Salton bonds soar as company pays coupon, meets exchange threshold; airline, aaiPharma rallies fizzle

By Paul Deckelman and Sara Rosenberg

New York, July 15 - Salton Inc.'s bonds were being quoted at sharply higher levels - though on restrained volume - in the wake of the announcement late Thursday by the Lake Forest, Ill.-based maker of the George Foreman electric hot dog and hamburger grills and other small appliances that it had made the June 15 interest payment on its 10¾% senior subordinated notes within the allowed 30-day grace period, thus avoiding a default.

Elsewhere, trading in distressed bonds was fairly quiet; traders reported little or no follow-through Friday from the higher levels seen Thursday in airline debt after cash-strapped Delta Air Lines Inc. raised its fare cap by $100 per ticket on some flights, a move quickly emulated by some of its rivals.

Traders also saw no further explosive gains in the bonds of aaiPharma Inc., which had risen sharply over the previous two sessions on the news that the Wilmington, N.C. based drug maker had settled on a winner in its bankruptcy court auction earlier in the week for its pharmaceuticals division.

Participants in the bank loan market meantime reported virtually no dealings in the bank paper of restructuring or otherwise distressed companies.

And things weren't much better in the bond trading pits.

"It's summer. It's Friday afternoon. People leave early. I don't know what you're seeing - but it was pretty boring here," was how one trader put it.

About the only issue that he saw any significant movement on, price-wise, was Salton - and even that was "not very active."

He quoted the company's 10¾% senior subordinated notes slated to come due on later this year at 66 bid, 68 offered, and its 12¼% senior subs due 2008 at 54 bid, 56 offered, saying that each had moved up from the lower levels they had held before Thursday's announcement that it had paid the $6.71 million June 15 interest payment on the 103/4s - and that it was making progress on getting bondholders to go for its previously announced exchange offer.

Those $125 million of 103/4s are scheduled to mature on Dec. 15, although the company is hoping to convince their holders to exchange the bonds for new debt, plus preferred stock and common stock, via a complex exchange offer unveiled several weeks ago, which is slated to run through Aug. 2, subject to possible extension. By taking out the bonds through such an exchange offer, the liquidity-challenged small appliance maker would eliminate the need to go to a possibly skeptical and unsympathetic capital market to refinance them.

In announcing that the coupon on the bonds had been paid, Salton also announced that so far, holders of $77.8 million of those bonds, or 62.3% of the outstanding amount, have so far tendered their bonds under the offer, thus surpassing the minimum $75 million participation floor. It said that $50.9 million of its 12¼% senior subordinated notes due 2008 have also agreed to tender their notes in connection with the company's debt exchange offer. Salton is issuing a total of $110 million principal amount of the new debt, and will issue the new bonds to the existing noteholders at a discount to par - recovery prices would range from 60 to 67 cents on the dollar in new notes under a formula outlined in the exchange offer documents. While it hopes to pick up all $125 million of the 103/4s, it will issue any of the new debt not given to the 10¾% noteholders under the exchange offer to the holders of the $175 million of 12¼% notes in exchange for their bonds.

Salton bonds split in two

A trader said that the 103/4s fall into two categories - "voted" and "non-voted." The "voted" bonds, he said, are those already tendered, with the holders opting for the package of debt and stock that Salton is offering, while the "non-voted" bonds haven't been tendered yet, with the holders holding out on expectations that if the tender offer is largely successful without them, the company will just pay the relatively small amount of bonds that will remain outstanding at or at least near par levels. He likened it to a game of "chicken" with management, with the "non-voted" holders gambling on the expected higher return if they don't get with the company's program.

However, the trader pointed out, although the tender offer still has several weeks to run, if the numbers remain around current levels, "they'll take out the $75 million or $77 million of the bonds through the exchange offer, but would still have another $40 million to $50 million outstanding. Where are they going to get the money to pay for that" come Dec. 15?

"So that should be interesting to watch - they're still hoping to exchange the entire piece, because they don't want to have to come up with $50 million to pay those off."

"He said that so far, the exchange offer was "half a success." He said it was "a little dicey the way they are trading."

With the holders of the "non-voted" bonds feeling they will get a better deal by not going along, those bonds, accordingly, were trading significantly higher than the "voted" bonds - 76 bid, 79 offered for the former, 64 bid, 66 offered for the latter.

"There's a differentiation there because with one, you give up your right to get your [full] money back, while the other one, you still have a chance" to be repaid in full.

Actually, the trader said, there had been not much movement in the bonds on Friday; "they popped" late on Thursday on the company's announcement. He saw that 10¾% "non-voted" bonds and the "voted" bonds having popped up four points on Thursday, to the levels of 76 bid, 79 offered for the former and 64 bid, 66 offered for the latter, while the 12¼% notes jumped as much as six or seven points on the session, to 53 bid, 54 offered. On Friday, he said, the three categories of bonds were all "a touch stronger," but most of the gains did take place on Thursday.

Several traders queried on Thursday about what was going on in the market made no mention at all of Salton at the time. The trader theorized that "people saw it - but you had to take some time to figure out what was going on, because you didn't want to get crossed up on buying or selling bonds that were 'voted' or were 'not voted', so no one really said or did anything yesterday [Thursday] until they digested it."

Foamex continues to bounce back

Elsewhere, there was a little bit of activity in Foamex LP's bonds, which had swooned radically early in the week on the Linwood, Pa.-based foam rubber products maker's warning that it has significantly reduced its earnings expectations for the second quarter of 2005, due to volatility in raw materials prices and a difficult operating environment.

Those bonds, after falling in the first part of the week, appeared to have firmed somewhat from their oversold initial levels, apparently helped by the news that it has retained the investment banking firm Miller Buckfire & Co., LLC "to help evaluate strategic alternatives for strengthening the company's balance sheet and enhancing long-term value."

After hitting all time lows on Wednesday, Foamex's 10¾% senior notes due 2009 were seen a point better on Thursday at 83 bid, 85 offered, while its 13 ½% notes coming due next month gained five points to 35 bid, 45 offered, and its 9 7/8% notes due 2007 were four points up at 26 bid, 30 offered.

On Friday, a trader quoted the 103/4s at 84.5 bid, 85.5 offered, pretty much unchanged, with the 131/2s at a wide 38 bid, 45 offered area, up several points, and the 9 7/8s anchored at 25 bid, 27 offered.

Another trader saw the 9 7/8s at 26 bid, 29 offered, its 131/2s at 40 bid, 45 offered, while the 103/4s remained tethered to the previous 26 bid, 29 offered levels.

aaiPharma quiet

There meanwhile seemed to be little or no dealings going on in the bonds of aaiPharma Inc., which had shot up smartly over several sessions earlier in the week on 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 aaiPharma's pharmaceuticals division.

It will buy those assets for $209.3 million, about $40 million more than the company's original stalking horse bid entered when aaiPharma filed for Chapter 11 in May.

aaiPharma'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, but by Friday, they were seen in that same low-80s context, a trader said.

Another trader, in quoting the bonds hanging in at 83 bid, 85 offered, not really much changed from 82-84, said that "they had their run," noting that it was the "judgment of the market" that the extra $40 million aaiPharma is getting "is worth 15 to 20 points," about the size of the recent rally in he bonds. He opined that the bonds were likely to stay there with no further upside, and no chance to be taken out at par.

Airlines quiet

And traders saw no further moves Friday in the airline sector, which had risen Thursday on 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.

Delta's flagship 7.70% notes due 2005 had risen a point Thursday to 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 day Thursday. Traders saw little or no change on Friday.

UAL allocates add-on loan

In bank loans, UAL Corp., parent company of United Airlines, allocated its upsized and repriced DIP, although trading levels on the reworked term loan remained at par 7/8 bid, 101 1/8 offered - in line with previous trading levels, according to a market source.

Under the amendment, the DIP term loan was increased by $300 million and pricing on the tranche was lowered to Libor plus 425 basis points from Libor plus 450 basis points.

Furthermore, pricing on the revolver was lowered to Libor plus 425 basis points from Libor plus 450 basis points as well.

In February of this year, the Elk Grove Township, Ill., airline carrier amended its DIP to, among other things, lower the interest rate to Libor plus 450 basis points from Libor plus 500 basis points and remove the 3% Libor floor that was previously in place.

In addition to the add-on and repricing, this newest amendment also involved lenders waiving events of default related to technical matters, including any agreements to acquire aircraft, and extending the maturity of the DIP to Dec. 30, with an option to extend the term until March 31, 2006.

Lenders were also asked to amend the minimum cash covenant, provide for a new capital expenditure basket for some aircraft purchases, including a cash sublimit and financing requirement for the balance of the purchase price, and make changes to the collateral package.

JPMorgan and Citigroup are the lead banks on the DIP.

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