Delta, Northwest Airlines dive; Transeastern bank paper rallies, parent bonds slip; Calpine strong

By Stephanie N. Rotondo

Portland, Ore., Jan. 23 - Bad news in oil and growing skepticism among Delta Air Lines Inc. creditors of the hostile bid from US Airways Group Inc. sent Delta's bonds sharply lower, while Northwest Airlines Corp. also took a big hit from rising claims in its bankruptcy case and an overall negative sentiment developing for airline valuations.

Late in the day, traders said it was difficult to read how the market will react Wednesday to new reports that Northwest and Delta have been in detailed discussions about a merger of the two bankrupt carriers, including a time table. The reaction is hard to gauge, as one trader put it, because of the big reversal in valuations for airline stocks on Tuesday.

A miss on earnings from United Airlines parent UAL Corp., which emerged bankruptcy almost a year ago, was a big factor in the declines in the airline sector Tuesday, according to traders across the credit structure spectrum. UAL reported a narrower fourth-quarter loss of $61 million, or 55 cents a share, but that was weaker than Wall Street analysts expected, and the company cut its forecast for 2007 capacity growth to flat or up 1%. UAL, which emerged bankruptcy Feb. 1, 2006, also said it doesn't plan to add to its fleet of aircraft this year.

As discussion continues with lenders of its credit facilities, the joint venture Transeastern made a comeback as its term loan closed the day almost 10 points higher than the previous day. Parent company Technical Olympic USA Inc., however, experienced about a 3-point dip in its 10 3/8% notes.

In other news, with still no news from Calpine Corp., its bonds were strong at par or better and onlookers had no real explanation. Though a previous proponent of the power company, one bond analyst said he sees very little risk value left and wonders what the future holds.

Airline paper in tailspin

Delta's 8.3% note saw a lot of action as oil news prompted an almost 3-point loss in the bond, with one trader reporting the note at 64.5 bid, 65 offer. The announcement of an increase in the nation's strategic petroleum reserve caused a more than $2 spike in crude oil, which closed at $55.04 a barrel. Oil prices were already rebounding this week due to cold weather, after last week's brief dip below $50.

According to U.S. Energy Secretary Samuel Bodman, the reserve will increase its stockpile of oil to 1.5 billion barrels over the next two decades from the current 727 million barrels of oil. The U.S. plans to begin buying 100,000 barrels a day starting this spring.

Meanwhile, Northwest's bonds lost about 5 points, according to one trader. The company's 10% note traded around 101, the trader said, down from last week.

In related bankrupt airline paper, Mesaba Aviation Inc. filed its reorganization plan Monday. Under the plan, it would reemerge as a subsidiary of Northwest Airlines. Northwest would acquire the feeder airline in exchange for a $145 million unsecured claim in Northwest's bankruptcy case.

Northwest filed for bankruptcy in September 2005. Mesaba, a subsidiary of Mair Holdings Inc., filed the following month.

US Air bid deadline nearing

In other Delta news, the company's official creditors committee is reportedly growing skeptical of U.S. Airways takeover bid. Doug Parker, chief executive officer of U.S. Airways, told the Associated Press he was "in the dark" about what the committee is looking for.

That generally was thought to be the cause for resurrecting the rumors of a post-bankruptcy merger between Delta and Northwest, according to one bond trader. And, he said it is widely expected that even if the two carriers ink a merger, it will be after each has completed the bankruptcy process. Delta and Northwest both target exiting bankruptcy around mid-2007.

Delta chief executive Gerald Grinstein, however, denied Tuesday that the company is discussing a merger with Northwest, but he said Delta hired an investment banker to "obtain information" from the airline.

As a backdrop, US Airway's Feb. 1 acceptance deadline is fast-approaching. And, Parker reiterated Tuesday that the date was firm, and, if no agreement had been reached, the $10.2 billion offer would be pulled.

Labor unions and state officials have come out against the proposed US Airways merger, citing concerns of flight reductions and fare increases. Delta has also steadfastly maintained its desire to remain independent. A Feb. 7 date is scheduled in bankruptcy court to discuss the company's disclosure statement of its recently filed reorganization plan.

Transeastern up, parent slides

Transeastern, a joint venture of Technical Olympic USA, Inc., saw its term loan rally on Tuesday as the parent company provided an update on the settlement discussions that are taking place with lenders in the senior and mezzanine Transeastern credit facilities, according to a trader.

The term loan closed the day trading in the 98 context, considerably higher than Monday's 89 bid level, the trader said.

Meanwhile, Technical Olympic saw its 10 3/8% note dip to 91.25 bid, 92 offered, according to one trader. The company closed the previous day around 95.

According to Technical Olympic, the proposal currently being discussed with Transeastern's lenders involves making a significant asset and cash investment in the joint venture or in a separate entity that will purchase some or all of the joint venture's assets.

The proposal contemplates that either the joint venture or the successor to some or all of its assets will become a wholly or majority owned subsidiary of Technical Olympic.

The joint venture or successor entity would then dedicate a portion of its cash flow to service the mezzanine debt.

Furthermore, the proposal contemplates paying amounts due under Transeastern's current senior credit facilities in full via a refinancing at the joint venture or the entity that would continue the joint venture's business.

Hollywood, Fla.-based homebuilder Technical Olympic went on to say that the settlement discussions are only in preliminary stages, meaning that there is still the possibility that it may be unable to agree to a settlement with the lenders or other parties including obtaining necessary consents and financings.

No answers for Calpine

Calpine trades were heavy, though nothing new has been reported on the company. The San Jose, Calif.-based power company's 8¼% notes due in 2007 slipped by 1 point to 104 as its 8½% bonds due 2011 increased a significant 3 points, landing at 100.75.

One analyst doesn't understand the excitement.

"A defaulted note should not be trading at 108," said Jon Kyle Cartwright, director of institutional investment research at BOSC, Inc., a subsidiary of BOK Financial Corp.

Cartwright said he had recommended buying into Calpine at a time when the Street thought very little of the potential of the notes. Now, he said, investors are buying aggressively as the bonds hit par or better.

"We took our 70 points and went home," he quipped.

But Cartwright said he sees very little risk reward left in the company and finds it "difficult to foresee any scenario where these bonds would trade at 108."

Cartwright did say that the increases could simply be explained by "momentum."

"Momentum has a way of feeding itself," he said.

As the Calpine saga continues, Cartwright predicted the outcome.

"We think there is an equity-for-debt swap at the end of this story."

Sara Rosenberg contributed to this article.

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