Delta steadies after week's wild ride; W.R. Grace bank debt off on fed probe

By Paul Deckelman and Sara Rosenberg

New York, Oct. 29 - Delta Air Lines Inc. bonds - which spent the week on a wild upward climb, spurred by hopes - apparently justified - of a deal with the troubled carrier's pilots on big wage cuts - were seen by traders Friday as having essentially plateaued around the highs they hit on Thursday.

In bank debt trading, bankrupt chemical maker W.R. Grace & Co.'s paper fell by about a point on Friday after news surfaced that the company is the target of a federal grand jury investigation.

Distressed-debt trading was generally quiet on Friday, with traders noting a marked reluctance to be long anything - or for that matter, short anything - heading into the final whirlwind weekend ahead of Tuesday's elections, the outcome of which is anybody's guess.

One issue seen pulling in its horns was Delta, whose shortest-dated paper had zoomed a whopping 30 points by Thursday from its week-earlier levels, pushed up on the pilot-pact speculation, which later proved to be the real thing, and other positive news. Those 7.70% notes due 2005 - which had been languishing around a 46-48 context just a week earlier - had made hefty gains throughout the week, to end Thursday at 76 bid 78 offered. On Friday, traders quoted the company's notes up another point, to 77 bid, 79 offered.

However, Delta's other widely followed issues were seen generally unchanged on the session, with its 10% notes due 2008 at 53 bid, 55 offered, its 7.90% notes due 2009 at 47 bid, 49 offered, and its 8.30% notes due 2029 at 37 bid, 38 offered. The latter notes, in particular, had also gained substantially over the course of the week, having muscled their way up to the upper 30s over the course of several sessions from the lower 20s previously.

The bond advance wasn't the only Delta move which appeared to have finally run out of steam; Delta's New York Stock Exchange-traded shares, which had been increasing in double-digit percentage terms during the week, were seen Friday down 27 cents ($4.72) to $5.45.

Meanwhile, Delta's convertible bonds, closely linked to the equities, were likewise seen on the downside Friday, with both the 8% converts and the 2 7/8% notes having pulled back between one and two points from their prior levels around 48.25 bid and 50.75 offered, respectively. Traders in that market reported seeing little action in the paper, and said even the hedge funds, whose considerable tolerance for risk in pursuit of rich returns, seemed leery about taking any long positions over weekend.

On Monday, Delta's more than 7,000 unionized pilots are scheduled to begin voting on the agreement announced late Wednesday night, which provides for the $1 billion of annual pay cuts the Atlanta-based airline operator said it absolutely had to have in order to stay out of bankruptcy - which is still a possibility, even with the paycut package, given the drag the company's $20 billion debt load and continued high fuel prices are exerting on Delta's finances. If they approve the deal to keep Delta out of bankruptcy, the captains - whose average six-figure salaries are considered the highest in the industry - would start to see their 32.5% pay cut beginning Dec. 1, and their salaries would be frozen at those levels for the next five years. In return, the pilots would receive options to buy the company's shares at favorable terms.

A distressed-debt trader said he saw no other movement in the airline sector Friday, with AMR Corp.'s 9% notes due 2016 continuing to hang in at 61 bid, 63 offered, little changed from Thursday.

Oxford Auto rises

The trader did see some substantial movement in Oxford Automotive Inc.'s 12% notes due 2010, which he said had moved up to 46 bid 49 offered from 37 bid, 40 offered recently. However, other than the recently firmer tone in the auto sector, he said he had not seen any fresh news about the Troy, Mich.-based automotive steering assembly maker that would justify such a move upward.

W.R. Grace loans down

In bank-debt trading, W.R. Grace's loan paper was seen lower Friday on news of the government probe, with one trader pegging the Columbia, Md.-based specialty chemicals and building materials maker's debt right around the 104 area.

A second trader said that the paper was quoted at 103 bid, 105 offered, but, he added, "I think it's going to be right back up because equity is bouncing back."

The federal investigation involves possible obstruction of federal agency proceedings, violations of federal environmental laws and conspiring with others to violate federal environmental laws, a company news release said.

Furthermore, several current and former senior level employees associated with Grace's construction products business have been named as targets of the investigation.

The company believes the investigation is related to its former vermiculite mining and processing activities in Libby, Mont. But, because the company has not yet been advised of any details about the possible violations, it is unable to assess whether the results of the investigation will be material.

Grace has been in Chapter 11 since April 2001, driven to seek protection from its creditors under a deluge of asbestos-liability lawsuits.

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