Airline bonds soar on M&A developments; GM off as Tracinda cuts stake

By Paul Deckelman and Paul A. Harris

New York, Nov. 22 - Bonds of Delta Air Lines Inc. and Northwest Airlines Corp. were heading skyward Wednesday, gaining altitude in response to merger-and-acquisition developments within the airline industry - Delta up after The Wall Street Journal reported that some of its bondholders are organizing a committee to support US Airways Group's unsolicited takeover bid for the bankrupt airline, Northwest gaining on news that yet another airline - Australian carrier Qantas - could be bought out.

Back on the ground, General Motors Corp.'s bonds were down again, this time in line with a slide in the giant carmaker's stock triggered by the news that billionaire investor Kirk Kerkorian is slashing his equity stake in GM, preferring to instead invest that money to tighten his control of gaming behemoth MGM Mirage - whose bonds were meantime little changed on the news.

On the earnings front, Tembec Inc.'s bonds - which had risen solidly on Tuesday in anticipation of the Canadian forest producer's fourth-quarter numbers - gave it all back Wednesday, even though the company reported a smaller net loss than it suffered a year ago.

Meantime, Calpine Corp.'s bonds - which have been rising steady over the past two to three weeks - were once again "up like a helium balloon," in the words of one trader, although there's no unanimity among market participants on just what is fueling the rise in the bonds of the bankrupt San Jose, Calf.-based power generating company.

The primary market remained pretty much out to lunch, with no new issues seen having priced, although Aleris International Inc. unveiled plans for a $1.1 billion issue as part of its impending LBO.

The secondary market was not much busier either, with many participants "out the door by 11 [a.m. ET]," as one participant put it, ahead of the official 2 p.m. ET close recommended by The Bond Market Association for debt markets in the United States, heading into the Thanksgiving holiday weekend. The debt markets were slated for full closure on Turkey Day, Thursday, and for an abbreviated session (2 p.m. ET close) on Friday. Things return more or less to normal on Monday.

Delta gains on bondholder maneuvers

Delta's bonds were seen up about 1½ to 2 points Wednesday, as The Wall Street Journal reported that some of the bondholders have established an informal group that would urge Delta's management to seriously consider the US Airways bid and not reject it out of hand.

A trader saw Delta's widely quoted 8.30% notes due 2029, and its 7.90% notes due 2009 at 62 bid, 63 offered, up around 2 points.

Another trader saw the '29s at 61.5 bid, 62.5 offered, up from about 59 bid, 60 offered on Tuesday.

Delta's Pink Sheets-traded shares, meantime, fell six cents (4.26%) to $1.35 on volume of 6.7 million, about 1½ times the norm.

When the proposed $8.78 billion takeover was announced earlier this month, Delta management said it would study the US Airways offer - but strongly reiterated that the bankrupt Atlanta-based Number-Three U.S. carrier's preference was to continue its restructuring effort, which has been going on for 14 months now, and emerging from Chapter 11 as a leaner, less-indebted standalone company.

The Journal said that although some of the company's larger creditors have expressed skepticism about the US Airways takeover try, that view is by no means universal. It said that creditors Deutsche Bank and Lehman Brothers Holdings organized conference calls Tuesday with bondholders, aimed at creating a second group of creditors - in effect, a splinter group - that would also have a voice in the airline's restructuring.

The restructuring ultimately must be approved by the current official committee of unsecured creditors, which is dominated by much larger creditors, the paper reported. It said the bondholders being wooed by Deutsche and Lehman represent about 30% of the total $16 billion to $18 billion claim that will eventually serve as the basis for doling out equity in post-bankruptcy Delta.

On those conference calls, it was reported, the bondholders were urged to unite in order to be able to put pressure on the company to fully consider the takeover bid, rather than rejecting it out of hand.

While Delta and the official creditors committee are set to meet jointly this coming week in New York with officials of US Airways - which itself was formed last year by America West Airlines' successful acquisition out of bankruptcy of US Airways - Delta continues to stand by its earlier assertions that the takeover plan is risky and the company's own restructuring plan is far batter for all stakeholders.

Deutsche Bank and Lehman Brothers declined comment on the story Wednesday.

A trader said that there was some logic in the notion that the takeover bid might prove more advantageous for the bondholders than the airline's plan, since "it would get the deal done and they would get their money up front," rather than having to wait around until the airline restructures and emerges from bankruptcy, at which point they would likely get shares in the revamped airline which might prove to be valuable - or might not - depending on whether the restructured Delta become profitable, since it would still have to operate in a crowded industry, competing against lower-cost carriers like Southwest Airlines and JetBlue, with no assurances that it would make a profit.

The Delta bonds have jumped sharply to their current levels in the 60s from their prior levels in the upper 30s which they held before the Nov. 15 announcement that US Air would bid more than $8 billion - $4 billion in cash and the rest in shares - for its bankrupt rival. Most of the gains took place the day of the announcement. Since then, they have gyrated in about a four-point range between 58 and 62, but have held most of their initial gains.

While there was a fair amount of trading in the bonds on Wednesday, relatively speaking, that must be seen in a context of the traditionally thin pre-holiday market dealings.

"So many people are gone today, [so] it's hard to get a sense of what is going on and what will really happen. We saw the Reuters story [following up on the initial WSJ piece], and the bonds are up a couple of points to the low 60s," said a distressed bond trader at one of the bulge bracket firms.

"You have to think that probably there are a handful of big guns, the biggest bondholders, involved in these talks, right. They will carry some weight, and it seems like the best bet is that they are going to go for the cash, the more the better. On that, the bonds will be better."

Northwest gets lift from Qantas news

Northwest's bonds, meantime, were up even more than the Delta bonds on Wednesday, lifted by a confluence of factors. One was the rise in the Delta notes, since the bonds of the two bankrupt airlines now seem to rise and fall sort of in tandem.

Another, a trader said, was the news that Qantas - the Australian-flag carrier perhaps best-known in the U.S. for its memorable TV commercials starring a cute, though melancholy little koala bear complaining that the airline had spoiled his peace by bringing too many tourists to the Land Down Under - has received a $7.77 billion acquisition bid from Australia's Macquarie Bank and buyout specialist Texas Pacific Group.

The trader saw Northwest's bonds up as much as 5 points on the day, with its 8 7/8% notes that were to have come due this year rising to 86.5 bid, 87.5 offered, citing the Qantas story as a catalyst for renewed speculation about possible consolidation in the airline industry. Analysts have said there are too many carriers with a total of too many seats chasing too few travelers, and that some of the weaker names in the fragmented industry would have to disappear, allowing for capacity cuts that would bring revenues and costs more closely into line. Northwest - the Eagan, Minn.-based Number-Four U.S. carrier - would probably qualify as one of those weaker names, having filed for Chapter 11 protection last year - ironically, on the same day and at the same Manhattan bankruptcy court as competitor Delta did.

A market source saw Northwest's 7 7/8% notes due 2008 up 4 ½ points on the session, at 88 bid.

A trader at another desk saw the Northwest bonds up about two or three points on the day, with the 8 7/8s at 87, and its 10% notes due 2009 also at 87, but cautioned that pre-holiday trading was "so thin, it's tough to tell what's really happening. There was not a whole lot of volume to justify such a move. If there were more people in, you could see what was really happening."

GM seen lower

Traders saw General Motors bonds were down for a second straight session, in line with a fall in the Detroit giant's shares sparked by the news that billionaire investor Kerkorian will sell 14 million GM shares in a private transaction at $33 per share, or $462 million total. That will cut the octogenarian tycoon's stake in the top carmaker, now estimated at 56 million shares, or 9.9% of GM, down to 42 million shares, or 7.4% of the company's 565.5 million-share float. The reduction in the shares, which are held by Kerkorian's investment vehicle, Tracinda Holdings, comes several weeks after the collapse of Kerkorian-encouraged talks between GM and overseas carmakers Renault and Nissan, aimed at bringing GM into their operational and marketing alliance - a step which Kerkorian had strongly urged as a means of troubled GM turning around its situation and trying to return to profitability.

A trader saw GM's benchmark 8 3/8% notes due 2033 down ½ point to 89.75 bid, 90.125 offered. Its 7 1/8% notes due 2013 were likewise down ½ point at 92.25 bid.

GM's New York Stock Exchange-traded shares were meantime down $1.52 (4.66%), to $31.09. Volume of 35 million shares was about 3 ½ times the usual turnover.

Kerkorian's company meantime said that it would tender for additional shares of Las Vegas-based gaming giant MGM Mirage, strengthening his majority hold on the company. However, the MGM Mirage bonds, like its 8 3/8% notes due 2011 were steady at 104 bid, 105 offered.

Wednesday's retreat in the GM bonds continued a slide that began Tuesday, when they had fallen about 1½ points across the board, responding to comments from a senior executive that the company's restructuring efforts were by no means done yet, and to United Auto Workers union president Ron Gettelfinger's reported comments indicating that the union - which will open talks with GM in July on a new four-year contract that would serve as the master agreement for the domestic carmakers - is not inclined to give GM the wage and benefit concessions the carmaker would like, and will especially defend the "jobs bank" provision of the current agreement, under which laid-off workers still receive most of their salaries and benefits. GM and its domestic rivals, Ford Motor Co. and Chrysler Group, contend that such a provision negates much of the impact of their cost-saving job cuts, and puts them at a disadvantage versus Japanese and other Asian carmakers who do not have such a requirement.

A trader meantime saw Ford's flagship 7.45% notes due 2031 down about a point at 78.75 bid, 79.125 offered.

Delphi bonds zigzag

Also in the automotive world, Delphi Corp. bonds were seesawing Wednesday with the 6½% issue due 2013 off about ½ point to the 103 area while the 6.55% due 2006 edged up about 0.75 point to 106, according to one trader. On the news front, UAW boss Gettelfinger had told union members late Tuesday that the union had reached a deal with Delphi to "convert supplemental temporary employees hired Nov. 20, 2006, or earlier to permanent status."

He said some contract employees and others would be excluded and that full details would be announced Wednesday.

The trader said the entire labor situation was perplexing, given Delphi's attempts to appease the union.

"We're talking about 5% of their employees, or a small portion, being problematic," he said. "If it was my business and, say I have 16,000 employees and 8 of them are giving me grief, I'd just fire them and move on."

Gettelfinger said there has been little discussion with Delphi on the company's request to cut wages and benefits in an effort to trim costs, however. Delphi is seeking to void its labor contracts. The next meeting in bankruptcy court is slated for Nov. 30, with a Jan. 31, 2007, deadline set to rule on the labor contract request.

"Delphi is a rogue company that used the unfair bankruptcy laws to take advantage of their workers," Gettelfinger said. "Once again, in the final analysis an agreement has to be reached that our membership is willing to ratify. Our union has been available to meet with the corporation at any time, day or night, but honestly, at this time there has been very little discussion."

Calpine climb continues

Outside of the autosphere, Calpine's bonds were once again heading upward, with one trader likening them to "a helium balloon."

The company's 10½% notes that were to have come due this year were up 1½ points at 89.5 bid, 90.5 offered, as were its other "pre-2000" bond issues, like the 8¾% notes due 2007, the 7¾% notes due 2009, the 7 7/8% notes due 2008 and the 7 5/8% notes due 2006.

Among the post-2000 bonds, the 8½% notes due 2011 and 8 5/8% notes due 2010 were seen a point better at 67.5 bid, 68.5 offered, while the 8½% notes due 2008 of the company's Calpine Canada Energy Finance II unit were seen up 2 points to 84 bid, 86 offered, in fairly active dealings for a pre-holiday market.

The trader added that over the past two weeks or so, those bonds were up "more than 20 points," with no real reason for the rise seen.

"Something is going on" - but what it is not clear, the trader said, dismissing the notion that the company's recent report of its first quarterly profit in two years may have been the catalyst.

"It was only $1.6 million. That's nothing to move 20 points over many sessions."

That trader noted that Calpine's Pink Sheets traded shares have recently jumped to around 75 cents from prior levels around 25 cents - indicating that "maybe someone over there [in the equity markets] has an inkling that something is going on."

Another trader, however, attributed the gains to the company's recent progress in cutting costs and monetizing assets, including the just-completed sale for $112 million of surplus generation turbines and other equipment.

However another trader saw profit-taking and quoted the 8½% parent bonds due 2011, one of the more liquid issues, down about a point to 65, one trader said, and the 8½% bonds of the Canada Energy Finance unit due 2008 off about a point to 82.

Tembec in retreat

On the downside, Tembec's bonds were seen down about a point to 1½ points across the board, giving up the gains that the Montréal-based forest products company's paper had notched on Tuesday, in advance of its quarterly numbers - an apparent case of the old market saw "buy the rumor, sell the news."

A trader saw its 8 5/8% notes due 2009 at 65.25 bid, "a little lower," while its 8½% notes due 2011 ended at 58.5 bid, and its 7¾% notes due 2012 were at 56.5.

Tembec reported that it lost C$54.5 million ($47.8 million), or 64 Canadian cents a share, for the three months ended Sept. 30, narrowing from its year-earlier red ink of C$134.9 million, or C$1.58 a share.

However, the company expressed concern about softening demand for newsprint, its key product, and the U.S. housing downturn, which depresses demand for lumber.

Apart from the names which had news out, traders saw virtually no activity in other issues - and even the names with news saw limited activity.

"If anything really traded all day, I'd be surprised," was how one put it. "It was a nothing day - a complete waste of time."

Primary mostly quiet

With many market participants getting an early start to the Thanksgiving holiday weekend, sources were marking the broad high-yield market flat at Wednesday's close.

No U.S. or Western European issuers priced deals during the Wednesday session.

However Ukrainian poultry producer, Myronivsky Hliboproduct (MHP), priced a $250 million issue of five-year senior notes (B2//B) at par to yield 10¼%. ABN and Morgan Stanley ran the books for the Rule 144A/Regulation S deal.

Three-day week tops $1 billion

The MHP deal took the holiday-shortened three-session Thanksgiving week's total of issuance to $1.150 billion.

The only other issuer to price bonds during those three sessions was Lear Corp., which completed an upsized quick-to-market $900 million two-part senior unsecured notes transaction on Monday.

The Southfield, Mich., supplier of automotive interior systems and components priced a $300 million tranche of seven-year notes at par to yield 8½%, and an upsized $600 million tranche of 10-year notes at par to yield 8¾%.

The overall transaction, led by Citigroup, was upsized by $200 million to $900 million from $700 million.

The record book

Tallying Wednesday's MHP deal the market headed into the Thanksgiving break having seen slightly more than $137.5 billion of issuance in an even 350 dollar-denominated tranches.

According to Prospect News data that total amount of dollar-denominated issuance is not quite $5 billion shy of the 2004 all-time record, which is slightly less than $142.4 billion.

However some sell-side sources have been telling Prospect News that by their reckoning, in terms of global issuance the 2006 primary market is already in record territory on an exchange-adjusted basis.

During a Wednesday morning conversation with Prospect News, one sell-side source tallied approximately $151 billion of global issuance for 2006 to Nov. 21, and said that the all-time record, set in 2004, is approximately $155 billion.

During the course of the pre-Thanksgiving week two sell-side sources said that there is an expectation that from the time that the market resumes on Monday, through the end of the year, an additional $7 billion to $10 billion of global issuance will price.

These sources said that global issuance for all of 2006 is now projected to come in between $165 billion and $170 billion.

The week ahead

At Wednesday's close, three deals were thought to be in the market. And the expectation is that all three could price by the end of the post-Thanksgiving week.

The most recently announced is the TNT Logistics €730 million two-part notes offering which is slated to start a roadshow on Monday in Europe.

The Amsterdam-based logistics company is offering €430 million of eight-year senior notes and €300 million of 10-year senior subordinated notes.

Credit Suisse, Bear Stearns, Goldman Sachs & Co. and ABN Amro are joint bookrunners for the LBO financing.

It joints Momentive Performance Management (General Electric's silicone products business), which is expected to price $1.95 billion in two parts during the middle of the post-Thanksgiving week, via JP Morgan, GE Capital and UBS Investment Bank.

Also in the market is Complete Production Services, Inc. with a $600 million offering of 10-year senior notes (B2) via Credit Suisse, with pricing also expected to during the post-Thanksgiving week.

Post-Thanksgiving names

In terms of other potential issuers that might step forward in the immediate aftermath of Thanksgiving, a buy-side source said earlier in the week that Allied Waste Industries, Inc., Owens-Illinois, Inc. and AES Corp. were names that had been "thrown around."

Ronda Fears contributed to this story

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