Adelphia bounces, ends steady; Calpine creeping up; Northwest, Delta drift lower; Iridium better

By Ronda Fears

Memphis, Jan. 9 - Activity in distressed bonds continued to be moderately brisk, traders said, but many noted a lot of off-the-run names were moving while many of the better-known names were not seeing a lot of activity.

"Less liquid names are having a lot of buyers and that's good," said one distressed bond trader.

One strong example another trader mentioned was bankrupt satellite telecom Iridium LLC bonds moving up 2 points. Creditors in the Iridium bankruptcy are suing former backer and majority owner Motorola Inc. in an effort to recoup some $3.5 billion plus interest, and the trial is under way in New York. Meanwhile, in the broad sense, Motorola and the telecom sector were showing considerable weakness Tuesday on a string of warnings recently from giants in the group, including Motorola.

Overall, market participants still see "explosive" buying in distressed bonds, as one trader put, but one observer thinks the fuse could burn out around mid-year unless there is a big uptick in defaults and/or bankruptcy filings.

"Credit spreads are very tight, reflecting investors' hunt for yield," a corporate bond strategist at one of the major international banks said Tuesday.

"We envision spreads starting very gradually to turn higher in 2007 as interest rates slowly tick up and that curbs the appetite for yield. That will be very, very slow, though. What's more likely is that credit fundamentals across the credit spectrum will also be eroding. So, the upshot could be a lot of opportunity in the lower end of the market.

"Distressed bonds, however, are probably going to continue to be priced very tight. I think the opportunity there will have to come from fresh paper moving into that area. Where that is going to come from is the big question."

Auto parts supplier Remy International Inc. is one name the market is anticipating could be next, but it would be no surprise so no big move in the bonds would result. In fact, traders say no filing by Remy would produce the big reaction in the bonds, but traders have noted a marked decline in activity in those bonds of late, saying most of the big players in that credit, such as Tennenbaum Capital Partners LLC, have already staked out their positions.

Fedders bonds lifted at 70

Another infrequent name mentioned, from another trader, was Fedders Corp.'s 9 7/8% bonds due 2014 catching a late bid of 70 that was lifted, sending the paper out at 69.5 bid, 71 offered.

The Liberty Corner, N.J.-based air conditioner manufacturer has been struggling for months with deteriorating performance, which prompted the company to hire The Blackstone Group last July to assist in restructuring and possible asset sales.

"That Fedders has retained Blackstone and TM Capital to assist them in restructuring and asset sales could not hurt," he said, saying that it could be successful based on Fedders being a well-known air conditioner brand name. But he said the length of this process has worn down many holders.

Last week, the company said it had completed the sale of its German distribution company, Polenz GmbH, to ACE Klimatechnik, a subsidiary of Electra Consumer Products Ltd., for $7.3 million in cash as it plans to focus on core markets in North America and Asia.

In November, the company said its decision to discontinue sales to The Home Depot retail stores in 2006 was the primary reason for a 19% decline in third-quarter sales to $51.2 million from $63.1 million, but a better customer mix and lower restructuring costs contributed to a narrower net loss of $11.6 million versus a loss of $18.4 million in the year-ago period.

Northwest off as plan nears

The deadline for a reorganization plan from Northwest Airlines Corp. approaches in a week, for which the company said Tuesday it would not seek an extension, but the paper was drifting lower. Delta Air Lines Inc. was lower as well, which one trader attributed to some profit taking while oil prices subside.

Northwest Airlines' 9 7/8% bonds were described as off by 2 points to 93. Delta's 8.30% bonds were said to be lower by about a half point, with the issue pegged at 63.25.

"Everyone is long and many need the next step to occur," one trader said. "With oil lower it should help."

But with the lack of any meaty news in either of the carrier's respective bankruptcy cases some traders said longs were exiting. Northwest did say Tuesday that it would not be seeking an extension of its exclusivity period and plans to meet the Jan. 16 deadline to file a reorganization plan, but there has not been any leaks as to what that might hold.

Meanwhile, oil prices continue to slide amid mild winter weather and selling by large investment funds. On Tuesday, Light, sweet crude for February delivery shed 45 cents to settle at $55.64 a barrel on the New York Mercantile Exchange - the lowest since June 2005.

Adelphia bounces, drops back

In a short-lived gain, Adelphia Communications Corp. bonds got a bounce early Tuesday but didn't manage to hang on to the rise as news spread of its official committee of equity security holders and a bondholder group appealing the order confirming its plan of reorganization, which might delay its exit.

The Adelphia bonds were described as better by as much as 1.5 points early Tuesday, according to one trader, who said the gain "soon faded and went quiet again." The bonds are still hovering around par, however.

Adelphia, the defunct Greenwood Village, Colo., cable company, had its reorganization plan confirmed on Friday, and at that time expected the plan to become effective on Jan. 17, assuming there were no further stays. There is a stay on the confirmation order pending an appeal until Jan. 16.

Meanwhile, Adelphia bondholders that will receive stock in Time Warner Cable, formed by the purchase of Adelphia's cable assets for $17 billion last July by Time Warner Inc. and Comcast Corp., saw that stock continue to slip in when-issued trade Tuesday. The stock dropped to $40 on Tuesday and is down from an open in the gray market on Friday of $43, but some analysts think it's not worth more than $38.

Calpine climbs 3-5 points

In another move without news, Calpine Corp.'s bond improved by as much as 3 to 5 points, traders said, and the gain was attributed to holders taking advantage of the strong bids in the market to pocket some profit on the paper.

The 4.75% bonds were last seen at 86 bid, and one trader pegged the 7¾% bonds due 2015 going out at 79 bid versus an open at 74 and Monday's close of 71.5. Another trader put the 7¾% bonds due 2009 rising to 101 on Tuesday from 98 the day before.

Elsewhere, on bank desks power project bank debt financing also continued to hold strong during Tuesday's session, with Teco Panda being a big mover on the day. The Teco Panda paper went out at 164 bid, 166 offered, up a couple of points from previous levels, a trader said.

Asarco steady on union pact

Tucson, Ariz.-based mining concern Asarco LLC announced Tuesday that it has reached a tentative contract agreement with steelworkers and a coalition of union workers, but the news didn't move the bonds as it was largely expected.

"The news was expected, plus with the bonds [are] trading well over par; the only thing that will move them is an indication that bondholders will get equity in the company," said one distressed bond trader.

According to Asarco, the new contract covers 1,600 hourly workers, and the unions representing the United Steelworkers, International Brotherhood of Electrical Workers, Machinists, Boilermakers, Teamsters, Operating Engineers, Millwrights and Pipefitters.

"This agreement is a tremendous breakthrough for workers in the mining industry," said USW District 12 director and the union's chief negotiator with Asarco, Terry Bonds, in the release.

In addition to substantial economic gains, the release said the steelworkers achieved breakthrough security protections never before achieved in the U.S. mining industry. The unions said they expect to hold ratification meetings in the next two to three weeks, following the preparation and distribution of a detailed summary of the tentative agreement.

Primus running out of carpet

Primus Telecommunications Group Inc. is another rarely seen name that traders said had a little action Tuesday. One trader said the Primus 12¾% notes due 2009 traded at a 4-point loss at 66 versus Monday's close of 70 but the paper recovered to close at 70.75 bid, 72 offered. The Primus 8% notes due 2014 were pegged unchanged at 60.5.

Those levels are rich to one analyst's view, citing little progress in the McLean, Va., long distance provider's efforts to enact a new business initiative in mid-2004 in answer to increasing competition from Regional Bell Operating Companies, or RBOCs, in the bundling of phone service with internet and wireless services.

"Since implementing the new strategy, the company's revenues have declined and net debt has increased. Moreover, Primus' 2005 operating results were terrible," said Samco Capital Markets analyst Caesar Silvestro in a recent report on Primus.

"Primus did not execute any measures to strengthen its balance sheet" in 2006, he added despite asset sales, debt for equity exchanges and debt extension swaps.

Moreover, the analyst said in a conversation with Prospect News that Primus likely will be "running out of carpet" around mid-2007. Although liquidity appears more than adequate to meet short term maturities, he said, if the company is unable to improve its top line revenue growth and/or execute its plan to improve the balance sheet, it could encounter a liquidity event in the latter part of the year.

Thus, he said in his report that the 12¾% bonds at 71 would have little coverage in a bankruptcy scenario, while the 8% bonds at 58 appear to have a great deal of negative news priced into them. At those levels, he said he would be a seller of the 123/4s and would hold the 8s.

Mills drops on troubles

Meanwhile in the convertibles market, The Mills Corp. dropped after the company said it will restate past results and must sell assets to pay off a $1.1 billion loan by end-March to stave off bankruptcy.

Mills' 6.75% convertible preferred fell about 4% outright on Tuesday, weighed by news that the company needs to restate past results following an investigation, and may have to seek bankruptcy protection if it cannot pay off a $1.1 billion loan.

The preferred, which has a $1,000 par, closed at 865 on Tuesday, down by 35.5 points. Mills stock fell 21.75% or $4.12 to close at $14.82.

"The stock got tattooed, wow," a buyside convertible trader said. "Only about 9,000 [preferred] shares traded today, not a lot."

Mills said Tuesday it needs to sell significant assets to repay a $1.1 billion loan that is due at the end of March, or it may be forced to seek bankruptcy protection. Mills also said an internal probe found accounting errors that will require the restatement of accounts from 2001 to the third quarter of 2005 and reduce shareholders' equity by up to $352 million. Mills' shareholders' equity was previously about $1.3 billion. Chevy Chase, Md.-based Mills, a real estate investment trust focusing on retail properties, is currently trying to sell itself.

The convertible preferreds will also now be classified as mezzanine equity by the company, which previously accounted for the preferreds as permanent equity. If Mills common stock is delisted, holders of the convertible preferreds may seek redemption of the securities, Mills said.

"This is obviously a big negative," a sellside convertible bond analyst said. "It's been building over time. This whole saga with Mills has been going on for months, and the news has been slowly getting worse, and culminating the way it has today, obviously the situation has gotten worse."

A sellside convertible bond trader said many holders of the Mills convertibles have exited since the company started to report problems with its Xanadu development and its accounting.

"There's nothing good about this for the convertibles," the trader said. "The preferreds are still holding at about 86.5, but if you ask me there's really no basis for confidence right now. You don't even know what their balance sheet really looks like at this point, and as a preferred holder you're not at the top of the pecking order, so you've got to be worried if they go into Chapter 11."

"There may have been a couple of offers out there for the company, but there's no certainty on a sale," the trader added. "Keep in mind that anyone who buys the company is inheriting a lot of issues."

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