Delta lifted ahead of bankruptcy exit; Remy rolls a point higher; Technical Olympic trimmed back

By Ronda Fears

Memphis, April 2 - The Passover holiday, which began Monday night and continues through midweek, put the kibosh on trading activity in distressed bonds and traders were anticipating a difficult week altogether. Additionally, the opening day for the New York Yankees and school breaks in the New York City area drew many other traders and market participants out of their seats.

Beyond the Jewish religious holiday, bond trading will be shortened to just a couple of hours on Friday in observance of Good Friday ahead of the Christian religious holiday, Easter, and traders don't expect many trades at all to be printed that day.

"It will be a tough week to get anything done," as one trader put it.

Even news from Remy International, Inc. that it will discontinue financial reporting with the Securities and Exchange Commission failed to generate much action. The company also confirmed market speculation that it is in discussions with noteholders on a recapitalization plan, but traders said "there wasn't anyone around to negotiate with."

Thus, traders said the Remy senior bonds showed very little trading activity, but were pegged probably a point or so higher, and the subordinated bonds weren't even mentioned.

Technical Olympic USA Inc. bonds, however, pulled back from recent advances, which one trader attributed to some anxiety about the possibility that the Florida homebuilder may have to absorb at least some of the debt of its joint venture Transeastern. Also, Moody's Investors Service on Monday cut Technical Olympic's senior notes a notch into the distressed C rating category and the subordinated notes a notch deeper into the C rating category.

Elsewhere, Solo Cup Co.'s notes were unchanged from Friday at 85, following gyrations last week after the Highland Park, Ill.-based maker of disposable cups and plates reported quarterly results.

Delta Air Lines Inc. was described by several distressed traders as probably the most active bonds in their neck of the woods, although the paper moved very little in terms of price.

Delta bonds lifted slightly

One trader described the activity in Delta as the "typical positioning and repositioning you see just before a company emerges bankruptcy," noting there was no fresh news on the carrier Monday. The bonds did not move much in the way of price, with the 8.3% issue closing out at 57 3/8 bid, 58 offered from an open of 57, but traders at several desks remarked that there was brisk activity in the paper.

The trade cited above said the market did like news from Delta Friday outlining its new board of directors once it exits bankruptcy, which is scheduled to take place at the end of this month.

On Friday, Delta said it has formed a newly constituted board of directors to take effect when the carrier emerges from Chapter 11. The 11-member board, which includes chief executive Gerald Grinstein, was selected by the official committee of unsecured creditors in consultation with Delta.

It includes Richard Anderson, executive vice president of UnitedHealth Group Inc., John Brinzo, chairman of Cleveland-Cliffs Inc., Daniel Carp, former chairman and CEO of Eastman Kodak Co., Eugene Davis, chairman and CEO of Pirinate Consulting Group LLC, Richard Goeltz, former vice chairman and chief financial officer of American Express Co., David Goode, former chairman of Norfolk Southern Corp., Victor Lund, former chairman and CEO of American Stores Co., Walter Massey, president of Morehouse College in Atlanta, Paula Rosput Reynolds, president and CEO of Safeco Corp. and Kenneth Woodrow, former vice chairman of Target Corp.

After about 18 months in bankruptcy reorganization, the third-largest domestic carrier is expected to emerge from Chapter 11 on April 30. It will issue new shares, which are expected to begin trading in early May. Its current shares will be canceled as part of its reorganization plan.

Remy ratchets up a point

Remy's announcement Monday that it will no longer be filing financials with the SEC was seen as a linchpin in the auto parts supplier's efforts at recapitalization negotiations with bondholders and other creditors. Market buzz of a rights offering sparked a surge in the bonds in recent weeks, but traders said the lack of players in the market Monday essentially stalled activity in the paper.

The 8 3/8% senior bonds were pegged ending Monday's session in the 84 area, "maybe up a point," according to one trader, who said the bonds "barely traded, barely moved."

The bonds had given up some upward movement last week as the rumors lingered without any visibility on the recapitalization effort, another trader remarked. So, he speculated that once the Jewish holiday is over and more players are back in their seats, "it ought to trade up pretty nicely."

"Discontinuing the SEC reporting will provide Remy with additional time and resources to allocate to the two key objectives required to strengthen our company - successfully completing a recapitalization effort and renegotiating certain key commercial agreements," said Remy chief executive John Weber in a news release.

"Achieving these objectives will improve both our balance sheet and margins, creating a platform for a sustainable and profitable business."

Remy said it is no longer be required to file periodic reports and certain forms with the SEC, and will not file a form 10-K for its fiscal year ended Dec. 31. But the Anderson, Ind.-based company anticipates that its 2006 audited financial statements will be completed no later than April 30 and will be available on its web site.

Remy also said it is in discussions with representatives of a majority of its outstanding notes regarding a recapitalization plan to delever the company's balance sheet.

The company said it continues to have access to its revolving credit facility with the support of its bank lenders. As of March 30, the company's liquidity position was about $94 million - $19 million of unrestricted cash and equivalents plus about $75 million available under bank revolver.

Additionally, $50 million of cash proceeds from the previously announced sale of assets of the diesel engine remanufacturing business remains in an escrow account for the benefit of the company's senior secured lenders.

Technical Olympic off

Florida homebuilder Technical Olympic's bonds softened Monday, traders said, although traffic in the bonds was described as very light, much like the entire distressed debt market. The company's bank debt, and that of its joint venture Transeastern, was not active, according to traders on bank desks.

It was a reversal from late last week when the battered Hollywood, Fla.-based homebuilder saw its bonds advance for a couple of sessions, including a rather strong 5 points during Thursday's session. The general trend has been pushing the bonds southerly, however, amid jitters about its Transeastern joint venture.

The latest blow to the credit, one trader said, was a downgrade by Moody's of the senior unsecured notes to Caa1 from B3 and the senior subordinated note rating to Caa2 from Caa1. And, Moody's said it is keeping the credit on review for further downgrade.

There also was a research report out Monday from the JGiordano Securities Group recommending a sell on the bonds, except for only the "aggressive investor."

"It has become rather apparent in the past few months that TOA's initial claims of zero financial responsibility for the Transeastern JV have proven wrong," wrote the JGiordano analysts in a report Monday.

"We believe that TOA will ultimately be forced to contribute significant capital to the deal; the only question remaining is: How much?"

The most likely outcome of ongoing negotiations between Transeastern lender Deutsche and TOA, the analysts suggest, would be to collapse the joint venture and have Technical Olympic assume control of the entity. Several issues are being addressed, including the $400 million senior term loan. The $225 million mezzanine debt seems to be a bit more problematic, the analysts said, and could well be the hold up.

"Part of the problem, we suspect, lies with how the assumption of the mezzanine debt would fit into TOA's capital structure: Will it be subordinated, pari passu, or senior to TOA's existing sub notes?" the analysts posed. "None of the documentation we've reviewed has made this very clear."

Also, the analysts said there is the issue of what the final balance sheet will look like, which many onlookers have neglected. Specifically, they are concerned about what sort of EBITDA generation will be necessary to support the additional debt levels if Transeastern is folded into Technical Olympic. In short, the analysts estimate the combined new entity would have total fixed debt of around $1.685 billion. Assuming a seven times firm value to EBITDA multiple, they figure Technical Olympic would have to general $240 million in annual cash flow to support the new debtload.

"Although TOA generated north of $400 million in 2005 and 2006, recall that these were real estate bubble profits, and they will be very difficult to repeat anytime soon," the analysts said.

"In fact, we believe a more likely EBITDA level going forward will be somewhere between $100 to $150 million. This would imply leverage in the range of 11 times to 16 times - a bit too aggressive, in our view, given the difficult business conditions that are only just now beginning to unfold."

Moody's said the downgrade Monday was prompted by its expectation that Technical Olympic's operating performance in 2007 and 2008 will be adversely affected by the weak conditions in the homebuilding industry and further greatly burdened by the additional debt to be taken on if and when the Transeastern situation is resolved.

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