Leap Wireless jumps on rival's better performance; Delta sags on cash-burn concern

By Paul Deckelman and Sara Rosenberg

New York, Aug. 9 - Leap Wireless International Inc.'s bank debt traded better on Monday - as sector peer MetroPCS Communications Inc. revealed that it had understated financial results for the quarter ended March 31, an admission viewed as a bullish sign for similar companies.

On the downside, Delta Air Lines Inc.'s bonds continue to spiral in, quoted down anywhere from three to seven points after the troubled Atlanta-based airline said that lower yields and higher fuel prices have eaten into its cash flow - meaning it will have to tap its cash reserves to pay certain expenses.

"Delta is a piece of crap," a trader flatly declared. "They're going to file [for Chapter 11 protection]. This [news that the company has to tap its mattress full of cash] can't be a surprise to anybody."

He saw Delta's 7.70% notes due 2005 as having come down to 48 bid, 49 offered from prior levels in the mid-to-lower 50s, with Delta's 2008 bonds at 36.5 bid, 37.5 offered, its 2010 notes at 35 bid, 36 offered, and its 8.30% notes due 2029 at 28.5 bid, 29.5 offered, in from recent levels in the lower 30s.

Another trader saw the 7.70s at 46 bid, 48 offered, down eight points from where they were last week, while its 7.90% notes due 2009 were seven points lower, at 32 bid, 34 offered, and the 8.30s were at 28 bid, 29 offered. The latter bond, he said, was off only about three points - but it had a shorter distance to fall. Noting the steeper declines taken by the shorter-term debt, he warned that "prices are converging," with all of the debt moving in the direction of being at the same level, sooner or later.

"If they file, it will all get the same return," regardless of coupon or tenor, all other factors such as place in the company's capital structure being equal.

Among its convertibles, Delta's 8% issue dropped about 1.75 points to 37 bid, 38 offered and the 2.875% converts fell around 3.5 points to 38.75 bid, 39.75 offered.

"The [Delta] pilots couldn't bail them out," said a sellside convert trader. "They will probably take the blame, or most of it, but fuels prices are the big whammy."

He said a lot of the analysts think the wording in Delta's Securities and Exchange Commission filing about cash flow and cash reserves "is just preparing the market for a bankruptcy filing."

One convertible player who sold out of a Delta position said that the two top concerns were fuel costs and terrorism risk, which the former having the greatest weight.

"The fuel issue is critical," said the source at a hedge fund in Connecticut. "We just decided to sell out at a little loss, but it wasn't that big a deal. It [bankruptcy] is getting there. Delta is a goner, or close to being a goner."

Rather, he said, his firm decided to buy fuel futures and credit default swaps in airline names.

Delta's New York Stock Exchange-traded shares, meanwhile, lost 13 cents (3.16%) to $3.98 on Monday.

Delta at a "competitive disadvantage"

Delta said in a Securities and Exchange Commission 10-Q filing that falling yields and rising fuel prices have caught the carrier in a bind. And it said that with a number of its rivals, such as American Airlines, US Airways and United Airlines had "significantly reduced their costs through bankruptcy or the threat of bankruptcy. As a result, our unit costs have gone from being among the lowest of the hub-and-spoke airlines to among the highest, a result that places us at a serious competitive disadvantage." US Air went bankrupt, emerged and is still struggling; United is still in Chapter 11, and American managed to successfully use the threat of bankruptcy to force additional concessions out of its pilot's union and other employees, as Delta hopes to do.

But Delta warned that "our unencumbered assets are limited, our credit ratings have been substantially lowered and our cost structure is materially higher than that of our competitors. Except for our existing commitments to finance our purchase of regional jet aircraft, we have no available lines of credit. We believe that, unless we achieve significant reductions in our cost structure, we will be unable to access the capital markets for new borrowings on acceptable terms."

It said that "continued losses of the magnitude we recorded in 2003 and in the six months ended June 30, 2004 are unsustainable, and we have significant obligations due in 2005 and thereafter, including significant debt maturities, operating lease payments, purchase obligations and required pension funding. We are intensively engaged in an effort to identify and obtain cost reductions from our key stakeholders and to implement new strategic business initiatives in order to effect a successful out-of-court restructuring, but there can be no assurance this effort will succeed.

"If we cannot make substantial progress in the near term toward achieving a competitive cost structure that will permit us to regain sustained profitability and access the capital markets on acceptable terms, we will need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code."

A trader said that Delta "is down to $2 billion of cash from $2.7 billion at the beginning of the year, and they said they would probably have a burn rate in the second half of the year similar to what they had in the first half of the year. They're trying to get a 35% cut out of the pilots, which is about a $1 billion of savings, and they really haven't gotten anywhere yet."

With crude oil prices continuing to hover around $45 a barrel - and those costs ultimately passed on to the end-users of distillate products, such as airlines that consume enormous quantities of increasingly expensive jet fuel - "unless this oil turns around - all of 'em are going to go out of business," sooner or later, the trader concluded.

Leap jumps on MetroPCS strength

Elsewhere, Leap Wireless's bank paper was quoted at 120 bid, 121 offered, well up from Friday's levels of 118.75 bid, 120 offered, according to traders, helped by what appears to be more strength than expected in one of the San Diego-based communications operator's rivals.

At the end of July, MetroPCS said that it was pulling its initial public offering due to accounting issues - leaving many fearing the worst, such as multiples in the wireless industry coming in and lack of demand in the equity market. And, as a comparable company, investors took their fears out on Leap's bank debt, dropping it all the way down to 112 bid, 113 offered, before the debt regained a couple of a points to settle in around a 116 to 117 context.

But, as it turns out, things for MetroPCS were actually okay. In fact, for the three months ended March 31 the company accidentally understated service revenues by $845,000, and consequently understated net income by $503,000.

The Dallas-based wireless communications company plans on restating results for the quarter upon completion of an investigation by the audit committee into the understatement. MetroPCS will also delay its 10-Q filing for the quarter ended June 30 and its second quarter 2004 earnings release until completion of the investigation, according to a news release.

Leap investors are apparently also heartened by the company's announcement last week that the Federal Communications Commission has approved the change of control of its wireless licenses - clearing the way for Leap's emergence from Chapter 11.

Leap expects to emerge from bankruptcy during the week of Aug. 16 as, in management's words, "a strong, stable company with one of the lowest cost structures in the industry,"

Upon Leap's emergence from bankruptcy, its long-term debt will be reduced to approximately $390 million from more than $2.4 billion. All of the issued and outstanding common stock, warrants and options of Leap will be cancelled on the effective date of the company's plan of reorganization and no distribution will be made to existing stock, option or warrant holders.

All of the positive developments surrounding Leap have done little for holders of its bond debt, far down the totem pole from the bank debt holders.

Leap's 12½% notes due 2010 remain quoted at 17 bid and its zero-coupon notes due 2010 at 14, "where they've been for a while," a market source said.

Mississippi Chemical to be acquired

The source meanwhile saw Mississippi Chemical Corp.'s 7¼% notes due 2017 at 63 bid, unchanged on the news that Terra Industries Inc. will acquire all of the outstanding shares of Mississippi Chemical - now operating under Chapter 11 - for an estimated total value of approximately $268 million. The transaction consideration will include cash and assumed debt of $161 million and stock of $107 million. The final value will depend on Terra's share price and closing adjustments. The source meanwhile saw Terra's 11½% notes due 2010 unchanged at 110.5 bid and its 12¼% notes due 2008 steady at 119.

The Jackson, Miss.-based chemicals maker's official committee of unsecured creditors in its bankruptcy case, Mississippi Chemical's largest unsecured creditors and its debtor-in-possession secured lenders also support the transaction.

However, not all investors were quite so pleased; a trader in distressed bonds said that he saw the company's notes, which had traded around 61 bid, 63 offered last week, trade as low as a wide 55 bid, 60 offered after the news of the deal, although those notes later tightened to 56 bid, 58 offered by day's end.

Mississippi Chemical's nearly worthless bulletin-board-traded penny stock meanwhile declined 1.7 cents (65.38%) to nine cents a share on volume of 1.6 million - about 25 times the usual turnover.

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