Airline bonds better as Delta backs off, a little, on fare cuts; Calpine bank debt eases

By Paul Deckelman and Sara Rosenberg

New York, July 14 - Airline bonds were seen firmer Thursday as investors reacted positively to the news that Delta Air Lines Inc. has backed away somewhat from the sharply lower fare structure that the troubled Atlanta-based air carrier announced earlier this year amid great fanfare.

Elsewhere, aaiPharma Inc.'s bonds were seen having risen sharply for a second straight session, given a boost by the announcement earlier in the week that the Wilmington, N.C.-based drug company had declared a winning bidder in its bankruptcy court-okayed auction of its pharmaceuticals division, for more money than originally expected.

In bank debt dealings, Calpine Corp.'s second-lien term loan dipped by about half a point during Thursday's session, and Mirant Corp.'s paper was also easier.

Delta bonds were seen higher, after the company announced that it had boosted the cap on its one-way economy class walk-up fares to $599 from $499 previously, and to $699 for first class from $599.

A trader saw Delta's bonds "up a touch," with its flagship 7.70% notes due 2005 a point better at 86 bid, 88 offered, while its 10% notes due 2008 were at 38 bid, 40 offered, its 7.90% notes due 2009 were at 34.5 bid, 35.5 offered, and its 8.30% notes due 2029 at 27.5 bid, 28.5 offered, all up 1½ points on the session.

Another trader quoted Delta's 8.30s a point better on the day at 26 bid, 28 offered, and said that the 7.90s were also up a point, at 33 bid, 35 offered, while the company's 10% notes due 2008 were two points better at 38 bid, 40 offered. He saw the 7.70s unchanged at 86 bid, 88 offered.

Delta's move to the higher ticket prices, while limited to just those two particular classes of fares, is seen as a partial retreat from the radically lower fares that it put into effect six months ago in an effort to win back some of its ridership from the low-cost upstart carriers who now control a sizable portion of the airline market.

Those fare cuts - which cut the prices of some Delta tickets by as much as 60%, from over $1,000 to less than half of that - were quickly matched by rival airline majors like the American Airlines unit of AMR Corp., the United Airlines unit of bankrupt UAL Corp., Continental Airlines Corp. and Northwest Airlines Corp.

While passenger traffic on the major airlines was up solidly following the introduction of the new fare structures, margins were down as revenue was decreased, all at time when crude oil prices - seen as an indicator of future price trends for jet fuel, a major expense for the carriers - rose from about $43 a barrel when Delta first cut its fares, to nearly $60 per barrel Thursday, socking Delta and the other airlines with rapidly escalating fuel bills, a further drag on the companies' bottom lines.

Continental and United on Thursday said that they would match Delta's partial rollback of the fare cuts, while American and Northwest said they would study the move.

A trader meantime saw Northwest's 9 7/8% notes due 2007 having advanced to 46 bid, 48 offered from prior levels at 43 bid, 45 offered, while its 10% notes due 2009 moved up to 43 bid, 45 offered from prior levels at 41 bid, 43 offered. Its 8 7/8% notes firmed to 62 bid, 64 offered from 60 bid, 62 offered previously.

At another desk, a source quoted Northwest's 7 7/8% notes due 2008 up 1 ½ points, to 43.5.

Besides the prospects of a little more money in the till for the carriers on the partial rollback of the fare cuts, the bonds were seen also having gotten a boost from positive second-quarter results posted by the leading low-cost carrier, Southwest Airlines, seen as a signal of possible benign earnings reports ahead from other industry players.

And on top of that, crude oil prices went into a swoon Thursday that brought the price of a barrel of light, sweet crude for August delivery down to $57.80 on the Nymex - down $2.21 on the day. Oil has fallen from recent levels around $62 a barrel on several factors, including a rise in U.S. stockpiles of distillates like heating oil and jet fuel, indications of slowing oil demand in China and projections that Hurricane Emily, now in the Caribbean, will likely not strike the oil-producing areas, as feared.

aaiPharma up again

Back on terra firma, aaiPharma's bonds were seen sharply higher for a second straight day, helped by the news earlier in the week that privately-held Xanodyne Pharmaceuticals Inc. was declared the winning bidder in the court-approved auction held Monday for substantially all of the assets of the bankrupt Wilmington, N.C.-based drug maker's pharmaceuticals division

The company's 11½% notes due 2010 - which on Wednesday had firmed up to 72 bid from prior levels in the mid-50s - kept right on going Thursday, closing at 82 bid, 84 offered.

A trader in distressed bonds opined that the notes "look like they're going back up to par," a neighborhood they've last occupied in the spring of 2004, when the drug maker revealed serious accounting problems related to sales of two of its major products, the painkiller Darvocet and the asthma medicine Breathine.

Since that time, the bonds had tumbled progressively lower, down into the 50s before the current upturn.

Calpine second lien loan down

In bank loan dealings, Calpine's second-lien term loan lost half a point, with levels closing out the day at 82 bid, 83 offered, according to a trader.

He said that "there was a call with a law firm that's trying to assemble and represent second-lien secured investors, so it pushed it down marginally" the trader explained.

Another trader saw the paper down two points to 82 bid, 83½ offered.

There has been some erosion in the San Jose, Calif.-based power company's bank debt and bonds, following the company's failure to get tenders of more than a fraction of its 9 5/8% first priority senior secured notes due 2014.

On Thursday, a trader saw the company's 8½% notes due 2008 a point down at 66 bid, 68 offered.

At another desk, Calpine's 8¾% notes due 2007 were down half a point at 75 bid, 75.5 offered. Its 8 5/8% notes due 2010 lost a point to 67.5 bid.

A market source said that the bonds sold off another point, extending Wednesday's losses. However, he saw that the shorter-dated paper had bounced a bit on the close.

Mirant loans slip

Also in that power generating sector, Mirant Corp.'s bank debt also fell off a touch, dropping about a half to three quarters of a point to 84 bid, 84.5 offered by day's end on market technicals, a trader said.

Like Calpine, Atlanta-based Mirant was softer during the previous session as well. On Wednesday, Mirant retreated by about a point to 84.5 bid, 85.5 offered.

Boston Exelon higher

On the flip side, energy project finance paper Boston Exelon posted two point gains on Thursday, closing out the session at 140 bid, 142 offered, the first trader added.

"There was an information call held by Morgan Stanley," the trader said in explanation of the paper's rise.

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

Foamex rebounds

Foamex LP's bonds, which have swooned badly over the past several sessions, appeared to be on the rebound Thursday, with the Linwood, Pa.-based foam rubber products manufacturer's 10¾% senior notes due 2009 a point better at 83 bid, 85 offered, while its 13½% notes coming due next month gained five points to 35 bid, 45 offered, while its 9 7/8% notes due 2007 were four points up at 26 bid, 30 offered.

Some players in the market have marveled that the 103/4s are as high as they are, given the possibility the company could default in August on the 131/2s.

A market participant said that dealings were "active" in the morning, but then slowed down as the session wore on and closing time neared.

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