Air Canada bonds drop 10 points; Metris rises; Atlas Air EETCs downgraded

By Carlise Newman

Chicago, Sept. 29 - Air Canada Inc. opened Monday's trading session dramatically lower after the company announced another step in the reorganization process Friday; the airline selected two investors to provide liquidity to accomplish its business plan and revealed details about recovery for unsecured creditors.

Air Canada will enter into negotiations with Cerberus Capital Management LP and a company controlled by Victor T.K. Li, a Canadian citizen with global business interests, based upon their proposed letters of intent.

Both proposals reach Air Canada's minimum C$700 million target of new equity and each also includes co-investment by creditors through a rights offering which would increase proceeds to C$1 billion. The rights would offer equity on the same terms as the equity investor that the company eventually selects.

Based on the proposals, unsecured creditors including bondholders and other financial institutions, with total estimated claims in the range of C$8 to 10 billion, subject to the results of the court supervised claims process, will receive an estimated 40% to 65% of equity, depending upon the total size of the equity raised and the extent to which unsecured creditors take up the rights offering.

Shareholders will likely receive nothing.

Air Canada debt "was down 10 points right out of the chute this morning," a trader said. He quoted the bonds, which had traded in the 43-44 area Friday, of dropping as low as 34 bid, before finishing out the day at 37½ bid, 38½ offered.

"It was pretty active today," he said of the troubled Canadian air carrier's paper.

Elsewhere, Metris Cos. Inc.'s debt was stronger after it announced Friday after the close that it reached an agreement to sell the federally insured deposits at subsidiary Direct Merchants Credit Card Bank. All of the bank's brokered and retail jumbo certificates of deposit, totaling $550 million, will be sold as part of the pending transaction.

The agreement is expected to close in October 2003 upon approval of the sale by the appropriate regulators.

Metris' 10% notes due 2004 were quoted up three points from Friday at 78 bid, 79¼ offered.

Previously, the Office of the Comptroller of the Currency requested and the bank agreed to eliminate federally insured deposits at the bank, or risk to the FDIC, by Sept. 30. The OCC has extended the deadline for meeting its request to Oct. 10.

In other news Atlas Air Inc. was slightly lower after a downgrade from Standard & Poor's Ratings Services. Atlas' 8.70% notes due 2021 were 2 points lower at 81 bid, a trader said.

S&P lowered its ratings on selected enhanced equipment trust certificates of Atlas Air. Ratings on pass-through certificates series 1999-1A-2 were lowered to B- from BB-; series 1999-1B to CCC+ from B-; and series 2000-1B to CCC+ from B.

All equipment trust certificate ratings remain on CreditWatch with negative implications, where they were placed on Oct. 17, 2002, S&P said.

Atlas announced on Sept. 12 that the companies plan to enter a pre-negotiated Chapter 11 bankruptcy in December 2003 to implement a planned financial restructuring.

"The rating actions are based on Standard & Poor's analysis of default and recovery prospects for the certificate holders under the proposed restructuring," said S&P credit analyst Philip Baggaley, in a news release.

The company also said it reached an agreement with the holders of a majority of its class A enhanced equipment trust certificates, and the agreement will further extend the forbearance agreement entered into in early July.

Under the proposed restructuring, unsecured creditors holding senior notes have been offered $125 to $150 million of senior convertible preferred stock and 10.1 million shares, or 51% of the company's new common stock. Holders of senior notes who are issuers of collateralized bond obligations may elect to receive up to $50 million of new senior subordinated notes in lieu of equity recovery. The senior convertible preferred stock is convertible into between 51% and 55% of common shares and votes on an as-converted basis.

"I would say Atlas is just heading to distressed levels. We don't see many bonds in the 80s on these desks," a trader said.

Meanwhile WorldCom Inc. ended its winning streak Monday. The bankrupt telephone company saw its senior notes drop 1 point to 33 bid, a trader said.

"There was no negative news out. I think the rally just ended for them for a while," he said.

Elsewhere, West Point Stevens Inc.'s 7 7/8% due 2008 were down nearly a point at 21 bid, while Loral Space & Communications Inc.'s 10% notes due 2006 were down half a point at 61½ bid.

(Paul Deckelman contributed to this report)

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