aaiPharma bonds move up 2 points; Intermet flattish but active; Trico Marine higher

By Ronda Fears

Nashville, Oct. 1 - aaiPharma Inc.'s announcement that it would skip the coupon on its 11.5% bonds had been the market's prognosis for some time, but traders said the bonds moved up on optimism that the company can work out some financing within the 30-day grace period.

There are some, however, who suspect the Wilmington, N.C., drug concern may be keeping a lid on its cash coffers with bankruptcy plans in the background.

Meanwhile, nothing new emerged on auto parts maker Intermet Corp. after it filed bankruptcy Thursday. The bonds, which recouped 5 points to the 40 area on the filing after a freefall over the past couple of weeks, were active but little changed, a distressed debt trader said.

Trico Marine Services Inc. bonds were active Friday, too, and higher by a half-point, although the Houma, La.-based oilfield services company has thus far only announced plans to file bankruptcy. As early as Sept. 10, the company said it planned to file a pre-packaged Chapter 11 with its 8 7/8% senior noteholders getting virtually all of the reorganized company's stock, but nothing has materialized yet.

"There wasn't any news, but it was an active name today" in the distressed debt arena, a trader said.

The $250 million issue of 8 7/8% senior notes due 2012 outstanding moved up by about ½ point to 43½ bid, 45½ offered, he said.

With the tape showing airlines stocks higher, despite Northwest Airlines Corp.'s chief executive resigning, Delta Air Lines Inc. bonds were just "holding in there" Friday after a 2-point slide on Thursday, a trader said. He pegged the long-dated 8.3% issue at 23½ bid, 24½ offered. Delta's shorter paper, the 7.7s, and the equipment trust certificates, were heard lower by about a point, however.

Delta's convertible bonds were slightly firmer, though, edging the 8% issue to 29 bid and the 2 7/8% issue to 32 bid, as the underlying stock was up nearly 5%.

aaiPharma trades up to 65½

Specialty pharmaceutical company aaiPharma didn't surprise anyone with its announcement that it would miss Friday's $10 million interest payment on its 11½% subordinated notes due 2010. At the same time, the company said it was working to make the payment, or make other arrangements, within the grace period, and traders said that moved the bonds up.

aaiPharma said it planned to open discussions with bondholders during the 30-day time frame.

The 11½% issue went out for the weekend at 65½ bid, 67½ offered, 2 points higher from Thursday, a distressed bond trader said. aaiPharma shares, however, plunged on the news, losing 28 cents on the day, or 18%, to $1.27.

Aside from liquidity constraints, aaiPharma has had a federal investigation into its drug sales practices hanging over it for months. The company restated results for 2002 and 2003 and has been subpoenaed by a federal grand jury, too. With the precipitous drop in its stock as a result of the developments, aaiPharma has received a delisting notice from the Nasdaq stock market but has not yet begun trading on pink sheets.

In addition, the company has had trouble keeping its executive team in place. On Tuesday, for the second time in less than a year, aaiPharma's chief executive resigned. Thus far in 2004, aaiPharma has replaced its chief operating officer, chief financial officer and several other top executives.

Legal problems also have surfaced regarding the company's failed merger with Cima Labs Inc. In August, Cima filed a lawsuit against aaiPharma to recover $16.5 million in costs related to the merger plans, claiming it would never have entered into talks with the company had it known the extent of its financial troubles.

aaiPharma seeking bank waiver

aaiPharma said it believes there is a likelihood of default regarding financial covenants under its senior credit facility, and added that it is in discussions with the lenders to seek waivers or consents for the potential defaults.

Standard & Poor's said the CCC rating on aaiPharma's bonds, and negative watch, reflect the possibility of a default in the near term due to liquidity problems, but noted that the banks could elect to extend credit to aaiPharma to fund the interest payment.

Another bond trader said, however, it appears that a bankruptcy filing could be the next step for aaiPharma.

"It looks to me like this might be a case where the company is holding onto its cash in anticipation of filing bankruptcy," he said.

Thus, he said getting into the bonds at "reasonable prices is quite a ways off. If you ask me, these should be more in the area of 40."

Intermet hovering in 40 area

Intermet was steady to a tad lower Friday following the big 5-point move Thursday. The gain Thursday was attributed to bondholders thinking a collection on the accrued interest was made likely now that the auto parts maker filed bankruptcy. Analysts said Friday the bond prices firming also may be due to short covering, as well.

The latter seemed to be a strong suggestion in the stock activity Friday, with 1.66 million shares moving versus the three-month running average of 604,090. The shares ended up 2 cents to close at 28 cents.

There also are hopes that Intermet might be the target of a buyout sooner rather than later as a result of the bankruptcy filing, another market source said.

"Suppliers are buried in overhead, fixed costs and outmoded methods and designs. A newer, more flexible supplier can easily make superior products for a lot less money. Outsourcing contracts and aftermarket [business] are attractive for components," he said. "Chrysler is one automaker that's under pressure to bring up quality and they announced that they will be looking to acquire suppliers."

Intermet woes more than steel

Shelly Lombard, Gimme Credit bond analyst, said Intermet's troubles are beyond the skyrocketing steel prices of the past couple of years, and even the slack in auto sales, but linked closer to the scattered nature of the auto parts supply sector that has eroded profitability for those players.

"Steel prices will eventually level off or drop. But the dynamics of this industry won't change. U.S. automakers are facing weak consumer demand and a shrinking share of the market," Lombard said in a report Friday.

"As a supplier to the suppliers, Intermet is at the bottom of the food chain, with little pricing power. And bad stuff always flows downhill to those at the bottom.

Moreover, the analyst said the fragmentation of the automotive component supply industry is an underlying problem for Intermet, compounded by weak auto sales. Intermet makes powertrain, chassis, suspension and structural components for vehicles. Its top customers are Ford Motor Co., General Motors Corp. and DaimlerChrysler as well as parts suppliers like Visteon Corp., Delphi Corp. and Metaldyne Corp. - several of which have issued their own earnings warnings amid sluggish sales.

"If steel prices were the only problem, Intermet bonds might seem cheap. With cash build and some sort of new debt issuance, bondholders could receive 35 to 60 cents in cash and/or new debt and the rest of their recovery in equity," Lombard said.

"Intermet plans to revise its capital structure, however. Given the relentless margin pressure that auto suppliers are facing, it makes sense to exchange some bonds for equity in order to provide additional financial cushion."

Atkins loan drops

In the bank loan market, Atkins Nutritionals, which has met with resistance from schools where it has been proposing to help kids cut the carbs and has also been facing increased competition, posted disappointing numbers in an investor call Thursday, according to one trader, who added that the company also disclosed that it had dipped into its revolver.

The trader saw the company's first-lien tranche at 75 bid, which is down from 85 within the past week, the trader said.

Meanwhile the trader saw the second-lien loan at 56 bid Friday, after having been as high as 77 during the past week.

Another trader had the Atkins first lien at 74 bid, 76 offered and the second lien 55 bid, 60 offered, both "down 10 points or so."

The Atkins move, traders added, represented the most dramatic movement in Friday's market.

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