Delphi cruises on Lehman endorsement; Delta warns pilots on cash levels

By Paul Deckelman and Sara Rosenberg

New York, Aug. 19 - Delphi Corp.'s bank debt, and its bonds, were once again stronger on Friday, with levels moving up as a Lehman Brothers equity analyst upgraded the company's stock - and market players are getting more confident in the idea that a deal can be reached with General Motors Corp. to get the struggling Troy, Mich.-based automotive electronics maker, a former GM subsidiary till its spin-off, out from under some unproductive operations.

In the airline sector, Delta Air Lines Inc. warned its pilots late in the day that the problem-plagued Atlanta-based Number-Three U.S. airline carrier's cash reserves had fallen to the point where it might have to seek further pay concessions from them - on top of the $1 billion the pilots gave up last year - although Delta said that it has made no decision yet on whether to do so and has taken no action.

Northwest Airlines Corp.'s bonds meantime were seen gyrating around at mostly lower levels, amid market nervousness over the approach of a 12:01 a.m. ET Saturday strike deadline by the line's mechanics union - but traders said those bonds came off their intraday lows to end only moderately lower.

Delphi's bank debt was seen up by about a quarter to a half a point on the Lehman news, traders in that market said.

One had the company's term loan quoted at 103 bid, 103½ offered and the revolver quoted at 95.5 bid, 96 offered, while a second trader had the term loan quoted even higher at 103.25 bid, 103.75 offered and the revolver quoted slightly wider at 95.5 bid, 96.5 offered.

A bond trader meanwhile saw Delphi's 6.55% notes due 2006 firm to 94 bid from 92 bid, 93 offered on Thursday, and its 7 1/8% notes due 2029 up about a point at 75.5 bid, 76.5 offered, after Lehman Brothers upped its rating on the company's shares, citing an expected bailout of Delphi from its top customer, GM.

The trader said that "they [Lehman] see a restructuring with GM a la Visteon," which earlier this year got its former parent, Ford, to take some two dozen unprofitable factories off its hands, taking some back directly and putting others into a trust that is expected to be sold. That step will help Van Buren, Mich.-based Visteon to lower its labor costs, by getting out from burdensome union contracts at the plants it is giving up.

"He [the Lehman analyst] also sees an upturn in GM orders [to Delphi]," the trader opined. "I'll believe that when I see it."

At another desk, a trader - also attributing the rise to the Lehman equity upgrade - pegged the 6.55s two points higher at 94 bid, 96 offered, while the company's other bonds all up a point, to 87 bid, 89 offered for the 6½% notes due 2009, 82 bid, 84 offered for the 6½% notes due 2013, and 75 bid, 77 offered from the 7 1/8% notes.

Another trader saw the 6.55s up two points at 94 bid, 95 offered, while the 6½% 2013s got up to 81.5 bid, 82.5 offered from prior levels at 80 bid, 81 offered.

Delphi's New York Stock Exchange-traded shares were up 44 cents ($7.43%) to $6.36, on volume of 7.6 million, not quite twice the usual turnover.

"People are just getting more comfortable with the idea that there may be a GM bailout," one of the bank debt traders said. He also noted that the Lehman equity upgrade.

On Friday morning, Lehman Brothers raised its stock recommendation on Delphi by two notches, to "overweight" from "underweight" because of the anticipation and probability given to a bailout by GM.

Investors began to worry about Delphi's future earlier this month, when the company announced that it drew down $1.5 billion under its revolving credit facility in order to have cash readily available to finance operations if needed.

After the draw was announced, all three rating agencies downgraded the company's loans - Moody's Investors Service to B3 from B1, Standard & Poor's to B- from BB- and Fitch Ratings to B from BB-.

However, shortly after all this drama, the company assured investors that it was and is working towards making a deal with its major unions to seek modifications required to implement its restructuring plan, as well as with GM to seek related financial support.

There was some talk of a potential Chapter 11 filing if negotiations with the unions and GM do not work out - but as time has passed and people have gained more confidence in the much-talked-about bailout, the fear of a bankruptcy reorganization has been diminishing.

Traders saw other automotive names generally up on sector sympathy with Delphi, although one noted no gains in Collins & Aikman Corp.'s 10¾% notes due 2011, holding steady at 34 bid, 35 offered.

Northwest lower, Delta steady

In the airline arena, Northwest Airlines was the dominant name in the sector all day, bouncing around at lower levels as the strike deadline drew ever nearer.

However, after trading had wound down for the day, Delta warned its pilots union that its cash reserves have fallen to the point Delta might seek to revise the agreement the carrier and the union reached last year to avoid a bankruptcy filing at that time.

The pilots - Delta's highest-paid non-management employees - agreed to $1 billion in annual concessions and Delta said it would not seek more givebacks from them unless its cash level fell below a certain point.

The pilot's union, ALPA, said Friday in a membership memo that Delta has informed it that the company's cash level has fallen below that point, which was not formally spelled out.

While Delta could seek more cuts, so far it has not; analysts believe that negotiations to seek more pilot concessions would be a long and painful process - and Delta would not have time for such protracted talks.

A company spokesman said Friday night that "the liquidity shortfall notice does not mean the company has decided to pursue any particular course of action at this time."

Earlier in the session, Delta's bonds - which had risen in step with Northwest's over the previous session or so - were "kinda unchanged," a trader said, with the benchmark 7.70% notes coming due Dec. 15 around the same 26.5 bid, 27.5 offered level at which he had seen those bonds finish Thursday, even though he saw a few small odd-lot trades as low as 24.5 bid, which he said were not representative.

Another trader saw Delta's bonds "all relatively steady," with the 7.70s continuing around 26 bid, and its other bonds, such as the 7.90% notes due 2009 and the 8.30% notes due 2029 all in a 15-18 context.

However, yet another trader saw the 7.70s up two points on the day at 27 bid, 28 offered, although he did see "all the other maturities unchanged," in the upper teens.

The bonds got a little bit of a boost from the news that J.P. Morgan is keeping its recommendation on Delta's stock at "overweight" - essentially a buy signal - even though market speculation is that the company will probably be filing for bankruptcy soon, driven there by sky-high fuel costs, heavy debts, big pension obligations and an extremely competitive environment in the airline business. Those market fears have beaten the company's stock down to around the $1.50 per share level, and have likewise sunk its once high-flying 7.70% notes to around a quarter on the dollar, well down from highs in the 80s just about a month or so ago.

A trader, noting JP Morgan's continued bullishness on Delta, wondered aloud "why does UAL stock trade where it does, and it's been operating in Chapter 11 for a few years now?" He said that - without having read JP Morgan analyst Jaime Baker's report, he could "understand" the logic behind the recommendation - at $1.50, how much lower can the stock go, and what does an investor with a taste for risk have to lose?

Earlier in the week, Baker, noting Delta's planned sale of Atlantic Southeast Airlines Inc. to SkyWest Inc., one of its regional partners, for $425 million, said in a research report that while that deal by itself would not be enough to keep Delta from sliding into bankruptcy, "If this is the first in a series of potential liquidity transactions, as we believe it is, Delta may ultimately make it out of the [emergency room]."

Northwest, meantime, was yo-yoing around at mostly lower levels, with the Eagan, Minn.-based Number-Four U.S. airline carrier's benchmark 8 7/8% notes due 2006 having moved down to about 62 bid, 63 offered, from Thursday's closing levels at 64 bid, 66 offered.

"That was a wild ride," a trader said.

But the two-point drop doesn't begin to tell the whole story; the trader said that when the session began, "the first news out of the gate this morning was that the union talks hadn't gone anywhere, and there were actually a few prints in the high 50s."

Northwest had resumed talks with the Airline Mechanics' Fraternal Association late Thursday, in hopes of averting a Saturday morning strike by some 5,000 mechanics, custodians and cleaners.

Northwest is seeking $1.1 billion in pay concessions from its various employee groups, including $176 million from AMFA - givebacks it says it absolutely must have to avoid bankruptcy. The airline rejected a union's offer on Wednesday, saying it only offered about $100 million of concessions.

After that initial bearish news, however, "the talks were back on, and we found out there was a counterproposal" by the company, and the bonds went back up to around a 62 bid level.

"So day-over-day, they were off about two or three points, but they were certainly up from their lows early, early this morning, when there were a couple of round-lot trades just south of 60."

Northwest on Friday presented what it called its "last and best offer" to the union, in hopes of avoiding the threatened walkout at 12:01 a.m. ET Saturday - even though the airline formulated a contingency plan that would let it keep flying by using replacement mechanics.

The trader saw Northwest's 9 7/8% notes due 2007 holding to "a similar pattern" - they traded off a few points down to 51 bid in early dealings from Thursday's close around 54, and then moved back up toward the end of the day to 53.5 bid.

He said that the 9 7/8s were "less liquid, and not as volatile" as the 8 7/8s. "There was not as much trading - and plus, it's probably not going to move as much as the '06s."

Another trader saw the 8 7/8s close at 60 bid, 62 offered - but he had only had them going home Thursday at 61 bid, 63 offered.

The trader also saw Northwest's 10% notes due 2009 likewise ending down a point, at 43 bid, 45 offered.

Northwest was "volatile going into the possibility of a strike," yet another trader said, quoting its 8 7/8s opening down three points at 60 bid, 61 offered, but then, "the day progressed, and there were rumblings [the two sides] were talking again," pushing the senior bonds to 63.5 bid, 64.5 offered - off about a half point from Thursday's levels, "but a decent rebound from the lows."

Owens Corning continues upward move

Back on the ground, the trader saw Owens Corning's 7½% notes due 2018 at 89 bid, 90 offered, up two points on the session, but up 10 points on the week.

Another trader saw those bonds a point better on the day at 88 bid, 89 offered, but agreed that they had risen solidly all week.

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