JetBlue a laggard as airline paper up; Delta bankruptcy fears weigh; PDLI gains; Aquila up; Xoma off

By Ronda Fears

Nashville, March 14 - The mention of $60 oil from the ranks of OPEC wreaked havoc on market psychology, as one trader put it, but the airline group gained ground amid anticipated fare hikes. Yet, JetBlue Airways Corp. and Delta Air Lines Inc. were two names showing weakness in the group.

Furthermore, another trader said Northwest Airlines Corp., which initiated a new round of fare hikes late last week, may have paved the way for a retreat Tuesday as it forecast flat growth in capacity for 2005 after Monday's closing bell.

Crude oil gained a nickel to $54.95 a barrel, according to the New York Mercantile Exchange. That was 22 cents short of the record last October. Dissention among the Organization of Petroleum Exporting Countries about supply shortfalls and uncertainty whether production gains, if approved, could be enforced weighed on the markets.

Stocks ended the day on higher ground overall, however.

Biotechs were described as modestly better, with upbeat remarks about Genzyme Corp. regarding stronger earnings growth and improving margins.

Protein Design Labs Inc. was a stand-out gainer among biotechs, however, and even its newest convertible - which sank and has remained underwater since the deal sold about a month ago - shot up ahead of the company's earnings after the close. The new 2% issue gained 5 or 6 points to 95.75 bid, 96.25 offered and the older 2.75% convertible added 6 or 7 points to 105.25 bid, 105.75 offered, a trader said. The stock closed up $2.06, or 14.36%, at $16.41.

Airline paper up on fare hikes

Airline paper took off virtually across the board Monday amid a second round of fare hikes in as many weeks by Northwest late last week, which was broadly anticipated to be matched, as before, by its peers - AMR Corp., Continental Airlines Inc. and Delta Air Lines, among others that do not have any convertibles in play.

Skyrocketing fuel prices sparked the fare increases by the airlines, many of which are laden with huge debt burdens in the face of rising costs. In addition, most airlines have lobbied, usually successfully, for pay cuts from their union and non-union workers.

JetBlue Airways Corp., a regional carrier based in New York, was one of the more pronounced laggards in the group, however, after having put another convertible into circulation last week. Among other concerns and general beefs with the new issue, some buyside sources are turned off by JetBlue's cash burn rate.

The new JetBlue 3.75% convertible edged up 0.1875 point to 99.1875 bid, 99.6875 offered while its older 3.5% convert gained 0.375 point to 88.5 bid, 89 offered. The stock added 31 cents on the day, or 1.71%, to $18.49.

Discount carriers are not altogether out of favor, though. One convertible hedge fund manager particularly likes AirTran Holdings Inc., a low cost carrier based in Orlando, Fla., because of the current yield on its 7% convertible due 2023 even with it trading at about 110. AirTran was among the biggest gainers of the day, too, with the convertible adding 4 points to 110.5 bid, 111.5 offered and the stock rising 50 cents, or 6.23%, to $8.52.

Another fund manager, however, prefers Continental Airlines Corp.'s 5% convertible due 2023 and 4.5% due 2007, which are both trading at around 84. "CAL has better cash flow, together with an amazing yield," he said. Continental's converts each gained about 1 point.

Northwest may have set the stage for a retreat, however, saying after the market closed Monday that it now expects available seat miles on domestic flights, an industry measure of overall capacity, to be flat in 2005 compared with 2004. In January the airline forecast a rise of 2% to 3%, and in February warned that it might revise that number lower due in part to high fuel costs.

Delta convertibles add half-point

Legacy carriers, particularly Delta Air Lines Inc., however, are not a shoo-in just because they have great name recognition among the flying public.

Ongoing struggles at the Atlanta-based airline, including rekindled fears of bankruptcy in a Securities and Exchange Commission filing last week, limited Delta's participation in the airline party Monday. In fact, there was considerable selling in the Delta convertibles, traders said, with both the 8% and 2.875% issues quoted at about 45.5, or up about a half-point.

Funds specializing in bankrupt and distressed paper are already jumping back into Delta bonds, although not all abandoned ship when Delta showed a ray of hope with its recent new financing and debt tenders, traders pointed out.

"There are still buyers out there for this [Delta convertibles] stuff, buying on the dip" in current price levels versus a month ago, one sellside trader said.

Some analysts have been reluctant to cede that Delta was ever in a turnaround. CreditSights analysts Roger E. King and Glenn Reynolds recommended selling all Delta securities in a report, saying bankruptcy seems inevitable.

"Delta will run out of cash in 2005, using reasonable assumptions on fuel costs and declining passenger yields" and the company's own projections for those items, the analysts said in the report. "A bankruptcy filing will be necessary to preserve cash."

Delta pensions a deadly punch

Moreover, the analysts said a bankruptcy filing is better sooner than later, in order to preserve cash and chuck its onerous pension plans.

"The pension plan is looming as a complete disaster for 2006 and 2007," the analysts said. "Delta has not disclosed projected cash funding requirements after this year. Doing so might be the equivalent of yelling fire in a crowded theater."

First, funding relief granted in 2004 and 2005 will have to be dealt with, the analysts said, and then there is the $5.3 billion under-funded status that will be amortized in a yet to be determined fashion. In addition, there are the retiring pilots that are draining cash because of lump sum payouts granted when the unionized group agreed to wage cuts.

Delta's pension plan benefits paid were 18% of assets in 2004, the analysts noted, compared to 8% at Northwest and America, or AMR.

"Delta has worked hard to cut costs, but it waited too long, and the exogenous factors of market yields and fuel price have overcome its efforts," the CreditSights analysts said. "Delta will be forced to file for bankruptcy, unless an out-of-the-box cash infusion occurs. Even it such an unlikely event happens, the pension funding liabilities will finish it off."

Aquila mandatory up on sale

Aquila Inc. said Monday it was shopping to sell certain assets, aiming to fetch enough to help fund up to $700 million for debt repurchases and redemptions through 2007. As of year-end 2004, the company had about $2.4 billion in total debt, including long-term gas contracts.

That buoyed the Aquila 6.75% mandatory due 2007 and other debt, with the stock also gaining 2.5%, or a dime, to close Monday at $4.03. The convertible closed on the New York Stock Exchange up 0.625 point to 36.33, but a dealer quoted it up 0.75 point at 36.75 bid, 37 offered.

Aquila executives said on a conference call that they are aiming for "investment-grade metrics," hoping to finance plant investment after the asset divestitures. Aquila has targeted BB metrics shortly after close of the asset sales, on the way to investment-grade territory.

Standard & Poor' affirmed Aquila's B- corporate credit rating but kept the outlook negative, citing the company's onerous debt burden, unregulated operations and marginal, albeit improving, liquidity, which the rating agency said outweigh the cash flow stability of its regulated utilities. Yet, S&P said the negative outlook may be revised to stable upon evidence that proceeds from the divestitures contribute to meaningful debt reduction and improved credit measures.

Near-term liquidity for Aquila is "marginal," S&P said, given negative cash flows in unregulated operations and $230 million in annual interest expense as of year-end 2004. As of Dec. 31, the company had $248 million in unrestricted cash reserves and $110 million available under its unsecured revolving credit facility plus a $150 million secured facility, which expires in April but is expected to be renewed and extended.

Cash kills Grey Global interest

On Friday, WPP Group plc announced the new conversion ratio for Grey Global Group Inc.'s $150 million of 5% convertibles assumed in the merger of the two advertising agencies. Although the reset conversion ratio is considered beneficial to holders, some onlookers who had been interested in the Grey Global converts before the WPP merger have lost interest since the deal evolved.

Initially, the issue will be convertible into 11.820362 shares of WPP and $499.31 in cash. The London ad agency noted that the proration percentage as defined in the indenture is 52.246438, the stock conversion amount is $522.46 and the cash conversion amount is $499.31.

WPP's acquisition of Grey, a New York advertising agency, closed on March 7, following an embroiled battle with the 5% convertible holders wanting more compensation as a result of the merger. In mid-September, Grey Global had snagged the $1.52 billion acquisition bid from WPP, after being on the auction block for several weeks.

One holder, who has held the Grey Global convertibles for a while, said he still likes them but was fishing for new price levels given the reset conversion ratio.

The issue has never traded a lot, partly because of size, but also because few holders have ever wanted to let go of those bonds, traders said. A sellside trader Monday said that still seems to be the case, as traffic in the issue has not picked up on the reset conversion ratio. Another sellside trader pegged the issue unchanged at 120.5 bid, 122.5 offered while WPP shares closed in London off 2p, or 0.33%, at 610p.

Another buyside contact, who manages a convertible hedge fund, had been extremely interested in the Grey Global convertible before the WPP merger but it was difficult to find any sellers. Now that the deal is done, even though the reset conversion ratio is considered beneficial to holders, he is no longer interested.

"The cash portion caused us to lose interest in the name," the hedge fund manager said. "We will re-visit it, if the terms warrant."

Xoma a new orphan to ponder

Xoma Ltd.s' 6.5% convertible is perhaps a recent issue already orphaned that is worth looking at, a sellside trader on the West Coast said. The Berkeley, Calif.-based biotech was sharply lower Monday ahead of its earnings report after Tuesday's close but had seen a big spike Friday on a new contract.

"It was up at one point 40%. I have no idea where the bonds are but I would guess 85 - 90 is right," the trader said, adding that he had heard there were recent buyers for the bonds at 70, which he was skeptical of.

"I have no idea if they are telling the truth or lying, as usual, but I will say this, no one really knows where they are [supposed to be valued at.] Using 85 versus [a stock price of] $1.31, I get them 9.5%, up 21% with a 7.65% current yield. Not bad, don't you think?"

Xoma sold the $60 million of 6.5%, up 15% convertibles in early February. A biotech concern focused on treatments for immunologic and inflammatory disorders, cancer and infectious diseases, Xoma said it planned to use proceeds for current research and development projects, new products, equipment acquisitions, general working capital and operating expenses.

Raptiva should show some sequential growth this year. On Friday, Xoma stock shot up 26% after the company reported it had won a $15 million contract from the National Institutes of Health.

Xoma is scheduled to report earnings after Tuesday's closing bell.

Wing trade a potent argument

Merrill Lynch convertible analyst Marc Malloy said in a report Monday that a wing trade - defined as a long equity /short credit position - "appears most appealing for high dividend paying credits which are at risk of shareholder friendly actions."

He cited Merrill's high grade credit strategy group, which reports that the argument for equity over credit is compelling because of stretched bond valuations, increased M&A and share buybacks as well as growing dividends. Moreover, with many BBB credits at sub-40 CDS levels, put insurance in the form of a CDS contract on an equity position is quite cheap, according to the strategists.

Malloy added that the trade may be interesting even for stable credits, as the net dividend yield - dividend less CDS premium - often is above 4%. In fact, depending on how the credit/equity hedge is structured, he said, a wing trade can accommodate many views on the stock.

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