Collins & Aikman gains on Lear news; Northwest helped by Morgan Stanley boost

By Paul Deckelman and Sara Rosenberg

New York, Aug. 16 - Collins & Aikman Corp.'s bank debt, as well as its bonds, continued to rise in Tuesday's market as news emerged that Lear Corp. may be interested in working out some sort of strategic transaction with the bankrupt company.

Elsewhere, news that Morgan Stanley had upped its rating on Northwest Airlines' stocks and bonds helped both firm smartly, despite market concerns that the Eagan, Minn.-based Number Four U.S. airline carrier faces skyrocketing fuel prices, heavy pension costs and a worsening labor situation that could send its mechanics out on strike, perhaps as soon as Friday night.

Collins & Aikman's bank debt was quoted at 87.75 bid, 88.75 offered by the end of the day, with about $20 million trading during the session, according to a trader. By comparison, at the close Monday, the Troy, Mich.-based automotive interior components maker's paper was quoted stronger by about a point at 86 bid, 87 offered by one trader, and a little wider at 86 bid, 88 offered by a second trader.

Collins & Aikman's 10¾% notes due 2011 were seen up about a point on the day to around the 34 level, while its subordinated 12 7/8% notes due 2012 gained almost a point to around a 7.75-8 bid context, traders said, on the news that Lear is interested in Collins.

The bank debt and bonds had risen Monday on rumors of a second bid for the company - speculation that proved true Tuesday as Southfield, Mich.-based Lear filed a letter with the Securities and Exchange Commission that it had sent to Collins & Aikman's president and chief executive officer, Frank Macher, expressing interest in the company. The first bid came from last week from Plastech Engineered Products Inc.

Lear executive vice president and chief financial officer, David C. Wajsgras, said in the letter that of particular interest is potentially merging all or a part of Collins & Aikman's interior components/systems business with its own.

"Based on recent press reports, we understand that Plastech Engineered Products, Inc. has recently submitted an acquisition proposal to Collins & Aikman. If Collins & Aikman intends to consider Plastech's offer or any other transaction proposal, we would welcome the opportunity to participate in that process," Wajsgras said in the letter.

"We understand the constraints under which Collins & Aikman is operating and the interests of Collins & Aikman's stakeholders in consummating a transaction that maximizes value with minimal execution risk. We are prepared to dedicate the internal and external resources necessary to evaluate a possible transaction, and we have already engaged financial, legal and other advisors," Wajsgras added.

Auto analyst Joseph J. Farricielli of Imperial Capital LLC in Beverley Hills, Calif. said he "wasn't surprised" when Lear emerged as a possible second partner for Collins & Aikman, along with Plastech, which earlier this month said it was interested in buying Collins & Aikman out of bankruptcy for $1 billion - an offer Collins & Aikman has not run to embrace, leading some in the market to believe it was not a serious bid.

In his letter to Collins chief Macher, Lear CFO Wajsgras noted that his company had recently announced plans to explore strategic alternatives for its interior components/systems business, and said that "[o]ne potentially attractive alternative, among others, would be for each company to contribute some or all of their respective interiors businesses to a newly-formed joint venture." He further said that Lear was "as well positioned as any other potential bidder to raise third-party equity financing if necessary to complete a transaction," and asked that Southfield, Mich.-based Lear be given the same access to data needed to develop a specific transaction structure and proposal as might be granted to Plastech "or any other prospective bidder."

Farricielli said even now, it was not yet clear whether Plastech's offer for Collins & Aikman is a firm bid or, as Collins & Aikman spokesman David Youngman said, just "an offer to make an offer after they have done their due diligence."

Be that as it may, the analyst said that it comes as no surprise "that other people are interested in the assets."

But he said that rather than an outright acquisition offer, "it sounds like it's more of an exit play on [Lear's] part, to get out of their own interior segment" via the potential joint venture alluded to in Wajsgras' latter. "Lear has made comments in the past that they are looking to exit that business. So it sounds like they're looking to do a combination in an effort to unload their own interior components."

Another possibility that could take shape, he acknowledged, would be for Lear to offer to buy Collins & Aikman outright, combine the interior components businesses of the two companies and then sell that to some third party.

Farricielli said that although Collins & Aikman is on record as having promised to have a business plan ready by the end of the month, he opined that "that's probably only for the banks, not necessarily for the general public, so, no, there's no firm deadline" - meaning the current scenarios will have time to play themselves out.

"It's still very early in the process," he said. "Remember that we haven't even heard from two big players" - financier Wilbur Ross, "who owns most of the bank debt" and is the lender for the separate reorganization process for Collins & Aikman's European unit, and Third Avenue Management LLC, whom the analyst described as "a big holder of the 10¾% notes."

He said that Ross - whose big debt holding is expected to be converted to equity during the reorganization - "has the most control of the situation, what will ultimately happen," and said that it was unlikely that Ross would "sell out for a low-ball price or [be] willing to get into bed with someone that's just looking to do a quick combination and exit underperforming assets."

Farricielli said that assuming he gains control of the company, Ross might even emerge as the consolidator in the industry, scooping up assets at bargain prices the same way he did in the then-troubled steel industry several years ago (Ross bought the assets of humbled steel giant Bethlehem Steel Corp. and other steelmakers who had likewise fallen on hard times, such as LTV Corp., to form his International Steel Group, which Ross later sold to the present Mittal Steel Co. NV.)

Would a savvy investor like Ross want to wade further into the currently troubled sector? Farricielli thinks so, noting that he profitably did so when the U.S.-based steel industry seemed to be going to hell in a handbasket. Additionally, he said, whatever troubles the sector is currently going through, "the interior component part of the automotive parts supply sector has great growth potential, because the amount of content that's being added on interior components is increasing every year. As people come up with more gadgets to integrate in the car, it's just an opportunity for more product for the interior component suppliers."

Farricielli also said that after a lengthy delay in approving a controversial package of outright aid and acceptance of higher prices that Collins & Aikman's six largest customers offered the beleaguered company after its bank lenders pulled the plug on the second half of its scheduled debtor-in-possession financing, bankruptcy judge Stephen W. Rhodes granted final approval for the package at a hearing Thursday in Detroit, although the filings in the case did not become public until Tuesday.

That package includes $82.5 million in upfront cash, and another $82.5 million of higher prices that the six customers - the Big Three, plus the major Japanese carmakers - will accept on a temporary basis to help Collins out. Some other creditors objected to that plan, which was originally put forward in late June after the second part of the DIP was withdrawn - arguing that it gave the customers too much say in how Collins would be reorganized. Those customers contended that Collins & Aikman is in its current predicament largely because of the unprofitable contracts with those same customers it is saddled with.

Calpine edges up

Elsewhere, the news that Calpine Corp. will sell its 550 megawatt power plant in Ontelaunee Township, Pa., to LS Power Equity Partners for $225 million and use the proceeds to lower its debt seemed to have only a modest impact on the San Jose, Calif.-based power generator's bonds.

While a market source saw Calpine's 7 7/8% notes due 2008 firm two points to 67 bid, most of the company's other bonds were up more modestly. Calpine's 8 5/8% notes due 2010 were half a point better at 64.5 bid, its 9 5/8% notes due 2014 were seen down ¾ point at 103, while its 7 5/8% notes due 2006 were a point better at 90.

Another trader, though, pronounced the company's 8½% notes due 2008 to be unchanged at 67 bid, 68 offered.

Standard & Poor's said the news would not change either the company's ratings or its outlook (B-/negative).

Northwest jumps on stock upgrade

Northwest Airlines "was up three points, just on the Morgan Stanley upgrade," said a trader who quoted the company's bonds 8 7/8% notes due 2006 at 55 bid, 56 offered, and its 10% notes due 2009 at 38.5 bid, 39.5 offered.

Another trader saw the 8 7/8s at 55 bid, 57 offered, the 10s at 38 bid, 40 offered, and the company's 9 7/8% notes due 2007 at 44 bid, 46 offered, all up three to four points.

"Morgan Stanley came out with their recommendation and the shorts all covered," he said.

The first trader, meantime, said that in moving both the stock and the bonds to "overweight" from "even-weight," the investment bank was saying that Northwest "will be able to stay off bankruptcy and get through this negotiations process, even if the mechanics decide to strike on Friday night. They'll have a solid contingency plan in place, so that buoyed the market, and the stock was also up."

Delta finishes little moved

However, the bonds of Northwest rival Delta Air Lines Inc. failed to gain on the late-Monday announcement that the troubled Atlanta-based Number-Three U.S. carrier will sell its Atlantic Southeast Airlines Inc. unit for $425 million, rising initially, but then giving all of those gains back later.

A trader quoted Delta's benchmark 7.70% notes due 2005 at 25 bid, 26 offered, up perhaps a point, "but the longer stuff," such as Delta's 8.30% notes due 2029, was "pretty much unchanged," he said.

Another trader agreed that Delta ended up going nowhere, after initially looking that it would rise on the news of the Atlantic Southeast sale - but then giving back whatever gains it notched.

He saw the 7.70s get as high as 29 bid, 31 offered, before dropping back to end unchanged at 25 bid, 27 offered, while all of the company's longer-dated bonds got as high as 20, but then dropped back to end at bid levels in a 15-17 context.

"This doesn't save them," the first trader said. "It buys them a little time, but they have to have a lot of moving pieces fall into place, to survive." he said.

"The market pretty much initially thought it was positive news - but as the stock sold off [i.e. retreated somewhat from its peak, although it ended with a sizable gain], the bonds sold off as well, and they pretty much ended unchanged."

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