Delta up 4-5.25 points; Mills repriced at 96.75, dips to 96; Aquila up 0.5-1 point in gray

By Ronda Fears

Nashville, Aug. 18 - Delta Air Lines Inc. convertibles got a strong tailwind Wednesday, lifting them by 4 to 5.25 points on developments with regards to its new restructuring plan, including progress in union pilot talks and reports of the airline hiring Weil Gotshal & Manges. Delta convertible bondholders were "pumped up," as one trader put it, on speculation that debtholders will end up owning the airline.

Elsewhere in the secondary market, energy names were hot topics, of course, as crude oil futures gained to a new high of $47.27. Unocal Corp.'s 6.25% convertible preferred shot up about 1 point to 51.55 on speculation of a call and then after the close the oil giant announced it would redeem half the issue with a redemption premium of 1.25%.

Coal names also were fired up. Arch Coal Inc.'s purchase of Vulcan Coal Holdings, or Triton Coal Co., was still hanging in limbo as the Federal Trade Commission moved to overturn a court ruling Friday to deny the agency's effort to block the deal. But traders said the market was betting that the deal would get consummated, and the Arch Coal convertible gained almost 3 points.

Massey Energy Co., another coal mining concern, announced the purchase of some coal assets in the auction process of Horizon Natural Resources Co.'s bankruptcy. Massey's convertibles rose 2 to 4 points on the news.

Otherwise, this week's spurt of new deals getting reoffered by underwriters below par was a source of conversation.

Banks move issuers off fence

The recent new deals getting reoffered by underwriters below par is more a matter of getting issuers off the fence or to advance deals off shadow calendars, capital markets sources say, rather than a buyers' strike as was the case during the last half of 2003 when the trend lasted for months and involved a string of deals.

In addition to the repriced deals from American Tower Corp. and The Mills Corp., FelCor Lodging Trust Inc. launched on Wednesday a tiny add-on deal that will be priced at a discount to par.

The Mills convertible preferred was repriced at 96.75, then dropped to 96 bid right out of the gate on confusion about the call feature. American Tower's new convertible bond was remarketed at 97.75 and gained to 99 after it broke to trade, then rose to 99.5 bid, 100 offered on Wednesday. FelCor was at bat after the close with a $50 million add-on to its series A 7.8% perpetual convertible preferreds to price to yield 8.25% to 8.375%.

"I cannot believe there is a buyers' strike given lack of recent issuance," said a capital markets source, who is not involved in any of the deals pricing this week. If anything, he said, capital markets professionals are printing deals that will get issuers to advance deals off shadow calendars, and then repricing them to buyers to move the paper off their propriety books.

"I also think a number of these deals have been competitive among the banks, as well as overnight transactions, so that usually means a tight price in order to win the business, followed by a knee-jerk reaction by investors given the terms, followed by an attempt to clear risk off their books by the lead."

He added, however, "It's nothing too earth-shattering; we have seen it before," and besides, "the market needs paper."

Indeed there is huge demand for new issues, but even at the subpar issue levels not everyone thinks the "discounts" are a bargain.

"What discounting?" remarked a sellside trader at a shop away from this week's new deals, adding that even in the immediate aftermarket "most bought deals don't trade up."

In addition to FelCor's add-on, also at bat after the close was Aquila Inc. with a $300 million mandatory talked at 6.75% to 7.25%, up 18% to 22%. Ahead of the pricing, Standard & Poor's upgraded Aquila debt. Aquila's books were over-subscribed, buyside sources said, and rather than getting discounted, the issue would most likely price at the tight end of guidance.

Also after Wednesday's close, aQuantive Inc. launched a small $70 million deal talked to yield 2.0% to 2.5% with a 42.5% to 47.5% initial conversion premium for Thursday's business.

Delta progress boosts converts

A seemingly sudden leap of progress in Delta's restructuring effort gave its bonds a strong boost Wednesday as the company's goal of getting a plan finalized or at least on the table by the end of August seemed like it could be reached.

Delta's 8% convertibles added 4 points to 35.5 bid, 36 offered, and the 2.875% convertibles rose 5.25 points to 40 bid, 41 offered on the day's events. Delta's junk bonds shot up 6 points on the news with the 7.7% notes due 2005 at 44 bid, 46 offered.

The Atlanta-based airline's union pilots are anticipating the company will meet its request to make up some of the roughly $300 million to $350 million difference between wage concessions demanded by the company and offered by the pilots, in a meeting scheduled for Thursday. But, debtholders believe they will end up with the majority of the airline.

Delta is asking for $1.02 billion in annual wages and pension cost cuts while pilots have offered to take $655 million to $705 million.

Ahead of the meeting scheduled with pilots on Thursday, however, Delta securities were getting a boost from reports that a detailed restructuring plan was to be presented to the company's board of directors on Wednesday.

Another positive factor, or at least a sign of the end to Delta's protracted financial saga, was talk of a debt-for-equity swap being under consideration, along with the company hiring the well-known bankruptcy/turnaround law firm Weil Gotshal & Manges.

"Debtholders will own the company one way or another," said a sellside trader.

Delta chief executive Gerald Grinstein is presenting his long-awaited plan for the airline's future to board members on Wednesday, the company said.

Mills dips on call confusion

The Mills deal indeed was reoffered below par during the marketing process early Wednesday. Buyside market sources said it was first pitched at 97.5, then cheapened by bookrunner Morgan Stanley to 96.75. The $275 million perpetual convertible preferreds - printed with a 6.75% dividend and 33% initial conversion premium - still went south from there in the immediate aftermarket.

"I heard there was some confusion with the ... explanation of what the call feature was," said a sellside market source, at a shop away from the deal.

The perpetual issue will be non-callable for five years, then with a 130% hurdle, according to the company's news release.

Traders on the buyside said the issue did not see much action and said the 96 bid from Wednesday morning was the last market posted.

The Arlington, Va.-based real estate investment trust plans to use proceeds to repay a portion of its existing bank line of credit that is expected to be drawn on in connection with the closing of its $1 billion acquisition of interests in nine shopping malls from General Motors Asset Management.

Mills shares on Wednesday added 20 cents, or 0.44%, to $45.35.

Aquila upgraded ahead of deal

Aquila's deal was getting lots of attention Wednesday with a gray market bid of 0.5 point over issue price and an offer at 1 point over. Market sources had said investors liked the turnaround utility story, and that was boosted by a credit upgrade during the session.

S&P raised Aquila's corporate credit ratings to B- from CCC+ and removed the debt from negative watch but kept the outlook at negative.

Kansas City, Mo.-based Aquila has about $2.5 billion of debt.

S&P said the upgrade was based on Aquila's termination of a long-term, prepaid natural gas supply contracts that represent 92% of its exposure in those types of arrangements.

"The termination allows the company to regain access to a substantial portion of its liquidity and alleviates credit concerns associated with the onerous impact of the gas prepay transactions on the company's financial profile," S&P said. "The longer-term cash drain associated with the gas prepay contracts will be alleviated."

Aquila shares closed up a nickel Wednesday, or 2%, to $2.55.

Arch Coal spikes 2-plus points

St. Louis-based Arch Coal, the second largest coal producer in the United States, has been trying to consummate the Triton purchase for more than a year now, after agreeing to buy Vulcan Coal Holdings, Triton's sole owner, for $364 million in May 2003.

In March, the FTC said it would try to stop Arch Coal's takeover of Triton, arguing the combination of the two companies would result in an unfair competitive advantage over coal producers in the western United States. In an attempt to alleviate that concern, in January Arch - the nation's second-biggest coal producer - agreed to sell the Buckskin Mine, which accounts for about 40 percent of Triton's coal production, to Kiewit Mining Acquisition for $82 million.

Joining the FTC to block the Arch Coal/Triton merger are the states of Missouri, Arkansas, Illinois, Iowa and Texas, which rely heavily on coal from the Wyoming Powder River Basin for electric power generation.

The FTC asserts that Arch's purchase of Triton would concentrate mining in the South Powder River Basin in the hands of just three companies - Arch, Peabody Energy and Kennecott.

Peabody, also based in St. Louis, is the world's biggest coal company, supplying enough coal to generate about 10 percent of the nation's electricity. Kennecott Energy is part of Rio Tinto, the global mining giant headquartered in London and Melbourne, Australia.

The FTC filed an appeal to overturn the ruling from Friday, and Arch Coal said it agreed not to immediately schedule closing for the merger transaction.

Despite the pending appeal, traders said investors were betting that the FTC objections will again be turned down and the merger completed.

Arch Coal's 5% convertible preferred rose 2.6875 points on the day to 84.5 bid, 85 offered, a dealer said. The stock gained $1.21, or 3.86%, to $32.56.

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