Delta solidly higher on sweeter US Airways bid; Northwest adds; Iridium firms; Doral floaters rise

By Ronda Fears

Memphis, Jan. 10 - It was a bumpy ride, albeit upward, for Delta Air Lines Inc. bonds Wednesday as US Airways Group Inc. sweetened its bid for the Atlanta-based bankrupt carrier while renewed rumors that Delta was talking with rival bankrupt carrier Northwest Airlines Corp. about a post-reorganization merger boosted the latter's bonds.

Traders said Delta bondholders waffled between exuberance because of the prospects of an extra $1 billion cash distribution in a US Airways deal and less enthusiasm about holding securities of a "new" debt-laden airline after the bankruptcy case is concluded. As for Northwest, traders said the outlook based on the scenario of a post-bankruptcy merger with Delta would depend on Northwest's ability to attract a White Knight sponsor for its reorganization.

The Delta/Northwest merger buzz in fact has been circulating for a few weeks now and Northwest players are more eagerly watching for details of its reorganization plan, which must be filed by next Tuesday unless the company gets an extension. Meanwhile, particularly in light of the 5-point spike in Northwest bonds on Wednesday, traders said that paper is pretty much "capped out."

"Delta monopolized everything today," as one distressed bond trader put it, but there were a few other issues of note finding some action Wednesday.

Another strong day, for example, was cited for bankrupt satellite telecom Iridium LLC with the bonds moving up to 31 bid, 32 offered as the creditors' lawsuit against former backer and majority owner Motorola Inc. progresses in New York. Iridium creditors are trying to recoup some $3.5 billion plus interest.

"I think they [Motorola] are going to try to ride it out," rather than come to a settlement before the trial is finished, said a distressed bond trader familiar with the situation, who has sat in on the trial proceedings. "But it's not going well for them."

Elsewhere, Doral Financial Corp.'s floating-rate notes traded up 2 points to 94 as market chatter began to circulate Wednesday that a refinancing deal has been struck between the Puerto Rico bank and holders of the $625 million issue. Nothing had hit the wires by press time, but market sources said they expected details by the week's end.

Delta ends up 3-4 points

Delta's bonds opened strong at 70 versus the 64.25 close on Tuesday, then drifted down to 67 before bobbing back up to 70, only to ease back and settle the day at 68 bid, 69 offered, traders said, which was still a strong gain on the US Airways news.

The day opened with news from US Airways that it had raised its bid for Delta by roughly 20%, or $1 billion in cash and 11 million additional shares of US Airways.

Under new terms, Delta creditors would get $5 billion in cash and 89.5 million shares of US Airways stock, for a total deal value of roughly $10.3 billion based on Wednesday's market. The bid is up from a previous offer of $4 billion in cash and 78.5 million shares of US Airways stock, which would be worth about $9.3 billion at current prices. Delta creditors would hold a 49% stake in the combined airline versus 45% previously.

Tempe, Ariz.-based US Airways was created from a merger with America West while it was in bankruptcy in September 2005. The Delta offer would more than double its shares outstanding, which stood at 88.2 million at the end of September. The new debt would also far exceed its current market value of $5.1 billion.

Delta sans US Air 'at any cost'

Delta's opposition to a US Airways merger is so vehement that one trader characterized the renewed buzz that it was in talks with Northwest about a post-bankruptcy merger as a means to "avoid a merger with US Air at any cost."

Last month, Delta submitted a stand-alone reorganization plan valuing the post-bankruptcy carrier at $9.4 billion to $12 billion. And the reaction and the company's answer Wednesday to the new US Airways offer was civil but shadowed by a continued staunch resistance.

"On its face, the revised proposal does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion," Delta said in a statement.

In any event, or perhaps illustrating Delta's desperation to avoid a link with US Airways, another trader remarked, "It's really not up to Delta management to make the call. It is up to the creditors."

US Airways made its original bid for Delta on Nov. 15 and it has served to perforate Delta creditors, with the creditors group in the bankruptcy case leaning toward support of the Delta plan and an ad hoc group of creditors backing US Airways.

Gordon Bethune, the former chief executive of Continental Airlines Inc., is the new independent adviser to the Delta bankruptcy creditors committee, and widely expected to be a vote in favor of the US Airways merger, however. Bethune led Houston-based Continental from 1996 to 2004, taking over after two bankruptcies at the carrier.

On Monday, US Airways bolstered the financial muscle behind its effort by adding Morgan Stanley as a lead backer for its plan, joining Citigroup, raising the committed capital for the merger to $8.2 billion from $7.2 billion. But the afore-cited trader said the cash payout is weighed against some level of ownership in a post-bankruptcy airline made up of US Airways and Delta and a hefty debt burden.

"There are two camps and depending on how you feel about owning the company going forward is where the bets will be, I think," he said.

Delta creditors have until Feb. 1

The outcome is expected to be settled in the next few weeks, as a Feb. 1 deadline was imposed by US Airways for Delta creditors to react to the latest bid. There is a Feb. 7 bankruptcy hearing scheduled to start the voting process on Delta's stand-alone plan, which might be delayed if US Airways gets a signal of support for its plan.

If there is a deal with Northwest in the works from Delta, however, traders said it could impact Northwest's situation as the latter has hired Evercore Group to seek out a merger, presumably in search of a reorganization plan sponsor. In any event, Northwest said 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.

Meanwhile, Northwest Airlines' bonds gained to 101 on Wednesday before easing back to end the session at 98, still a sharp gain from Tuesday's close of 93.

Doral refinancing seen done

Elsewhere, market sources said Doral Financial may have averted a bankruptcy in the refinancing of its $625 million floating-rate note issue that comes due in July 2007, a measure that has been in the works for several weeks now. Rumors that a deal has been struck were circulating Wednesday, and traders said the floaters moved up 2 points to 94 in the last two sessions.

Details of the final terms of any deal were not in circulation Wednesday but the most recent chatter put the bondholders getting about one-third to one-half of the payoff in cash and the remainder in equity.

Negotiations for the split, traders have said, were hinged on a view by the bondholders that Doral shares were worth $1 or less; the stock zoomed on the New York Stock Exchange by 20% on Wednesday to close at $2.53. The stock has come down from more than $4 a couple of months ago when the refinancing talks were said to have gotten under way.

One trader said that his best take on the move in Doral bonds was that big holder(s) might just be "figuring if they are in, they may as well be in big and end up with more of Doral" equity following the refinancing, which would give them more control and perhaps steer the future of the company going forward.

Last week, Doral's chairman of the board, John Ward, resigned after a disagreement with the board of directors over the future direction of the company - including a sale of the company versus piecemeal asset sales. Ward, who became chairman in July 2005 and was later interim chief executive, also objected to Doral's third-quarter earnings release and the process used to draft it.

Doral named Dennis Buchert, an independent director who joined the board in October, to succeed Ward as chairman.

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