Telecom bank debt lower; Delta Air Lines bonds continue slide

By Paul Deckelman and Sara Rosenberg

New York, Aug. 13 - Telecom names took a bit of a hit this week in the distressed bank loan market, as McLeodUSA Inc. dropped by about five points since last week and Choice One Communications Inc. decided to follow McLeodUSA down, dropping by about three points, according to traders.

On the bond side of the ledger, the securities of Delta Air Lines Inc. continued to steadily erode in the wake of the troubled Atlanta-based carrier's revelations this past week that it is burning through its cash reserves faster than a 747's engines burn through a planeload of increasingly expensive jet fuel.

On Friday, Cedar Rapids, Iowa-based telecommer McLeodUSA's bank debt was quoted as low as 43 bid, 45 offered, well down from levels around 50 bid the previous week, a trader said.

Rochester, N.Y.-based Choice One was meantime quoted by one trader at 48 bid, 50 offered, and by a second trader at 46 bid, 49 offered.

"It feels like the whole telecom sector is getting beat up," the first trader said.

"No one wants to ride these things at this point," the second trader said in explanation of why the sector is weaker.

Meanwhile, Horizon Natural Resources' (AEI Resources) bank debt continued to head in the opposite direction, moving up half a point on Friday to 90.5 bid, 93 offered, a trader said. The paper started the week trading around 74, spiked into the mid-80s on news of union contracts being dismissed, and then just kept climbing from there.

News reports said that a federal bankruptcy judge ruled that the insolvent Ashland, Ky.-based coal miner, in Chapter 11 since November 2002, does not have to honor union contracts, eliminating medical coverage and retirement benefits, and making the company more attractive to buyers.

Horizon's assets are scheduled to be auctioned on Aug. 17.

Newcoal LLC, a group led by investor Wilbur Ross and organized by the holders of a majority of the $465 million principal amount of Horizon's second-lien notes, is the stalking-horse bidder with an offer of $277.35 million. Just last week, Newcoal was given court approval to use the group's second-lien Horizon bonds in its bid.

Delta continues dive

Among the bond investors, Delta Air Lines continued to shrivel in Friday's dealings, completing a week's worth of intense downside movement.

A trader quoted the company's 9¾% notes due 2021 as having slid to 27.5 bid from prior levels around 31.5, while a second trader pegged those bonds maybe a point lower, and allowed that they were off considerably.

Meanwhile, the more widely traded Delta issues were not seen Friday, instead quoted hugging the lower levels to which they had fallen earlier in the week - about 41-42 bid for Delta's 7.70% notes due 2005 and 26-27 bid for its 8.30% bonds due 2029.

Those bonds had slid precipitously following Delta's quarterly 10-Q filing on Monday, in which the airline warned that its cash position was down to about $2 billion as of the end of the second quarter on June 30, from the $2.7 billion it had started the year with. Not only was that a more intense cash-burn rate than the company had predicted earlier - Delta said that it was likely to keep right on consuming cash at that rate given sharply higher fuel prices now in effect and its continued lack of the kind of concessions the airline says its needs from its pilots' union in order to survive in the long run.

The Air Line Pilots' Association, representing some 7,500 unionized captains at Delta, has offered pay concessions worth about $700 million to $800 million - substantially more than they had offered the airline earlier in the year. But in the interim, fuel costs went up and Delta continued to lose market share to the encroaching low-cost carriers like Jet Blue and Southwest Air - and now the airline says it needs the pilots to pony up $1 billion in pay cuts and says a Chapter 11 filing is a distinct possibility if they don't.

Delta and the pilots had been expected to be in intense negotiations by now on the concessions, but no sessions have been scheduled at this time. Instead, Delta chairman Gerald Grinstein has continually castigated the pilots as the best paid in the industry and has said the company cannot and will not accept anything below its stated demand. The pilots meantime - apparently fearing that Delta might pocket their concessions, go bankrupt anyway and then use Chapter 11 to abrogate its pension obligations to them, the way United Airlines is currently attempting to do - have said that Delta's financial problems cannot be solved on their backs alone - a position the company has also officially stated, even as it has continued to seek a 35% pay cut from the captains.

Delta is meantime currently in the final stages of a much ballyhooed company-wide review of its operations, with a wide-ranging report on how it can operate as a leaner, sharper, more efficient and cost-effective company expected to be presented to the company's board sometime this month.

Other hub-and-spoke airlines hit

In the wake of the Delta slide, and with crude oil prices (and, down the line, jet fuel prices) continuing to hover around all-time highs even as the competition from the upstart low-cost carriers remains intense and fares are a buyer's market, the bonds of other traditional hub-and-spoke network carriers not quite so badly off as Delta also remain under pressure.

A trader saw Northwest Airlines Corp.'s bonds "slightly lower," with the Eagan, Minn.-based carrier's 7 7/8% notes due 2008 down 2½ points at 85 bid, although its 8 7/8% notes due 2006 were actually half a point better at 78. Continental Airlines Corp.'s 8% notes due 2005 were seen half a point off at 87.5 bid.

Hanger steady at lower levels

Elsewhere, Hanger Orthopedic Group Inc. - whose 10 3/8% notes due 2009 tumbled into the lower 80s from prior levels around par earlier in the week after the Bethesda, Md.-based operator of orthopedic-care and prosthetic centers said it would have to delay filing its results by a week and would be in default on some of its bank debt covenants and be barred from accessing its revolving credit facility - continued to trade in the mid-80s, up slightly from their lows for the week but well down from the previous par-level area. A trader saw the bonds at 86.5 bid, unchanged on the session, while its 11 ¼% notes due 2009 were equally unchanged at 88 bid.

There was also no word from the company as of late Friday on whether it would make the scheduled $10.3 million coupon payment on the notes due Monday. Many observers were betting against it, since the company had said in a Securities and Exchange Commission filing that it only had about $14 million of cash on hand.

Durango reaches deal

From south of the border came word Friday that Corporacion Durango SA, Mexico's largest paper maker, had reached an agreement with 68% of its unsecured creditors. The company hopes to go through what is known as the concurso mercantil process under Mexican bankruptcy laws.

Under this process, unsecured creditors will receive about 85% of their original principal amount in new debt, and the remaining part in equity. Durango previously said it had $695 million of unsecured bank and bond debt although it disputed $48.1 million of that total.

Creditors owning Durango's unsecured bank debt are to receive new series A debt totaling $116.1 million. Durango previously said it has $136.6 million of senior unsecured bank debt.

Holders of the other unsecured debt, including Durango's $18.2 million of 12 5/8% notes due 2003, $301.7 million of 13 1/8% notes due 2006, $10.4 million of 13½% notes due 2008 and $175 million of 13¾% notes due 2009 would receive new series B debt totaling $433.8 million.

The creditors will also receive 17% of Durango's equity.

In this particular bankruptcy process, a restructuring can be confirmed with the agreement of a majority of creditors and imposed on the remainder.

Not everyone was particularly pleased with the latest turn of events.

"It doesn't seem as good as the original proposal that was out about five months ago," said a market source.

"In the prior proposal they addressed PDI [past due interest], whereas in this one I don't see any mention of PDI, although the company says they are going to file a 6-K [foreign entity filing notice] with the SEC.

"I haven't seen this trade in over a week," the source added.

The market source also noted that interestingly, "the 2003 bonds, which they had defaulted on ahead of time, are being treated in the same manner as all the other outstanding bonds. In the first proposal the 2003 bonds were subordinated."

The deal is subject to approval from the First District Court in Durango, Mexico, which is supervising the company's bankruptcy case.

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