ATA bonds continue climbing on Southwest news; Mirant bank debt bounces from Tuesday levels

By Paul Deckelman and Sara Rosenberg

New York, Dec. 15 - ATA Holdings Corp. again moved up Wednesday, even more sharply than they had on Tuesday, as investors continued to react favorably to the idea that low-cost airline industry leader Southwest Airlines Co. might purchase a controlling stake in the bankrupt Indianapolis-based air carrier

In bank loan trading, Mirant Corp. paper, which had been in retreat Tuesday as investors worried about the outcome of its continuing legal battle with Washington-based electric utility Pepco Holdings Inc., was seen a bit stronger Wednesday, traders saying the market was basically correcting itself after pushing levels down what one trader called "a little bit too far" the session before.

A trader in distressed bonds quoted ATA's 13% notes due 2009 and 12 1/8% notes due 2010 as having pushed all the way up to 47 bid, 49 offered by Wednesday afternoon, versus their closing level Tuesday at 38 bid, 40 offered.

Another trader, although he saw the ATA unsecured paper having only gone as high as the lower 40s from prior levels in the upper 30s, opined that the troubled airline operator's bonds were "freakin' going nuts" on the Southwest story, which was reported Tuesday by ATA's hometown paper, the Indianapolis Star.

The Star, quoting from a draft of the Southwest's proposal to the federal bankruptcy court handling ATA's reorganization that it had obtained, said that Dallas-based Southwest - the most established and financially strongest of the low-fare carriers that are taking an increasing share of the airline market - is bidding to take control of ATA by injecting $47 million in cash into it, taking a 35% stake in the airline and naming new senior executives, who would work to cut labor costs 15% to 20%.

The Star said that the $47 million would pay for six ATA gates at Midway Airport in Chicago, where the two airlines are the biggest carriers. Southwest would then funnel another $40 million to ATA as a short-term loan to get it through the bankruptcy process.

Once out of bankruptcy, the paper said, Southwest would invest another $30 million in ATA in the form of convertible preferred notes it could exchange later for about 35% of ATA's stock.

Southwest says that ATA would continue to operate as a separate airline, flying out of hubs at Chicago and Indianapolis, and the two airlines would code share on certain routes, which could bring the cash-strapped ATA as much as $25 million annually, Southwest chief executive officer Gary Kelly said.

If the Southwest plan is approved, it would give the combined Southwest/ATA a stranglehold at Midway, with four out of every five gates under their control.

That would effectively shut out rival low-fare carrier AirTran Airlines from busy Midway, which is popular with Windy City travelers because it is closer to downtown than the larger O'Hare International.

ATA and Orlando, Fla.-based AirTran last month negotiated an $89.3 million deal for AirTran to buy all 14 of ATA's Midway gates. U.S. bankruptcy judge Basil Lorch III is scheduled to decide which plan to approve at a hearing Thursday.

A trader said otherwise among the airlines, "nothing was happening. United Airlines parent UAL Corp.'s bonds were seen around 7 bid, 8 offered, up from recent levels around 6-61/2, after the bankrupt Chicago-based carrier announced Tuesday that its pilots had agreed to a tentative contract - the first of the airline's four big unions to tentatively OK a deal in United's latest round of labor cost-cutting.

Mirant loans higher

In bank debt dealings, bankrupt Atlanta-based energy operator Mirant's 2003 and 2004 loan paper was quoted at 67 bid, 68 offered Wednesday, up half a point on the day, a trader said.

On Tuesday, the bank debt had fallen to 66.5 bid, 67.5 offered from around 68 bid, 68.75 offered, as Mirant said that it would hold off payment on the Pepco contract until the U.S. Bankruptcy Court for the Northern District of Texas, in Fort Worth, ruled on the situation.

Late Wednesday, as the market was closing, the bankruptcy court made its ruling, with judge D. Michael Lynn denying Pepco's motion for a temporary restraining order forcing payment on grounds that non-payment isn't causing it irreparable harm, news reports said.

The judge said that he would revisit the issue in the normal course of business some time after the first of the year.

Lynn ruled that while Pepco met three of the four criteria needed to get a restraining order - that the public interest is being served, that fairness prevails and the sense that Pepco would ultimately win the case on its merits - he decreed that the energy provider had sufficient assets that would block it from causing irreparable harm through continued non-payment.

The U.S. District Court for the Northern District of Texas had already ruled on the issue in favor of Pepco but the district court judge referred his decision to the bankruptcy court.

The payments are owed under the asset purchase and sale agreement through which Mirant bought Pepco's generating assets in December 2000.

While Mirant seems to have dodged a bullet - for now, anyway - if the bankruptcy court ultimately rules in favor of Pepco when judge Lynn revisits the issue, Mirant estimates it could be on the hook for more than $300 million during 2004 and 2005, the company said in a previously filed Securities and Exchange Commission filing.

Gate Gourmet loan down

Elsewhere, Gate Gourmet Inc.'s term loan B weakened by approximately half a point on Wednesday to the 96.5 area, according to a market source, after spending the first two sessions of this week regaining ground from a substantial drop on Friday.

On Tuesday, the paper was seen trading in the 97 context, compared to 96 bid, 97 offered on Monday. The paper had fallen all the way to 95.5 bid from 102 on Friday after the company held a lender call in which liquidity concerns were expressed and lenders were asked to give some leeway on payments and covenants.

More specifically, the call was held so that the company could ask lenders to defer loan amortization payments due Dec. 31 till April 1, 2005 and waive financial covenants for Dec. 31. The company also wants to defer interest payments on its mezzanine debt.

The Zurich, Switzerland-based airline catering company declined to comment to Prospect News on the matter saying, "As a principal, I am afraid Gate Gourmet does not give out any information on financial issues as we are a private company, and not listed on any stock market."

Consents from lenders on the proposal are due Dec. 20.

Back among the bonds, a trader saw bankrupt St. Louis-based chemical maker Solutia Inc.'s 7 3/8% notes due 2027 and 6.72% notes due 2037 firm to 81 bid, 82 offered from 76 bid, 78 offered. Also on the upside, bankrupt Troy, Mich.-based auto components maker Intermet Corp.'s 9¾% notes due 2009 were up three points at 39 bid, 40 offered.

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