Delta steady on earnings miss, credit downgrade; Six Flags sold off; Titan bid up in gray

By Ronda Fears

Nashville, July 19 - Delta Air Lines Inc. convertible holders were standing pat for the most part Monday on the carrier's huge loss and credit downgrade, while short covering pushed the stock higher. Most of the bets now seem to be placed on getting reasonable concessions from pilots, but the wildcards are the restructuring package due to be aired in August and fuel prices.

Northwest Airlines Corp. and AMR Corp., parent to American Airlines Inc., also saw short covering in the stock, which suggested that hedge fund players at least believe there is going to be a pop in the stock of the major carriers. The converts responded much like Delta, with little movement.

Movement overall was a bit sluggish Monday, though typical, traders said.

Many convertible players were looking to take advantage of spikes in volatility as a result of earnings misses or disappointments. One dealer pointed out that the Nasdaq market volatility index spiked 6% higher Monday to 22.22 and the old VIX was up nearly 6% but still lagging in the 15 neighborhood.

Speaking of reactions to earnings, the market may be poised to stage a sell off in Flextronics Inc. if after-hours trading is anything to go by, one convert trader noted, pointing to a plunge in the stock following the company's earnings and disappointing guidance after the closing bell Monday.

Nothing was new in the primary market, although Titan International Inc. was at bat after the close with a small $100 million that was seen bid up in the gray market.

Flextronics reactions in flux

Flextronics reported turning the corner into profits in fiscal first quarter and boosted year-over-year revenue in the quarter by 25%, but the electronics contract manufacturer downplayed future growth in its guidance for the next two quarters.

"The numbers aren't that bad in context to a year ago," a buyside trader said. "It's just that we'd been psyched up for this big recovery and now the expectations aren't measuring up. The [Flextronics] stock was pummeled" after hours.

A sellside trader said, however, that the weakness may incite some buying, as Flextronics has "been a darling in the semiconductor space."

Flextronics shares closed Monday off 4 cents, or 0.28%, to $14.06; in after-hours trading the stock plunged lower by $1.18, or 8.39%.

The Flextronics 1% convertible due 2010 was quoted at the close at 115.25 bid, 115.75 offered.

For fiscal second quarter the company said it expects earnings of 15-18 cents a share on sales of $4.1 billion to 4.4 billion, and for fiscal third quarter the company expects EPS of 21-24 cents on sales of $4.4 billion to $4.7 billion.

That overshadowed the actual earnings achieved, which showed Flextronics had a GAAP profit of $74.3 million, or 13 cents a share, in the June quarter, compared with a loss of $289.7 million a year ago. Excluding restructuring and other items, the company posted a profit of $78.3 million, or 14 cents a share, on sales of $3.88 billion - right on target with analysts' expectations.

Delta issues in holding pattern

Delta's convertibles were both said to be flattish with the 8s at about 51.5 bid and the 2.875s at around 55 bid and up "a bit" with the stock gaining 44 cents, or 8%, to end Monday at $5.95.

While Standard & Poor's cut Delta's credit on what it said was rising bankruptcy risk, a holder in the Delta convertibles said the bets seem to be running that the third largest U.S. air carrier will avoid bankruptcy.

Delta reported a whopping second quarter loss of $1.96 billion, or $15.79 per share, compared with a profit of $184 million, or $1.40 per share, in the year-ago period. Excluding special charges, which amounted to $1.65 billion, Delta lost $312 million, or $2.55 per share, whereas the year-ago profit was possible due to government funding and a one-time sale gain.

A staggering cost structure, which includes the highest paid pilots in the industry and skyrocketing fuel prices, are a major factor.

The Delta convert holder said that the pilot wage negotiations are expected to come off with a reasonable compromise between management and the flyers, and secured debtholders - the banks, bondholders and equipment trust noteholders - are expected to be cooperative.

Delta-pilot deal buzz falters

There was a rumor early on Monday that a deal had been struck between Delta and the pilots, which was the catalyst for the short covering in the stock because that would be a linchpin in the air carrier's turnaround plan, the holder said.

"When that [rumor of a pilot agreement] went around, people started to cover" short positions, he said, saying he is holding both the Delta 8s and 2.875s outright whereas many hedge fund players are short the 8s and long the 2.875s because the lower coupon issue has a low conversion premium and the 8s are busted.

"We got a treatment on what should happen if, or when, this restructuring gets done."

The stock popped 8%. In addition to there being a lot of short interest in Delta stock, a sellside trader remarked around mid-afternoon that "options players piled up on call options, with twice the average volume crossing the tape" on Monday.

A convertible trader on the sellside said a lot of the stillness in the converts hinged on the credit downgrade.

Citing an increased risk of bankruptcy or distressed out-of-court restructuring, S&P cut Delta's senior secured debt to CCC+ from B- and senior unsecured debt to CCC- from CCC, with a negative outlook. S&P views a restructuring of bond payments or a coercive debt exchange as a default, which would cause the company's corporate credit rating to be lowered to a default or selective default status.

Refinance package a wildcard

A broad strategic study and plan, initiated by Gerald Grinstein when he became Delta's new chief executive at the start of 2004, is to be presented in August.

Representation of the plan as "comprehensive versus piecemeal" was a fine detail that bondholders picked up on in the company's conference call Monday.

"The balance sheet is not sustainable with the debt they have," the convertible holder said.

Delta had $20.5 billion of debt at the end of second quarter, and the company also admitted the 117% debt to capitalization ratio was "non-viable." But the company said it is in no danger of tripping debt covenants and again downplayed bankruptcy talk.

What a "comprehensive" refinance package might be versus one "piecemealed" is a concern to convertible holders especially because they are oftentimes lumped with or near stockholders "who always seem to get shafted in a restructuring package," the sellside trader said.

Six Flags convert flails

Amusement park operator Six Flags Inc. reported weak second quarter results last week, hampered by a 4% drop in attendance, which on Monday prompted Standard & Poor's to put its ratings on negative watch. S&P said it expected any downgrade would be limited to one notch.

While Six Flags bank debt was described as steady and the stock gained slightly Monday, the convertible declined in a big sell-off.

"The stock got killed Friday," a convert dealer said. "Today the convert took it on the chin."

New York-based Six Flags, the second largest theme park company in the world, had $2.4 billion of total debt and convertible preferreds at June 30. S&P estimated that debt, including the converts, to EBITDA rose to roughly 8.5 times in the 12 months ended June 30 versus 8 times a year ago.

Six Flags shares ended Monday up 4 cents, or 0.85%, to $4.76, on average volume of about 2 million shares.

The 7.25% convertible preferred due 2009 dropped 0.30 point, or 1.44%, to 20.60 on the New York Stock Exchange on heavy volume of 153,100 shares compared with the three-month running average of 18,285. Six Flags bank debt was described as strong in the 101 bid, 102 offered area.

Titan spin mostly positive

Titan was at bat after the close with $100 million of five-year convertible notes talked to yield 4.75% to 5.25% with a 25% to 30% initial conversion premium - the first new deal to come to the convertible market in nearly three weeks aside from the small $65 million Empire Resorts, Inc. offering disclosed late Friday.

The Quincy, Ill.-based company, which makes off-highway wheels and tires for agricultural, earthmoving and construction vehicles, intends to use proceeds, together with borrowings under a new $100 million bank revolver, to repay all amounts outstanding under an existing term loan and to redeem all of its 8.75% senior subordinated notes due 2007.

Titan shares closed Monday down 22 cents, or 2.18%, to $9.87.

Titan may be "spinning its wheels," said one skeptic. "Seems the tire and wheel maker is stuck in the mud. I have an uneasy feeling about this one. The whole market is acting like it wants to fall off a cliff and take all bystanders with it."

A cheerleader of the deal, noted that the issue was bid 1 point over issue price in the gray market Friday and maybe traded a bit higher that than.

"It's more like burning rubber coming off the line," he said regarding Titan's future.

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