Delphi bank debt up but bonds swoon as bankruptcy nears; Delta DIP loan trades around

By Paul Deckelman and Sara Rosenberg

New York, Oct. 7 - Delphi Corp.'s debt instruments resembled a two-headed monster on Friday, as the troubled Troy, Mich.-based automotive electronics manufacturer's revolving credit loan edged higher as the clock continued to tick on the company's self-imposed Oct. 17 bankruptcy deadline filing and investors saw signs that a filing is near. But even as the revolver was going up - with the bank debt investors envisioning a full, or nearly full recovery - Delphi's bonds and shares continued to skid sharply lower.

Elsewhere, Delta Air Lines Inc.'s new debtor-in-possession loan was allocated, and began trading around, although there was little or no movement seen in the bonds of the bankrupt Number-Three U.S. airline carrier, or in the bonds of such also-bankrupt rivals as Northwest Airlines Corp. and United Airline's parent, UAL Corp.

Curative Health Services Inc.'s bonds were seen actively trading around in a largely otherwise pretty inactive, abbreviated pre-holiday session, although there was not much in the way of price movement going on.

The U.S. debt markets officially ended trading at 2 p.m. ET ahead of the Columbus Day holiday, which also closed the debt markets (though not the equity markets) Monday.

Bank debt traders saw Delphi's revolver firming on Friday, with one opining that investors are banking on being taken out at par or being rolled into some sort of debtor-in-possession financing facility in the event that the company files - which is looking increasingly likely.

The revolver was quoted at 98.5 bid, 98.75 offered on Friday, up from Thursday's closing levels of 98.125 bid, 98.625 offered, the trader said. On Thursday, a different trader said the revolver had been trading right around the 98 level.

Word in the market is that people have been starting to lean towards the likelihood of a Chapter 11 filing as the Oct. 17 deadline that was previously laid down by Delphi looms closer and closer - and still no agreement has been reached with General Motors Corp. and the United Auto Workers union.

Most recently pushing lenders to the Chapter 11 frame of mind was Standard & Poor's late Thursday downgrade of the company's corporate credit rating to CCC- from CCC+ because of increased bankruptcy concerns.

"For the past several months, Delphi has been engaged in discussions with GM, its largest customer and former parent, and with the UAW, its largest union, to restructure its unprofitable U.S. operations," said S&P credit analyst Martin King, in the release.

"While we believe all three parties are motivated to complete a deal outside of bankruptcy court, the time frame for doing so has become very limited. Delphi has indicated that it may place its U.S. operations in Chapter 11 bankruptcy if a deal is not reached by Oct. 17, 2005, when changes to U.S. bankruptcy law will put greater constraints on companies that file for this type of protection," King added in the release.

While the bank debt was firming, the company's bonds were headed in the opposite direction, particularly on Friday.

A trader saw the entire high-yield automotive sector opening down about a point - but said that Delphi was "definitely much weaker, on bankruptcy concerns," pegging the company's benchmark 6.55% notes due 2006 at 64.5 bid, 65.5 offered, which he said was down about four points on the day. The 6.55s were "the real active one," while "you didn't see that much" of its 7 1/8% notes due 2029, which he had falling about that same four points, to 55 bid.

Other traders agreed that Delphi's 6.55s were the most heavily traded issue and suffered the steepest drop, with one quoting those bonds at 60 bid, 62, offered, well down from Thursday's close at 68 bid, 70 offered.

He also saw the company's 6½% notes due 2009 fall to 57 bid, 59 offered from prior levels at 64 bid, 66 offered, while the 61/2s due 2013 dropped to 58 bid, 60 offered from 63 bid, 65 offered, and the 7 1/8s retreated to 56 bid, 58 offered from 61 bid, 63 offered.

Yet another trader saw Delphi riding a roller coaster on Friday, opening at 60 bid, 62 offered, way down from the 69 bid, 70 offered level at which he had seen those bonds close on Thursday. With Delphi's hometown paper, The Detroit News, reporting that a bankruptcy filing could come as early as Friday, "people thought they might file," he said, and then, "when they didn't file, the bonds moved back up," to around 65 bid, down only four points on the session.

But those bonds did an about-face and went back down to close around 62 bid, 63 offered, which he called a seven-point drop on the day, after "the union guy said that bankruptcy is inevitable" - an apparent reference to comments by Henry Reichard, chairman of the International Union of Electrical Workers-Communication Workers of America's Automotive Conference Board, who was quoted in a news interview as having said that "it looks like the inevitable is at hand with the bankruptcy filing."

The union leader - whose electrical workers group represents about 8,000 of Delphi's 185,000 employees - said that he did not think that Delphi would be able to work things out with its unions and with GM before the Oct. 17 deadline.

However, later in the day, the president of the UAW, Ron Gettelfinger, said he's willing to seek ways to avert a bankruptcy.

However, that might be easier said than done. Another UAW official, vice president Richard Shoemaker, on Friday told Detroit radio station WJR that while GM also has to agree to help its one-time unit out, no matter what kind of labor-cost concessions the union may agree to, as far has he knows, GM hasn't started negotiating with Delphi and has not yet formally agreed to take part in its problem child's financial restructuring. A GM spokesman refused to comment on Shoemaker's assertions.

Delphi, which inherited labor costs well above those of other auto-parts makers when it was spun off from GM in 1999, now wants GM and the UAW to help it stay out of bankruptcy by cutting those costs. It has reportedly proposed cutting the hourly wage-and-benefits package that some 30,000 UAW members at its plants now enjoy to about $16 to $18 per hour, total, from current levels as high as $65 an hour - the kind of compensation automakers like GM pay, but not auto parts makers. The cash portion of the proposed new compensation could fall as low as $10 an hour - a 64% cut from what the union workers now make.

Published reports have said that Delphi also wants GM to give it as much as $6 billion in financial help while it restructures.

The markets noted another sign Friday that Delphi was headed toward the bankruptcy courts - it improved the severance plan for its key executives as a means of inducing them to not jump ship should the company go into Chapter 11. The company said in a Securities and Exchange Commission filing that 21 executives - though not chief executive officer Robert S. Miller - would receive 18 months of severance, plus at least a portion of their bonuses should Delphi terminate their employment or they leave for "good reason." That's an improvement from the prior 12-month maximum, which Delphi felt was not competitive enough to allow it to retain its key personnel.

With all of that going on, the third trader said, Delphi's other bonds were also on the slide Friday. The 7 1/8s, he said "don't have as far to fall" as the 6.55s, but he saw them gyrating around the same way as the shorter bonds did, falling from Thursday's 62 bid, 63 offered close to 58.5 bid, 59.5 offered as trading opened Friday morning, and then went as high as 61 when there was no immediate filing, and then backed off that high after the unionist's comments, to close at 58.5 bid, 59.5 offered, the same as the opening price. "The market awaits news," he said, "but it was being shut down at 2 p.m. [ET] and nobody is sure what's going to happen.

He also saw the 6½% 2013 notes at 60.5 bid, 61.5 offered, down from 64 bid, 65 offered Thursday, and the 2009 61/2s at 60 bid, 61 offered, also down from 64 bid, 65 offered. "They're all trading with accrued [interest] - right now."

Delphi's New York Stock-Exchange-traded shares, meantime were "getting murdered," he opined, as the stock nosedived $1.08 (49.09%) to close at $1.12, a new all-time low, on volume of 93.8 million shares, more than 11 times the usual turnover.

Curative Health higher

Another trader said that with the junk market pretty quiet overall, "the active bonds out there," a trader said, "were Delphi, Cure, and Tekni [Plex Inc.]"

He saw Curative Health's 10¾% notes due 2011 at 67.5 bid, 68.5 offered. "A lot of bonds traded, and they were up, a little better, I don't know why. There was no news." On Thursday, those bonds had gyrated around in the lower 60s before coming to rest around 65.5 bid, 66.5 offered.

That's well below recent levels in the lower 70s that the bonds had held, before investors were spooked by an analyst's report late last month that said the bonds really ought to be trading in the 40s.

The bonds of the Hauppauge, N.Y.-based healthcare products distributor have been looking very sickly ever since the California state Department of Health Services said that the state had been overcharged for shipments of a clotting factor drug, and going after three retail pharmacies there selling the drug - which had been supplied to them by two Curative subsidiaries.

The state wants $38 million in damages, and Curative said that the pharmacies could assert claims for indemnification up to that amount.

Also worrying bond investors - cash-strapped Curative has a coupon payment on its bonds due on Nov. 1, the trader said, which puts the company under additional pressure.

Tekni-Plex active

The trader meantime saw activity in the bonds of Tekni-Plex Inc., whose 12¾% subordinated notes were seen around 50.5 bid, 51.5 offered, "right around where they had been," although he saw the Somerville, N.J.-based packaging marker's bonds at one point dip to 49, pushed down by market worries about the impact that higher resin prices might have on the company's operations.

He saw its senior 8¾% notes meantime "holding in" at 84.75 bid, 85.75 offered.

Delta allocates DIP, trades up

Back among the bank debt investors, Delta Air Lines allocated its $1.9 billion debtor-in-possession financing facility first thing Friday morning, with the term loan A and the term loan C closing out the day in the 102s, and the term loan B closing out the day in the 103s.

Delta's DIP opened for trading Friday morning with the term loan quoted at 102 bid, 102.5 offered, the term loan B quoted at 102 bid, 102.5 offered and the term loan C quoted at 102.125 bid, 102.625 offered, according to a fund manager.

Shortly after the break, however, levels changed a little, with the term loan A quoted at 102.125 bid, 102.625 offered, the term loan B quoted at 103.25 bid, 103.75 offered and the term loan C quoted at 102.125 bid, 102.625 offered - which is where all three tranches basically ended the shortened session, the fund manager added.

All of the paper was trading so high because each tranche has a pretty huge coupon and since it is a DIP, it has "super priority security", the fund manager explained.

The $600 million term loan A is priced with an interest rate of Libor plus 450 basis points. Originally, price talk on the tranche was Libor plus 500 basis points, but it was reverse flexed during syndication.

The $700 million term loan B is priced with an interest rate of Libor plus 650 basis points. Originally, the tranche was sized at $600 million and price talk was Libor plus 700 basis points, but it was upsized and reverse flexed during syndication.

Lastly, the $600 million term loan C is priced with an interest rate of Libor plus 900 basis points. Originally, the tranche was sized at $500 million, but it was upsized during syndication.

General Electric Capital Corp. acted as the lead arranger and bookrunner on the deal, and Morgan Stanley acted as a co-lead on the term loan C.

On Thursday, Delta announced that it obtained final court approval for the $1.9 billion 30-month DIP, up from an original size of $1.7 billion. The court also granted final authority for Delta to use $350 million of secured post-petition financing that American Express has agreed to provide.

The Atlanta-based airline's DIP will refinance $630 million of financing provided by GE Commercial Finance and $500 million of financing provided by American Express in November 2004. The company will apply proceeds from the DIP to repay $50 million of the American Express facility, reducing the amount owed under that facility to $300 million.

The DIP is secured by a super-priority lien on all unencumbered assets of the company, including unrestricted cash, certain aircraft, real estate, spare parts, ground service equipment, tooling, simulators, routes, slots and stocks of subsidiaries.

The $350 million of secured financing from American Express will be secured by liens junior to the DIP facility.

Delta, Northwest, UAL bonds quiet

While that was going on, a bond trader said that Delta's bonds were unchanged at 17.5 bid, 18.5 offered. The issue, he said "had been pretty quiet."

He also saw the bonds of bankrupt Eagan, Minn.-based Number-Four U.S. carrier Northwest Airlines also pretty much steady at 28 bid, 29 offered.

UAL - which on announced this past week that it had arranged for $3 billion of exit financing and expects to emerge from Chapter 11 in February - was likewise unmoved at 13.5 bid, 14.5 offered.

AMR Corp. - the parent of one of the few non-bankrupt old-line carriers, American Airlines - was also little changed, its 9% notes due 2012 hovering at 70 bid, 71 offered.

"It's status quo," he said of the situation in the normally volatile airline sector. "Everyone's just waiting for the third-quarter numbers to come out in a couple of weeks, and the price of oil isn't doing much to the stocks or the bonds," despite having fallen to the lowest levels seen in two months, with Nymex crude prices below $62 per barrel.

"I think that [the Q3 numbers] is the headline that we're waiting for, and also to see the pension [story]," he said, referring to efforts to gain the stricken carriers more time - as much as 14 years - to make up the difference in their underfunded pension obligations. "It still has to get passed in the House, so we have a ways to go."

But the next big headline for the sector, he declared, is "the third-quarter numbers - and [the airlines'] projections for the rest of the year.

"That's why we're so quiet."

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