RCN trades up to 56 but retreats to close unchanged at 51; Salton soars 5 points; Delta loses altitude

By Ronda Fears

Nashville, May 27 - RCN Corp. filed for bankruptcy, as expected, and traders said speculators bid the bonds up to as high as 56 before the paper backed off to close the day unchanged.

"We were hearing the buyers [for RCN bonds] were existing holders trying to grab up as much as they could," said a distressed trader, who pointed out that he did not move any of the RCN bonds.

Key investors in Princeton, N.J.-based RCN are Level 3 Communications, Vulcan Ventures (Paul Allen), Walter Scott Jr. (including holdings of Red Basin LLC), Hicks Muse Tate & Furst and Wells Fargo.

RCN, founded in 1997, provides bundled cable, phone and internet services to consumers in the so-called "last mile" in seven of the top 10 major markets in the United States.

The company is represented in the bankruptcy negotiations by AlixPartners LLC, The Blackstone Group LP and Skadden, Arps, Slate, Meagher & Flom LLP.

Several other distressed names were easier Thursday, including a small gain in Charter Communications Inc.'s 8 5/8% notes due 2009 and a spike in Salton Inc. bonds.

Salton bonds moved sharply higher - as much as 5 points - after the troubled small appliance maker announced it would lay off 200 employees. But traders attributed a good portion of the gains to short covering as Salton shares skyrocketed nearly 40% on the day.

Losing ground, however, Delta Air Lines Inc.'s 7.90% issue due 2009 fell 3.5 points to 48.50 bid, 49.50 offered on Thursday from 52 bid, 53 offered on Wednesday. Late Wednesday, Blackstone Group chairman Pete Peterson said the firm has been hired by the airline in a restructuring advisory capacity, which traders said elevated speculation that Delta would be the next carrier to take the bankruptcy route, perhaps quickly.

RCN bonds better by 2 points

RCN opened strong on the bankruptcy filing, but the gains didn't last long.

The bonds traded as high as 56 and then ended at 52 bid, 53 offered - virtually unchanged from where the paper went home Wednesday night.

"There was a little burst of euphoria there," one distressed trader said. "I don't know why. Then, they fell back down to end up unchanged."

Another dealer said existing holders were building stronger positions based on the proposed bankruptcy reorganization, which was hashed out between the company, its banks and noteholders. The company had been wrangling with creditors for months, hoping to strike a debt-for-equity arrangement.

"With just a cursory look at the plan that was filed, it looks like the bonds should be worth somewhere around 35," the dealer said.

That would be the work out on the company's statement that the plan as filed would reduce its debt to $480 million from $1.66 billion.

"But they are getting stock [in the reorganized RCN] and are already major investors in RCN, which is what we heard," the dealer said. "So, if you believe in the stock story, then you feel like you're getting paid more, right?

"We were hearing that there were some big buyers early, but that fizzled quickly. They apparently had a threshold, or just didn't want to pay more than 56 for this paper."

RCN plan erases bond debt

As proposed, the plan would pay the senior bank lenders in full, unless they rolled over those claims into RCN's new bank facilities, and bondholders would get stock in the reorganized RCN.

Existing stockholders and holders of RCN preferred stock would receive, on a basis to be determined, two-year warrants exercisable into 2% of the reorganized RCN's common stock with a strike price equivalent to an enterprise valuation of $1.66 billion.

Holders of existing warrants and options will not receive anything.

All obligations under RCN's commercial term loan and credit agreement will remain outstanding or refinanced in whole or in part.

"This was a careful, proactive and deliberate process that achieved a consensus among all these stakeholders," said John Dubel, who led the restructuring process at RCN.

"Having worked on many telecom restructurings, I am very optimistic about RCN emerging quickly from Chapter 11 because its underlying business strategy remains sound."

The company aims to emerge from bankruptcy in fourth quarter.

In connection with the restructuring, RCN also announced Thursday that it has entered into a commitment letter with Deutsche Bank Securities Inc. for a new $310 million first lien facility, including a $285 million term loan facility and a $25 million letter-of-credit facility, and a $150 million second lien facility. The facilities will be guaranteed by all of RCN's wholly owned domestic subsidiaries and secured by substantially all the assets of RCN and its subsidiaries.

Salton rises on short covering

Salton's 12¼% bonds shot up to trade at 67.5 on Thursday, a gain of about 5 points, on the company's layoff news that will reduce annual costs by $11 million. The bonds finished off that high, though still strong, at 65.5 bid, 66.5 offered, after closing out Wednesday at 61.5.

Traders in distressed bonds said they suspected short covering was the source of the steep spike, noting that Salton shares gained $1.59, or 39.26%, to $5.64 with "volume off the charts." Some 2.63 million of the shares traded Thursday, versus the three-month running average of 323,000 shares.

"The news would push the stock up by itself, but not 40%," a distressed trader said. "Anyone in a short position was having to cover themselves. It is a thing that feeds on itself, so at the end of the day it looked pretty phenomenal. So, there could be some pullback on Friday."

He noted that the 2.63 million Salton shares were roughly in the neighborhood of the short interest in the stock. As of April 15 - the most recent data available, he said, short-interest represented almost one-quarter of the 11.3 million shares outstanding.

The Lake Forest, Ill.-based maker of the George Foreman hotdog and hamburger grills and other small appliances announced Thursday that it had eliminated 200 domestic jobs, reducing annual expenses by $11 million. The company said it would also take a quarterly charge of $600,000.

Salton bank talks positive

The appliance maker may be making some progress with its bank negotiations, too, the trader said. The banks have agreed to give the struggling company until June 10 to make its case for either a waiver on its debt covenant violations or a new credit facility.

There have been rumors off and on for several weeks in the market that there will ultimately be a bank bailout of the company.

Salton bonds posted losses for most of the past two weeks following worsened quarterly results and news of breaking financing covenant thresholds.

Since reporting quarterly results in early May, Salton has been in talks with lenders to amend its credit agreements regarding covenant violations resulting from weakened financial measures. The company also retained Ernst & Young Corporate Finance LLC to help negotiate with lenders.

Salton said Thursday that the layoffs were the initial phase of its recently announced cost-reduction program, which has an objective of a minimum of $40 million in annual cost reductions.

"While it is disappointing that we had to take these actions, Salton is firmly committed to returning its domestic operations to profitability," said Leonhard Dreimann, chief executive of Salton, in a news release.

"We believe these actions, as part of our overall restructuring activities, will better align our domestic cost structure with the current revenue base."

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