Tekni-Plex notes bounce on short covering; Delta bonds soar, then fall to flat position

By Ronda Fears and Paul A. Harris

Nashville, Sept. 16 - It was a slow Thursday in distressed bonds Thursday thanks to the Jewish holiday but what was happening provided a boost to adrenalin levels. Tekni-Plex Inc. bonds dropped on news of its default on its bank loans, then recovered as short positions were squeezed.

Delta Air Lines Inc. was another source of exciting trading activity in the wake of the troubled airline's distressed debt exchange offer, announced late Wednesday, which prompted downgrades to the notes involved.

The short-dated Delta bonds - the 7.7s due 2005 - traded as high as 58 bid before easing back to 49 bid at the close, for a gain of 5 points on the session. Other Delta junk bonds were higher, too, as well as the convertible notes, with all those long dated issues in the mid-20s to mid-30s area, while the stock ended off by more than 2%.

"No one knows how to value this company," said a former Delta bondholder, who sold out of the credit several weeks ago.

Northwest Airlines Corp. and Continental Airlines Inc. were a little better bid, too, traders said.

Otherwise, the ongoing saga of Foster Wheeler Ltd.'s efforts to win a debt-for-equity exchange offer, which has been unfolding for more than a year now, was still a topic of interest. The Clinton, N.J., construction firm extended the exchange for the umpteenth time this week, noting the convertible preferred threshold is still not met. It warned of the consequences if the new Oct. 1 deadline passes without a successful exchange, a message interpreted by many in the markets as meaning it will likely be filing bankruptcy.

A distressed credit analyst said that there are really only about two or three convertible preferred holders resisting the exchange. But the "hawks," as he referred to them, could put the ultimate kibosh on Foster Wheeler's efforts to avoid bankruptcy, and ironically, perhaps, then the preferred holders would be among the lowest on the food chain of debtholders.

Tekni-Plex notes dip, bounce

After Tekni-Plex announced late Wednesday that it is in default on its bank revolver and senior secured term loan due 2008, its bonds dropped as expected Thursday but then rebounded over the course of the session due to short covering. The bonds had been sharply lower in the run up to the announcement.

The Somerville, N.J., packaging products manufacturer said the default was caused by a breach of financial covenants due to its expected net loss for the 12 months ending July 2.

A bond trader said there were buyers of Tekni-Plex's senior notes as well as subordinated notes but supply was scarce as there were no sellers.

"At their lows Wednesday the senior notes may have traded at 91 or 92. They closed around 91.5 bid, 93.5 offered," he said.

"We were working as good as a 93.5 bid or a 94.5 bid at one point, for decent size, this afternoon, and could not get an offering."

The subordinated notes were around 86 bid, 88 offered, he added.

Tekni-Plex shorts squeezed

Some of the rebound in the Tekni-Plex bonds was attributed to a valuation call, but also short covering as the market re-thought valuation levels and apparently decided the drops had gone too far.

"At the end of the day, even if these guys do $105 million for the year, which is what people are thinking, in EBITDA, [and] you put a 6-times or 6.5-times multiple on the thing ... the senior notes are covered. And you're likely covered on the subs too," the bond trader said.

"Unless you think this thing is a workout, the bonds are cheap."

Hedge funds getting involved, though, were caught in a short squeeze after buying in at the low points and the bonds started moving up. Even a couple of dealers were rumored to be caught short, he said.

"I think a lot of people started shorting them. I think there were a lot of hedge funds, and so forth, that jumped in, but they jumped in at the lows," the trader said. "So a lot of guys are getting squeezed now as it turns around."

Delta bonds land firmly, flat

By the session close, the Delta bonds looked as if they held up rather steady in the wake of the troubled airline's exchange offer, which prompted downgrades to the notes involved. But the short-dated Delta bonds at least traded sharply higher during the session before easing back by the end of the day.

Delta's so-called benchmark 7.7s of 2005 traded as high as 58 bid, 60 offered, a distressed trader said. Then the issue dropped back sharply to close at 49 bid, 51 offered, still up about 5 points from Wednesday's close.

"They tried to take the long Delta paper higher, but it ended the day unchanged," the trader added.

The 8.3s of 2029 were pretty much unchanged on the day, he said, as were the Delta convertibles. The 8.3s, indeed, ended only about a half-point higher at 26.5 bid, 27.5 offered but another bond trader saw the long-dated issue trade as high as 31 bid, 32 offered.

Delta's 8% convertibles due 2023 added about a half-point to 34.5 bid, 35.5 offered and the 2.875% convertible due 2024 slipped by about a quarter-point to 37.5 bid, 38.5 offered, a sellside convert trader said.

"It's totally crazy," said a desk analyst at one of the big convertible sellside shops. "Personally, I don't see how folks, and there are some, can say the converts are worth 30 to 40%, especially if they file [bankruptcy], the stock will go to zip, most likely."

Delta exchange seen doomed

While valuation levels on Delta's bonds appeared to be holding rather steady, many market sources said they really feel like the company's exchange offer is doomed to fail, mainly because it's too little, too late. Yet, at current levels for the bonds, some say they think it's a reasonable recovery rate even if the airline files bankruptcy.

S&P credit analyst Philip Baggaley said the Delta exchange offer would only be a net $875 million net debt reduction, which he said would clearly not make much of a dent in its total debtload of $20 billion.

"We don't like the DAL exchange - it's essentially too little, too late - and the company is going into the winter months when they will suck up a lot of cash," said Michael McNulty, a credit analyst with Context Capital in Connecticut.

"If JetBlue and the other non-union carriers were smart, they would institute a massive fare war right now, making things much worse for DAL and US Air. I would not be surprised to see this happen, by the way. Also, oil looks higher and no matter what DAL does, they cannot operate with the high oil costs. I think it's a goner, as well."

However a fund manager in New York - adding a disclaimer that "we are not distressed experts" - noted that the Delta convertibles have a high delta, making them very sensitive to stock movements, so "you know the convertibles will trade up if anything positive happens, regardless of the 135% premium on the 8s, and the stock could be very volatile.

"Yet, on the downside," in the event of a bankruptcy filing, he added, "surely Delta has some assets, including a brand name that isn't the worst in the airline industry. It may be realistic to expect 30-40 cents on the dollar in a bankruptcy."

Pilot retirements a wildcard

Delta said late Thursday that its managers and pilots will meet again Friday, and likely negotiate through the weekend, to find a way to keep the airline staffed with pilots, as many opt for early retirement. The next round of early retirements hits on Oct. 1

S&P's Baggaley said the possibility of Delta's pilots retiring en masse was the biggest wildcard. He added that S&P has not evaluated the exchange or rated the new notes offered but he did mention that unsecured bondholders usually get pennies on the dollar, in the form of equity, in a bankruptcy case, so an exchange could offer a higher recovery rate.

The exchange offer expires Oct. 14, but the more pressing issue of pilot negotiations faces a threat by the union flyers to take early retirement en masse Oct. 1.

Delta CEO Gerald Grinstein had hoped a deal with pilots could be in place by the end of this week, but he backed off that deadline as it proved to be too difficult to arrange on such short notice.

Foster Wheeler hold-outs slim

With the clock ticking towards Foster Wheeler's latest, and perhaps last, extension to its debt-for-equity exchange offer, onlookers said it is difficult to find the logic among the two or three convertible preferred holders who are barring the deal's success.

The preferred holders are holding up the exchange. The company suggests it may be forced to file bankruptcy if the exchange fails. But in the event of a bankruptcy, the preferred holders would be the lowest among debtholders involved in the exchange - holders of the Foster Wheeler 6.5% convertible bonds, three series of "Robbins" bonds and a regular note issue, nearly all of which have agreed to participate in the exchange.

"They are very close but there are two or three [holders of the restricted convertible preferreds] in a position of blocking the whole thing," said a distressed analyst at a sellside shop.

"It doesn't make sense, it's not logical as a group for them to veto the thing. But as an individual holder it makes sense, I suppose. It's greed, a game people play in negotiations."

The strategy, he said, is that the preferred holders holding out want other preferred holders to tender their converts instead of them, as they believe the preferreds would trade up once the exchange is done.

Furthermore, he added, Foster Wheeler has no chance of getting any other debt exchanged if the convertible preferreds hold out because noteholders would not agree to equitizing their positions, which would subordinate their stake to the preferreds.

A buyside market source said earlier in the week that the preferred holders seem to believe that Foster Wheeler will not file bankruptcy just because of 800,000 shares of the convertible preferreds not getting tendered.

Foster Wheeler on Tuesday again extended the exchange to 5 p.m. ET Friday, saying the 60% participation threshold for the 9% convertible preferreds had still not been met. That threshold also has been reduced several times from the original 85% target. The company also indicated that if the exchange fails, it would likely seek to effect the debt exchanges through bankruptcy court.

Thus far, only 49.3% of the preferreds have been tendered, up from 48.7% at the last report on Sept. 10.

Adelphia loans trade

Meanwhile, the bank loan market was also quiet with the holidays.

Although rumors had circulated earlier in Thursday's session that the existing paper of Adelphia was firming, late in the day a trader told Prospect News that it was hardly worth noting.

"It might be up a little," the trader said. "Some of the Century stuff looked like it was moving around a little bit, but still staying well below par for everything but Frontier."

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