Delta gains following pilot vote; Adelphia up as LBO coalition seen possible

By Paul Deckelman

New York, Nov. 12 - Delta Air Lines Inc. bonds were seen pushing upward on Friday in the wake of the news that the troubled Atlanta-based air carrier's pilots had finally approved the $1 billion pay-cut package the airline had been demanding from them, bringing to an end a months-long saga aimed at getting Delta's captains - thought to be the best paid in the industry - to make a sizable contribution to the airline's efforts to stay out of bankruptcy.

And the bonds of Adelphia Communications Corp. - already in bankruptcy - were seen several points higher, possibly in response to a newspaper report that several major leveraged buyout companies might band together to make a bid for the entire company, which is currently in the midst of auctioning its assets off - or selling the entire company in one fell swoop, under the right circumstances.

A trader in distressed bonds quoted Delta's bonds as "all up." He saw the company's benchmark 7.70% notes due 2005 firming to 86 bid, 88 offered from prior levels at 83 bid, 85 offered, while its 10% notes due 2008 were two points better on the day at 62 bid, 64 offered. Delta's 7.90% notes due 2009 improved to 53 bid, 55 offered from 50 bid, 52 offered previously and its 8.30% notes due 2029 moved up to 42 bid, 44 offered from 39 bid, 42 offered.

At another desk, a trader saw the bonds up two points across the board, with the 7.70s at 85 bid, 87 offered and the 7.90s at 53 bid, 54 offered, up from 50.5 bid, 51.5 offered.

Delta's New York Stock Exchange-traded shares rose 55 cents (8.74%) to $6.84, on volume of 13.4 million, nearly double the usual turnover.

Delta's convertible bonds - which are closely linked to the equity - were seen up between two and four points on the session to the 60 bid area. A sellside trader in that market said holders "have thus far rejected the temptation to sell into strength."

Delta said Thursday that 91% of the airline's more than 7,000 pilots had voted on the deal, with 79% of those who were voting approving it. Under the terms of the five-year agreement, which goes into effect on Dec. 1, the captains - who currently earn between $100,000 and $300,000 annually, based on seniority - will take a 32.5% pay cut, and their wages will be frozen at those levels through December 2009. There will also be work-rule changes aimed at wringing more productivity from the pilots, they will have to kick in to their company funded medical insurance plan, and there will be changes in the company's pension contributions. In return, the pilots will get options to buy up to 15% of Delta's stock.

The $1 billion of pilot pay cuts are part of Delta's efforts to trim more than $2 billion off its annual costs, as it fights to keep from following rivals United Airlines and US Airways into Chapter 11. Delta has also cut the pay of its other employees, including company executives, outlined plans earlier in the week for cutting more than 6,000 positions, has gotten many of its vendors to make concessions and help it lower its costs, and is trying to get some of its debt holders to agree to a debt exchange transaction that would start to chip away at its $20 billion mountain of debt obligations. That debt swap is slated to end Nov. 18, unless extended.

In response to the pilots' approval of the pay cut package, Standard & Poor's said Friday that it may change Delta's ratings, aside from its AAA rated insured issues. Right now, Delta's corporate credit is rated at CC.

The ratings agency cited the pilots' vote in deciding to put Delta on CreditWatch with developing implications. It held out the prospect that the Delta ratings could be raised if it succeeds in implementing its transformation plan, which includes the pay cuts and the debt reduction initiative. On the other hand, the ratings could be lowered to SD - selective default - "if the debt exchange, or other debt arrangements are completed in a manner judged to be a distressed exchange," which would be tantamount to a default, S&P warned.

Delta's good news had little impact on the bonds of other airlines, including American Airlines parent AMR Corp. or the bankrupt ATA Airlines, a trader said.

Adelphia bonds gain

Back on the ground, Adelphia Communications bonds firmed Friday, helped along by the possibility that big equity investment firms might team up to make a bid for the Greenwood Village, Colo.-based cable company, which is currently in Chapter 11. That possibility was touted in an article in Friday's edition of The New York Times.

A market source pegged Adelphia's 7¾% notes due 2009 as having moved up to 85 bid from 82.5, while the company's 7 7/8% notes due 2009 - which had also been at 82.5 - moved up to 83.

He also saw the company's zero-coupon notes due 2008 a point better at 69 bid, while its 10¼% notes due 2011 were half a point up at 91.5

A trader at another shop saw Adelphia as having "moved up across the board," with the 101/4s improving to 91 bid, 92 offered from 89 bid, 91 offered and its 10¼% notes due 2006 up a point at 86 bid, 87 offered. Adelphia's convertible notes, he said had done especially well, pushing up to 19 bid, 21 offered, from 15 bid, 17 offered.

According to the Times article, several prominent investment firms are exploring a joint bid for all of Adelphia, in what would be the largest leveraged buyout since the landmark takeover of RJR Nabisco in 1989.

The article attributed its information to unidentified "executives involved in the auction." It said that the private-equity companies that have recently begun looking at the possibility of bidding for all of Adelphia, rather than for small parts of its assets, include such LBO heavyweights as Thomas H. Lee Partners, Providence Equity Partners and Kohlberg Kravis Roberts. The latter company emerged as the ultimate victor in the $25 billion buyout battle for RJR Nabisco. Other firms may also become involved, said the executives quoted by the Times.

The paper said that such a consortium of private equity firms "would create a rival to the two giants in cable, Time Warner and Comcast, which have indicated that they plan a joint bid for Adelphia."

It said that such a bid would likely require raising some $18 billion or more.

The Times report said that "the mega-consortium envisioned for such an enormous bid has yet to be formed" - but it also said that "conversations between some of the firms - in both formal meetings and informal talks - and Adelphia have increased in recent days," although the paper took pains to stress that such talks were still in a very early stage and might never actually result in anything because of the huge cost of buying Adelphia, the nation's sixth-largest cable operator, with some 5.4 million subscribers.

Adelphia went into bankruptcy in June 2002, following the ouster from management control of the company of founder John Rigas and members of his family, a number of whom occupied senior management positions and/or sat on Adelphia's board, amid charges that they had systematically looted the company of hundreds of millions of dollars for their own private gain. Rigas and several of his relatives were indicted and are being tried on federal fraud charges; they have denied the allegations of improper dealings.

After the filing, a new management team was put into place. Adelphia initially envisioned restructuring and then emerging as an independent company freed from its huge debt burden but bondholders and other creditors pushed for an auction procedure, feeling that they might get a better recovery that way. After some reluctance, Adelphia finally acceded to the creditor request and began preparing an auction, although it reserved the right to call off the sale and proceed with its original plan if the proceeds from an auction were not great enough.

Comcast and Time-Warner, the nation's two largest cable operators, were seen as likely buyers of at least some of Adelphia's far-flung assets, which include properties in metropolitan Los Angeles, Florida, upstate New York and elsewhere. When Adelphia finally agreed to put itself up for auction, it said it would accept bids for seven distinct regional clusters of cable systems, with some of its less desirable operations combined with its trophy properties in order to sell everything off. Alternatively, it said it would also listen to any reasonable offers for the entire company, which has an estimated enterprise value of at least $17 billion. The auction is being run by UBS Investment Bank and Allen & Co. Adelphia is expected to decide on winning bids by year's end or early in 2005.

In order to facilitate the sales, Adelphia said it would accept a joint bid from Comcast and Time-Warner should they wish to submit one. I t was thought that the two giants might buy the whole company, divvy up its different systems to be compatible with each giant's respective footprint, and then sell off any leftover properties to smaller cable operators for whom they might be a match, or to private-equity companies viewing them as a financial investment.

While that scenario seems to have emerged as the most likely, the ides of the LBO firms uniting to do essentially the same thing has tossed a surprising ingredient into the mix.

The Times said the company is actively working to encourage the buyout scenario, since having more than one big bidder (i.e. the Time-Warner/Comcast de facto alliance) would increase the possible return that creditors might get in the event that Adelphia decides to accept one or more bids and sell the assets.

It said that the cable company and its advisors in some cases "have even proposed specific financing solutions for such a deal. And Adelphia has quietly extended a special carrot to some of the firms: if they end up winning the auction, Adelphia's management team, led by William T. Schleyer, who formerly ran AT&T's cable business, would probably stay to lead the buyout."

Schleyer and Adelphia management, however, have "been careful not to commit to back any one firm's bid or to discuss compensation or other issues should they stay," the Times quoted its executive sources as saying. It noted, though that "just the possibility that Mr. Schleyer would consider leading a buyout could help the private equity firms secure financing. At the same time, though, it also could give rise to questions among the smaller firms that are bidding."

The paper further said that if the buyout firms decide to cobble together a joint bid, they "expect that they would have to raise at least $6 billion in equity and $12 billion in debt. Some of that debt, $2 billion to $4 billion, would probably be in the form of a bridge loan, the executives said, which would allow the firms to buy Adelphia and quickly sell some small pieces of it," although the firms "might have to raise even more money just to pay operating costs and for system upgrades."

The Times said that a spokesman for Adelphia declined to comment on the matter.

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