Delphi mixed; Tower savaged; Delta, Northwest chased higher; Doral bonds gain; Six Flags flies

By Ronda Fears

Memphis, Jan. 11 - As the bankruptcy hearing got under way Thursday in the battle for control of the reorganization of auto parts supplier Delphi Corp., traders said there was mixed reaction in the bonds with no real feeling yet emanating from the proceeding. In general, the bonds were described as fairly steady to weaker on some late-day selling as bids got lifted.

It was a slaughter for the securities of fellow auto parts supplier Tower Automotive Inc., however, as three bondholders who were sponsoring its equity rights offering suddenly pulled out.

On a more positive note, perhaps, traders said Delta Air Lines Inc. and Northwest Airlines Corp. marked further gains as buyers continued to chase the paper; some, however, felt that the gains are overly optimistic.

Refinancing talks that had seemed to be going positively for Doral Financial Corp. and its floating-rate note holders a day before, however, suddenly turned sour Thursday, sources close to the talks said. Noting the floater comes due in July, one source said that if the parties remain at an impasse, the bondholders may force the company into bankruptcy. Yet, Doral securities were better on the day.

There was some activity in another troubled financial name Thursday, too, in fact an aged bankrupt financial - Bank of New England Corp., which was in bankruptcy 10 years ago. But a trader remarked Thursday that the subordinated bonds moved up a half point to 8.5; he pegged the senior bonds, which essentially are sitting in one place, at 17. The trader said that while the bankruptcy case has been long gone, there remains an ongoing dispute between the senior bondholders and subordinated bondholders as to the payout.

In other refinancing buzz, Level 3 Communications, Inc. traded sharply higher Thursday, and the move was largely unexplained by traders during the regular session, but after the closing bell the company announced a debt-for-equity swap.

Elsewhere, it seems Six Flags Inc. managed to take some heat off with the sale of seven theme parks for $312 million, which moved its bonds up by as much as 3 to 4 points, but one trader said the sale price was a disappointment.

Delphi plan hearing begins

A hearing began Thursday and could go into Friday in bankruptcy court for Delphi's $3.4 billion plan of reorganization backed by a group of private equity, hedge fund and investment bank investors, which is being contested by hedge fund Highland Capital Management LP with a rival bid of $4.7 billion.

The U.S. Trustee also is contesting the Delphi process of going directly to the court for approval, circumventing the normal course of a vote among the parties in the bankruptcy case.

Traders said the reactions in the bonds was mixed as there was no strong indication of how the arguments were going Thursday, and late in the day with three more witnesses scheduled to testify, the hearing would likely be continuing Friday.

"The most negative outcome probably is a delay; nothing is getting decided in this hearing I don't think," one trader said.

Delphi's 6.55% notes were described as steady to a little firmer at 112 by one trader. But he added that the Delphi 6½% bonds due 2009 traded as high as 112.5 versus Wednesday's close of 111.75 before dropping back to end the day with a loss of about 1.5 points at 110.25.

The run-up sparked some selling to take profits late in the session, the trader said.

Delphi's proposed plan would be backed by Appaloosa Management LP, Cerberus Capital Management LP and Harbinger Capital Partners Master Fund I, along with Merrill Lynch & Co. and UBS Securities LLC, which have pledged $1.4 billion to $3.4 billion for 30% to 70% of reorganized Troy, Mich.-based Delphi. It includes a rights offering at $45 per share.

The Delphi-submitted plan, which was filed Dec. 18, also depends on consensual resolution of its labor agreements by Jan. 31, but it has garnered support from former parent and still biggest customer General Motors Corp., and the labor unions have indicated support.

Highland's plan, submitted Dec. 21, has been rejected by Delphi but has found support from Delphi equity holders as it would give roughly $1.3 billion more ownership in the reorganized company to current equity holders. Highland and the Delphi equity committee also have complained that the Delphi plan would give the supporting investors the right to buy at least 40 million shares at $35 a share, a big discount to the $45 rights offering.

Tower bonds plunge 5 points

As a reminder that even deals thought to be sealed can fall through, Tower Automotive announced that the sponsors of its planned $250 million rights offering to exit bankruptcy - Strategic Value Partners LLC, Wayzata Investment Partners LLC and Stark Investments - had suddenly pulled out of the deal that was inked almost a month ago.

"Tower bonds were savaged," as one distressed bond trader put it.

The 12% bonds due 2013 of parent R.J. Tower Corp. fell 5 points to an offer of 10 with no bids; no trades were printed, either. Even though the rights offering would not directly impact Tower shares, the Pink Sheets traded stock fell more than 28% to about 8 cents, and its 6¾% preferred also was said to be lower.

"You could bid 9 and probably get them," the trader said, "but I wouldn't be surprised to see them go to 5 or 6."

Novi, Mich.-based Tower was the first of the domestic auto parts suppliers to file for bankruptcy in 2005 as their performance came under pressure from high steel prices and production cuts amid trouble at U.S. automakers GM and Ford Motor Co.

On the news Thursday, however, Tower said it has received other proposals from interested investors and continues to evaluate those proposals with the goal of completing its restructuring in the first half of 2007.

In a deal announced Dec. 20, Tower said the three bondholders had committed to backstop $225 million of the $250 million rights offering, which would be the framework for its reorganization plan.

Tower had been in continuing discussions with lenders on a plan for the maturity of its current debtor-in-possession facility, which expires in February.

In the bank loan market, Tower's first-lien term loan under its DIP financing facility took a slight tumble on Thursday's news as well, according to a trader. The first-lien term loan closed the day at 98.5 bid, 99.5 offered, down from previous levels of 99.5 bid, par offered, the trader said.

Doral talks breaking down

In another example of deals gone bad, market sources were saying Thursday that refinancing talks between the Puerto Rico bank Doral Financial and holders of its $625 million of floating-rate notes, which had been described as virtually wrapped up the day before, were either exaggerated or suddenly went south.

"With every stroke of the pen this changes, you know," said one source who is familiar with the talks. "Needless to say, it's not over yet."

Nonetheless, the floaters traded up Thursday by almost 2 points, and Doral shares added another 3.5% on the New York Stock Exchange. One bond trader pegged the floaters going out at 95 bid, 96 offered versus a 94 close Wednesday; another trader said the issue eased back to close at 94. The Doral 4¾% preferreds moved up as well but in a wide spread of 98 bid, 102 offered.

The major points of contention remain the equity portion of the refinancing talks, sources said. The negotiations have been going on for several weeks now and have always suggested a debt-for-equity swap plus some level of cash. The chatter Thursday put the cash portion of the discussions as low as $275 million to a cap of $295 million.

As for the equity portion of the refinancing, bondholders had been arguing that the value on the stock should be around $1 per share but chatter Thursday suggested an agreement to a strike price of $1.75 if they could get a senior convertible preferred or bond, as they are currently senior creditors with the floater. Doral shares have come down to $2.62 on Thursday from more than $4 when the refinancing talks were said to have begun in November.

But, one onlooker noted that covenants in Doral's existing preferreds, and there are four or five issues, would have to be amended to permit more senior paper. Yet, he could understand the holders of the floaters wanting to retain senior status in the capital structure.

The floater matures in July 2007 and if something cannot be ironed out by then, onlookers speculate that the bondholders will force the company into bankruptcy. In addition to the refinancing matter, Doral is combating regulatory issues with its banks and financial reporting requirements.

One source said another point of contention with the bondholders is that they want the company to establish a litigation reserve in the neighborhood of $250 million to $750 million, and may be pushing for asset sales to accomplish that.

The troubles at Doral have sparked a string of leadership changes. Last week, the 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 was named chairman in July 2005.

Level 3 bonds gain nicely

In other refinancing buzz, Level 3 Communications, Inc. traded sharply higher Thursday, and the move was largely unexplained by traders during the regular session. However, well after the market close, a trader said the 11½% bonds due 2010 traded up as much as 8 points on rumors of another refinancing deal. The company announced a deal after the closing bell, but it turned out to not affect that issue.

After the close, the Broomfield, Colo., internet backbone company announced another stride in its previously stated goal of refinancing its 2010 and 2011 tenor bonds, with a debt-for-equity exchange of $490 million of its 10% convertible notes due 2011 for 160.1 million shares plus accrued and unpaid interest.

That works out to an equivalent of 326.78 shares per $1,000 note, a hefty premium to the bond terms that provide a conversion rate of 277.77 shares per $1,000 note.

Level 3's convertibles did not move, according to the trader, but the 11½% notes traded as high as 114 on Thursday before easing back to end at 107.5 bid, 108.5 offered, still a nice gain from Wednesday's close of 106. Level 3 shares were sharply higher Thursday as well, even into after-hours activity, but traders expect that will be reversed Friday on the dilution from the debt-for-equity swap.

As a result of the exchange, Level 3 expects to reduce its 2007 cash interest expense by about $47 million. The notes are not callable until May 1, 2009.

In December, Level 3 sold a $500 million add-on to its 9.25% notes due 2014 to fund a tender for the 10¾% notes due 2011 at 109.

Six Flags bonds add 3-4 points

Elsewhere, Six Flags has "bought some time," as one trader put it, by selling seven theme parks for $312 million, but he was not impressed with the price tag for the properties - three water parks and four theme parks. He noted that credit analysts were not overly impressed with the transaction, either, as Standard & Poor's said it was keeping Six Flags ratings on negative watch.

"For a while it looked like they weren't going to be able to sell anything and this price tells me why; I thought they could raise more," the trader said.

Six Flags bonds moved up on the news, however, as some of the proceeds is earmarked to pay down debt. Near the market close, the trader pegged the 9¾% bonds due 2013 up to 98.25 from 94.5 the day before, while the 8 7/8% bonds due 2010 rose to 99.875 from 98.875 and the 9 5/8% bonds were steady at 95.

Six Flags has sold the parks to PARC 7F-Operations Corp. of Jacksonville, Fla., for $312 million - $275 million in cash plus a receivables note for $37 million. According to Six Flags, the seven parks had an estimated $30 million of EBITDA with 2006 attendance of around 3.6 million.

"We're pleased with the sale price for this portfolio of parks, particularly since we were able to retain the Magic Mountain parks," Six Flags said in a statement. "This transaction confirms the value inherent in our major market branded parks."

The deal is part of a plan Six Flags unveiled last year, when it identified a number of parks it planned to sell off in an effort to cut debt and sell off noncore assets. But the company will hang on to its two attractions in the Los Angeles area, Magic Mountain and the adjacent water park, Hurricane Harbor, which had been on the auction block.

Delta, Northwest run on chasers

Delta Air Lines and Northwest Airlines bonds continued to move up on the heels of US Airways Group Inc. sweetening its bid for the Atlanta-based bankrupt carrier Delta by roughly $2 billion although buzz that Delta was talking with Northwest about a post-reorganization merger cooled off considerably. While the sharp pullback in oil prices helped considerably, some players are thinking the paper has gotten expensive.

"You believe they have stopped running and then there they go again," said one distressed bond trader, referring to the addition of another 2 to 3 points in Delta bonds Thursday. He put the bonds going home at 70.5 bid, 71 offered, up from 68 bid, 69 offered on Wednesday.

As for Northwest, the trader said, "People were trying to chase it, and it ran too fast."

Northwest bonds were along for the ride, indeed. Another trader pegged Northwest's 10% bonds trading as high as 103 and the 9 7/8% bonds up to 102.5 before both drifted back to close at 99.5 bid, 100 offered versus a 98 close on Wednesday.

US Airways has raised its hostile bid for Delta to $5 billion in cash plus 89.5 million shares of US Airways stock from a previous offer of $4 billion in cash and 78.5 million shares of US Airways stock. Delta creditors would hold a 49% stake in the combined airline versus 45% previously.

US Airways made its original bid for Delta on Nov. 15, which Delta has continued to fight. Last month, Delta submitted a stand-alone reorganization plan valuing the post-bankruptcy carrier at $9.4 billion to $12 billion.

Delta creditors must react to the latest US Airways bid by Feb. 1. There is a Feb. 7 bankruptcy hearing scheduled to start the bankruptcy court process on Delta's stand-alone plan.

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