Holiday stills trading; Delta bonds likely to firm as pilots OK huge pay cut

By Paul Deckelman

New York, Nov. 11 - There was "nothing cooking" in the distressed debt market Thursday the few participants who were on the job said - but late-breaking news that Delta Air Lines Inc.'s pilots had voted by a solid margin to approve the $1 billion pay-cut package the company had been seeking carried the potential for sending the troubled Atlanta-based carrier's bonds up Friday - and possibly those of some of its peers in the airline sector as well.

The news that some 79% of the pilots voting on the plan had agreed to it came pretty late in the session - not that very much had been going on before that time anyway. With the Bond Market Association having recommended a full closure for the U.S. debt markets Thursday in honor of Veterans Day, few shops were actually open for business - and as one trader put it, these had "only skeleton crews there, and with the big guys out, there was nobody around to pull the trigger on any trades."

He saw only some odd lots banging around in the over-the-counter market. "People are sitting around, reading research reports, things like that," he said. "High yield follows the lead of the government [bond] market," which itself was shuttered for the holiday.

He said that he "didn't even see Delta being quoted" Thursday, and said "you can just assume they're at [Wednesday's] levels - 83 bid for the benchmark 7.70% notes due 2005, 50 bid for the 7.90% notes due 2009 and 29.75 bid for the 8.30% notes due 2029.

Those Delta's bonds have firmed remarkably over the past two to three weeks on expectations that the pilots would cave and go along with management's demand that the line's more than 7,000 captains - considered the best paid in the airline industry - accept the $1 billion pay cut concession package, without which Delta said it could not possibly avoid a bankruptcy filing.

Just several weeks ago, the 7.70s were mired in the mid-40s, the 7.90s were marooned in the upper 20s, and the 8.30s were languishing around the 24 bid level. Delta's New York Stock Exchange-traded shares were meanwhile down around $3 a share - but they have since also roughly doubled on expectations the pilots would give in, closing Thursday at $6.29. Following the release of the news, the shares rose another 36 cents in after-hours trading

The airline had been badgering the pilots for months to give it the $1 billion permanent wage cut as part of Delta's efforts to bring its cost structure more in line with those of rival old-line network carriers like American Airlines, Northwest Airlines, Continental Airlines, and the bankrupt United Airlines and US Airways, as well as the still lower cost structures of low-fare competitors such as the venerable Southwest Airlines and upstart low-fare operators like JetBlue, AirTran and the now-bankrupt ATA Airlines.

The pilots at first resisted any efforts to - in their union's words - balance Delta's books on the backs of its members. But as time went by and the airline's already finances continued to deteriorate, the realization set in that should Delta actually have to file for bankruptcy, as it threatened, the pilots' jobs and their pensions might be in even more danger.

The Air Line Pilots' Association at first proposed pay cuts totaling $705 million which Delta said was inadequate. Then, in mid-October, came the news that the union had made another offer, the size of which was not publicly announced, but which was thought to have moved them closer to Delta's position. Finally, the pilots gave in and their union agreed to the $1 billion package, a five-year contract that calls for a 32.5% pay cut, effective Dec. 1. Those pay levels will stay in effect through December 2009.

The agreement also includes work-rule changes to increase the efficiency of pilot scheduling. The pilots will pay higher premiums on their medical insurance, taking some of the burden off the company, and there will be a freeze in company contributions to their pension plan.

In return, the pilots will get options to buy up to 15% of the company's stock.

Some 91% of the pilots started voting on the contract on Nov. 1, with four-fifths of them ultimately approving it. They did so reluctantly, with a spokesman for the union terming it the lesser of two evils.

The pilot concessions alone do not guarantee that Delta - which has lost more than $6 billion since early 2001 - will absolutely stay out of bankruptcy. The airlines' finances have been adversely impacted by the recent rise in oil costs to above $55 a barrel, which translates to higher jet fuel prices, and has been burning through its once healthy cash position at an alarming rate.

Delta is also trying to get help from its bondholders. It is in the midst of an offer to exchange new debt for existing senior unsecured and secured passthrough certificate debt held by qualified institutional buyers, a swap offer that is scheduled to end on Nov. 18, unless it is again extended. Delta says the cooperation of the bondholders is vital to its efforts to trim its approximately $20 billion of outstanding debt.

Distressed convertibles trade

Elsewhere, traders said little or nothing was going on in distressed land.

One trader said that with the stock market open, there was some activity in the convertible debt of distressed names such as the bankrupt Adelphia Communications Corp. and Mirant Corp. and the struggling debt-laden Charter Communications Inc., although he saw no activity in the regular junk bonds of those companies.

He pegged the Adelphia converts at 16 bid, 18 offered, "up a little, maybe," while Charter's 5¾% converts were at 93.5 bid and Mirant's 2½% converts were at 67.75 bid, 68.75 offered.

Adelphia's bonds had recently been firming, on the news that the official unsecured creditors' committee of the Greenwood Village, Colo.-based cable operator - in Chapter 11 since June 2002 following the ouster from power of its controlling Rigas family - had come up with a reorganization proposal for use in the event Adelphia decides not to accept bids to buy its assets from other cablers, such as the giants Time Warner and Comcast Cable.

Under the committee's plan, Adelphia would have an enterprise value of $17 billion. While secured creditors would be paid off in cash, the unsecured creditors would get stock in the reorganized company. Adelphia said that it is studying the plan.

Adelphia's zero-coupon notes due 2008 were seen Wednesday having risen several points to 68 bid, its 8 3/8% notes due 2017 had improved to 116.5 bid, and its 9 3/8% notes due 2009 were seen better at 89 bid.

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