Delta bonds fall on renewed warnings on pensions, fuel; Atkins bank debt gains

By Paul Deckelman and Sara Rosenberg

New York, July 25 - Delta Air Lines Inc.'s bonds were lower Monday - particularly the troubled Atlanta-based carrier's benchmark 7.70% notes due 2005 - after the company's chief executive officer, Gerald Grinstein, warned on Monday that Delta was in dire need of federal pension reform in order to avoid bankruptcy - but also said that even with a pension fix from Congress Delta's road is still rocky and uncertain, due to sky-high fuel prices.

On the other hand, aaiPharma Inc.'s bonds were seen having firmed smartly, probably because the bankrupt Wilmington, N.C. -based drug company said that it had completed the previously announced $209 million sale of its pharmaceuticals division to Xanodyne Pharmaceuticals Inc.

In the bank debt market, Atkins Nutritionals Inc.'s first-lien paper was said to be climbing higher, with levels now being seen in a 70 bid, 72 offered context after having reached a low of 58 last week, according to a trader.

No particular reason was noticeable for the rebounding levels in the Ronkonkoma, N.Y. -based diet food provider's debt.

"It's all probably being driven by private info," a second trader added.

Back among the bond traders, the Delta 7.70s were seen by one trader as having swooned to 75 bid, 77 offered, well down from prior levels at 83 bid, 85 offered.

At another shop, a trader saw a slightly less drastic fall to 75 bid, 77 offered from about 80 bid on Friday.

Delta's other bonds were also lower, although since they are all trading at much lower levels and don't have as far to fall, none were down as much as the '05s.

"The 7.70s are the only ones really getting hit," a trader said. "It's a matter of compression. If people think they're going into bankruptcy, those bonds are going to fall to around the same levels in the 20s and the 30s that its other bonds are trading at."

He saw the company's 10% notes due 2008 drop to 31 bid, 33 offered from 35 bid, 37 offered, while its 7.90% notes due 2009 dipped to 28 bid, 30 offered from 30 bid, 32 offered previously. Delta's 8.30% notes due 2029 ended at 23 bid, 24 offered, down from 24 bid, 26 offered.

The second trader agreed that the 7.70s were the Delta bonds that most of the accounts he follows - "the retail guys," as opposed to institutional money - were playing in, taking them down "a good four to five points on the session."

He agreed with the first trader's assessment, that Delta's relatively higher-flying short bonds were starting to pancake down so that they would be "trading right on top of all of the other bonds" - a sure sign that the market does not believe that Delta will be able to redeem the remaining $122 million of those bonds when they come due in December, and may, by that time, already be in bankruptcy or, at best, restructuring its debt outside the courts, with bondholders poised to take a severe haircut in either case.

Those fears - which were aggravated last week when Delta announced that it had lost $388 million in the just-completed second quarter - were once again brought to the fore on Monday, when Grinstein - speaking at an Atlanta employee pep rally in support of pension reform efforts by Sen. Johnny Isakson, R.-Ga., and other members of the state's Congressional delegation - warned that pension reform was essential, but also cautioned that even if Congress does give Delta and other airlines some form of pension relief, the carrier might still be laid low by sky-high fuel costs.

"Pension reform is certainly a vital [concern], but fuel price is too," Grinstein grimly declared.

Delta has been backing a bill sponsored by Isakson and Sen. Jay Rockefeller, D.-W.Va., that would let the airlines stretch out their pension obligation payments over 25 years. However, after some senators objected to that long a time frame, a pension reform bill emerged late Monday that would give the airlines a 14-year stretchout. An aide to Sen. Trent Lott, R.-Miss., said that the modified bill would be considered Tuesday by the Senate Finance Committee.

Even if the committee passes it and sends it to the floor, the plan is by no means a done deal; any bill the Senate passes must be reconciled with a House version which at this point includes not include any break for the airlines.

Another trader saw Delta's 7.90% notes "coming off a touch," at 29.5 bid, 31.5 offered, down two points from Friday. He saw the 7.70s five points lower at 75 bid.

aaiPharma gains

Elsewhere, aaiPharma's 11½% notes due 2010 were seen higher, apparently helped by the completion of the asset-sale deal with Xanodyne.

One junk trader had the bonds improving to 95 from 93.5 previously, another saw them rise to 94 bid, 96 offered from prior levels at 91 bid, 93 offered.

Those bonds had shot up to around their current levels over a number of sessions earlier in the month, when it was announced that Xanodyne had emerged as the winning bidder in a court-supervised auction for assets of the pharmaceuticals division.

aaiPharma filed for Chapter 11 on May 10 after having struggled since early March 2004 with accounting problems stemming from improperly reported sales of two of its key products, the asthma medication Brethine and the painkiller Darvocet. The company was also beset by unusually brisk turnover among its senior executives.

It said that Xanodyne's $209.3 million cash bid - which was approved by the court at a hearing on July 18 in Wilmington, Del. - was about $40 million higher than the company's original "stalking horse" offer which aaiPharma announced as part of its filing.

Besides purchasing the division, Xanodyne also committed to buy up to $30 million of services from aaiPharma's development services division over the next three years, subject to certain conditions.

Calpine rises

A trader in distressed bonds said he saw Calpine Corp.'s 8½% notes due 2008 a bit better at 71 bid, 72 offered, up two points.

But he saw little or no change in such recently familiar names as Northwest Airlines Corp., Foamex International, Winn-Dixie Stores Inc., and the asbestos-challenged bonds of Owens Corning, Armstrong World Industries and Federal-Mogul Corp.

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