Intermet notes dive on Q3 loss warning; Atkins bank paper firms

By Paul Deckelman and Sara Rosenberg

New York, Sept. 20 - Intermet Corp. bonds and shares were seen tumbling on Monday, as investors reacted negatively to the Tory, Mich.-based automotive components maker's warning that it would show a third-quarter loss and could default on its financial covenants.

Elsewhere, several traders said they had seen not much activity in the bonds of Delta Air Lines Inc., which had been gyrating around last week on expectations that the troubled Atlanta-based air carrier might - or might not - be able to come to an accord with its pilots union over the thorny issue of mass early retirements by veteran captains. However, the stage was set for possible movement in Tuesday's session, as news that Delta and the pilots had indeed reached an accord began hitting screens after Monday's market activity had concluded.

In bank loan trading, Atkins Nutritionals Inc.'s bank debt, especially the second-lien paper, saw quite an improvement on Monday, continuing the positive momentum that was sparked at the end of last week when earnings numbers came out in line with expectations.

But the major mover, without a doubt, was Intermet, whose 9¾% notes due 2009 were being quoted as having swooned to 45 bid; one trader pegged the bonds down 25 points on the session, while another quoted them down a whopping 31 points to that level.

The company's Nasdaq-traded shares meanwhile collapsed to the tune of $1.40 (64.81%) to finish at 76 cents, on volume of 3.995 million - an astounding 105 times the usual daily turnover in the previously little-known and even less-traded issue.

The shares and the bonds went south in a hurry in response to the company's warning, released on Friday evening, that primarily due to escalating costs of scrap steel and other raw materials, Intermet - which manufactures powertrain, chassis/suspension and structural components for the automotive industry - expects to report a third-quarter net loss of between $19 million and $24 million, or 74 to 94 cents per diluted share, despite an anticipated increase in revenues to $197.9 million from $172.7 million in the year earlier third period.

"Increased revenues, however, have not been enough to offset the unprecedented increase in scrap-steel and other raw-material prices and operational issues at certain North American plants," the company declared in releasing its projections.

Intermet said that the projected third-quarter loss is expected to cause the company to be in default on various financial covenants contained in its credit agreement, which provides for a $90 million revolving loan facility and a $120 million term loan, secured by all of Intermet's domestic assets and pledges of the stock of its foreign subsidiaries. Total debt is about $395 million.

The company said that it specifically expects that its leverage by Sept. 30 will exceed the levels permitted by the credit agreement and that its interest coverage also will be inadequate. It said that "[a]lthough none of the lenders has at this time refused to advance further funds under the credit agreement, Intermet has determined that it is unable to access its revolving loan facility absent a waiver by the lenders of conditions to borrowing," and so it has begun talks with its lenders on getting a waiver that would permit continued access to the revolver.

Intermet said the agent on its bank facility has indicated a willingness to going along with a waiver of the covenant defaults that would run through early December and the company anticipates finalizing such an arrangement perhaps this week. But it cautioned that if it couldn't get the waiver, as well as short- term funding for which it has recently been negotiating, that could set off a chain of events of default that could conceivably force it to "pursue a more aggressive restructuring strategy, which could include voluntary bankruptcy proceedings."

That prospect, in turn, caused Standard & Poor's to lower its corporate credit and senior secured bank loan credit ratings on Intermet to CCC from B+ and its senior unsecured debt rating to CCC- from B, while putting the ratings on CreditWatch with negative implications.

S&P said downgrade reflects heightened concerns over Intermet's prospects of operating as an ongoing concern, given its inability to absorb the impact of raw material price increases, as well as its potential for defaulting on its credit covenant and possibly being forced into bankruptcy or some other form of restructuring.

Delta steady

Elsewhere, a trader said that Delta's short paper "was holding in once again," quoting the air carrier's benchmark 7.70% notes due 2005 as straddling 50 and its 7.90% notes due 2009 as straddling 31. However, he saw its longer-dated paper off, with the 8.30% notes due 2029 "down a little bit" at 25 bid, 26 offered.

At another desk, a trader said that, unlike last week, when Delta bonds were actively traded in anticipation of, or response to, news developments, on Monday, "I didn't even notice them. If there was movement, I didn't see it."

He saw the 7.70s at 48.5 bid, 50.5 offered, and the 8.30s at 25.5 bid, 26.5 offered.

The company's convertible bonds were meantime seen easier, with the 8% notes quoted down ½ point to 34.25 bid, and its 2 7/8% notes a point down at 35.75 bid. Delta's New York Stock Exchange-traded shares were off 15 cents (3.79%) to $3.81 on lighter-than-usual volume of 2.5 million shares.

After the market closed, news reports began hitting the tape, indicating that the union representing the company's pilots had agreed to an arrangement that would let Delta call pilots back out of retirement on a limited basis to deal with staff shortages. In return, the company agreed not to terminate the pilots' pension plan before February even if it files for bankruptcy.

Several hundred pilots - apparently fearful that Delta might follow the lead of bankrupt United Airlines and attempt to terminate their pension plan - have recently retired, in hopes of taking 50% of their pension money in an up-front lump sum (the rest would be paid out over time as an annuity). The airline fears that it could face a wave of retirement by the captains Oct. 1, which would have the impact of double whammy - the impact of so many pilots retiring at once would play havoc with Delta's operations and could push it into bankruptcy, while a rash of newly retired pilots exercising their 50% lump sum option would accelerate an already serious cash-burn situation at Delta, which already blew through $700 million of a $2.7 billion cash cushion in the first six months of the year and anticipates burning cash at an equal, if not higher, rate in the second half.

A solution to the pilot retirement problem would have to be ratified by the full rank and file. And while a compromise between management and the union is seen as a decidedly positive sign, it still does not necessarily mean that Delta is making much progress on its other major issue with the pilots - its efforts to get the captains to sign off on $1 billion of annualized pay cuts, as part of the carrier's efforts to cut spending by at least $2 billion annually.

Winn-Dixie holds after Friday's drop

In other bond news, Winn-Dixie Stores Inc.'s 8 7/8% notes due 2008, which had fallen back about two points Friday on a combination of hurricane-loss fears and news that the troubled Jacksonville, Fla.-based supermarket operator's long-time chairman, A. Dano Davis, will leave the company, were seen trading round the same levels Monday, at 86 bid, 88 offered.

Also little changed were WCI Steel's 10% notes, holding steady at 59 bid. Adelphia Communications Corp.'s 10 7/8% notes due 2010 were seen down a point at 90.5 while the bankrupt Greenwood Village, Colo.-based cable operator's 10¼% notes due 2011 were 1½ points off, at 92.5 despite a lack of fresh news developments.

Atkins loans gain

In bank debt trading, Atkins Nutritionals' bank debt was better, with the first-lien bank paper quoted at 88 bid, 90 offered and the second-lien bank debt at 75 bid, 80 offered, according to a trader, who placed the first-lien up by about two points and the second-lien up by a bunch of points.

On Friday, though, a different trader had the first-lien quoted at 87.5 bid, 89.5 offered - only making Monday's levels stronger by about half a point - and the second-lien quoted at 65 bid, 67 offered.

The release of earnings in line with market expectations helped to calm investor fears about the Ronkonkoma, N.Y., provider of food, nutritional and information products possibly needing a waiver to avoid defaulting under its credit agreement.

MCI bonds gain

On the telecom front, the news that MCI is apparently shopping itself around was seen by several traders as having pushed the company's bonds up.

One quoted the 5.908% notes due 2007 at 99 bid, the 8.688% notes due 2009 at 96 bid, and the 7.735% notes due 2014 at 94 bid, which he called "up a little," about a quarter to a half point, in "active trading, on pretty good size." But he said that the bonds "are not going to go up a lot," with the short notes practically at par already.

Another trader saw the 10-years at 94.75 bid, 94.875 offered, up half a point.

"We couldn't give those bonds away on Friday," he said, noting that they now were "definitely" trading up.

Another trader, however, saw those MCI bonds actually off from their prior levels, with the three-year off half a point at 99.5 bid, the five-year also down a half at 96.25 bid and the 10-year maybe a quarter-point down at 94 bid, 94.5 offered.

"My sense was there was better sellers [Monday]. We saw two or three different sellers."

It was his theory that the sellers were coming out because the $6 billion target valuation the news reports put on the company was "much less than they originally thought," quoting an $8 billion figure from earlier in the year.

Not only is the company's valuation now less than it had been before, he said, but "their cash flow is going down" amid tough competition in the long-distance market, which has seen long-distance service priced like an increasingly cheap commodity as more players, including resellers and formerly restricted regional Bell operating companies get into the business.

He noted that when MCI emerged from bankruptcy earlier in the year, its shares were trading at $25 - and it now trades at $17, "so selling the company for $6 billion means investors will take a significant hit" versus its former valuation.

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