serious consideration rather than rejecting it out of hand.

On Wednesday, that group, which holds about $2.3 billion of Delta's bonds and bank debt, formally called on Delta "to provide thoughtful and unbiased consideration" to the sweetened US Airways bid, and further urged management to cooperate fully with its would-be suitor's efforts to get information. It also urged Delta to not discourage alternatives from other companies that could provide stakeholders with greater recoveries than under a standalone reorganization.

Delta on Wednesday said that while its board will do its fiduciary duty to review the revised offer from US Air, it still believes that "on its face, the revised proposal does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion."

Delta's official unsecured creditors committee meantime had said prior to Wednesday that it was reviewing both Delta's standalone plan and US Airways' buyout offer.

But for all of Delta management's talk that it intends to restructure and then go it alone, the market has long buzzed with rumors that management's Plan B is some sort of link-up with Eagan, Minn.-based Northwest, which is also currently reorganizing under the scrutiny of the Manhattan court; in fact, the two companies filed their respective petitions with that same court literally within hours of one another on the same day in September 2005.

The Wall Street Journal on Wednesday reported on its website that Northwest and Delta have been talking regularly for quite some time about a possible combination as a more "realistic" alternative to the hostile takeover by US Air. It attributed its information to anonymous sources close to the situation. Neither Delta nor Northwest would comment on the report.

The Journal further reported that Delta has also held conversations with UAL Corp.'s United Airlines unit, although it said those talks haven't been as frequent or recent as the ongoing Northwest-Delta contacts.

One trader characterized the renewed buzz that Delta was in talks with Northwest about a post-bankruptcy merger as a means to "avoid a merger with US Air at any cost."

Northwest's bonds were seen up about 4 to 5 points on Wednesday, "depending on the issue," a trader said, with its 10% notes due 2009 a 4 point gainer at 99 bid, par offered. At another desk, Northwest's 7 7/8% notes due 2008 were seen up 3 points on the day at 98.

Also seen helping the airlines power upward was the continued downside move in world crude oil prices, which holds out the prospect that prices will fall for various petroleum derivatives refined from crude, especially jet fuel. Escalating fuel costs helped to force both Delta and Northwest into their emergency landings in the bankruptcy courts.

But now crude has hit its lowest levels in over a year-and-a-half. Light, sweet crude for February delivery dropped $1.62 per barrel in Wednesday's dealings on the New York Mercantile Exchange to settle in at $54.02 - its lowest close since June 10, 2005. At one point during the session, crude got as low as $53.89. Oil prices have fallen by nearly a third since peaking at $78.40 last July and are down 9% percent so far this year.

Oil drop a double-edged sword

But while the drop in oil prices has been welcomed by airline investors, bondholders in energy companies who see the prospect of lower revenues from those lower prices are singing quite a different tune.

Chesapeake Energy's 6¼% notes due 2018 were seen by one market source to have lost ½ point to 95 bid, while at another desk, the Oklahoma City-based independent oil and gas exploration and production operator's 6 3/8% notes due 2015 were seen down a full point at 96.625.

Other energy names seen down about 5/8 point included Forest Oil Corp.'s 7¾% notes due 2014, at 100.125, and OPTI Canada Inc.'s 8¼% notes due 2014, at 102.

Kodak up, though trading quiet

The news that Eastman Kodak will dispose of its health-imaging business via a sale to Onex Healthcare Holdings Inc. for as much as $2.55 billion - $2.35 billion in cash up front and the other $200 million if the sold unit achieves certain financial goals - gave the photo giant's bonds a little lift, although a trader described activity in the name as "very quiet," adding that "this was pretty much expected."

He saw Kodak's 7¼% notes due 2013 up a point at 101 bid, 102 offered, although at another desk, those bonds were seen up 1½ points on the session to 102.5 bid.

Yet another trader saw the bonds "up a little, but not a whole lot," at 101.25, and saw its 3 5/8% notes due 2008 little changed at 96 bid, 97 offered, since "the 08s don't have much [time] to go. There was not a lot of trading there."

Kodak's decision to abandon the X-ray film business that it pioneered - company founder George Eastman, starting in 1896, was the first to sell films that could record the radioactive images produced by the then-newly discovered X-ray technology - is the latest step in the company's shedding its dwindling traditional photography business as it attempts to re-invent itself as a provider of digital imaging products and commercial printing technology.

Smurfit unit IPO possibility lifts bonds

Bonds connected with packaging producer Jefferson Smurfit were seen better, as one of its units, Europe-based Smurfit Kappa Group noted recent market speculation about a possible initial public offering, and confirmed that it is, in fact, considering an IPO.

Smurfit Kappa said it would be seeking approval from its lenders to amend certain terms of its senior credit facility, which would facilitate an IPO during 2007.

A trader saw Jefferson Smurfit's 8¼% notes due 2012 up ½ point at 99.25 bid, 100.25 offered, while Smurfit Stone Container Corp.'s 8 3/8% notes due 2012 were also up ½ point at 98.75 bid, 99.75 offered.

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