Delta bankruptcy seen inevitable; GM, Ford weigh financials, IPG; KV Pharma slammed; Red Hat up

By Ronda Fears

Nashville, May 11 - Delta Air Lines Inc. is considered in a holding pattern just waiting to alight on the steps of bankruptcy court. The Atlanta-based carrier's bonds continue to freefall and have dragged a fair amount of the airline sector lower, too.

"Now it's a matter of when, not if," said a convertible trader at a boutique that specializes in distressed bonds. "In order to avoid liquidation, they will have to have a certain amount of cash when they file. As I recall it was somewhere in the neighborhood of $750 million to $850 million when the 'B' word popped up last year."

Delta, which reported a nearly $1.1 billion loss in the first quarter, had $1.8 billion in unrestricted cash at the end of March. Financing agreements with American Express Co. and General Electric Co. last fall to avert bankruptcy require Delta to maintain $1 billion in unrestricted cash through Oct. 31 and $750 million thereafter, but the carrier is trying to get those restrictions revised.

With bankruptcy now seen sooner rather than later, the trader said both Delta convertible issues were off another 1.5 points Wednesday. The 8s were pegged at 31 bid, 33 offered and the 2.875s at 26.25 bid, 27.25 offered, with the common down 23 cents, or 7.74%, to close at $2.74. Delta's straight bonds slid to all-time lows Wednesday with the 8.3s due 2029 down 3 points to 21.5 bid, 23.5 offered.

General Motors Corp. and Ford Motor Co. also continued to lose ground, and were putting pressure on large financial and insurance names, like UnumProvident Corp. and American Express Co., that have exposure to those now-junk bonds.

Countrywide Financial Corp., Fannie Mae and Sallie Mae convertibles also dropped sharply as Treasuries soared amid a flight to quality.

TOP deal sunk

In general, sellers outnumbered buyers and the prevailing tough market conditions that have been a barrier for TOP Tankers Inc.'s new deal finally sunk it.

TOP Tankers' $300 million convertible deal was pulled Wednesday due to tough market conditions, according to market sources. The Greek oil shipper sweetened indicative terms on the issue twice, and twice delayed it due to prevailing ill winds. It had last been talked to price with a dividend of 6.50% to 6.75% and initial conversion premium of 20%.

"What we heard was that because of all the media attention on hedge funds pulling out of converts, there were a lot of orders [for the TOP Tankers convertible] cancelled late in the day [Tuesday]," said a buyside trader.

Chatter about withdrawals continued to circulate, and another buyside source said, "From what I understand, May 15 is the date to redeem funds for June 30, but people may, and will, continue to sell to raise money for June 30. That's six more weeks."

Convertible issuance isn't the only casualty, however. Just on Wednesday, market conditions were cited in Carter's Inc. pulling junk bond funding for it Oshkosh acquisition and Borden Chemical downsizing a bond deal.

KV Pharma suffers

KV Pharmaceuticals Co. warned about its fiscal fourth quarter results on Wednesday, and an 18% plunge in the stock crushed the convertibles.

St. Louis-based KV Pharma said Wednesday that it expects results in the quarter ended March 31 to come in "significantly below" year-ago results. The company now sees a "modest net income" to a "small loss" on revenue of about $72 million - far below the average First Call analyst estimate of a net profit of 26 cents a share on revenue of $94.5 million.

The company attributed the shortfall to delayed approvals for certain generic products, increased investments in its sales force, a temporary interruption in the supply of a key branded product, lower volumes and price deterioration relative to certain products, and unfavorable timing for certain trade show orders.

KV Pharma's 2.5% convertible was quoted down by 13 points to 97.5 bid, 98.5 offered as the stock lost $4.30 on the day, or 17.75%, to close at $19.92.

ViroPharma up on buybacks

Elsewhere in the biotech and drug group, though, there were some gainers. ViroPharma Inc. continued to gain Wednesday on news of buybacks by the company in its old 6% issue, after a nice five-point spike on Tuesday.

Exton, Pa.-based ViroPharma announced Wednesday the purchase of $29 million of its outstanding 6% convertibles due 2007 at 96, leaving $98.9 million of the issue outstanding.

ViroPharma has a newer 6% convertible trading in the area of 150, and a sellside trader said both issues have been "a home run" despite funding troubles experienced by the company in times past.

Several smaller biotech names have been gaining buying interest, he said, as takeovers in the sector are still pondered.

"Some of these smaller names are really moving. There's takeover speculation in a few again," the trader said. "Since Corixa Corp. got taken [by GlaxoSmithKline plc] people are asking more questions on the broken ones."

Cell Genesys Inc. and Incyte Corp. are two convertible names in which the stocks have been moving up every day. Cell Genesys shares gained 34 cents Wednesday, or 5.54%, to $6.48, and Incyte shares rose 13 cents, or 1.57%, to $8.43. Cell Genesys has a 3.125% convertible due 2011 and Incyte a 3.5% convertible due 2011.

Merck & Co. Inc. executives have said the company would look as some acquisitions, the convert trader said, and Johnson & Johnson seems to always be looking. Amgen Inc. also still has a lot of cash, he added.

"There are lots of potential buyouts," the trader said.

Red Hat rises on Dell interest

Speculation that Red Hat Inc. was a takeover candidate has been circulating off and on for months, but the idea gained steam on rising interest in the Linux software platform development company from Michael Dell, founder of computer giant Dell Inc.

Red Hat's 0.5% convertible gained to 79.5 bid, 80 offered on headlines Wednesday that Dell bought $99.5 million of the Red Hat bonds through Dell's investment manager, MSD Capital. Red Hat made the investment public in an April 27 filing with the Securities and Exchange Commission, but the item hit the tape Wednesday.

Thus, the gain in Red Hat securities was scoffed by some onlookers. One pointed out that analysts and computer industry observers for some time have been speculating about whether Dell himself would be interested in acquiring Red Hat, but Dell also has partnered with other Linux-friendly vendors such as Novell Inc.

Red Hat shares Wednesday gained 76 cents, or 6.76%, to $12.00.

Interpublic off on losing GM

French ad giant Publicis' Starcom MediaVest won a new advertising contract from General Motors, pushing out a unit of Interpublic Group of Cos. Inc.

Interpublic's 4.5% convertible bonds were off 1 point, and its 5.375% mandatory lost 0.75 point on the news.

GM spent $2.8 billion on media in 2004, according to ad-tracker TNS Media Intelligence. Adding in dealers, however, the total value of GM's advertising and media business is more on the order of $3.5 billion, according to industry magazine Advertising Age.

Interpublic shares tumbled 16 cents, or 1.27%, to close Wednesday at $12.46.

GM, Ford exposure weighs

Selling in GM and Ford convertibles picked up Wednesday and also exerted extra pressure on big holders in financial and insurance circles such as American Express Co. and UnumProvident Corp.

"There were a lot of reasons the financials [and insurance issues] were easier today, but exposure to GM and Ford was certainly a factor," said a sellside trader. She said the spike in 30-year Treasury bonds, which at one juncture of the session were higher by more than 1 point, was another big factor.

GM's 6.25% convertible dropped 0.25 point to 19.5. The GM 5.25% convert was easier by 0.125 point to 16.625. And, the GM 4.5% convertible was down 0.25 point to 23.125. Meanwhile, GM shares continued to lose ground, dropping 53 cents on the day, or 1.68%, to settle at $31.00.

Ford's 6.5% convertible fell 1 point to 37.375 while the stock lost 14 cents, or 1.43%, to end at $9.64.

UnumProvident's 8.25% mandatory due 2006 fell 0.5 point on Wednesday to 34 bid, 34.125 offered, while the stock eased lower by 2 cents on the day, or 0.12%, to close at $17.26.

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