Northwest drops as other airline convertibles trade mixed; software names see better bids

By Rebecca Melvin

Princeton, N.J., Sept. 12 - The convertibles of Delta Air Lines Inc. traded flat Monday amid reports that a bankruptcy filing from the third-largest U.S. carrier is imminent. And the convertibles of Northwest Airlines Corp. slumped a point or two as investors considered seriously the possibility of a Chapter 11 bankruptcy filing from that carrier.

Elsewhere in the space, AMR Corp. and Continental Airlines Corp. traded higher as oil prices eased. Jetblue Airways Corp. was also better with the move in oil, a trader said.

News of Oracle Corp.'s acquisition of Siebel Systems Inc. for $5.85 billion inspired better bids for convertible paper in the software sector, although neither Oracle nor Siebel have convertible bonds. Siebel redeemed an issue of 5.5% convertibles at the end of 2003.

Nevertheless Novell Inc., i2 Technologies Inc. and Red Hat Inc. were mentioned in trade on Monday.

Of biotechnology names trading Monday, Medtronic Inc. was about 0.25 point stronger, Invitrogen Corp. and Amgen Inc. convertibles were said to be holding up despite lower underlying stock prices, and the $80 million convertible issue of Dov Pharmaceutical Inc. moved higher on positive drug trial data.

Delta, Northwest trade briskly

The convertibles of Delta traded flat while those of Northwest Airlines continued their insistent downward trajectory after reports that Delta is closer to bankruptcy than many expected, and suspicions that Northwest may not be far behind since negotiations with its striking mechanics union have broken down.

The Wall Street Journal reported early Monday that Atlanta-based Delta is close to an agreement for $1.7 billion in financing that would help it continue operating during bankruptcy, citing unnamed sources familiar with the situation.

The Associated Press reported Monday afternoon that Delta plans to file for bankruptcy in New York as early as Wednesday.

"But the news of the day is that Northwest could be a lot closer [to bankruptcy] than expected," a Connecticut-based sellside trader said.

And while Northwest's 6.635% convertibles fell again to 33 bid, 35 offered, with a trade reported at 33.75, and its 7.635% convertibles down at 29 bid, 31 offered, some still think Northwest can manage to keep itself out of bankruptcy court.

The market was moving Monday on the idea that the clock is ticking if the Eagan, Minn.-based carrier wants to squeeze into bankruptcy court before rules change Oct. 17, a New York-based credit analyst said.

"Northwest is at an inflection point," the credit analyst told Prospect News. "Tomorrow is the first day that Northwest can hire replacement workers as permanent employees," and there is also word that the pilots union is getting on board with accepting concessions, which if that happens, then the flight attendants are likely to fall in line, he said.

Hiring the replacement workers means that Northwest can pay the mechanics about $26 an hour, compared to the previous wage level somewhere in the low $30s, the analyst said.

If this happens, then the carrier can probably avert a filing he said, "Northwest and the people running Northwest have a plan ready. But, and let's face it, they'd prefer not to use it. Bankruptcy wipes out equity value, disadvantages pensions and hurts your employees," he said.

As for Delta, the nation's No. 3 carrier, the analyst believes that if the filing isn't this week, it will be next week.

"Delta's plans have all been laid. They're going to have to go. They have an old and unique fleet of planes that couldn't be combined well with another airline," the analyst said.

The Delta bonds were flat for the first time, which means that they were trading without accrued interest. When they're trading at that point, it says that holders aren't expecting to get paid the 90 days from June 15," he said.

Delta 8% traded at 14.75 bid, 15.75 offered, as did its 2.875s, traders said. Shares of Delta plunged 25 cents, or 23%, to $0.85 on the New York Stock Exchange. Northwest shares slid 17 cents, or 4.9%, $3.31.

The union representing the Northwest workers walked out of talks with the airline on Sunday. Northwest is asking the unions to agree to wage cuts, layoffs and contract changes to lower costs as it contends with higher fuel prices. The Aircraft Mechanics Fraternal Association said the talks broke down over disagreements about severance packages and work rules.

AMR lifts, as Continental edges higher

The convertibles of AMR Corp., the parent of American Airlines, rose about 1.5 points, as its stock surged almost 10% in reaction to lower oil prices, a New York-based sellside trader said.

The AMR 4.25% convertibles were at 90 bid, 91 offered, and the 4.5% convertibles traded at 79.25 bid, 80.25 offered.

Continental Airlines' convertibles were also indicated higher, with its 5% convertible seen up 2 or 3 points at 89 bid, 91 offered, while shares of the Houston-based carrier closed 8% higher at $13.08. No trades were reported to Prospect News, however.

Meanwhile, Moody's said after the close that it has lowered the speculative grade liquidity rating of Continental to SGL-3 from SGL-2. The rating agency also affirmed the carrier's long-term debt ratings. The outlook is negative.

The agency said the downgrade reflects Continental's operating losses and weakened prospects for operating cash flow, as stronger revenue and cost containment measures have been offset by record-level fuel costs. The airline has few remaining assets that can be readily monetized, nor does the company have lines of credit available, the agency said.

Moody's also said the negative outlook reflects the potential for Continental's ratings to be subject to downward adjustment, absent sustained improvement in operating trends.

i2 moves lower in trade

The 5.25% convertibles of i2 Technologies due 2006 traded early at 99 before ending the session 1.25 points lower at 97.75. Its shares closed 2.6% lower at $23.44.

Traders said that Oracle's announcement that it would buy rival Siebel and thereby give Oracle a stronger position in the customer management software arena, focused attention on this sector.

The swiftly consolidating sector hasn't dented the size of convertible paper in this area despite the fact that some bonds have gone away. That's because others have been issued to replace them, a New York-based sellside trader said. There is roughly about $6.3 billion in face value in convertibles in software names, a level that is about the same as three years ago, and includes the large issues of Bea Systems and Veritas among others, the trader said.

Medtronic gains slightly

The 1.25% convertibles of Medtronic gained about 0.25 point to trade at 102.25 as its stock moved higher early but closed slightly lower after market sources said the health care concern is planning to sell $1 billion in senior notes in two parts in the Rule 144A private placement market.

The sale is expected to include five-year and 10-year senior notes, with pricing as early as Monday, the sources added.

The joint lead managers on the sale are Citigroup Global Markets, Goldman Sachs and Merrill Lynch.

Trial news lifts DOV Pharmaceutical

DOV Pharmaceutical's convertibles jumped Monday after the drug maker said that its non-narcotic painkiller bicifadine was statistically superior to a placebo in a late-stage clinical trial.

In a phase III clinical trial involving 325 patients, the company found that a 400 milligram dose of bicifadine or a 100 milligram dose of tramadol, a narcotic painkiller, was statistically superior to placebo in relieving pain following bunion removal. The late-stage trial is the first of four planned to support a Food and Drug Administration submission.

The findings support two other clinical trials for bicifadine to relieve moderate-to-severe pain following dental surgery.

DOV's 2.5% convertibles were up about 2 points at 94.25. Its shares closed up $1.12, or 7%, at $17.10

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