Airlines under pressure; GM, Ford mostly lower; Cephalon higher, Amgen firm

By Rebecca Melvin

Princeton, N.J., Sept. 15 - Many convertibles players unwound positions in Northwest Airlines Corp. and Delta Air Lines Inc. or sat on the sidelines Thursday, a day after both of the carriers filed for Chapter 11 bankruptcy protection. But while trading remained fairly active in those issues, their prices were steady, contrary to a whipsaw effect many expected after the filings.

Negative sentiment weighed on other convertibles in the airline sector, including AMR Corp., the parent of American Airlines, Continental Airlines Corp., and Pinnacle Airlines Corp. Although Pinnacle was doing better on a dollar-neutral basis, one sellside trader said.

The convertibles of JetBlue Airways Corp. were mostly flat despite a gain in its underlying stock, which traders attributed to expectations of a potential benefit for the regional discount airline in the face of new bankruptcies among legacy carriers.

Among biotechnology names in convertibles trade Thursday, Amgen Inc. was firm after an upgrade by Deutsche Bank lifted its underlying stock, and Cephalon Inc. extended gains, traders said.

But convertible paper in the automotive sector was mostly weaker, and Scientific Games Corp., Dobson Communications Corp. and The Men's Wearhouse Inc. were weaker as their stocks slipped as the overall stock markets barely moved. But buyers stepped in later and picked up Men's Wearhouse, a trader said.

"We were just watching," said a trader with a New York-based hedge fund. "It's been quiet, and remarkably slow after Labor Day even though that's not the way it usually is."

Northwest, Delta steady, other airlines mostly lower

The convertibles of Delta started the session at 16 bid, 17 offered, where they went out Wednesday, and by the end of Thursday they were quoted at 15.75 bid, 16.25 offered, for both the Delta 8% and 2.875% convertibles. Delta's shares were up during the session and closed higher by four cents, or 5.6%, at $0.75.

Delta's move into bankruptcy court was fully expected, and because it has been long in coming, the Atlanta-based third-largest U.S. carrier had often been seen as "the weaker sister," a credit analyst told Prospect News.

"So it's interesting that "within minutes they wound up in the same place," he said, referring to Northwest, the No. 4 U.S. airline, which caused greater drama among trading desks this week because its move into bankruptcy court was less expected.

But while trading the day after the bankruptcy news was seen as anticlimactic by some traders, it left new questions to be answered, such as will Northwest want to reverse the bankruptcy as soon as possible, and will it do so with a debtor-in-possession facility or not.

Northwest doesn't have a significant amount of unencumbered assets, which are necessary to do a new DIP, said a New York-based credit analyst. He predicted that the airline will call its secured loans totaling $975 million in three different tranches.

As for unsecured creditors like convertible bond holders, he said it's positive that the bonds have "settled in" around the low 20s, as opposed to the mid teens like those of Delta, but holders can only expect a three cent to four cent difference "which in the overall scheme of things, is nothing."

Northwest's 6.625% and 7.625% convertibles were down a point or two to 21.5 bid, 22.5 offered at the close. Northwest shares plunged 99 cents, or 53% to $0.88.

A possible reason that the bonds came to rest at a higher level than Delta's is perhaps due to speculation that the Eagan, Minn.-based carrier will come out of bankruptcy relatively quickly, said the credit analyst. He also surmised that the reason it entered bankruptcy so quickly wasn't due to a lack of ability to keep running, but to a lack of willingness to do so.

"I don't think that it was the fuel costs, although that is an obvious concern. But I think it was a question of loss of willingness because they saw that they weren't going to get the mechanics in on the plan," he said.

Northwest's 5,400 mechanics, custodians and cleaners went on strike more than three weeks ago over efforts to cut costs. The airline said it brought in 1,500 replacement workers to keep the airline running and this week began to hire the replacements.

As for further action on the convertibles: "Now we wait for news out of the courts, and that will move the bonds," a trader said.

Continental, AMR move lower

The convertibles of AMR and Continental were indicated a point or two lower on Thursday, with Continental's 4.5% convertible due 2007 indicated at about 84 bid, 85 offered, compared to a trade Wednesday at 86.25.

Pinnacle Airlines, which saw a 4% drop in its common stock in heavy volume, saw its 3.25% convertibles last bid versus the close at 70.3. The 3.25s traded Wednesday at 71.8. Its shares closed down 29 cents at $6.97.

The convertibles of JetBlue were flat, with a trade of the 3.5% convertibles due 2033 at 86.7 Thursday and a trade of its 3.75% convertible due 2025 at 99.5.

Dana news weighs on auto credits

The convertibles of General Motors Corp. and Ford Motor Co. were mostly lower Thursday in light trading, although GM's 5.25% convertible bonds were higher by 0.7 point, or 0.38%, to 18.27 in heavy volume, after Dana Corp., the auto and truck parts maker, cut its 2005 earnings forecast by more than half.

Dana cited higher steel and energy costs as well as other factors for its lowered forecast.

Later Thursday, the company's credit was downgraded to junk by Standard & Poor's and Fitch Ratings. S&P cut Dana's corporate credit and senior unsecured debt ratings to BB+ from BBB-.

The news weighed on the auto sector, a convertibles desk trader.

Cephalon extends gains

The 0% convertibles of Cephalon were up about 0.50 point, with the 0% A tranche at 93.75 bid, 95.25 at the end of the session, and the 0% B tranche at 93 bid, 93.5 offered.

"They were better to buy," a New York-based sellside trader said of the Cephalon 0s.

The Cephalon 2% convertibles also traded higher at about 114, according to a New York-based trader.

Shares of the Frazer, Pa.-based biotechnology company, which jumped two weeks ago on approval in Germany for a sleep disorder drug, have been on a tear of late and closed Thursday up $1.56, or 4%, at $46.98.

Meanwhile, the convertibles of Amgen traded as its stock lifted after Deutsche Bank upgraded the stock to "buy," citing possible clinical milestones as well as "compelling" valuation. The bank sees possible blockbuster status for Aranesp to treat heart failure and for AMG 162 in various osteoporosis indications.

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