Delta continues to soar, now on debt-swap news; Owens Corning bank paper keeps sliding

By Paul Deckelman and Sara Rosenberg

New York, Oct. 14 - Delta Air Lines Inc. bonds were sharply higher for a second consecutive session Thursday, this time pushed up on the news that the troubled Atlanta-based air carrier had extended its pending exchange offer for a portion of its debt - and had sweetened the terms to make it more attractive to debt holders. On Wednesday, Delta's bonds had surged skyward on news that the carrier's pilots' union had presented the company with a new wage concession proposal.

In bank debt dealings, Owens Corning's paper continued to erode, as players weighed the impact of last week's bankruptcy court ruling essentially stripping the bank debt holders of their heretofore privileged position when it comes to claims against the Toledo, Ohio-based insulation maker's assets.

But the big story in the distressed markets Thursday was Delta, as its bonds firmed smartly for a second straight session, particularly the shorter-maturity paper.

A trader noted that the bonds had risen Wednesday, "but they were really up [Thursday]." He said that "the shorter stuff had the most impact," quoting Delta's benchmark 7.70% notes due 2005 as having pushed up about nine points on the session to 64 bid from prior levels in the 50s. By way of contrast, the company's 8.30% notes due 2029 firmed to 32.5 bid, a gain of about 3½ points on the session, while the 7.90% notes due 2009 ended at 38 bid, 40 offered, a two-point rise, "all on the debt swap."

Another trader saw all of the company's bonds at slightly lower levels than the first source, but still up substantially on the session, with the 8.30s "maybe up one or two [points]" to around 31 bid, the Delta 10% notes due 2008 "up a few [points]" to 40.5, and the 7.70s "up a lot more" to close above 60.

At another desk, a market-watcher pegged the 7.70s at 62 bid, up from 49 the day before, while the 7.90s rose to 37.5 from 36, although they jumped to those levels from the upper 20s the day before. He saw the 8.30% bonds three points better Thursday at 30 bid.

Delta's convertible bonds and their underlying shares were also up solidly for a second consecutive session on the news, with the view among players in the converts market being that extension of the exchange offer for the debt will at least delay a possible bankruptcy filing, if not stave it off completely. Delta's 8% convertible notes were quoted some 4¾ points better on the session to 40 bid, while its 2 7/8% converts were up more than three points to end at 41.

Delta's New York Stock Exchange-traded shares - which had jumped more than 21% Wednesday on the news of the pilots' revised offer to Delta - added on another 41 cents (10.79%) Thursday on the debt-swap news to end at $4.21, on volume of more than 11 million shares, more than double the usual turnover.

Delta began its debt exchange on Sept. 15, announcing that it planned to issue up to $680 million of new bonds in three maturities, and swap that for up to $1.56 billion principal amount of existing unsecured debt and enhanced pass-through certificates held by qualified institutional holders. Delta said that the swap was part of its efforts to restructure its roughly $20 billion of debt out of court, something it says must be accomplished if it is to avoid a bankruptcy filing.

Only $94 million response

But the exchange offer has failed to generate much support from the holders of the existing paper, probably due to the deep discount from the face value of their existing bonds that Delta was asking them to accept; the company offered them new bonds worth between 35 cents to 75 cents on the dollar for their existing holdings, and as of Wednesday, holders of just $94 million principal amount out of the $2.6 billion total amount of existing debt eligible to be exchanged (although Delta only plans to accept $1.56 billion tops) had tendered their unsecured debt and passthroughs.

With time running out, Delta extended the offer for another month; increased the amount of new debt it plans to exchange for the existing debt; and in order to get the holders to commit quickly to the sweetened terms of the offer, set an early tender deadline and offered an early tender premium in the form of either additional new debt or company stock, depending on the maturity of the existing debt (see "Tenders and Redemptions" elsewhere in this issue for complete details).

However, Delta added a minimum participation threshold of 75% of the existing debt being exchanged for - it previously required participation that would result in the issuance of $612 million of new notes - and retained the requirement that it be able to obtain $1 billion in give-backs from the airline's pilots that will give Delta the wage cuts it says it needs in order to successfully turn the company around.

The company has been seeking $1 billion of wage cuts from the captains, who are considered the best-paid among the major old-line carriers. The pilots had countered with an offer totaling $705 million, which Delta termed inadequate, but on Wednesday, the Air Line Pilots Association announced that it had made a new counter-offer to Delta, although it did not give any specifics. The idea that the pilots had budged from their position and had come closer to Delta's position had been enough to boost the company's bonds and shares solidly on Wednesday; a trader said "it looks like the pilots may have come to their senses and realized that they would gain nothing by putting Delta out of business."

ATA notes better

Another airline carrier in the news Thursday was ATA Holdings Corp., whose 12 1/8% notes due 2010 were seen having firmed to 30 bid, 32 offered, well up from prior levels around 26 bid, as The Wall Street Journal reported that rival low-fare carrier America West Airlines was in talks to buy part or even all of the troubled Indianapolis-based low-fare operator. Neither company would comment on the story, which quoted unidentified sources "familiar with the talks."

Owens Corning loans down again

In bank debt dealings, Owens Corning's paper was seen continuing to decline Thursday, quoted really wide at 65 bid, 70 offered, according to a market source. On Wednesday, the paper had been quoted at 66 bid, 68 offered by one trader and at 68.5 bid, 69.5 offered by a different trader.

The erosion of the company's paper from its previous low-80s context all the way down to its current mid-60s levels began last week, when judge John Fullam of the U.S. Bankruptcy Court in Wilmington, Del., ruled in favor of a motion presented by bondholders and other non-bank debt creditors seeking substantive consolidation, under which the bank lenders were basically stripped of their special claims on Owens Corning's assets that had given them priority over the bondholders and other claimants.

The ruling hurt the group of 43 banks, led by CSFB, which fought against consolidation in pressing their claim that their approximately $1.6 billion in loans to the parent company and its units had priority over the claims presented by the bondholders and other creditors.

Once news of the ruling hit the loan market, the Ohio-based insulation maker's bank debt began to slide down to its current levels. Meanwhile, the company's bonds firmed from the lower 40s into the lower 50s, although they have come slightly off those peaks and are now seen anchored around 49 bid.

Mirant loans down

Mirant Corp.'s 2003 bank debt took a bit of a step back Thursday on no particular news, with the Atlanta energy company's paper quoted at 61.5 bid, 62.5 offered, down a quarter of a point, a trader said.

And a bond trader saw R.J. Tower Corp.'s 12% notes due 2013 fall as low as 66 bid from prior levels around 70 bid, 72 offered, before bouncing off those lows to still end down two points on the day at 68 bid, 69 offered. He cited a negative comment on the auto components maker in a Jefferies & Co. research report, as well as overall weakness in the automotive sector.

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