Delta bonds jump on labor talks news, despite oil surge; Owens Corning bank debt continues to ease

By Paul Deckelman and Sara Rosenberg

New York, Oct. 13 - Delta Air Lines Inc.'s bonds were seen sharply higher Wednesday, pushing skyward despite a new surge in world crude oil prices following an explosion that damaged an oil pipeline in Mexico. The troubled Atlanta-based carrier's bonds were able to weather that normally negative development, as news reports indicated that the union representing the carrier's pilots had presented management with a new contract proposal.

Owens Corning bank debt, which has been on the slide since an unfavorable court decision last week, was again seen at easier levels, traders said.

Delta's bonds - which were seen having surged as much as two points in late dealings Tuesday with no news out - were reported by market participants to be continuing that trend on Wednesday. A market source pegged the carrier's benchmark 7.70% notes due 2005 as having jumped to 49 bid from prior levels at 44, although others saw a smaller gain Wednesday, saying the bonds had already firmed about two points Tuesday to 46.5.

The source saw Delta's 8.30% notes due 2029 improve to 27 bid from previous levels around 24, although, again, a trader elsewhere had seen the bonds already improve Tuesday to 26.5 from 25.75.

The source also saw Delta's 7.90% notes due 2009 as having pushed up to 36 bid from recent levels around 28, and said this was "the most active issue of them all."

He attributed the gain to news reports indicating that the Air Line Pilots' Association, which represents about 7,500 Delta captains, had made a new proposal to management. Delta has been demanding that the pilots accept permanent wage cuts of about 35%, saving the airline about $1 billion annually.

A trader said the 7.70% notes got as good as 52 bid, 54 offered from prior levels around 45.5 bid, 47.5 offered, while the 7.90s were three points better at 30 bid, 32 offered, and the 8.30s were up some 3½ points at 28 bid, 28.5 offered.

"They're movin' and groovin', despite the oil price being up," he declared. "It's all about the unions."

Another trader also said that Delta's high-yield notes "moved up a little bit."

Delta's convertible bonds were likewise solidly higher on the pilot news and despite higher oil prices. Its 8% converts were quoted at 33.5 and its 2.875% convertibles at 36.875, both well up from the 29 area they had languished at earlier this week. Delta's New York Stock Exchange-traded shares which underlie the converts jumped 67 cents (21.41%) on Wednesday to $3.80. Volume of 9.6 million shares was twice the norm.

Delta's pilots are considered about the best paid among the major old-line air carriers and Delta has said that it needs the huge concession from them in order to achieve a less burdensome cost structure, particularly as profit margins continue to shrink in the increasingly competitive industry.

The pilots' previous proposal to Delta was for about a 23% wage cut, which would save the airline $705 million, a sum that Delta said was clearly inadequate.

A spokeswoman for the pilot's union said that ALPA presented Delta executives with a new proposal late Friday. Karen Miller also said that the two sides have been meeting intensely for a number of weeks. The talks, she said, were now becoming "more all-encompassing instead of focusing on work rules."

Delta bonds and shares have been zig-zagging up and down in recent weeks on market speculation that the company might be making progress in its efforts to get the pilots to sign off on the billion-dollar pay cut package.

News of the new pilots offer come just a day ahead of the scheduled expiration of an exchange offer, announced in mid-September, under which Delta hopes to give up to $680 million of new senior secured notes to the holders of as much as $1.56 billion principal amount of unsecured debt securities and enhanced passthrough certificates. Delta says the exchange offer is part of its attempt to restructure its approximately $20 billion of debt without going through bankruptcy, and says both the pilot concessions and the success of the exchange offer are vital to its efforts to avoid having to make an emergency landing in Chapter 11, something that Delta rivals United Airlines and US Air were forced to do.

One of the big negatives facing Delta, United, US Air and other, more financially stable carriers such as Continental Airlines, American Airlines and Northwest Airlines has been soaring fuel prices, as jet fuel costs have risen along with escalating crude oil prices.

After having fallen back on Tuesday from record-high intraday trading levels above $54 a barrel to close on the New York Mercantile Exchange at $52.51, crude prices initially continued to ease Wednesday, to as low as $51.49 in morning trading. But they headed right back up later in the session, following news that a 30-inch oil line exploded in eastern Mexico on Wednesday morning, which sparked market fears of a possible terrorism connection. Light sweet crude for November delivery surged $1.13 to settle at $53.64, about where it had ended Monday, thus erasing all of Tuesday's price reductions. Besides the news out of Mexico, the oil markets have also recently been roiled by an oil workers' strike in Nigeria and the impact September's hurricanes have had on Gulf of Mexico production.

Owens Corning loans down

In bank debt dealings, Owens Corning's bank debt was heard to have fallen off a bit in Wednesday's market, although by how much was up for debate, as one trader placed the paper at 66 bid, 68 offered and a second saw it at 68.5 bid, 69.5 offered. On Monday, the paper had been quoted at 69 bid, 71 offered.

"The market is convinced it's just too high," the first trader said about the drop. "The bonds are trading around 50. There was a ruling that the bank debt is pari passu with the bonds so it should be like 10 points higher - not 20."

"Nobody likes what happened the other week," the second trader added. "It was a setback. The battle was lost - but the war is not over."

Of course, the "setback" he referred to was last week's ruling by judge John Fullam of the U.S. Bankruptcy Court in Wilmington, Del. on the matter of substantive consolidation - essentially, collapsing subsidiaries though which Owens Corning had arranged loans into the parent company and putting all of the parent company and subsidiary debt on a more or less equal footing. The upshot was that bank lenders were basically stripped of special claims on Owens Corning's assets that had given them priority over bondholders and other claimants.

The ruling boosted the company's bonds from the lower 40s into the lower 50s, although some stray quotes, not thought to be very reliable, had the bonds even better. The bank debt, meantime, fell from the lower 80s to present levels below 70.

Fullam's ruling hurt the group of 43 banks, led by CSFB, which had fought against consolidation in pressing their claim that their\ roughly $1.6 billion in loans to the parent company and its units had priority over the claims presented by the bondholders and other creditors.

And, now the market is expecting the banks to appeal the ruling - an event which, if it happens, could hold up the Toledo, Ohio-based insulation maker's reorganization process, already dragging on for more than four years, for quite some additional time.

Adelphia loans trade

Also in bank loan activity, Adelphia Communications Corp.'s paper was very active on some desks Wednesday with the Olympus, TCI, Century revolver and Century Old all seen trading, according to a trader.

The TCI paper was quoted at 99.75 bid, 100.125 offered and the Old Century was trading around 99, the trader said.

Trading activity in the Greenwood Village, Colo.-based cable company's bank debt has picked up recently, with more talk of possible merger and acquisition activity in the cable sector sparking the flow, as the trader previously explained.

Winn-Dixie bonds gain

Back among bond investors, traders said that Winn- Dixie Stores Inc. bonds were finally moving up, in what one trader called "a delayed reaction" to the Jacksonville, Fla.-based supermarket operator's announcement late last week that its insurance policy would cover most of its damages from the quartet of killer hurricanes that ravaged Winn-Dixie's home turf of Florida and other parts of the southeastern U.S. last month. The company will only be out the $10.3 million annual deductible on its policy, which it met during the first of the four storms, Hurricane Charley.

Winn-Dixie still has one store each closed from Charley, Frances and Ivan, and two stores still closed as a result of Jeanne. Distribution centers and manufacturing facilities were not significantly affected and remain operational, the company said.

The trader saw Winn-Dixie's 8 7/8% notes due 2008 at 88 bid, well up from recent levels in the low-to-mid 80s, while its 8.181% bonds due 2024 jumped to 76.5 bid from 72.

Another trader saw the 8 7/8% notes "up a couple" of points, while the 8.181s were "better bid," at 76.

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