Northwest, Delta fly off into Chapter 11; Mirant bank debt continues retreat

By Paul Deckelman and Sara Rosenberg

New York, Sept. 14 - Distressed debt investors might be forgiven for thinking they were seeing double on Wednesday, as Delta Air Lines Inc. and competitor Northwest Airlines Corp. each sought Chapter 11 protection from their bondholders and other creditors in separate filings at the same courthouse - the U.S. Bankruptcy Court for the Southern District of New York, in Manhattan, and the news of the two filings successively hit the tape maybe half hour apart, after the market had wrapped up trading for the session. It was an historic event believed to be unprecedented in U.S. corporate history - two large rivals in the same industry filing for bankruptcy on the same day, and before the same court to boot.

Elsewhere, traders saw the bonds of Delphi Corp. pushing higher, as bondholders of the troubled Troy, Mich.-based automotive electronics manufacturer - itself fighting to stay out of bankruptcy - apparently felt optimistic that former corporate parent General Motors Corp. will step up and help the company the way GM's Big Three rival Ford Motor Co. helped one of its former units, Visteon Corp. Final details of the Ford bailout of Visteon were announced on Tuesday.

In the bank debt market, Mirant Corp.'s loans continued to drop during Wednesday's market hours, making this two days in a row that the paper moved down, after a recent strong run-up.

Delta, Northwest steady

Among the airlines, market participants saw Delta and Northwest's bonds holding around the same levels to which they had been whittled down, with Delta in the mid-to-upper teens, and Northwest - whose bonds plunged badly on Tuesday - around the mid 20s. Both sets of bonds were now trading flat, or without their accrued interest, following their respective filings (see related stories elsewhere in this issue for full details of the companies' respective bankruptcy filings).

Traders explained that there were no huge price movements, since the bankruptcy buzz had been swirling around Delta for many months, and around Northwest for a number of weeks.

A trader said that before the news of Northwest's bankruptcy filing, which hit the tape shortly after 5 p.m. ET, the Eagan, Minn.-based Number-Four U.S. airline carrier's benchmark 8 7/8% notes due 2006 had risen to 30 bid, 32 offered from prior levels at 27 bid, 29 offered, its 10% notes due 2009 were a point better at 24 bid, 26 offered, while its 8.70% notes due 2007 and 7 7/8% notes due 2008 were each unchanged at 25 bid, 27 offered, and its 9 7/8% notes due 2007 were also unchanged at 26 bid, 28 offered, with all bonds trading flat following Tuesday's news that Northwest had not made some $42 million in obligated payments to regional carrier Mesaba Aviation and to holders of some of its equipment certificates.

Another trader saw the 8 7/8s at 29.5 bid, pre-filing.

After news of the filing, yet another trader said, the 8 7/8s dropped to 22 bid, 24 offered, down eight points from where they had been, while the 10s were also at that level, down two points from where they were pre-news, with all the bonds trading flat, "and that's all you need to know."

Northwest's Nasdaq-traded shares - which had lost more than half of their remaining value in very heavy trading on Tuesday - on Wednesday recovered some of their lost ground, rising 30 cents (19.11%) to $1.87. Volume was 78.5 million shares, about 11 times the norm.

As for Delta, a market source said that the company's 7.70% notes slated to come due Dec. 15 were trading at 16.5, down from 18.5 previously. He saw the 7.90% notes due 2009 unchanged at 15.75, while its 8.30% bonds due 2029 actually rose half a point to 16 bid.

A trader at another shop, noting the news of Delta's filing shortly after 4:40 p.m. ET, said that all of the company's bonds were trading at 15.5 bid, 16.5 offered, trading flat, up from 15 bid, 16 bid, earlier.

He said that "It doesn't matter" any more about the coupon and the maturity since all bonds in a bankruptcy situation trade pari passu.

At one time some weeks back, Delta's benchmark 7.70s had traded substantially above its other bonds, such as the 7.90s and the 8.30s, among others, which eventually compressed to trade right on top of one another - but the 7.70s began careeening downward and this week finally joined the other bonds around the mid-teens.

Another trader saw all of the bonds at 16 bid, 16.5 offered, trading flat, while a third saw them after the filing at 16 bid, 17 offered, flat, up from 15.5 bid, 16 offered earlier on.

Delta's New York Stock Exchange-traded shares, now considered a distressed penny stock, dropped seven cents (8.71%) to 71 cents per share on volume of 27.6 million shares, almost triple the usual turnover.

A trader said that from where he sat, "it's certainly a possibility" that either the Delta bankruptcy or the Northwest insolvency - or maybe even both - might be a prolonged process, not unlike the marathon restructuring that UAL Corp., the corporate parent of Number-Two U.S. carrier United Airlines, has been undergoing since December 2002.

Elk Grove Village, Ill.-based UAL is now expected to emerge from bankruptcy sometime early next year, and the trader said the company "is milking it for all its worth," since as long as it is in bankruptcy, it doesn't have to service any debt, unlike its competitors, and it has managed to off-load its pension obligations onto the federal government's Pension Benefits Guaranty Corp.

He opined that both of the newly bankrupt airlines may well have decided to file now because the federal bankruptcy laws are scheduled to change on Oct. 17. Among other things, debtors filing after that deadline will have less time in which to present a reorganization plan, opening the way for creditors and other stakeholders to submit plans not necessarily to management's liking. "In doing so [filing now], they are allowing themselves plenty of time to do what they need to do - there is no time constraint to file a reorganization plan."

Although bankruptcy has traditionally been seen as a last resort when all else has failed, the trader said that now that the other shoe - finally - has been dropped by both Northwest and Delta, "this could be good" for each company, and for the industry.

"If all goes according to plan, they should come out smaller, and I think everyone is hoping for some consolidation action" that will cut down on the airline industry's overall capacity - the number of planes flying and seats available, a glut which has helped to keep ticket prices at levels too low to generate enough revenues to help the carriers cope with skyrocketing fuel prices and other expenses.

"These companies will shrink, because they will have to shrink, and in doing so, some company, or another airline can scoop them up or merge with them," the way AmericaWest Holdings Corp. is buying US Airways Group Inc. out of bankruptcy, a deal given final approval by the Arlington, Va.-based Number-Seven U.S. airline's creditors on Wednesday.

One scenario which he said is not beyond the realm of possibility is the combination of Delta and Northwest themselves, about which he said "rumblings have been heard" in the market for a while. "It's possible, you never know. If it does happen, [they're] going to do what should have happened 25 years ago - the elimination of the duplicate service the two competitors currently run to the same markets, instead letting Delta focus on its southern U.S. base while Northwest builds on its strength in the Midwest and its international routes.

However, he noted, "that's just one option. A number of different things could happen. But I hope that this industry changes for the better now - people have learned their lessons."

While it's possible that either Delta or Northwest could merge or, more likely, be acquired by another carrier not currently in bankruptcy, the way AmericaWest is buying US Air, or the way industry leader AMR Corp.'s unit, American Airlines, acquired Trans World Airlines Inc. in early 2001, such combinations are by no means a panacea for the industry.

Analyst sees merger difficulties

One airline industry analyst skeptical about consolidation scenarios is Bill Mastoris, a managing director at BNY Capital, who notes that a major obstacle in trying to make two separate organizations into one is how to handle the seniority issues that would come up in combining the workforce groups of two merging companies, each with their own seniority schedules. This is especially true since any merged entity will likely be smaller than the sum of the two pre-merger companies, in terms of fewer routes flown and fewer planes in the air - meaning fewer pilot and other air crew slots and, down the line, fewer ground crew positions as well.

"The merging of the pilot group is going to be extremely difficult," he cautioned. "We've seen an indication of that with AmericaWest and US Air. It's not necessarily a smooth operation, and if you go back throughout history, it's been very, very rough, and the track record for airline mergers has been pretty miserable."

As for the possibility that Delta and Northwest might be able to merge with one another, if they can find a strong financial partner to help them out, he said that "you had a lot of analysis that's been done on United by a lot of different groups that would [potentially] take a position, but nobody has really stepped forward in a very volatile fuel price environment, with what is still generally characterized as an uncertain fare environment" - and United's assets are probably better and more attractive to a would-be investor than a combined Delta/Northwest entity's would be.

Mastoris said "neither carrier really wanted this."

He said a "confluence of factors, and the short time frame in which they had to get a lot of very difficult tasks accomplished" pushed the carriers into the courts. Seasonally speaking, he said that if each airline is "not at their peak cash levels right now, then they're awfully close" - but even so, they were still not able to overcome all of the various financial obstacles, including fuel costs, which left bankruptcy as "probably the best [alternative], although it was an unfortunate alternative."

The analyst disagreed with the proposition that the impending change in the bankruptcy laws helped to perhaps artificially speed up the decision to file for protection on the part of each company.

While the Oct. 17 deadline might be a factor to be considered, "given the fact that fuel is fairly high at this point, and given that there's an uncertainty looking forward into the seasonally weak fourth quarter and [2006] first quarter when it comes to passenger traffic, and it's also a period that's characterized generally by lower fares than you have during the peak season, I'm not sure it would have made a huge difference."

That having been said, the deadline was there, he said, as "an absolute must" date by which the carriers would have had to have achieved their pension relief and have gotten their labor cost concessions, in the case of Northwest, if they were to have avoided bankruptcy.

"I know that [Delta chief executive officer] Gerry Grinstein tried to do everything he possibly could to keep Delta out of bankruptcy, which is the right thing to do - but also, by the same token, what [he] needed to get done, in terms of additional concessions, additional funding, in conjunction with fuel prices, made that Oct. 17 date seem a whole lot larger than it would have otherwise appeared several months ago." It "loomed a whole lot larger as liquidity was eroding."

Mastoris said that while Hurricane Katrina - which caused energy prices to shoot up after it disrupted Gulf of Mexico petroleum production - "certainly did not help," it would not be accurate to say that the hurricane was what pushed the two carriers over the final precipice and into bankruptcy, since "all of the same general macroeconomic trends and factors [in place before the storm] were still there, while fuel prices, after spiking upward, have since come back down to levels "not inconsistent with where they were before Katrina actually hit."

Analyst sees cases shorter than UAL

He does not believe that either company - even with the extra time granted by the current bankruptcy laws - is likely to be in Chapter 11 for anywhere nearly as long as UAL has been. "This is going to be a much more extradited bankruptcy."

He said that the aircraft market "has been largely defined in terms of lease rates and value," while "the labor rates are pretty clear," including fair compensation for pilots, mechanics baggage handlers, reservation agents and the like.

"I think there's not going to be a huge disagreement there."

The UAL bankruptcy process, extended as it has been, has now created "a blueprint" for dealing with the insolvencies of other large, nationwide legacy carriers such as Delta and Northwest.

The UAL reorganization has been long and contentious in part due to United's efforts to shed its heavy pension burdens, which were eventually absorbed by the PBGC , and Mastoris cautioned that "the threat will clearly be there" that either Delta or Northwest, or both, might seek a similar federal takeover, since both airlines, before their bankruptcy, had been loudly lamenting the negative impact their pension obligations had on their finances - Grinstein and his opposite number at Northwest, Douglas Steenland, even went to Washington in early June to testify before a Senate committee, seeking approval for extending the time they would have to make up their unfunded pension liabilities.

"I think it would be incumbent upon Congress to go ahead and act, certainly before year-end, and I am sure that will be communicated" by the companies, and "if you don't get it, I think you could have a dumping of those pensions."

However, he said that the Delta and Northwest employee groups - which saw how their the pensions of their counterparts at United, as well as at US Airways, were reduced when PBGC took the United plans over - "are going to work to preserve those pensions, and will be willing to sacrifice more, in terms of wages and non-pension benefits, than they have at any time in the past" in order to preserve their pensions. "What happened at United, and what happened at US Airways clearly has had an impact, no question."

Mirant loans down again

Elsewhere, Mirant's bank debt was weaker by about a point across the board with the 2003 paper quoted at 102.5 bid, 103.5 offered, the 2004 paper quoted at 101.5 bid, 102.5 offered and the 2005 paper quoted at 99.5 bid, 100.5 offered, according to a trader.

No specific company news was seen as pushing the bank debt down, 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.

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

Mirant's 2½% convertible notes due 2021 were seen to have lost half a point to 98.5 bid, 99.5 offered. Its 7.90% notes due 2009 were unchanged at 114 bid, 115 offered, while its 7.40% notes that were to have come due last year hung in at 113 bid, 114 offered.

Delphi loans higher

Delphi Corp.'s revolving credit loan felt stronger in Wednesday's dealings, as the loan's security package essentially took full affect.

The revolver traded around 97 and closed out the day quoted at 97 bid, 97.25 offered, according to a trader. On Tuesday the revolver had closed out the session quoted at 96.75 bid, 97.25 offered.

"This thing got done in June," the trader said about Delphi's revolver. "It takes 90 days to perfect the lien. Today or tomorrow is the day that the liens were perfected."

A bond trader meantime saw Delphi's 6.55% notes due 2006 up two points at 82 bid, 83 offered, while its 6½% notes due 2009 and 6½% notes due 2013 each gained three points, to 77 bid, 78 offered, and 74 bid, 75 offered, respectively. Its 7 1/8% notes due 2029 also finished three ahead, at 69 bid, 70 offered.

The trader, in noting the rise, opined that Delphi's bondholders "think GM is going to come in and bail 'em out" - but he said that what was really happening was that "they're jumping out of the frying pan and into the fire. If GM comes in, they'll take all of the best assets as security - and will leave bondholders holding the bag."

Also in the automotive sector, Collins & Aikman Corp.'s benchmark 10¾% notes due 2011, were seen having risen to 40 bid, 42 offered from 38 bid, 40 offered previously.

Outside the autosphere, Salton Corp.'s 10¾% notes scheduled to come due on Dec. 15 were seen holding steady at 85 bid, while its 12¼% notes due 2008 stayed at 55.5 bid, after the Lake Forest, Ill.-based maker of the popular George Foreman brand electric hamburger and hotdog grills and other small appliances said that it would delay release of its fourth quarter and full-year numbers, citing its recent big debt-swap offer, which saw Salton eliminate $75 million of the $125 million of 10¾% bonds by giving their holders newer debt, plus common stock.

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