Delta bonds sliding on renewed Chapter 11 concerns; Collins & Aikman bank debt eases on DIP launch

By Paul Deckelman and Sara Rosenberg

New York, July 27 - For the second time this week, Delta Air Lines Inc. bonds were seen in an earthbound tailspin Wednesday, as the latest attempt by management of the troubled Atlanta-based airline carrier to reassure company employees that it was fighting to keep the company out of Chapter 11 only succeeded in spooking the financial markets - where Delta's bonds and shares already trade as though bankruptcy is a foregone conclusion.

In the bank loan market, Collins & Aikman Corp.'s existing paper was seen lower, even as the bankrupt Troy, Mich.-based automotive interior components maker's new debtor-in-possession financing facility was launched.

Earlier in the week Delta's already battered bonds had fallen sharply after chief executive officer Gerald Grinstein said that even if Congress passes a pension reform bill that lets airlines like Delta stretch out the time they will have to meet their unfunded pension fund obligations to 14 years, the company could still find itself in Chapter 11, pushed there by skyrocketing fuel costs.

On Wednesday, those bonds took another nosedive, after Grinstein, once again inadvertently reminded investors that Delta could end up in bankruptcy.

A trader saw Delta's 7.70% notes due 2005 as having fallen to 67 bid, 69 offered from prior levels around 76 bid, 78 offered, while at another desk, another trader saw those bonds at that same 67 bid, 69 offering, although there, it had been seen having finished Tuesday at 74 bid, 76 offered.

The formerly high-flying 7.70% notes - seen in the upper 80s just a few short weeks ago - have been the most hard-hit Delta issue recently, tumbling sharply from that perch to head lower, traders say, because many in the market believe that Delta will not be able to pay off the remaining $122 million of the notes when they come due on Dec. 15, but will by that time probably be in bankruptcy, with the 7.70s trading pari passu with all of the company's other unsecured bonds, which most recently have been trading in the 20s and the lower 30s. The traders say that the 7.70s are converging toward those lower levels in anticipation of such a development.

The first trader meantime saw Delta's 8.30% notes due 2029 as low as 21 bid, 23 offered, down three points on the session, while its 7.90% notes due 2009 were at 26 bid, 28 offered, a three-point loss. The trader further saw the company's 10% notes due 2008 having fallen to 28 bid, 30 offered, from 32 bid, 34 offered.

The second trader saw Delta's 7.90s down three points at 26.5 bid, 27.5 offered, while its 8.30s were down a point, at 22.75 bid, 23.75 offered.

A third trader said that Delta's bonds "have already been trading so low that today [Wednedsay] was almost like, 'ho hum'." He saw the 8.30s at 23.5 bid, 24 offered, the 7.90s at 27.5 bid, 28 offered, both down half a point, and the 7.70s "down four or five points" to around the 70 level, "though in very light trading."

Those Delta bonds fell after an internal company memo - which inevitably was leaked to news organizations - sought to address the question of why the carrier was continuing to do so badly, even while some of its competitors managed to post profits in the latest quarter (Delta lost $388 million in that period).

Grinstein said that "it is in large part a matter of timing and competitive market challenges unique to Delta."

While the CEO noted that Delta was making progress with its much-touted Transformation Plan, which involves some $5 billion of annual savings, "because it takes time to implement some of the changes, we do not yet have the benefit of the plan's full savings to help offset the record-high fuel prices."

He also said that Delta was especially hard hit - more so than such "legacy carrier" rivals as American Airlines, Northwest Airlines and Continental Airlines - because "[t]he overlap with low-cost carriers in our markets is greater than any other network airline. Therefore, Delta is more susceptible to LCC pricing pressures. We currently cannot capture as much revenue per passenger, especially on the East Coast, as legacy carriers with a different LCC market-presence mix are able to do."

On top of that, sky-high fuel costs continue to eat Delta alive, with the airline having spent "an astounding" $1.1 billion on fuel in the most recent quarter, fully $400 million more than it spent to gas up its planes a year earlier.

The bottom line, Grinstein warned is that while "there can be no doubt that Delta's transformation plan is delivering results. What is also clear is that it is not enough. The high price of fuel, the interest expense on our debt, and other factors have significantly outpaced our transformation initiatives and masked our progress. Clearly, more must be done, and be done quickly."

He said that "[a]s many of you are aware, given our financial situation, there is renewed speculation about bankruptcy. We have been candid about the risk that a number of factors, some of which are beyond our control, will affect our ability to avoid a Chapter 11 filing." Grinstein did say, however that Delta was continuing to work on an out-of-court restructuring solution, believing it to still be in the best interests of the company - and to still be achievable.

Equity investors were no more impressed by such whistling past the graveyard than bond players had been. Delta's New York Stock Exchange-traded shares swooned 40 cents (11.80%) to end at $2.99, on volume of 25 .7 million - more than five times the usual handle.

Northwest steady

Apart from Delta, a trader said that Northwest Airlines Corp.'s bonds - which had risen on Tuesday after the Eagan, Minn.-based airline operator reported a second-quarter loss that was smaller than many on Wall Street had been predicting - were "pretty much unchanged," although he saw Northwest's 8 7/8% notes due 2006 a point better at 65 bid, 66 offered, while its 9 7/8% notes due 2007 and 10% notes due 2009 were each down a point, at 47 bid, 49 offered and 41 bid, 43 offered, respectively.

American Airlines parent AMR Corp.'s 9% notes due 2012 were unchanged at 80 bid, 82 offered.

Collins & Aikman loans dip

In the bank loan market, Collins & Aikman's paper was quoted at 83 bid, 84.5 offered, according to a trader, who called it half a point to a full point lower.

During market hours, the company launched its proposed $150 million two-year debtor-in-possession financing facility, consisting of a $25 million revolver and a $125 million term loan B, with both tranches talked at Libor plus 300 basis points.

Collins & Aikman filed for bankruptcy in May and initially it planned on getting a $300 million DIP consisting of a $200 million revolver at prime plus 150 basis points and a $100 million term loan at prime plus 250 bps. However, the syndicate opted not to provide the company with the full amount, and the company is therefore now coming to market at half the size as originally contemplated.

Borrowings under the DIP will be available for working capital and general corporate purposes.

A bond trader meantime saw Collins' 10¾% notes due 2012 at 29 bid, "same as [Tuesday]."

Meanwhile, Mirant Corp.'s bank debt ended the day about a point stronger with the 2003 paper quoted at 84.5 bid, 85.5 offered and the 2005 paper quoted at 87.25 bid, 88.25 offered, according to a trader.

No particular news was seen sparking the Atlanta-based energy company's strengthening.

Foamex bonds down

A trader saw Foamex International's bonds lower, with another market source suggesting that the Linwood, Pa.-based foam rubber products manufacturer and its bondholders are trying to negotiate a deal ahead of the scheduled maturity of its 13½% notes slated to come due next month.

The trader saw those bonds bid at 29, well down from prior levels around 39, although he said no offered levels had been seen, meaning there was no actual trading.

He did see Foamex's 9 7/8% notes due 2007 having fallen to 27 bid, 29 offered from 36 bid, 38 offered earlier, while its 10¾% senior notes due 2009 were four points down at 86 bid, 88 offered.

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