Fedders firms; Remy bonds steady on forbearance news; Delta looks to lower loan pricing

By Stephanie N. Rotondo

Portland, Ore., April 16 - Poor weather conditions kept some market participants away from their desks Monday, causing a light trading day in the distressed bond market.

"It's the worst rain I've ever seen," a distressed trader said. He said that in addition to the wet day, a lack of news could also be affecting trading activity.

"There wasn't much excitement," he noted.

One market source, however, did get worked up on the topic of Fedders Corp.

The source, who calls the Fedders story "interesting," expressed amazement at the company's inability to turn around. Many, he noted, are blaming poor managerial decisions for the company's overall poor performance.

Still, the bonds were seen slightly firmer. The notes had also firmed on Friday, with one trader saying that investors were seeing more stability in the company.

Meanwhile, Remy International Inc. announced it had reached a forbearance agreement with a majority of its bondholders, a tidbit many market players were expecting to hear. The news sparked little movement in the company's bonds, a trader said, as it was nothing new.

In distressed airline paper, Delta Air Lines Inc. may be looking to lower its pricing on its $2.5 billion exit financing credit facility, which one fund manager call "oversubscribed."

Fedders firms

Fedders' 9 7/8% notes due 2014 came in slightly firmer as the trading week began, though with light activity. A distressed trader said the notes traded at 43 bid, 45 offered early in the day but moved up to 45 bid, 47 offered by afternoon. A market source called the notes up half a point at 44.

But one market source is wondering why the company's debt is not performing better.

The source called the Fedders story "interesting," pointing to previous thought that the company would turn around once Goldman Sachs got involved, likening the theory to Movie Gallery Inc.'s recent stability.

"I figured once Goldman got involved, it would be just like Movie Gallery," he said.

He said one firm that held a lot of Fedders debt and equity "really let [them] have it" during a bondholders conference call earlier this month. Investors and hedge funds have grown weary with how the company has been run. In fact, the source indicated that many players "don't trust [Fedders] management."

Still, it was widely believed that, as the company refinanced some of its debt with Goldman, the lender would take the company in hand, so to speak.

The source said he believed that Goldman's involvement would garner a $50 million price tag on the company's indoor air quality business - an asset the Liberty Corner, N.J.-based company has been trying to unload since July 2006. The proceeds of the sale could have then been used to "take out Wachovia," he said.

But the company has been unable to sell the business, even telling bondholders that they have abandoned those efforts.

The source also expected Goldman to advise the company to buy back some of its debt, a move that could potentially improve its operating results.

"Why wouldn't you buy these bonds back if you believe in your own company?" he asked.

This situation has not played out that way, he said, and now the bonds are trading at low levels associated with a bankruptcy scenario.

One analyst, however, thinks the bonds will go even lower.

In a research note published Monday, Shelly Lombard, senior analyst with Gimme Credit LLC, stated "we wouldn't pay more than 30 for the bonds."

The research firm has continually "panned" the air quality solutions producer, and a recent drop in revenue did nothing to get back into the firm's good graces. Annual revenue for 2006 was reportedly down by 6.2% "due to the decision to stop selling room air conditioners to Home Depot, lower industrial air cleaning product sales in Asia and a drop in residential central air conditioning sales because of pre-buying in 2005 before efficiency requirements changed," Lombard wrote.

Even the Goldman deal, a move aimed at increasing the company's liquidity, may not help.

"The new secured facility from Goldman keeps Fedders on an expensive and short leash," she said. With the term loan pricing at Libor plus 12% and maturing in 2009, Lombard speculates that Fedders could only have two years of liquidity.

The analyst also believes that the company needs to increase its EBITDA, something the market source agreed with. Both parties are looking for the company to grow its EBITDA to at least $40 million to $50 million.

Overall, Lombard said, "Fedders' name isn't much of an advantage and its size, lack of installed base to generate parts sales, and concerns about whether it will be around to honor warranties are disadvantages...After two years of coupons, investors' cost basis would be about 10, a cheap option on a long shot."

Remy steady on news

Lombard also had some biting words for distressed automotive components marker Remy.

"We thought Remy's senior bonds could be worth as much as 95 cents in an out-of-court restructuring," she said. "But although we thought the juniors had a strong incentive to strike an out-of-court deal, the prospect of a 35 to 60 cents recovery to the seniors in a Chapter 11 kept us on the sidelines. Now it looks like a deal will get done."

But, competition in the aftermarket business could turn the company either way. With that in mind, Lombard said, "We're not a buyer yet."

The new comments on Remy come as the company announced that it had entered into a forbearance agreement with a majority of its noteholders. Under the agreement, the company will not make a coupon payment - which came due over the weekend - on its 9 3/8% senior subordinated notes due 2007. A payment on the floating-rate notes also due over the weekend was made.

A distressed trader said the Anderson, Ind.-based company's bonds "didn't trade much" on the news, adding that it was "kind of expected."

"It's not like [it] came out-of-the-blue," he said.

The trader called the notes unchanged, while a market source placed the 9 3/8% notes due 2008 at 31, the 11% notes due 2009 - which, coincidentally, have a coupon payment due May 1 -at 30 and the 8 5/8% notes due 2007 at 90.5 - all essentially unchanged.

At another desk, a trader quoted both the 11% and the 9 3/8% notes at 34 bid, 36 offered, up from 31 previously. He said they were trading flat with due bills to the seller.

But another trader saw them flat at 30 bid, 32 offered, "pretty much where they were." He saw the 8 5/8% notes up 2 points at 91.5 bid, 92.5 offered, trading with accrued interest.

Rumors that the company would default on its coupon payment prompted losses in the bonds last week, but further buzz that a new deal had been inked with general Motors Corp. helped the notes regain those losses. Calls to the company to confirm the GM rumor went unreturned Monday.

The forbearance agreement is part of a wider aim on the company's part of recapitalize. The company announced earlier this month that it had entered into discussions with its noteholders on a plan to delever its balance sheet.

"We are very encouraged by the productive discussions we have had regarding a comprehensive recapitalization of our financial structure," president and chief executive officer John Weber said in the release. "I am pleased that our progress is reflected in the significantly high percentage of the holders of the senior subordinated notes and senior notes that have agreed to the forbearance."

Remy still has access to its revolving credit facility and, as of Friday, the company's liquidity position was about $73 million, consisting of unrestricted cash and cash equivalents of $25 million and permitted availability under its revolving credit facility of about $48 million.

Delta looks to lower loan pricing

Buzz around the market is that Delta may lower pricing on its in-market $2.5 billion exit financing credit facility being that the deal was extremely well-received by investors, according to a fund manager.

Currently the $1 billion five-year revolver (B+) and the $500 million five-year first-lien term loan A (B+) are being talked at Libor plus 200 bps to 225 bps, while the $1 billion seven-year second-lien term loan B (B-) is being talked at of Libor plus 350 bps.

"It was way oversubscribed," the fund manager said. "Pricing will probably be flexing down."

JPMorgan, Goldman Sachs, Merrill Lynch, Lehman Brothers, UBS and Barclays Capital are the lead banks on the deal, with JPMorgan the left lead on the first-lien debt and Goldman Sachs the left lead on the second-lien debt.

Security will be substantially all of the first-priority collateral in the existing debtor-in-possession facility.

Proceeds will be used to repay the Atlanta-based airline's $2.1 billion DIP facility led by GE Capital and American Express, to make other payments required upon exit from bankruptcy and to increase its cash balance.

Broad market mixed

A trader saw Tembec Inc.'s bonds having "a little bounce back," quoting the bonds up a couple of points, though he said he saw no big news concerning the Canadian dollar that might explain it. He slated the 8 5/8% notes due 2009 up 2 points at 66 bid, 67 offered.

Another trader said the bonds had "a big spurt in the morning," with the 7¾% notes due 2012, for instance, "up sharply" to 61, before coming off the peak levels to finish at 59.25 bid, 60 offered. The bonds were called "higher on the day but off the highs."

MagnaChip Semiconductor LLC's 8% notes due 2014 were seen down 4 points to 55 bid, 56 offered on no news. The company is expected to post its first-quarter earnings on April 26.

Sara Rosenberg and Paul Deckelman contributed to this article.

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