Interstate Bakeries bank debt up, even after Chapter 11; Intermet bonds keep falling

By Paul Deckelman and Sara Rosenberg

New York, Sept. 22 - Interstate Bakeries Corp.'s revolver and term loan bank debt actively traded at levels that were higher by about 1½ points as the company announced that it had filed for Chapter 11 - a gain that was surprising to some.

In distressed bond dealings, Intermet Corp.'s notes continued to fall for a third consecutive session, breaching the psychologically significant support level at 40. Other automotive names were heard to have followed the Troy, Mich.-based components maker downward.

Interstate Bakeries' revolver traded around 97, and the term loan traded around 95, according to a trader who admitted that he was "a little surprised to see it trade up that much."

"But," he added, "it is what it is."

The Kansas City, Mo.-based wholesale baker and distributor of fresh baked bread and sweet goods - known for such famous consumer brands as Wonder Bread, Hostess Twinkies, Dolly Madison and Drake's Ring Dings - filed for bankruptcy protection in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City, mainly because of liquidity issues resulting from declining sales, a high fixed-cost structure, excess industry capacity, rising employee healthcare and pension costs, and higher costs for ingredients and energy, according to a company news release.

Furthermore, on the heels of the filing, some management shuffles took place as Tony Alvarez - head of the well-known turnaround Alvarez & Marsal turnaround specialists firm - was named chief executive officer.

John Suckow was named chief restructuring officer and James R. Elsesser, resigned as chairman and chief executive officer, effective Wednesday.

The company has received a commitment from JPMorgan Chase Bank for a $200 million debtor-in-possession financing facility that is still subject to court approval.

Interstate convertibles trade

Meanwhile the bankruptcy threw Interstates' recent private placement convertibles into a tailspin, although traders said the bonds are likely to recoup par due to securities regulations about such matters. The blowup was speculated as perhaps the quickest on record, since Interstate just sold the convertibles on Aug. 12.

A big chunk, some $55 million, of the Interstate Bakeries 6% convertible bonds due 2014, a $100 million issue, traded Wednesday at 85, market sources said. Traders pegged the issue anywhere from 60 to the mid-70s, but a sellside trader active in the name said those were levels were far too low.

Nearly ever since the Interstate Bakeries convertibles were sold at par of 100 in a private placement Aug. 12 they have been underwater, but the handful of buyers of the deal - about four or five hedge funds, mostly big players in the convertible market - have already made money on the issue and the bonds are expected to get a full par recovery in the bankruptcy.

"These are risk arb guys now, who have a fraudulent conveyance claim that basically is that this issue should have never happened," said a sellside trader at one of the major convertible desks. "A fraudulent conveyance claim is standard when a company files [bankruptcy] within 90 days of the issue, and these were sold, what, four or five weeks ago."

The Interstate Bakeries 6% convertible bonds traded at 85 on Wednesday after the news, which halted the stock on the opening bell at $2.05 - down 37.3% from Tuesday's close - and brought about a downgrade to the credit to D for default from CCC- by Standard & Poor's.

A buyside source saw a bid for a small slice of the issue at 79, which would be down from 83.5 bid a week ago seen by a sellside trader. Another sellside trader pegged the issue in the mid-70s.

A buyside trader said there was a bid for a small slice of the issue at 79, and a sellside trader at a boutique that traffics convertibles pegged the issue at 60. But a sellside trader active in the name said those were levels were off from the live market for the Interstate Bakeries bonds.

"That's too low," the sellside trader, at a major convertible desk, said. "I'd own them at 80, but there's a lot of hair on this, no doubt."

Recovery seen on convertibles

A risk arb source said indeed a par recovery is anticipated by holders of the Interstate Bakeries convertibles, because of the timing of the bankruptcy in relation to the bond sale. Besides, he said, the holders have already made money on the issue.

"These set up nice and lots of money has already been made, I'm sure, and they may even make more because of the legal issues," the source said, who pointed out that he does not hold any of the Interstate Bakeries convertibles.

Interstate Bakeries sold the $100 million issue of 10-year convertible senior subordinated notes at par with a 6% coupon and 12.5% initial conversion rate in a private placement on Aug. 12.

Proceeds of the bond sale were earmarked to pay down the company's senior credit facility with JPMorgan Chase and Bank of America. Sources contacted on the private placement teams at Bank of America were not available to comment; sources at JPMorgan were not reached.

Simultaneously with the convertible deal, Interstate Bakeries amended its senior secured credit facility, increasing the interest rate by 50 basis points on all loans, modifying the leverage and interest coverage covenants through the first quarter of fiscal 2006 to increase financial flexibility and prohibiting dividend payments until its senior bank debt is rated Ba3/BB- with a stable outlook or better.

Meanwhile, there was an investigation into the company's books, with an estimated charge of about $40 million to second quarter pretax income and a boost to its reserve for workers compensation claims by $40 million. That resulted in the company seeking up to a 15-day extension to file its form 10-K with the SEC and planning to restate second and third quarter financial statements.

Interest paid to the banks was bumped up again, meanwhile, with more flexibility to Interstate Bakeries, but Wednesday the company relented to financial pressures - a Sept. 26 deadline to meet certain conditions or receive waivers from its bank lenders to continue drawing on its revolver - with the bankruptcy filing.

Intermet down again

Elsewhere, Intermet's 9¾% notes due 2009 - which swooned some 30 points on Monday down to the mid-40s after the company said that it would likely post a third-quarter loss of $19 million to $24 million, putting it in violation of its bank facility covenants - made it three down sessions in a row Wednesday.

The bonds had fallen from Monday's close of 45 to around 42 on Wednesday and "were getting hit again," a trader said, who saw those bonds trade in the morning at 40 bid, 42 offered, before falling through the 40 mark late in the day to end at 39.5 offered.

At another desk, a trader in distressed bonds saw the notes open at 41 bid, 43 offered, and then dive to 36 bid, 39 offered at the close.

The company's Nasdaq traded shares - which lost a whopping 64% of their value Monday to end at 76 cents and were then unchanged from that level Tuesday - lost another 20 cents (26.32%) to end at 56 cents. Volume of 1.9 million shares was more than ten times the usual activity level.

Intermet's problems - high costs of scrap steel and other raw materials, along with declining sales as the Big Three automakers it supplies curtail production amid still-soft consumer confidence and lagging sales - are common to other automotive suppliers as well, and a whole raft of names in the sector were several points lower Wednesday on sector sympathy.

The sector "got hammered," said a trader.

Among the part-makers' names which were hard hit were such distressed denizens as Oxford Automotive, whose bonds dropped to 38 bid, 45 offered from previous levels at 47 bid, 50 offered, and J.L. French Automotive Casting, whose 11½% notes due 2009 ended at 75 bid, down four points on the day.

Delta lower

Apart from the beleaguered automotive sector, traders saw Delta Air Lines Inc.'s bonds "down a couple points," one said, with the struggling Atlanta-based air carrier's benchmark 7.70% notes due 2005 at 47 bid, 49 offered, down from 49 bid, 50 offered previously. Delta's 8.30% notes due 2029 fell to 24 bid, 26 offered from 26 bid, 27 offered.

Adelphia steady

Traders saw Adelphia Communications Corp.'s bonds continuing to hold the somewhat lower levels to which they have recently fallen, despite the start of the bidding process for the bankrupt Greenwood Village, Colo.-based cable operator's assets.

"They were pretty much unchanged," a trader said, quoting Adelphia's 10 7/8% notes due 2010 at 89.5 - off from recent highs in the mid 90s - and its 11% notes due 2006 at 123.5. Adelphia's 9 7/8% notes due 2007 were seen staying around 88.

Adelphia said that it would take bids on any or all seven clusters of its subscribers, as well as entertaining bids for the company as a whole. It said that a number of potential buyers had expressed interest in some or all of the assets, although only cable giants Time Warner Inc. and Comcast Corp. are seen to be in any position to bid for the whole company in one fell swoop.

Analysts say that a sale of Adelphia, either whole or piecemeal, could bring proceeds of around $20 billion - although the company said that it reserves the right to decide not to go through with any sales if it thinks the bids are inadequate, instead planning to emerge from Chapter 11 as a standalone independent.

Owens Corning quiet

Back among bank debt investors, activity in Owens Corning's paper slowed down as investors awaited a ruling on the substantive consolidation issue. And, once market players heard that the ruling would not surface Wednesday, it was hard to get trading momentum started.

"Everyone expected something to happen but it didn't," a trader said. "After we found out it would be delayed we tried to mix it up a little bit but no one would play ball."

Levels on the Toledo, Ohio-based insulation maker's bank debt remained unchanged at 75 bid, 80 offered - where it fell Tuesday in an approximately 10-point drop as rumors flew that the bankruptcy judge for the case was tough on the banks' lawyers during a Monday session. That left some worried that the company may win its battle to consolidate its subsidiaries, which in turn could dilute bank debt claims.

Owens Corning's bonds, meanwhile, which had been seen up somewhat on Tuesday, even as the bank debt fell, were unchanged Wednesday, generally quoted hanging in around 47 bid, 48 offered.

(Ronda Fears contributed to this report)

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