Delta bonds gain as carrier completes short-term debt swap; Boston Exelon loans trade around

By Paul Deckelman and Sara Rosenberg

New York, Nov. 24 - Delta Air Lines Inc.'s bonds were being quoted up at least a point on the session Wednesday after the troubled Atlanta-based carrier announced the results of its three-part debt exchange offer. Bottom line is that the short-term portion of the offer passed the minimum tender level test, while the other two parts of the deal - relating to intermediate and long-term debt - did not.

In bank loan dealings, Boston Exelon, a project energy loan, traded around in an otherwise quiet pre-holiday session despite a lack of specific news about the credit.

There was ample news out about Delta, which announced that its offer to swap up to $680 million of new debt for up to $2.6 billion of existing senior unsecured notes and secured passthrough certificates had concluded as scheduled on Monday, without any further extension (see "Tenders and Redemptions" elsewhere in this issue for full details).

The company - which had divided the debt it was seeking to exchange the new bonds for into three categories - short-term, intermediate and long-term - said that while enough holders of the short-term debt had tendered their securities to allow the company to issue the new bonds, holders in the other two categories fell short.

But even though Delta did not achieve all of its aims in the exchange offer, it will get rid of a fairly sizable chunk ($256.823 million) of the short-term debt scheduled to be maturing soon by replacing it with a lesser principal amount of new debt that extends those maturities.

That was progress enough to give Delta's bonds a boost in Wednesday's abbreviated pre-Thanksgiving holiday dealings and to send its stock skyward as well. The bond market officially closed at 2 p.m. ET on Wednesday. The Bond Market Association also recommended a full close Thursday and again an early close on Friday.

A trader said "wow," as he observed that Delta's 8.30% notes due 2029 had firmed to 42.5 bid, 43 offered, up from 41 bid, 42 offered previously, while its benchmark 7.70% notes due 2005 got as good as 85.5 bid, 86.5 offered, from previous levels in the lower 80s.

"That paper is unbelievable," he said, noting that the 7.70s "had been in the 40s just a couple of weeks ago," before the Delta bonds began climbing on the company's ultimately successful effort to dragoon its 7,000 relatively well-paid pilots to accept a 32.5% wage cut over the next five years, its lining up some new financing and trying to get its bondholders to go along with out-of-court debt restructuring moves.

At another desk, a source saw the 8.30s firm a point to 41.5, while the other bonds were also all up a point, at 84.5 for the 7.70s, 55 for the 7.90% notes due 2009 and 44 for the 9% notes due 2016, an issue that is usually not much seen.

Yet another trader saw the 8.30s at 42, the 7.90s at 54, "better than the usual 10 point spread" that the 7.90s trade at relative to the 8.30s, and 7.70s at 85.

On the equity side of the game, Delta's New York Stock Exchange-traded shares were up 43 cents (6.56%) to $6.98.

Delta buys 6-12 months, analyst says

Delta's managing to get at least some of its bondholders to go along with the company on the debt swap "has bought themselves at least another six to 12 months" of staying out of bankruptcy, according to Ray Neidl, an airline industry analyst for Calyon Securities.

Because Delta will now be able to use the collateral previously earmarked for the intermediate and the long-term securities to back alternative funding, the airline's failure to get the other two parts of the exchange done should have "no effect at all" on the company's overall plans, Neidl said.

With Delta now whittling down its $20 billion debt load at least somewhat and more likely to follow, and having gotten the pilots' OK on the pay cut, which should save Delta $1 billion a year and having found other areas for cutting expenses, "they're in good shape" relative to where they had been in say, August, September or early October, the analyst said. "I think you're going to see them saying something in a couple of weeks about the restructuring."

Even if Delta had gotten the assent of the full compliment of bondholders for its debt exchange, that still would have actually taken out a net of $1.9 billion (after issuance of the new notes) from a debt load that's 10 times that size. Neidl acknowledges that "they've got more work ahead of them," but he added that "they just have to get themselves stabilized in the short term, and now they can address their long-term balance sheet."

All of this not-so-bad news comes against a backdrop of continued problems for the larger airline industry. Neidl says that "things are still horrible" for the sector on an operating basis. He said that companies like Delta and Northwest Airlines Corp. - which announced earlier in the week the restructuring of its $975 million credit facility - "are buying themselves more time with the credit restructuring, but they're still losing massive amounts of money because of low yields and high fuel prices."

World crude oil prices - which had spiked to over $55 a barrel in mid-October, eased back down to around $45-46 in early November and then pushed back up to around the $50 mark currently - rose 50 cents Wednesday on the New York Mercantile Exchanger to settle at $49.44 per barrel of light, sweet crude for January delivery. That translates to about $1.50 per gallon if an airline isn't hedged, which Neidl calls "very high" by historical standards, even accounting for inflation. "I'm assuming it's going to come down a little bit," he predicted, "but [the airlines] are expecting high fuel prices for the foreseeable future."

A market source meanwhile quoted Northwest's 7 7/8% notes due 2008 at 75.5 bid, up half a point.

At another shop, a trader saw the Eagan, Minn.-based carrier's 10% notes due 2009 at 75, its 7 5/8% notes due 2005 at 99.5 and its 9 7/8% notes due 2007 at 85.

Exelon Boston loan changes hands

Back on terra firma, not much was going on in the distressed debt world.

Bank debt players reported that Exelon Boston's loan traded in a 94 bid, 95 offered context. A trader - who said that the paper isn't normally seen very often - saw the paper a little bit higher on the day.

The trader added that he saw no specific reason found for the firming in Boston Exelon.

The Boston Exelon project was owned by Exelon Corp. at one point but now is owned by lenders.

Asbestos names hold firm

Back among bond investors, a trader in distressed issues saw asbestos-related names "still quiet," with the bonds of Chicago-based building materials producer USG Corp. still up to near the 130 bid level.

Another observer saw asbestos-challenged Toledo, Ohio-based insulation maker Owens-Corning's bonds clinging to the gains they notched, for no particular reason, on Tuesday, when those notes moved up to around 73 bid from prior levels at 69. And he saw Lancaster, Pa.-based floorcovering maker Armstrong World Industries' bonds unchanged at 71 bid.

USG, Owens Corning and Armstrong were among dozens of companies forced to seek Chapter 11 protection from a flood of asbestos-claim lawsuits.

Adelphia Communications Corp.'s bonds remained firm, a trader said, pegging the bankrupt Greenwood Village. Colo.-based cable operator's 10¼% notes due 2011 at 96.5, up a half point, while its 9 3/8% notes due 2009 were at 94 bid and its 9¼% notes that were to have matured in 2002, hanging in at 90 bid.

R.J. Tower Corp.'s 12% notes due 2013 were seen having firmed about a point on the session Wednesday to 75.75, after having fallen as low as 74 bid, down more than two points, on the news earlier in the week that Moody's Investors Service had put the bonds' B3 rating, and the rating of parent Tower Automotive Inc. under scrutiny for a possible ratings downgrade.

Moody's cited the Novi, Mich.-based automotive components manufacturer's "increasingly constrained liquidity, insufficient cash interest coverage by operating earnings, and rising leverage." The ratings agency said that the company's cash flow generation "has been constrained by significant up-front launch costs and capital expenditures associated with new business rollouts, restructuring and consolidation charges, rising raw materials prices, lower North American [original equipment manufacturer] production levels, and other factors."

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