Delta convertibles dive 1 point each; Jakks Pacific slammed by lawsuit; Ford, GM off

By Ronda Fears

Nashville, Oct. 19 - Delta Air Lines Inc. convertibles continued to decline Tuesday as credit spreads widened. In addition, a buyside market source pondered whether the airline might be trudging the same path as Mirant Corp. - not just to bankruptcy, but forced into filing bankruptcy because debtholders with credit default swap positions were the crucial snag in out-of-court restructuring efforts.

FLYi Inc., formerly Atlantic Coast Airlines Holdings Inc. and now operating as Independence Air, also took a sharp dive Tuesday as its stock was downgraded because of its ties to Delta, which compounds trouble for the low-cost carrier as it also is linked to the bankrupt parent of United Airlines, UAL Corp.

Jakks Pacific Inc. was yo-yoed Tuesday as the San Francisco toymaker first soared on a very strong earnings report, then was slammed hard when headlines hit the tape late in the afternoon about the World Wrestling Entertainment Inc. lawsuit. The wrestling company's suit involves bribery charges.

Ford Motor Co. plunged Tuesday on its earnings that showed its automotive business continued to survive by profits at its financing arm. General Motors Corp., with a similar earnings trend, was lower in sympathy.

Tower Automotive Inc., however, saw a slight bounce in its convertibles on news that the auto parts maker is seeking an amendment to its credit facility to allow for an accounts receivable securitization. The converts edged up about a half-point with the 5.75s in the 25 area and 6.75s in the 45 context. The company's junk bonds gained 2.5 points with the 12s at 67.5 bid, and its first-lien bank debt added a half-point to 97.5.

Otherwise in secondary dealings, it was difficult to find any gainers, traders said, but there were some fresh bids on the market's cheapening.

Biotechnology firm CuraGen Corp. said Tuesday that it will cut about a third of its staff to save cash as the company focuses on developing its most promising drug candidates.

HCC Insurance Holdings Inc. launched an exchange offer for its 2% convertible notes, and Yellow Roadway Corp. said after the closing bell rang that it would seek to exchange both its convertibles to remove contingent conversion features. All those convertibles were lower on the day.

Delta trudging path of Mirant?

With grave signs of trouble in Delta's pending debt exchange offer and recent discussion on Wall Street that the escalated activity in the credit default swap market could affect restructuring efforts, a convertible market source said there is some concern about the airline following the path of Mirant.

Last week, Delta sweetened its offer to exchange up to $680 million worth of $1.56 billion of debt and extended the offer to Oct. 26. It had been due to expire last Thursday, but by then only $24.2 million had been tendered of the targeted 90% threshold of the $680 million being sought in the exchange.

In addition to the previous exchange offer, Delta said it is asking holders of $150 million of its 7.7% notes due 2005 to extend the maturity of those notes to 2007 and accept $22.5 million of common stock as an incentive.

Delta convertible holders are worried by the slim participation thus far in the exchange offer and the sign that pilot talks are not going well, since the exchange now hinges on talks with pilots over some $1 billion in wage concessions being sought by the Atlanta-based airline.

In mid-2003, Mirant was amidst a major out-of-court restructuring effort with exchanges pending for several pieces of debt, including its 2.5% convertibles. Those talks, in addition to negotiations with banks to amend credit facilities, broke down and the Atlanta based power firm filed bankruptcy in July 2003.

Hitch may be CDS holders

But it may be that the major snag in Delta's exchange negotiations is coming from debtholders with a lot of CDS insurance, said a buyside analyst. That would be exactly what was rumored to be behind Mirant's ultimate demise, said a sellside trader.

"That would be very interesting," said a sellside convertible analyst. "It's what happened to Mirant, although those details were very sketchy and we never heard really what happened."

The sellside convertible trader said that Delta paper was wider in general Tuesday but added that he hadn't seen any activity in the airline's CDS paper in quite a while.

Delta beyond point of return

Because of its rapid cash drain and ominous earnings warning Delta may be beyond the point of return, whether it gets pilot wage concessions and/or the debt exchanges being sought by the airline, said a credit analyst in a report Tuesday.

Delta warned Friday that its net loss for third quarter will be somewhere between $625 million and $675 million, a much wider loss than expected, and that its cash balances are rapidly evaporating. The airline also disclosed that it is in negotiations with certain debtholders to defer the $325 million of securities due in 2005.

"In April, we suggested a bear hedge - purchase of the long-dated unsecured bonds versus a sale of the 2.9% convertibles at a 20 point spread," said GimmeCredit analyst Kimberly Noland in a report Tuesday. "This trade has delivered 20 points of profit including carry. We would close it out."

The Delta 2.875% convertible on Tuesday was about a point lower, along with its 8% convertible. The 2.875s were pegged at 31 bid, 31.25 offered and the 8s at 34 bid, 35 offered. Delta shares lost 12 cents, or 3.86%, to close at $2.99.

Ford, GM convertibles track lower

Before the bell, Ford topped analysts' estimates with third-quarter net income of $266 million, or 15 cents a share, reversing a net loss of $25 million, or 1 cent a share, a year before. Revenues also beat analysts' expectations at $32.8 billion from $30.2 billion, and vehicle-unit sales grew to 1.5 million from 1.42 million.

Still, investors remain concerned that the bottom line didn't show higher profitability from the increase in sales, as Ford's automotive business posted a wider loss of $609 million in the quarter while financing made up the difference. Also, Ford's business in Europe continued to lose ground.

GM also has struggled to improve profits in its automotive group, versus its financing arm. GM reported earnings last week.

Also impacting the auto paper was recent news that the automakers have been asked by the Securities and Exchange Commission to produce records for pension accounting, as both have huge, albeit shrinking, pension liabilities. Although there is no indication that this is a formal investigation, the news did put extra pressure on the credits.

"Ford [credit spreads] widened out a bit, the longer-dated paper, but for the most part, the credit was holding up," a trader said. As for GM, though, he said the spreads were "a tad wider on the short end."

Ford's 6.5% convertible trust preferreds fell 1.31 points, or 2.58%, to 49.48 on the New York Stock Exchange amid heavy trading volume. Ford shares also were very active, ending the day lower by 46 cents, or 3.44%, to $12.93.

GM's convertibles were only slightly lower with the 5.25% bonds at 23.25 and the 6.25% bonds at 25.25; both issues have a par of 25. GM shares dropped 91 cents, or 2.34%, to $38.

Jakks socked by WWE lawsuit

Jakks executives rang the opening bell on the Nasdaq, and the market cheered its earnings as the Malibu, Calif.-based toymaker reported that third-quarter profits, excluding non-cash stock-based compensation charges and a one-time gain in 2003, nearly tripled to $25.7 million, or 95 cents per share, compared with $8.7 million, or 35 cents per share. Third-quarter net sales more than doubled to $206.1 million from $90.3 million.

But a dispute with World Wrestling Entertainment that escalated to a lawsuit slammed Jakks during afternoon trade.

Jakks shares traded as high as $25.25 intraday but closed down by $5.34, or 22.11%, to $18.81 and were lower still in after-hours trading by 91 cents, or another 4.84%.

The Jakks 4.625% convertible due 2023 fell by more than 20 points on an outright basis, but traders said on a heavy hedge the bonds were actually holding fairly steady. The issue closed out the day at 121.25 bid, 122 offered.

World Wrestling's lawsuit against Jakks and video game maker THQ Inc. alleges a commercial bribery scheme involving licensing of World Wrestling images and dolls. The charges stem from a suit filed against the wrestling company by then-licensing agent Stanley Shenker & Associates, who claimed World Wrestling owed it money.

In the course of the Stanley Shenker litigation, World Wrestling alleges it discovered Shenker had been paying a World Wrestling executive while it was seeking the toy license. In addition, World Wrestling asserts Jakks deposited funds in various Shenker bank accounts overseas and the money was split with the World Wrestling executive.

Jakks had said in its earnings release that the dispute with World Wrestling involved licensing negotiations that occurred more than six years ago. The company denied any wrongdoing in connection with the transactions.

Yellow, HCC exchange offers

Yellow Roadway Corp. announced Tuesday plans to offer holders of its contingent convertible notes new notes with a net share settlement feature before year-end. Also Tuesday, HCC launched an exchange offer for its 2% convertible.

HCC has scheduled a conference call for Thursday at 9 a.m. ET. The HCC exchange offer does not specifically amend the notes for net share settlement, but includes language for the company to pay the notes in cash and/or stock; in return, HCC is adding one year of call protection, pushing back puts by one year and including takeover protection for holders.

By inserting a net share settlement feature, the minimization of dilution effected by the CoCo feature is achieved. An onslaught of exchanges of CoCo convertibles have been anticipated since the Financial Accounting Standards Board adopted a new rule Sept. 30 to require issuers to account for the dilution from CoCo convertibles in earnings as if they were converted.

Yellow's convertibles ended Tuesday off slightly with the stock, with the 3.75s at 134.8125 and the 5s at 153.625. The trucking firm did not announce its exchange plans until after the close. Yellow shares closed off 39 cents, or 0.8%, to $48.15.

HCC's converts, however, snapped back on its exchange news, which hit the tape about midday. The 2% issue dropped 2 points to 103.5 bid, 104 offered, and its 1.3% issue was lower in sympathy, losing about 1.5 points to 99 bid, 99.5 offered.

HCC shares closed down by 80 cents, or 2.77%, to $28.09 as the insurance sector continued to decline in reaction to the kickback charges leveled last week against insurance broker Marsh & McLennan and a handful of insurance firms, including several convertible names but not HCC.

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