Doral seen in equity swap talks with bondholders; Delta eases; Northwest steady; autos stalled

By Ronda Fears

Memphis, Nov. 20 - It was a quiet day on distressed desks, traders said, as activity in Delta Air Lines Inc. and Northwest Airlines Corp. cooled off even as the holiday-shortened week began, signaling one of the busiest travel weeks of the year.

Elsewhere, Doral Financial Corp. didn't see much activity in its bonds either, but there was scuttlebutt in circulation that the company is in talks with holders of its $625 million of floaters due next year about a refinancing deal that would involve an equity swap with some cash from the sale of a portfolio of loans.

Auto names were quiet as well, along with pretty much the entire slate of distressed debt issues.

"It's a short week but it will seem longer because not a lot is happening," said one distressed bond trader. "We've got a lot of calls for quotes, you know, stuff like that, but we haven't done a lot today."

Doral sees handful of trades

There were a handful of trades in the Doral floaters, moving the issue up a half-point or so to the 93.875 area, traders said. But, for the most part, the market was trying to distill the rumors about the refinancing in order to decide what to do.

The Puerto Rico-based bank hired Bear, Stearns and JPMorgan last week to help evaluate alternatives for refinancing its $625 million floating-rate senior notes due July 2007 and restructuring its balance sheet to reduce interest rate risk exposure and improve its future earnings profile.

"We know there is some deal in the works, but what portion will be equity and how much cash is there going to be," posed one distressed debt trader.

Another said the buzz is that Doral will be offering a boat load of equity and proceeds from the sale of a portfolio of loans to write-off the $625 million debt, but the details are sketchy. A caveat is that apparently hedged noteholders want to run the stock down to $1 or as close thereabouts as possible beforehand so they get more shares. Then when the dust settles and the stock goes up, they stand to make more money.

Doral shares on Monday lost more than 6% to $4.16 on volume of 2.4 million shares versus the norm of 2 million shares. One onlooker said that from the level of activity and recent short interest in the stock, it doesn't appear that the bondholders have staged any big effort.

"Having covered my short too soon (you can never take money off the table at the right moment) now I haven't a clue as to what to do. I am inclined to do nothing and watch from afar," said one buyside source.

"I think they are going to need a lot of luck to refinance the $625 million in reset notes. If Wakeman [Doral chief executive Glen Wakeman] has to sell assets to do so, it seems the bondholders own Doral. The bonds are senior and they are a short-term bullet pointed at the heart of this company.

"The bankers must orchestrate an asset sale for Doral when every buyer in the Western world knows Doral needs cash. Will they get anywhere near decent prices? It's an exercise that makes me think of the immortal words of the ex-DLJ Bank analyst to Citicorp chairman John Reid, 'Pretend I'm from Mars.'"

Doral preferreds a sweet spot

Perhaps the best place in Doral's capital structure, one sellsider said, is the 4.75% preferred shares, which he pegged Monday at 115.5 versus a par of 250.

"The Doral FDIC call report [cease-and-desist order on Doral Bank] situation looks really sad. I hear they did an accounts receivable facility and a mortgage portfolio sale for liquidity," he said.

"The interesting play is the 4¾% preferred, which if the company gets recapped is best upside piece of the structure."

The buysider agreed. "There is no doubt the preferreds are the sweet spot. The issue is currently yielding 9.54%."

In October, Doral first acknowledged it would require outside financing or other sources of capital to repay the $625 million floating-rate senior notes when they mature on July 20, 2007, saying it might issue high-yield bonds, equity or sell assets to fund the refinancing or restructuring.

Credit analysts have said the company's low capital levels and a high percentage of hybrid equity along with the floaters are troublesome short term, and long-term concerns include regulatory restrictions on Doral Bank, ongoing capitalization constraints, poor operational performance in 2006 and the potential financial impact from lawsuits and the change of business model from a mortgage company to a full-service bank.

Delta bonds drifting off highs

Elsewhere, there was still considerable activity in Delta's bonds, but the issues continued to drift lower as reports over the weekend established that the company plans, in response to the $8 billion merger proposal by US Airways Group, Inc., to develop a reorganization plan by mid-December.

Delta's 8.30% bonds due 2029 were quoted lower by about 1 point to the 59.5/60.5 area late Monday, while the stock continued to climb. The shares ended the day with a gain of more than 11% to settle at $1.40.

After rising to near 70 when the US Airways bid emerged, traders said a considerable number of holders have taken profits.

"A lot of those were booked in at 20 or 30 so you can see that some profits would be pocketed," one trader said.

Delta executives told London-based The Financial Times that the company has "no plans" to seek a white knight and will instead produce a restructuring plan to counter a takeover bid by US Airways, which consists of $4 billion in cash and US Airways stock - which has risen in value from $4 billion when the bid surfaced last week to around $4.7 billion now.

Meanwhile, on Monday, Delta said it would recall about 700 more maintenance employees from furlough, beginning in mid-December. Earlier in November the Atlanta-based No. 3 domestic carrier recalled 1,000 flight attendants.

Northwest strategy shifts

As for Northwest Airlines, traders said the wind was shifting in strategy. The idea that Eagan, Minn.-based Northwest could go into play by virtue of the Delta merger has propelled Northwest bonds, along with speculation that the No. 4 domestic carrier might pick up some gates that would likely be sold off in the event of a Delta merger with US Airways.

Northwest's 10% bonds due 2009 were pegged at 82/83, off about a point, whereas the 9 7/8% due 2007 were still seen "going strong," as one trader put it, with a gain of 2 to 3 points to as high as 86 Monday before easing back to around 83.5 at the close. That, he noted, was against a 7.5% decline in the stock, which closed the session at $2.20.

"The short covering is over, plus the stock was just overbought," the trader said. "Now that there has been some reconsideration of the big drive up, we are back to shorting the common against long the bonds. The problem is the ratio of how much common to short to protect you, yet not kill your return if it doesn't work out."

Delphi, Remy, Dura steady

With little to no news as impetus for the auto-related sector, those bonds bounced around some Monday but basically saw no big changes.

Delphi Corp.'s 6½% bonds due 2009 were quoted at 106, about where the issue went out Friday. On Friday, a bankruptcy judge gave the bankrupt Troy, Mich.-based auto parts maker more time to meet with its unions, creditors and former parent General Motors Corp. to resolve labor contract and parts issues.

Delco Remy International Inc.'s bonds "bounced around a little but ended up, not much changed," according to one trader. He pegged the 8 5/8% bonds due 2007 at 75/76.25 and the 11% bonds due 2009 at 32/33, with "not a lot of trading" in either issue.

Dura Automotive Systems Inc.'s 8 5/8% bonds due 2012 were quoted unchanged at 25.25/26.25.

Last week, several hedge funds involved in the Dura situation were complaining of the Rochester Hills, Mich.-based parts maker's debtor-in-possession financing plans.

"The DIP package becomes the 'new' senior debt. In fact, it becomes senior to all creditors. So, if those funds were spent unwisely or merely to sustain expenses as it continued to lose money, then, the DIP loan took money out of the seniors' recovery," said a buyside market source. "You can see also why, and it's typical, but I don't expect much to come of it."

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