Delta bonds fly on news of note-swap deal; asbestos bank debt better

By Paul Deckelman and Sara Rosenberg

New York, Oct. 26 - Delta Air Lines Inc. bonds were up solidly for a third straight session Tuesday, pushed skyward by the news that the troubled Atlanta-based airline carrier had reached an agreement with the holders of $135 million of its 7.70% notes due 2005 to swap those notes for new debt that matures in 2008. Another airline in the news was ATA Holdings Corp., but its bonds were headed in the opposite direction Tuesday on renewed bankruptcy speculation - which turned out to be accurate - and the latest in a series of recent debt rating cuts. The beleaguered Indianapolis-based low-cost carrier filed for Chapter 11 protection from its bondholders and other creditors after the close of trading.

In the bank debt market, some asbestos names were seen up during Tuesday's session, with USG Corp. and W.R. Grace & Co. the most prominent gainers, as their paper was pushed higher by recent financial results.

Delta's 7.70s "were riding a roller-coaster," a trader said, quoting the bonds - which had pushed up to the mid 50s the prior two sessions from the upper 40s - as having zoomed as high as 66 bid, 67 offered from Monday's close at 55 bid, 57 offered. Late in the day, the bonds came off that peak, but still ended with what the trader called "a pretty good jump," at 62 bid, 64 offered.

He also saw Delta's 7.90% notes due 2009 as having firmed to 38 bid, 41 offered Tuesday from Monday's 34 bid, 36 offered, while the company's 8.30% notes due 2029 ended at 30 bid, 32 offered, up from 27 bid, 29 offered.

"All of the bonds were a little higher [than those closing levels], before they came back down," the trader said.

At another desk, a trader remarked that the Delta bonds "continued to improve." He saw the 7.70s end at 63 bid, 64 offered, with the Delta 10% notes due 2008 at 45 bid, 46 offered, the 7.90s at 41 bid, 43 offered and the 8.30s at 29 bid, 34 offered.

Yet a third trader, while calling Delta "a little better," said the name was something of a "mixed bag," as "people try to digest" the latest news in the company's up-and-down saga.

He saw the 7.70s "initially trade off" as market players saw the news of the announcement about the bond swap - which was released after the close Monday - and tried to figure it out, and he quoted those bonds as having fallen as low as 47.5 bid from Monday's close at 55, on the news. But once the news began to percolate around the market and investors realized that it was a positive for Delta, those bonds went back up as high as 68 bid, he said, before coming off that peak to end at 65.

The 7.90s, he said, got as low as 36 bid and as high as 42 before finally ending at 40, while the 8.30s dropped to 25 bid from Monday's close at 28, before bouncing up to 32 bid and closing finally at 30.

Delta's convertible notes were also seen solidly higher, although a source in that market attributed the gains more to the news that the airline had reached a labor accord with its flight superintendents. At the closing bell, the 8% converts were trading at 41.5 and the 2 7/8% notes were at 43, both up seven to eight points on the session.

Delta's New York Stock Exchange-traded shares underlying the convertibles meantime soared 85 cents (22.29%) to finish at $4.63, on heavy volume of 28.1 million.

Delta's restructuring efforts

Under the terms of the debt-swap deal announced late Monday, holders of the roughly $135 million of outstanding 7.70% notes agreed to exchange those notes for newly issued 8% senior notes due 2008, plus a pro-rata allocation of a number of shares of Delta's common stock to be issued under a formula.

Delta, which is groaning under some $20 billion of outstanding debt, has recently been making moves to eliminate some of that as part of its effort to avoid bankruptcy, including a separate exchange offer aimed at the holders of some $2 billion of unsecured and secured passthrough certificates.

Besides trying to cut debt, Delta has also been working on another key front - trying to bring down its labor costs to make it more competitive with its sector peers among the old-line carriers, like American Airlines, Northwest and Continental, and better able to withstand the challenge of low-cost upstarts like JetBlue and ATA.

Its chief focus has been trying to get its 7,500 pilots - thought to be the best-paid in the industry - to cough up $1 billion of permanent annual wage cut concessions, and there has been hopeful talk that a deal might be struck soon. The pilots had been offering $705 million of paycuts, which the airline rejected as inadequate, but they recently made another proposal thought to be close to Delta's target, although no details were released.

On Tuesday, Delta separately announced that it had reached a tentative contract accord with the Professional Airline Flight Control Association, which represents Delta's 185 flight superintendents. No financial terms were disclosed.

Delta - buffeted by rising fuel costs, its heavy debt load and what's generally considered to be the highest cost structure in the industry, has warned that it would be forced into bankruptcy without the pilot pay cuts and also cautioned that it could wind up there anyway even with the pay cut concessions, given the difficult operating environment in the airline industry.

ATA files for Chapter 11

Just how difficult those conditions were illustrated by the Chapter 11 filing late in the day of ATA, which becomes the third sizable airline to seek refuge in the courts, along with United Airlines and US Airways, the latter making its second trip to court-ordered reorganization. ATA is also believed to be the first bankrupt among the new breed of upstart low-fare carriers - who have eaten into the market shares of the old airlines like Delta and UAL. Some of the lower-cost carriers, who heretofore seemed to have escaped the financial carnage that has decimated the traditional carriers, recently reported losses, showing that they too are not immune from the effects of sky-high fuel prices and intense competition.

Prior to its filing, ATA's 12 1/8% notes due 2013 and 13% notes due 2014 had fallen badly, dropping to closing levels at 21 bid, 23 offered from Monday's 26 bid, 28 offered. Traders said the notes were pushed down by a combination of market speculation that the company - which had warned earlier that it was likely to run out of money soon - would indeed file for bankruptcy, as well as Moody's Investors Service's ratings cut Monday, which dropped the bonds down to C from Ca previously. The ratings agency cited the company's badly deteriorating financial performance.

USG, W.R. Grace loans up

In bank debt dealings Tuesday, bankrupt Chicago-based building materials maker USG's loan paper was quoted Tuesday at 103.75 bid, 105 offered, up about 1½ points, while bankrupt Columbia, Md. Chemicals maker W.R. Grace was quoted at 105.5 bid, up about two points, a trader said.

On Tuesday, USG announced results for the third quarter that included record net sales of $1.2 billion, up by $212 million from last year, net earnings of $90 million, up by $51 million from last year, and diluted earnings per share of $2.10, compared with 89 cents a year ago.

For the first nine months of 2004, net sales were $3.3 billion, up from $2.7 billion last year, net earnings were $227 million compared with $76 million for that period last year, and diluted earnings per share were $5.28, compared with $1.75 last year.

"USG's growth strategies are succeeding," said William C. Foote, chairman, chief executive officer and president, in a news release. "Our solid financial and operational performance thus far in 2004 reflects both robust demand for our products and the success of our strategies emphasizing the introduction of new products, expansion of our distribution business and investment in new low-cost manufacturing capacity. Our strategies, supported by over $300 million in capital spending during the past three years, are enabling us to grow along with our customers and increase production efficiencies to help manage rising operating costs."

USG filed for Chapter 11 in June 2001, driven there by a flood of asbestos-related lawsuit claims. It joined Grace, which had ducked under the bankruptcy code umbrella in April of that year, for much the same reason.

Last week, Grace released third quarter numbers that included sales of $579.9 million, compared with $521 million in the prior year quarter, and net income of $48 million, or 72 cents per diluted share, compared with a loss of $9.9 million, or 15 cents per share, in the third quarter of 2003.

For the first nine months of 2004, Grace reported sales of $1.67 billion, a 13.7% increase over 2003, and net income was $85.1 million or $1.29 per share, compared with a net loss of $5.7 million, or nine cents per share, for the comparable 2003 period.

Most recently, though, Grace revealed that an interim order was issued by the bankruptcy court in Wilmington, Del. on Monday granting the company's request to restrict stock trading.

The restrictions apply to people who own 4.75% or more of Grace common stock or seek to acquire 4.75% or more of Grace common stock, according to an 8-K filed with the Securities and Exchange Commission Tuesday.

Mirant loans higher

Elsewhere, Mirant Corp.'s bank paper was stronger, with the Atlanta-based energy company's 2003 debt quoted higher by about half a point at 61.5 bid, 62.5 offered and the MAGI (Mirant Americas Generation Inc.) debt quoted higher by about a quarter of a point at 91.75 bid, 92.5 offered, according to a trader.

On Tuesday, the Official Committee of Unsecured Creditors of Mirant announced that the information meeting originally scheduled for Nov. 1 has been postponed to a later date to be determined after the debtors file their proposed disclosure statement with the Bankruptcy Court.

This information meeting, at which issues relating to Mirant's reorganization will be discussed, is expected to occur within the next 60 days.

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