Delta drifts lower; Northwest firm; Salton bonds slip; Solo Cup bid up

By Ronda Fears

Memphis, Nov. 17 - Airline paper buoyed traffic on distressed debt desks Friday, but Delta Air Lines Inc. bonds drifted lower as players considered that the US Airways Group, Inc. bid has opened a door to a path that may be long and arduous.

Delta's slide was largely attributed to profit taking from the spike that took its bonds to near 70 from the lower 30s area after the US Airways bid popped up Wednesday, as some felt the situation may take a long time to come to a resolution.

"Basically, I think there's a good chance the merger gets done," but it will take a while to play out, said a distressed debt trader. "What we are seeing is a lot of profit taking. If you bought in the 20s or the 30s, it would be hard to resist."

Still, while the ETA for an outcome in the Delta story may take a while, the move toward further consolidation in the airline industry has breathed new life into the bonds of Northwest Airlines Corp., which were still finding a few takers Friday.

Elsewhere, Salton Inc.'s bonds were easing from some exuberance seen on the possibility of a merger with rival Applica Inc. at the behest of Harbinger Capital Partners Master Fund I, Ltd. - a majority stakeholder in both companies.

Solo Cup Co. bonds, however, were bid up Friday after management said it would be looking for financial alternatives or looking to sell assets, but traders noted light activity in the paper amid some skepticism that it could find willing buyers.

Delta bonds off about 4 points

As it seems Delta will vigorously fight a US Airways hostile takeover, the bonds continued to retreat Friday with the most active 8.30% notes due 2029 going out at 59/60 versus the previous day's finish at 63/65.

The 8.30s had soared to the 69 area on Thursday, and some traders mentioned seeing the bonds at 70, but eased back to settle Thursday in the area of 59/60. The descent continued Friday with the issue opening at 60/61, a trader said, and the bonds kept sinking throughout most of the day. Meanwhile, Delta stock also shifted lower with a loss of a nickel, or 3.82%, to close Friday at $1.26.

"They [Delta's bonds] got a bit ahead of themselves," said one distressed bond trader. "They are coming back to reality."

The rise in the bonds was sparked Wednesday by US Airway's $8 billion offer - $4 billion in cash and $4 billion in US Airways stock, which has since risen to a value of $4.7 billion. But Atlanta-based No. 3 domestic carrier Delta has openly resisted a merger and on Friday it was reported in The Wall Street Journal that Delta chief executive Gerald Grinstein and other executives held a series of conference calls with creditors in which they asked them to reject the proposal.

U.S. Airways executives are reportedly still trying to arrange a meeting with representatives of Delta's official creditors committee.

An analyst at a big hedge fund in New York said that while there are "lots of lucrative trades in Delta's capital structure," there was no way that an intelligent analysis of the potential merger could be done.

"No one has put a pencil to this. They can't. There is nothing to work out yet. They are just making wild assumptions based on where other airline bonds are trading," she said. "That said, I know we are very active in this situation. There are a lot of ways to play this, regardless of the outcome, and make money."

Northwest bumped up 2 points

On the other hand, Northwest Airlines' bonds gained another 2 points or so Friday with the 9 7/8% senior notes due 2007 finishing the week at 84/85. The issue had a sinking bout at midday, one trader said, to the 82 neighborhood but bounced back in the early afternoon and didn't see much action in the latter part of the session.

The idea that Eagan, Minn.-based Northwest could go into play by virtue of the Delta merger underscoring the need for further consolidation in the airline sector, even if the Delta/US Airways deal doesn't go through, has propelled Northwest bonds. Another factor, onlookers say, is that No. 4 domestic carrier Northwest might pick up some gates that would likely be sold off in the event of a combined Delta, US Airways operation.

Northwest shares did not participate entirely in the bonds' ongoing rise. The stock traded in a band of $2.05 to $2.74, with some 11.65 million shares changing hands compared with the norm of 2 million shares, but ended the day unchanged at $2.38.

Salton eases on risk exposure

Easing back, Salton Inc.'s 12¼% senior subordinated notes due 2008 were off around 2 points a day after the Lake Forest, Ill.-based small appliance maker inked an exclusivity agreement with Harbinger barring it from any other acquisition talks for the next month.

The issue was quoted at 90, versus an offer of 92 on Thursday.

A distressed bond trader suggested it was a matter of risk exposure.

"It's hard to handicap, because if it doesn't work, if Harbinger decides to walk away, what you are left with is a company that isn't so good on its own," the trader said.

The New York-based hedge fund, part of the well-known investment firm Harbert Management Corp., is in talks with Salton about a possible merger with rival small appliance manufacturer Applica Inc., which agreed in October to be acquired by 40% owner Harbinger. Harbinger said it expects to complete due diligence on Salton and line up funding commitments for a transaction by Dec. 15.

However, in an upside/downside risk analysis, the trader said the situation leans heavier on the negative side, although Harbinger's reputation lends a certain amount of legitimacy to a positive outcome.

"At 90 for the bonds, you have 10 points of upside, but maybe 20 to 30 points downside," the trader said.

"At this juncture, you don't know what to do. I think he's [Harbinger head Philip Falcone] more inclined at this stage of the game to be a long-term investor. The problem is if they don't come to an agreement."

Salton on back burner

A source at another New York-based hedge fund agreed that the situation is worth a look but entails considerable risk, so he's leaving the trade on the back burner for now.

"I would consider buying a secured bond or two as a high risk investment strategy. They have some neat assets but whether they can hold interest with a buyer is a true worry," the buysider said.

"I have not done the homework to see what bondholders would get in a bankruptcy but I believe they would come out OK. For right now, though, I have passed on this one. I will come back to it."

Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances. Miramar, Fla.-based Applica makes and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker and Belson brand beauty salon products.

Last month Salton formed a special committee of its board of directors and hired Houlihan Lokey Howard & Zukin Capital Inc. to conduct a "strategic review" of its business, with the possible sale of the company being among the potential options under study.

That followed Harbinger's call for a merger with Applica. Besides controlling Applica, Harbinger is also a major Salton investor, with 30,000 shares of Salton's series A voting convertible preferred stock, convertible into more than 15% of the company's common stock. Harbinger agreed on Oct. 19 to acquire the remaining 60% of Applica that it does not already own for $6 a share, or $88 million. The transaction is expected to close in the first quarter of 2007.

Solo Cup firms on bid side

On news that Solo Cup Co. is evaluating options to improve its performance, such as alternative financing and the sale of non-strategic assets, traders said the 8½% bonds due 2014 got a couple of nibbles at 87.25 but closed the day back at 83/84, just about where they went home the day before.

A distressed debt trader said he saw a couple of bids at 87.25 get hits, after the bonds opened around 84, but the issue came back at the end of the day to close at the lower level.

Robert Korzenski, chief executive of The Highland Park, Ill.-based maker of disposable cups and plates, said in the company's third-quarter conference call Thursday that following the disappointing showing - a net loss of $339.3 million versus a restated net loss of $13.5 million a year before - it would be looking at alternatives to improve its performance.

"I agree that the company is at least traveling down the right path. My belief is that it is the industry itself that is the challenge. It's hard to make big money these days the old fashioned way," a trader said.

"I think one of the big hesitations may be due to the fact nobody has figured out how all this 'transformation' is going to suddenly cause Solo to be able to earn the cost of capital."

Solo may be left at the altar

Korzenski acknowledged that Solo's third-quarter results were impacted by "continued challenging industry environment, increased raw material costs and isolated inventory management issues." The measure to improve performance comes after a string of initiatives that include big layoffs in April and bringing Korzenski on board as the new CEO in August.

"I think they have a dominant position, if they can get their act together," said another trader. "That's a big if."

But, looking for a buyer of certain assets, or even the entire company, may be constrained by the same industry fundamentals, onlookers said.

"You can walk down the aisle, but that doesn't mean someone is going to be standing down there waiting on you," quipped a buysider. "You might be left at the altar."

The buyside analyst said the most likely buyers of Solo assets are troubled themselves, that being MeadWestvaco Corp. and Packaging Corp. of America.

Solo also is in negotiations, which must be completed by Jan. 2, to close on new amendments to its existing loan facilities or to replace its first- or second-lien facility with new borrowings. Chief financial officer Eric Simonsen said during the third-quarter call that he is confident of meeting the Jan. 2 deadline.

At Oct. 1, Solo's outstanding borrowings, which included its first- and second-lien facilities, its 8½% senior subordinated notes and borrowings in Canada and Japan, totaled $1.15 billion, Simonsen said. The company had cash and cash equivalents of $22.2 million at Oct. 1, compared with $12.1 million at the start of the year, according to its 10-Q.

Solo expects cash flow to slightly increase during the fourth quarter due to moderating raw material costs and a reduction in inventory levels, Korzenski said, but its focus for the remainder of the year will be on implementing initiatives to reduce costs and improve manufacturing efficiencies.

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