Delta retreats on wider-loss warning; W.R. Grace bank debt up on creditor talks

By Paul Deckelman and Sara Rosenberg

New York, Oct. 15 - Delta Air Lines Inc.'s sharp two-day upturn abruptly ended Friday as the troubled Atlanta-based air carrier warned that it would post sharply wider losses in the third quarter - sobering news which threw cold water on investors who had basked in the glow of good news on the pilot labor talks and debt restructuring fronts the previous two sessions.

In bank debt dealings Friday, W.R. Grace & Co.'s paper traded around a bit, rallying by about 1½ points on the day after the Columbia, Md.-based specialty chemicals and building materials company announced that it had filed a motion to delay the filing of its plan of reorganization in the belief that additional negotiations with creditors could lead to a consensual Chapter 11 scheme to bring the company out of bankruptcy.

Delta - whose benchmark 7.70% notes due 2005 had traded up to the low 60s by the close of trading Thursday, up at least a dozen points from prior levels - began losing altitude almost as soon as the market opened, pushed down by its early-morning release warning of anticipated wider losses.

In morning trading, the 7.70s were quoted having fallen to 59 bid, down two points from Thursday afternoon's level, while its 10 3/8% notes due 2011 were seen down three points in the early going to 36.

By the end of the day, a trader said, the 7.70% notes, which he estimated had flown as high as 65 bid during Thursday's dealings, had retreated five points to end at 60. He noted, however, that even with that retreat, the bonds were still hovering well above the 45-47 context they had occupied before the market got its double dose of good news at mid-week - Wednesday's news that the union representing Delta's 7,500 pilots had budged from their previous position and had made a new offer to management, encompassing deeper wage cuts than before, and Thursday's news that the company was extending and improving the terms on its offer to exchange new debt for about $1.5 billion principal amount of existing unsecured and passthrough debt.

Another trader saw the Delta bonds "a little easier," quoting the 7.70s as low as 56 bid during the session, while the 7.90% notes due 2009 were at 36. He saw Delta's 8.30% bonds due 2029, which had traded around the 30 neighborhood on Thursday, offered at 29.

At another desk, a market observer pegged the 7.70s down three points on the session at 59 bid, while the 7.90s were two points lower at 35.5 bid, and the 8.30s were 1½ points down at 28.5.

Delta's convertible debt - which had moved up Wednesday and Thursday in tandem with the straight junk bonds to levels around 40-41 for its 8% and 2 7/8% converts, were heard to have fallen some five to seven points on the company's warning, while Delta's New York Stock Exchange-traded shares - which were up over 21% on Wednesday and another 10% Thursday - gave most of those hefty gains back, as they fell 79 cents (18.76%) to $3.42 on volume of 10.7 million shares, twice the norm.

Given the surprising strength of the two-day run up on both the debt side and the equity side, some kind of retrenchment or correction was considered almost inevitable after the week's big gains, even if there had been no negative news out - and there was plenty of negative news out for investors to worry about.

Delta's expected loss

Delta, which will issue its third-quarter earnings on Wednesday, but which will not hold a conference call to discuss the results, said in an 8-K filing with the Securities and Exchange Commission that it expects to post a loss of between $625 million and $675 million for the quarter - as much as four times the loss it had a year ago. On a per-share basis, Delta sees a loss of $4.99 to $5.39, wider than the $3.78 a share analysts have been projecting and far wider than the year-ago $164 million of red ink, or $1.36 per share. Delta blamed its anticipated worse-than-expected numbers on weak domestic fares and a spike in fuel costs.

Even as intense competition in the airline industry - particularly from lower-cost carriers - has cut into Delta's top line and has trimmed its margins, despite recently improved load factor statistics, escalating fuel costs and an uncompetitive labor cost structure have accelerated the airline's cash-burn problem,

Delta had about $2.7 billion of cash or short-term equivalents on hand at the start of the year but that had been whittled down to $2 billion by June 30. The airline continued to eat through its once-sizable cash stockpile at an even faster rate during the quarter, bringing it down to $1.45 billion by Sept. 30.

A bond market source crunched the numbers and deduced that Delta as a company is burning through its cash reserves even faster than the big Pratt & Whitney jet turbines that power its planes burn through their thousands of gallons of jet fuel on a cross-country run. He estimated the company's loss at at least $7 million a day, and said that with just $1.4 billion left in the kitty, "Chapter 11 is coming up very soon for Delta."

Delta further warned that even though it is on track to reach about $2.3 billion of its targeted $5 billion in annual cost cuts by the end of the year, its situation is so serious that it will still face a liquidity crunch. Even if it achieves its full $5 billion target of cost cuts by next year, Delta will still need to raise about $800 million of new financing in 2005, and defer $325 million of debt scheduled to mature that year.

Ironically, the new warning comes even as it looks like progress is being made on Delta's belt-tightening efforts, thanks to the Air Line Pilots Association's decision to make a new offer to management. Delta has been pushing its captains - considered the best-paid in the industry - for $1 billion in annual pay cuts through 2006. Up till now, the pilots have offered no more than $705 million of cuts, which the airline considers inadequate. There were not details on the new proposal the pilot's made a week ago, although Friday's editions of The Wall Street Journal reported that the two sides - which have been negotiating on and off for a year - were closer than they had been to reaching agreement on a package of wage cuts.

W.R. Grace loans gain

In bank debt trading Friday, W.R. Grace's paper was heard by market sources to have strengthened to 103 bid from 101.5 previously; the rise was "in anticipation of the plan [the company is expected to file] and what the evaluation might be," a trader explained.

Grace's plan of reorganization was supposed to have been filed on Thursday. The company, however, requested that its motion to delay the filing be considered at its scheduled Oct. 25 omnibus hearing.

"Grace expects to continue discussions with the official committees representing asbestos and general creditors, and equity holders over the next several weeks," a news release said.

Grace was driven into Chapter 11 in April 2001 under a flood of asbestos-litigation claims, along with a number of other companies.

Bond traders noted the sharp rise on Friday in Grace's NYSE-traded shares, to $11.58, up $1.82 (18.65%), on volume of 5.4 million shares, over five times the usual activity level. But they said they had not seen the company's bonds trading for some months.

"A lot of the asbestos stocks were up" Friday, a trader said, perhaps in sector sympathy with Grace, or "perhaps something is going on" in terms of efforts to craft an asbestos-claims mechanism acceptable to all sides.

He speculated that "the bonds must have been up as well as the stock," but had no fresh levels on anything. He said that Owens Corning - whose bonds had recently firmed after a federal bankruptcy judge sided with bondholders and against bank debt holders in approving a motion for substantive consolidation of the Toledo, Ohio -based insulation maker and its subsidiaries - was hanging in around 49 bid. The ruling basically stripped the banks of their special priority claims on Owens Corning's assets. The company's bank debt was languishing in the mid-to-upper 60s as the week ended, well down from previous levels in the 80s.

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