Delphi mostly easier after Friday gains; Northwest short bonds up as airline defies strike

By Paul Deckelman and Sara Rosenberg

New York, Aug. 22 - Delphi Corp.'s bank debt was seen mixed on Monday after its solid rise Friday, with the company's term loan continuing to inch its way higher - but its revolver taking a step backwards on some selling pressure. The Troy, Mich.-based automotive electronics maker's bonds were meantime seen easier, with traders suggesting it was "giving back" at least some of the gains they had notched on Friday following a bullish assessment about the company's prospects from Lehman Brothers.

The strike by more than 4,000 mechanics and other employees against Northwest Airlines Corp. seemed to have little or no effect on the company's bondholders and shareholders, with its shortest bond, the 8 7/8% notes due 2006 seen to have firmed solidly on the news that the carrier was maintaining its schedule, with the help of replacement mechanics hired under an elaborate contingency plan.

A bank debt trader said Delphi's term loan gained about a quarter of a point during market hours with the paper closing out the day at 103.25 bid, 103.75 offered.

However, Delphi's revolver closed out the day with levels down by about half a point at 95 bid, 96 offered, the trader said, explaining that the revolver's performance was a result of some banks selling off paper.

That bank debt has been on a lot of peoples' radar ever since early this month when the company announced that it had drawn down $1.5 billion under its revolving credit facility in order to have cash readily available to finance operations if needed - a move that sparked loan downgrades from all three rating agencies; Moody's Investors Service to B3 from B1, Standard & Poor's to B- from BB- and Fitch Ratings to B from BB-.

Immediately following the draw news and the downgrades, Delphi's bank debt fell to quotes of 94.5 bid, 95 offered on the revolver and 101.5 bid, 102 offered on the term loan.

However, not long after that, the levels started to bounce back as the company assured investors that it was and is working towards making a deal with its major unions to seek modifications required to implement its restructuring plan, as well as with GM to seek related financial support.

In fact, bank levels have steadily been rising since then, as investors have gotten more comfortable with this idea of a GM bailout and started considering a potential Chapter 11 filing as less and less likely.

And, Lehman Brothers upgrade of the company's stock this past Friday to "overweight" from "underweight" has further helped matters, as can be seen by the quarter to a half a point gain that the bank debt experienced during Friday's session.

On the bond side of the ledger, a trader said Delphi "gave back" some of the gains it notched on Friday.

"Most of the action was in the 6.55% notes due 2006," which he saw easing to 93 bid, 93.5 offered from prior levels around 94 bid, 94.5 offered, "a little retrenchment." He also saw the Delphi 6½% notes due 2013 half a point lower at 81 bid, 82 offered.

Another trader saw the 6.55s dipping to 92.5 bid, 93.5 offered from 94 bid, 95 offered. He likewise saw the 61/2s of 2013 down a point on the day at 81 bid, 83 offered. The 61/2s of 2009 were at 87 bid, 88 offered and the 7 1/8% notes due 2029 at 75 bid, 77 offered, both unchanged on the day.

Northwest bonds better

Elsewhere, Northwest's 8 7/8% notes were seen by a trader "up a little." He quoted those bonds at 65 bid, 67 offered, up from 63 bid, 65 offered late Friday.

"Northwest did do a little better, especially the shorter stuff," he said - but as for the longer-dated bonds, he saw no movements in its 9 7/8% notes due 2007, which stayed at 54 bid, 56 offered, or in the 10% notes due 2009, unchanged at 47 bid, 49 offered. He did see a one-point gain to 47 bid, 48 offered, in the 7 7/8% notes due 2008. All of this occurred, he said, on very light volume."

Another trader saw the 8 7/8s as good as 66 bid, 67 offered, which he pegged as "up four or five points" from the levels seen Friday, before the walkout.

"The intermediate bonds were not up as much as the short ones," he said. He estimated the 9 7/8s up a point at 53 bid, 54 offered, and declared that "the rest of the curve" was also only up a point.

A market source saw the 7 7/8s up a point on the day, at 46.5 bid.

Northwest's Nasdaq-traded shares rose 28 cents (5.20%) to $5.66. Volume of 10.8 million shares was more than double the usual activity level.

Northwest's approximately 4,400 mechanics, aircraft cleaners and facilities custodians represented by the Aircraft Mechanics Fraternal Association - about 11% of its roughly 40,000 employees - walked off the job at 12:01 a.m. ET on Saturday, after several months of fruitless negotiations with the airline over its demand for $176 million in permanent annual labor cost savings, part of $1.1 billion it seeks from all of its employee groups to avoid crash-landing in the bankruptcy courts as some of its rivals - United Airlines, US Airways Group and low-cost carrier ATA Airlines - have already done.

Those talks went right down to the wire, continuing into Friday, before the two sides broke off the negotiations - Northwest claiming that the last offer from the union only offered up about $100 million of cost savings, far less than the carrier says it needs, and the union miffed because Northwest refused to budge from its plan calling for massive layoffs.

Under the expired contract, the mechanics averaged about $70,000 a year in pay, and the cleaners and custodians around $40,000. The company wants to cut their wages by about 25% and lay off about 2,000 of the union's members, or almost half of them - this on top of job cuts enacted since 2001, when Northwest had twice as many AMFA-represented workers. Northwest said that its proposed further cuts would be concentrated among the cleaners and custodians, arguing that other airlines use contractors to do that work for less money.

Northwest, in demanding the $1.1 billion of labor cost concessions from its employees, including the $176 million from AMFA, claims to now have the highest labor costs among the old-line "legacy carriers" that include rivals Delta, American Airlines, United Airlines, Continental Airlines and US Airways. United and US Air, both currently bankrupt, have cut their labor costs and pension obligations sharply under their respective Chapter 11 reorganizations, and American, Continental and Delta have cut costs considerably without having to resort to bankruptcy, although Delta, the most financially threatened of those three, is seen by the financial markets as the most likely candidate to go bankrupt anyway.

So far, of the $1.1 billion of concessions it says it must have to stay out of bankruptcy, Northwest has only gotten about $300 million, the value of a 15% pay cut agreed to by its pilots union, combined with cuts for salaried employees. The airline is negotiating with ground workers and flight attendants, and it has said it can reopen talks with pilots once it gets concessions from the other groups.

Northwest is continuing to fly, under an elaborate contingency plan that the airline spent more than a year drawing up, at a reported cost in the tens of millions of dollars. It's counting on a combination of outsourcing its heavy maintenance work - the intensive, stem-to-stern safety checks mandated by the Federal Aviation Administration, and other major operations - to off-site third-party contractors, a system already used by some of Northwest's rivals, while using maintenance supervisory personnel and replacement mechanics for the more routine, on-site jobs that the airline normally does on its planes right at the airports where it operates.

"The mechanics are not on the plane" the way the pilots and the flight attendants are, said airline analyst Roger King of Credit Sights, "so no one particular flight will not take out if there are no mechanics."

Since other airlines are already outsourcing the heavy maintenance work - he names United and US Air, which went to that system once they got into bankruptcy and could get out from under burdensome contracts - and Alaska Airlines as well, "these other airlines have already lowered the bar. It's not like [Northwest] is asking anything from their mechanics that these other airlines have done so.

AMFA - a breakway union which recruited many mechanics formerly represented by another labor group, the International Association of Machinists - has vowed to accept no job cuts - but King says the reality is that "the world has changed. There's been a destructive [to airline revenues] technology - Internet [ticket] pricing, and the low-cost carriers, have changed the business," King says, and all of this has made the kind of jobs-for-life system that used to prevail at Northwest and the other traditional carriers as obsolete as propeller-driven airliners.

King believes - and Wall Street would seem to agree - that Northwest's management is likely to prevail in its struggle with AMFA.

One factor is the refusal of the airlines' other unions to back AMFA by refusing to cross their picket lines. "Right now, the average seniority of a Northwest employee is over 20 years. So their pension plan and their retirement benefits are a significant part of their present net value. So if these [other employees] go on strike and the airline shuts down, I can guarantee you that there will probably be a bankruptcy filing - and they'll all be bigger losers." Therefore, at least in the case of Northwest, "a strike is not an affective weapon any more. The world has changed - and the industrial labor unions are having a hard time coming to grips with that."

To lighten its load, the airline switched to its fall schedule over the weekend, so it is only running about 1,300 flights a day nationwide instead of roughly 1,600, and while a few flights were cancelled and some were delayed, most managed to get into the air pretty much on-time, carrying passenger load factors in the 80% area, about the industry norm.

While the union has decried the Northwest's replacement system and has predicted that the mechanical problems will soon start piling up and grounding aircraft, King - who acknowledges that Northwest has the oldest fleet among the major carriers, with many "maintenance-intensive" DC-9s, DC-10s and 747-200s, all at least 20 to 30 years old - says that even so, Northwest will get by because "not every plane is going to break down today - it takes a while for some kind of malfunction to develop." Assuming most of the planes were in decent shape when the strike began, "they're not going to start breaking down for a while, from the fact that the new mechanics aren't 100% familiar with the operations at Northwest." While a longer strike will put the airline's makeshift maintenance operation under more pressure, King also sees a learning curve - the replacement mechanics, all of whom have already worked for other airlines for at least five to 10 years, and who have been undergoing training by Northwest at a base in Tucson, Ariz., where it parks its mothballed planes, will come to learn about the peculiarities of Northwest maintenance system and the idiosyncrasies of the particular aircraft they are servicing, enabling them to better overcome problems as time goes by.

On top of that, he predicts that sooner or later, some AMFA mechanics will jump ship, and go back to work. "Those guys aren't going to get jobs anywhere else," he opines, "not at the same level of pay and benefits they've got now. They're not, period," and he says that it is unlikely Northwest will hire them back if the strike lasts very long - the replacement mechanics will replace them for good.

King says that even as Northwest holds the line and keeps flying during the strike, "It doesn't necessarily mean the bonds are a screaming buy - because there's still a host of issues that Northwest still has to face," including high fuel costs, heavy pension obligations, and the highly competitive airline industry, with the strong challenge the low-cost carriers are presenting to Northwest and the other legacy carriers. He cautions that "the problems that Delta is facing, now, [Northwest] is going to be facing in a year or two."

But successfully weathering the strike, he says, will show that the airline is willing to take "a tough stand," which will help Northwest when it tries to get additional cost concessions out of its other employee groups.

While there was some speculation about Northwest earlier in the summer - especially after its CEO, Douglas Steenland, warned Congress that his airline could face possible Chapter 11 absent any Washington help on the pension issue - King says that weathering the strike and then using that to get the needed cost concessions from its employee groups will give Northwest "a year or two to straighten things out."

Delta faces challenges, but bonds up

Not so for Delta, though. King says the troubled Atlanta-based Number-Three U.S. air carrier is in the process of "imploding" - besides the same issues facing the other carriers, Delta is facing a demand from its credit-card processors to set aside some $750 million - a sizable chunk of money for a company that only has about $1.5 billion of available cash. Many analysts say that's the minimum amount it has to maintain, if it is to avoid being pushed into bankruptcy.

Delta faced a bankruptcy threat least fall - but managed to dodge a bullet when General Electric and American Express came to the rescue and fronted the struggling airline $1 billion. King says it is unlikely that another such deus ex machina rescue would emerge this time around.

"Delta's going into bankruptcy," he asserts. "The only way people are going to give it money is with security, and the question is - how much unencumbered collateral is left?"

The analyst allows that "it might find some miracle of escaping bankruptcy this year by somebody throwing a bunch of money in - but it's going to go next year. It's got to go some time. The balance sheet is way too big, the airline has way too much low-cost competition, so it has a top-line problem, and it's got a huge unfunded pension problem.

"So this one is not going to escape bankruptcy - it's just a matter of when."

Although bankruptcy buzz has beaten Delta's bonds down to current levels - around the mid-20s for its benchmark 7.70% notes due Dec. 15 and upper teens for the rest of its unsecured capital structure - on Monday, investors chose to ignore the warning flags, and took the longer bonds higher; a trader saw the 10% notes due 2008 at 19 bid, 20 offered, its 7.90% notes due 2009 at 18 bid, 19 offered, and its 8.30% notes due 2029 at 17 bid, 18 offered, all up a point. The 7.70s were unchanged at 26 bid, 28 offered.

Owens Corning stays firm

Back on solid ground, a trader saw Owens Corning holding onto the gains that the bankrupt Toledo, Ohio-based insulation maker notched last week, when by some accounts, the bonds rose as much as 10 or 11 points for the week.

He saw Owens Corning's 7½% notes due 2018 at 88 bid, 90 offered. Another trader, who also saw the asbestos-challenged company's bonds track higher, said he was at a loss to explain why they did so.

Bonds of Armstrong World Industries, the bankrupt Lancaster, Pa.-based floorcovering maker, were unchanged at 83 bid, 85 offered, whiled those of bankrupt Southfield, Mich.-based auto parts maker Federal-Mogul Corp. were steady at 28 bid, 29 offered.

USG Corp.'s bonds "never move," said a trader who quoted the bankrupt Chicago-based building products maker's bonds at 131-133. The company's shares, which hover above $60, shot up nearly four points in heavy trading Friday - prompting the New York Stock Exchange to request that the company comment on the unusual activity in its shares. USG said it had no comment.

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