Doral floaters seen off slightly; Airlines gain altitude, fly closer to post-bankruptcy

By Stephanie N. Rotondo

Portland, Ore., April 10 - Traders were predicting a slow week Tuesday as many market participants have taken off for the Easter and Passover holidays.

One trader said the holidays are affecting the market globally, with many in Europe and Asia also away from their desks. He said it was possible things would pick up toward the end of the week but called the day "quiet."

During the lifeless day, the bond market did see some activity in Doral Financial Corp. A trader said the bonds came in slightly during trading, while another said he saw the notes firming since the mid-March sale of its New York branches to New York Community Bancorp Inc.

But another trader believes it would be best for bondholders if the company simply filed for bankruptcy. He also mentioned that he was amazed that holders of the company's preferred stock were still receiving monthly dividends.

"Why wouldn't they hold on to that cash?" he said, noting that the payments - which come from operating earnings - do not have to be paid each month. "There's no real harm" in not paying the monthly dividend, as the company would not be forced into default and could instead use the income to improve its overall financial situation.

"It doesn't add up," he said,

Meanwhile, distressed airlines Delta Air Lines Inc. and Northwest Airlines Corp. are edging closer to emerging from bankruptcy and their bonds have been seeing slight gains.

One market player believes, however, that the companies' notes are valued high on continued hope of some type of merger or acquisition. He said that M&A does not seem possible soon but would create a fairly sizable upside should it occur.

Doral floaters off slightly

A trader said Doral's floating-rate notes due 2007 "have a firm tone since the sale of [the company's] New York-area businesses." The bonds, which traders were previously trying to unload without success, are seeing trades at 94.5, he said.

Another trader said the notes fell a half a point to close at 94.5, down from the previous day's levels of 95 bid, 95.5 offered.

The first trader also said that an issue of the financial institution's preferred stock jumped to 126 from 107 on Thursday. Another trader, however, disagreed, calling the 107 trade an "errant print."

He said it was more likely that the preferred was in the low-120s and then due to a "gray market," a lower trade - he called it 106 - went through.

"All the preferreds are trading north of 50% of face," he said, calling the paper "well bid for," but overall unchanged in value.

The trader also said he did not see the sale of the New York branches as "interesting," though it did help to clean up the struggling Puerto Rican bank's balance sheet.

The question in many investors' minds, according to the trader, is how the company's debt will be structured in the future.

"Do you really want to hand seniority over to the preferred stockholders?" he said.

At this point, he said, the best thing the company could do is file for Chapter 11 protection and hand the company over to the bondholders, giving preferred holders some sort of relief.

A trader said the current situation, however, looks good.

"At this point it looks like bondholders will get paid off at 100...[the] stock [is] diluted to pennies and [any] preferred left outstanding may have some good upside," he said.

The company is expected to file its 10-K this month.

Airlines take flight

As both distressed airlines Delta and Northwest Airlines get closer to emerging from bankruptcy, the respective companies' bonds seem to edge higher, even slightly.

But what exactly is driving the boost? According to one trader, it is a combination of oil prices falling again and continued merger and acquisition speculation.

The trader said Delta's active 8.3% notes due 2029 closed at 58.5 bid, 59 offered, while Northwest's 10% notes due 2009 were "up a little" at 88 bid, 89 offered.

When asked why the bonds were seeing gains - however slight - he said he believed the notes to be priced "pretty high on a merger and acquisition scenario."

He said that, should either company decide to merge with another airline, the transaction could have as much as 10 to 15 points of upside. However, without a merger, he saw a "fair amount of downside" to bondholders.

In his opinion, there is "no imminent M&A," he said, though, "in the longer term it makes sense."

But, both companies have been adamant about standing - or perhaps more appropriately, flying - on their own two feet. Delta, he said, seems to want to be the acquirer, while Northwest has maintained its desire to be independent.

A Reuters article posted Tuesday said that both airlines are set to emerge from bankruptcy as some of the highest valued companies in the industry. That idea, the trader said, "makes sense."

"That's why everyone was going after them," he said.

And, as merger talks seem to have died down, bondholders have ended up frustrated.

"It was a pretty nice deal that [U.S. Airways] laid out [to Delta]," he said. But, don't look to the near term for any merger news on either company.

"If anything happens, it probably won't be until they exit [bankruptcy]," he said.

On top of the M&A possibility is the falling price of crude oil. The price per barrel of light sweet crude rose to more than $66 last week, dropping over $3 by Monday. Tuesday, however, saw a slight increase, rising 38 cents to close at $61.89 per barrel.

Delta is slated to emerge from bankruptcy by April 30. A confirmation on Northwest's reorganization plan and disclosure statement is scheduled for May 16.

Broad market mixed

Technical Olympic USA Inc. saw decent activity on an otherwise quiet day, a trader said. He pegged the 9% notes due 2010 "a little off" at 94.5 offered.

The trader also noted that the market is "waiting for something to happen" with Hines Horticulture Inc. The nursery supplier delayed filing its 10-K last month - twice - leaving investors and market players wondering what was going on. The trader quoted the 10¼% notes due 2011 at 79 bid, 81 offered, which he deemed unchanged.

At another desk, a trader called Fedders Corp.'s 9 7/8% notes due 2014 weaker at 47 bid, 49 offered.

Another trader said he dealt a fair amount of Solutia Inc.'s bonds, though he added the notes were "pretty well put away." He quoted the 7 3/8% notes due 2027 as unchanged at 94.5 bid, 95.5 offered.

The St. Louis-based developer of specialty chemicals, fibers and fluids announced last week that it had settled its four-year lawsuit with FMC Corp. The company is slated to receive $22.5 million from its former joint venture partner in Astaris upon approval from the bankruptcy court overseeing Solutia's reorganization.

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