Northwest sees heavy selling; Delta bonds begin trading flat, dive to 15 area; Delphi long dates fall

By Ronda Fears and Sara Rosenberg

Nashville, Sept. 12 - With Oct. 17 seen as a catalyst for companies that have been teetering on the brink of bankruptcy to plunge into the court restructuring process, the bonds of Delta Air Lines Inc., Northwest Airlines Corp. and Delphi Corp. all took a dive Monday.

Buzz that Delta would file as soon as Wednesday prompted a good deal of trading in distressed bonds, traders said, but that was obviously not a huge surprise insofar as Delta is concerned. Delta paper, however, did begin trading flat, or without interest, for the first time on Monday as the bankruptcy filing seems to be cast in cement.

Northwest Airlines bankruptcy rumors may not be as firmly grounded, but players said the story seemed to be leaning further toward a filing than not, and selling was heavy in all Northwest paper.

Conversely, AMR Corp. - parent of American Airlines Inc. - and Continental Air Lines Corp. paper was higher on the day, although after the closing bell Moody's Investors Service cut continental's liquidity rating. Moody's said Continental's stronger revenue and cost containment measures have been offset by record fuel costs, and the rating agency sees weakened prospects to improve operating cash flow.

Delphi, a former General Motors Corp. subsidiary, has openly admitted that it is highly possible that a filing could come before the Oct. 17 - a demarcation point when federal bankruptcy laws will be less accommodating to corporate debtors.

In distressed loans, Mirant Corp.'s debt continued its steady rise.

Delta recovery value seen as 15

The Associated Press reported Monday afternoon that Delta Air Lines Inc., the third-largest U.S. air carrier, plans to file bankruptcy in New York as early as Wednesday, quoting an unnamed industry consultant who has been informed of the company's plans.

Traders said Delta's bonds saw heavy traffic Monday on the chatter, which included other reports that the airline would file bankruptcy on Thursday. In any event, it was no huge revelation since bankruptcy buzz has swirled around Delta for more than a year now.

"Everything today was based on the recovery swap, the bet on what that is," said a sellside trader, referring to the trading activity in Delta's bonds on Monday. "The whole world sees that at about 15 cents on the dollar."

After little to no movement in the bonds on Friday, he described activity Monday as an unwinding of bullish trades, with the paper shedding roughly 3¾ points across tenors. The most active, though, was the long-dated 8.3% bonds due 2029, a distressed bond trader said. Those bonds fell 3¾ points to 15 3/8 but he said that issue traded as low as 11¾ during the session.

Delta's shortest paper, the 7.7% notes coming due on Dec. 15, fell to 15 on Monday from around 22 bid on Friday. Those bonds were seen as low as 12 bid, the trader said, but actually traded as high as 17.

The actual declines were even worse, since all the bonds are now quoted flat, excluding several points of accrued interest.

While bankruptcy buzz has dogged Atlanta-based Delta for many months, the chatter has heated up profoundly in the last month. Since mid-August there have been reports that cash-strapped Delta was already in the process of lining up debtor-in-possession financing - a universal move ahead of filing bankruptcy.

Northwest holders puke bonds

"There was not a lot of puking up the Delta bonds," another sellside trader said, but it was a different ride for Northwest players.

Rather, a bout of air sickness among Northwest bondholders sent the troubled airline's paper in a tailspin Monday as the chatter about Delta, compounded with the Oct. 17 bankruptcy law date in the background, sparked a huge sell-off.

"Northwest holders were throwing up," said one sellside bond trader. "They were throwing in the towel."

Northwest Airlines 8 7/8% notes due 2006 were described as lower by 2½ points to 44½ bid, 46½ offered, and the 7 5/8% convertibles fell to 29½ - a new low seen by traders.

With the airline set to begin hiring permanent replacements Tuesday for the union mechanics, aircraft cleaners and facilities custodians represented by the Aircraft Mechanics Fraternal Association who have been on strike since Aug. 20, uncertainty is mounting on the Northwest story since contract negotiations are pending with several other unions as the company seeks some $1.1 billion in concessions from employees.

"Northwest is walking a very thin line," said a distressed bond trader. "There are people in both camps - those who think they will pull out of this dive in the 11th hour, and those who think they will crash into a heap at the foot of the bankruptcy courthouse steps."

Delphi bondholders jittery, too

Delphi holders were getting jittery, too, with all the bankruptcy talk in distressed circles. In particular, traders remarked that Delphi bondholders were dumping long-dated paper although there was heavy traffic in the 6.55% notes due 2006.

Conventional wisdom in the bond markets suggests Delphi is looking to former parent GM for some sort of financial bailout package, much like Ford Motor Co. lent a $2-billion-plus helping hand to Visteon Corp. in the form of inter-company liability forgiveness, restructuring financing and help with managing plants.

Moreover, the Troy, Mich.-based automotive electronics maker has warned that it could be forced into a bankruptcy filing if it does not get concessions from the United Auto Workers union and/or help from GM. The company has said a filing could come before the Oct. 17 date when federal bankruptcy laws will change.

Remarks from the UAW that it would prefer Delphi to avoid bankruptcy, and other small positive sign, failed to help bondholders keep the faith Monday in the face of the overall negative market tone.

"A lot of hope seeped out for Delphi today with all the talk about Delta filing," said a sellside analyst who covers distressed debt and special situations for a shop on the West Coast. "GM, I think, is not so sure of coming to Delphi's rescue, either. It's not the exact situation that happened with Visteon and Ford."

Delphi's 7 1/8% notes due 2029 dropped 1½ points Monday to 66½ bid, 68½ offered, traders said.

Other issues were very busy, traders said, but little changed with the 6.55% notes due 2006 lingering at 80 bid, 82 offered, the 6½% notes due 2009 off ¾ point at 74¼ bid, 76¼ offered and the 6½% noted due 2013 off about a half-point at 72 bid, 74 offered.

Mirant loans up again

Mirant's bank debt continued to trade up during Monday's session, a trend that has been noticeable ever since the company reached an agreement with creditors and equity holders regarding its reorganization.

The '03 and '04 paper was quoted higher by about three quarters of a point at 104 bid, 105 offered, according to a trader. However, the '05 paper was pretty much unchanged at par ¾ bid, 101¾ offered, the trader added.

Last Thursday, the Atlanta-based energy company announced that it has reached an agreement with its creditors that will lead to an amended plan of reorganization under which $6.5 billion of unsecured debt will be exchanged for 96.25% of new common stock in the reorganized company.

After the agreement was announced, Mirant's bank debt skyrocketed during both Thursday's and Friday's market sessions.

By comparison, last Tuesday, before news of the agreement had hit the market, the '03 and '04 paper was quoted at 91¼ bid, 92¼ offered and the '05 paper was quoted at 93 bid, 95 offered.

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