Northwest bonds plummet, bank debt up on bankruptcy buzz; Delta steady as filing also expected

By Paul Deckelman and Sara Rosenberg

New York, Sept. 13 - Time appeared to be running out Tuesday for both Northwest Airlines Corp. and rival Delta Air Lines Inc., with the financial markets expecting an imminent Chapter 11 filing for one or possibly both faltering airline operators, perhaps even as soon as Wednesday. Northwest's bonds fall sharply and now all trade within a couple of points of one another in the low 20s - usually a harbinger of a coming reorganization - although its bank debt actually firmed on Tuesday. Delta's bonds, meantime, were seen little changed, holding pretty steady around the 15-16 level where all of its bonds now trade, even its formerly high-flying 7.70% notes that are supposed to come due Dec. 15.

"I guess the compression is complete," a trader said.

As to Northwest, another trader, paraphrasing a line from the movie "Raising Arizona," colorfully opined that "if a frog had wings, he wouldn't bump his ass a hoppin'," when asked about the ability of Eagan, Minn.-based Northwest to survive without going into bankruptcy.

Those chances - already estimated by most in the market to be somewhere between slim and none - got even slimmer Tuesday, with the announcement by Masaba Aviation Inc., a regional feeder airline, that Northwest had not made a payment of nearly $19 million that was due on Monday. Later in the session, Northwest said that it missed other payments totaling $23 million related to aircraft financing that were due Saturday through Monday. The New York Times' nytimes.com website, quoting unidentified sources, said that both Northwest and Delta could file for bankruptcy on Wednesday.

That torrent of bad news "crushed" the company's bonds, said a trader in distressed issues, who quoted the company's benchmark 8 7/8% notes due 2006, which opened the session at Monday's close around 44 bid, 46 offered, falling as low as 20 bid during the day, before coming slightly off their lows to finish out at 25 bid, 27 offered.

He said that its other issues moved down to near those same levels as the bonds compressed, heading toward a single level that would reflect the market's estimation of bondholders' likely recovery in a bankruptcy. In Northwest's case, that would seem to be in the low-to-mid 20s, as its 9 7/8% notes due 2007 dropped to 23 bid, 25 offered from 35 bid, 37 offered previously, its 7 7/8% notes due 2008 plunged to 21 bid, 23 offered, a 10-point drop from prior levels, and its 10% notes due 2009 were also down 10 points, to 22 bid, 24 offered.

"The big one [mover of the day] was Northwest," another trader said, pegging its 8.70% notes due 2007 at 25 bid, 27 offered, down from 33 bid, 34 offered on Monday.

"Some of these Northwest bonds," like the 8.70s, "were down almost 10 points on the day before they came back a little," he asserted.

But the biggest loser of the day lost way more than that, as the 8 7/8s "really got whacked pretty good," falling to closing levels around 25 bid, 27 offered from 43 bid, 45 offered previously.

The first trader said that the bonds were "on a roller coaster" with all of the bad news and the intensifying bankruptcy speculation, "with some [people] started trading it flat [i.e. without the accrued interest], some trading it with [interest], going up and down. It's unbelievable.

"So far [as of late Tuesday afternoon], they haven't really filed, and guys are switching back and forth." He added that "the big dealers are [still] trading with [interest]."

At another shop, however, a trader said that the bonds "went flat" - a loss of about 2½ points of accrued interest on the 8 7/8s, he noted. He saw those bonds, after having closed on Monday at 43 bid, 44 offered, opening Tuesday at 42 bid, 44 offered, then eased slightly to 41.5 bid, 43 offered - and then completely "go into the toilet" and nosedive to levels as low as 20 bid, 25 offered on the Mesaba news. After that, "there was just no looking back." After hitting the wide 20-25 market, he said, the bonds went flat, before tightening a little to 22 bid, 24 offered, and finally to 25.5 bid, 27.5 offered, trading flat.

A market source at another desk looking over the Northwest carnage estimated that its 7 7/8s due 2008 dropped more than eight points on the session to 24 bid.

Yet another trader saw the 8 7/8s descend to 25.5 bid, 27.5 offered by day's end, a nearly 20-point swoon. He attributed the fall, however, to the New York Times web article indicating that Northwest was going to file, "supposedly tomorrow [Wednesday]," perhaps along with Delta. That, he said, was more compelling than the Mesaba Air payment glitch, which he called merely "part and parcel of the whole situation."

"It doesn't help," he said, while still noting that the Times speculation was the more likely catalyst.

He also noted the late-afternoon announcement that Northwest would not make about $23 million of payments. It said in filing with the Securities and Exchange Commission that the payments, which were due on Sept. 10, 11 and 12, were payments "relating primarily to outstanding equipment trust certificate aircraft financings." Not making those payments "makes sense if you're about to file."

The trader saw people trading the company's bonds at various times both with accrued and without accrued interest.

"At the beginning, when nobody knew what was going on, there was a little mass confusion, they were going back and forth, but it seemed like at the end of the day everyone decided to trade them with accrued, being that the '07 and the '08 paper, if you were to settle a trade today and if they were to pay off their coupon payment on [Sept. 15] on all three issues, they're trading basically with only one day of accrued. So I think that's the reason people are looking at it and saying, essentially that it's not a huge claim on the unsecured paper, only two of them have a point or two of accrued interest built into them, the '06s and the '09s. People decided to trade them with - though that's beside the point."

At his shop, he said they were trading Northwest with the interest - although it should be noted that this was during trading which took place before the company's announcement that it had not made the interest payments on the certificates, which will likely have everyone trading it without on Wednesday.

Northwest additionally faces coupon payments due Friday on both issues of its 2007 unsecured bonds - the 8.70% and 9 7/8% notes - as well as its 7 7/8% notes due 2008. There has been no word from the company on what it intends to do about those bonds, although a bankruptcy filing, should it come in the next few days, will make that a moot question.

In bank debt dealings, Northwest's paper gained about half a point to a full point across the board, even as the rumors of a potential Chapter 11 filing flew around the marketplace.

The term loan A was quoted at 98.25 bid, 99 offered, the term loan B was quoted at 99 bid, 99.5 offered , and the term loan C was quoted at 98.5 bid, 99.25 offered, according to a trader.

Northwest's Nasdaq-traded shares meantime lost more than half of what little value they still have, plunging $1.74 (52.57%) to $1.57 on very heavy trading of 98 million shares - 14 times the usual turnover.

Delta compressed

Northwest, like others operating in its sector, has been struggling with soaring fuel costs and low-fare competition. Perhaps the most obvious victim is Delta, around which bankruptcy rumors have been swirling for over a year.

Now, however, this may finally come to pass, despite the best efforts of CEO Gerald Grinstein and his management team to head it off.

The final piece of the puzzle, according to some in the bond markets, came when the troubled Atlanta-based Number-Three U.S. air carrier's 7.70s, which had previously managed to stay a few points above the company's other bonds, clinging to its levels in the low-to-mid 20s, finally gave up the ghost and fell into the mid-teens - the maximum recovery the market believes all bond holders will get.

On Tuesday, a trader said, Delta's 7.70s were unchanged at 16 bid, 18 offered, its 10% notes due 2008 were likewise unchanged at 15 bid, 16 offered. That was also the level to which the company's 7.90% notes due 2009 and 8.30% notes due 2029 both firmed, from prior levels at 13 bid, 14 offered.

"I didn't see anything trading above 16," the trader said. "I'd say this compression [of bond price levels] is complete. The rumors say they're going to file [Wednesday]. "

"Delta just stinks," said another trader, who saw all of its bonds around the 14.5-15 level. "Everything is compressed. [Wednesday] is the day."

He suggested, jokingly, that Delta and its bitter rival "just hold hands and file together. Maybe then they could merge in bankruptcy."

Collins & Aikman down

In the automotive sector, Collins & Aikman Corp.'s 10¾% notes due 2011 lost two points to end at 38 bid, 40 offered, although nobody said they had seen any fresh news out on the bankrupt Troy, Mich.-based automotive components supplier.

Charter gains more

Elsewhere, a trader said, Charter Communications Corp.'s bonds were up half a point across the board, as the St. Louis-based cable operator's "continued to bask in the afterglow'" of the company's announcement Monday of the early results of a big debt-exchange offer that slightly reduced its $18 billion-plus debt load, while also extending maturities on many issues. Otherwise, there was "no new news."

He quoted the cabler's 8 5/8% notes due 2009 having firmed to 85 bid, 86 offered, while its 11 1/8% notes due 2011 were also half a point better, at 78.5 bid, 79.5 offered.

Mirant eases after run up

Back among the bank debt investors, Mirant Corp.'s 2003 and 2004 paper took a breather on Tuesday, actually coming in off its recent highs by about half a point during market hours, according to a trader.

The '03 and '04 issues were quoted at 103.5 bid, 104.5 offered, down from Monday's levels of 104 bid, 105 offered, the trader said.

However, the 2005 paper stayed pretty much unchanged at 100.5 bid, 101.5 offered, the trader added.

Last Thursday, the bankrupt Atlanta-based energy company announced that it has reached an agreement with its creditors that will lead to an amended plan of reorganization.

Since news of the agreement hit the market, its bank debt has pretty much been on a continuous trip higher - until now.

Mirant's 7.40% notes that were to have come due last year were up ¾ point to 115.75, a bond trader said, while its 7.90% notes due 2009 were half a point better at 116.5.

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