Delta bonds continue to sag; Goodyear lower on materials cost worries

By Paul Deckelman and Paul A. Harris

New York, Aug. 23 - Delta Air Lines Inc. bonds were lower for a second consecutive session Monday as an early attempt by investors to bounce back from Friday's retreat fizzled. Also on the downside, in relatively light trading, was Goodyear Tire & Rubber Co., apparently hurt by investor fears that continued high oil prices and the resulting rise in prices of raw materials used in tires could puncture the Akron, Ohio-based tiremaking giant's nascent turnaround.

Primaryside activity was nearly non-existent, market participants said, with Fairfax Financial Holdings Ltd.'s announcement that it plans to sell a $50 million add-on to its existing issue of 7¾% notes due 2012 the only news.

Back among the established names, Delta "was the big one today." a trader said, quoting the Atlanta-based airline's 7.70% notes due 2004 as having retreated to 41 bid, 43 offered, down from 45 bid, 46 offered at the end of trading Friday. He saw the company's 7.90% notes due 2009 "down a few [points]" at 31 bid, 33 offered, while its 8.30% notes due 2029 were at 27 bid, 28 offered, down perhaps a point.

"The long-end stuff," he said "is not down as much as the shorter pieces," as the company's bonds are "compressing."

"The short paper," another trader agreed, "is gonna get taken down a lot quicker [than the longer bonds] as they loom toward the crapper. The short paper is gonna get dumped out [of] and is gonna be trading on top of the long paper."

He saw the 7.70s tumble to 41 bid, 43 offered from 45 bid, 47 offered on Friday, while the 8.30s were down just a point at 27 bid, 29 offered. He saw the 7.90s off two points from Friday's levels, closing Monday at 33.5 bid, 33.5 offered.

At another desk, the 7.70s were seen having initially headed higher, quoted at 46.5 bid, a two-point gain from Friday, while its usually little-traded 10 3/8% notes due 2011 were seen four points better at 33. But that early advance faded as the negative sentiment about the struggling carrier seemed to take over, just as it had on Friday.

Delta's paper had risen, in some cases dramatically, for most of last week, given wings by the news that the carrier and its pilots were again at last talking, with hopes that the company could convince the captains to sign on to a $1 billion annual pay cut, as Delta tries to bring its bloated cost structure in line with those of its rival carriers. Delta also benefited from the long awaited conclusion of its much-ballyhooed strategic review of all aspects of the way it does business, the details of which were presented to the company's board of directors by chief executive officer Gerald Grinstein in a closed-door meeting Wednesday. But those bonds came back down on Friday, especially hurt by a Standard & Poor's downgrade after Delta unveiled plans to ask some bondholders to okay changes in their notes' indenture - a step seen by some analysts as precursor to an effort by the company to strong-arm its bondholders into swallowing less-favorable terms in a note exchange, something S&P warned would be tantamount to a default.

A trader at yet another desk missed the 7.70s' move downward and had them still pegged around 45 bid, 47 offered. But he did see the 2029s at 27 bid, 29 offered..

Goodyear lower on tire report

Elsewhere, a trader saw Goodyear's bonds "weaker on the articles" - presumably a reference to a Wall Street Journal piece on the tire industry that projected a bumpy road ahead as the industry tries to pull out of its recent slump. He quoted Goodyear's 7.857% notes down about a point on the session, bid in the 93.625- 93.75 area.

The Journal piece suggested that Goodyear and other tiremakers such as the only other U.S.-based major producer, Cooper Tire, and such foreign-based tiremakers as France's Michelin, Germany's Continental and Japan's Bridgestone (Firestone's parent) were being increasingly impacted by the continued high cost of oil, with crude hovering around the $50 per barrel mark. The newspaper pointed out that "many raw materials used in tires are derived from oil, which continues to break through new price ceilings. According to the Morgan Stanley Tire Input Pricing Index - a weighted index of raw materials used in tire making that includes rubber, oil and butadiene - raw materials costs have risen 41% since a year ago."

The report said that Goodyear lamented a $41 million rise in materials costs in its latest quarterly results, when it showed its first profit since the third quarter of 2002. Goodyear said that added costs "devoured any savings it might have otherwise gained from restructuring moves and productivity gains," the article said.

The WSJ noted the progress that Goodyear has made in climbing out of the sea of red ink in which it had wallowed for some two years, while also dealing with a Securities and Exchange investigations of its accounting, which is still going on.

It quoted an analyst who said Goodyear most likely would not be "crushed" by the more difficult industry environment now emerging but would, the analyst said, "be hurt on the margins."

El Paso little moved

El Paso Corp. said that its pending restatements of its financial results for the years 1999 through 2003 would reflect a $2.67 billion writedown in oil and gas property values and a $1 billion writedown in shareholder equity, reflecting accounting revisions for natural gas hedges.

But a trader said that the Houston-based energy company's bonds had shown "no real change" Monday, with its 8.05% bonds due 2030 at 86 bid, 87 offered, its 7¾% bonds due 2032 at 84 bid, 85 offered, and its 6.95% notes due 2007 at 98 bid, 99 offered, all "pretty much unchanged." A second trader confirmed those levels, although another shop did see El Paso's 7 7/8% notes due 2012 up nearly a point at just under 96 bid.

Toys "R" Us lower on earnings

A trader saw Toys "R" Us Inc.'s bonds down a bout a point across the board after the Wayne, N.J.,-based toy and game retailing giant reported fiscal second quarter results that showed lower sales and a slide into the red for operating earnings, despite positive operating results the year before (see separate story elsewhere in this issue).

He saw Toys' 7 7/8% notes due 2013 dipping to 98.5 bid, 99.5 offered, while its 7 5/8% notes due 2011 were at 98.75 bid, 99.25 offered, each down a point, as earnings "weren't as bad as the previous quarter, but with all of the restructuring charges, those were bad earnings."

Primary quiet

Various sources on both the buy- and sell-sides characterized the opening session of August 2004's final full week as extremely quiet.

However one company did appear Monday with a drive-by deal, according to a market source.

Toronto-based Fairfax Financial Holdings Ltd. is doing a $50 million add-on to its 7¾% senior notes due April 26, 2012 (existing ratings Ba3/BB), which it issued as part of an exchange in April.

Terms on the Banc of America Securities-led deal are expected to emerge on Tuesday.

According to the market source, no price talk had been heard by the Monday close, however late in the session the existing bonds were trading at 97.5 bid, 98.5 offered.

According to a press release from the company $160.4 million of the notes were issued in the exchange offer which closed on April 29.

The notes, along with cash, were offered in exchange for the existing 8 1/8% notes due 2005 of TIG Holdings, Inc., Fairfax's 7 3/8% notes due 2006 and Fairfax's 6 7/8% notes due 2008.

Fairfax loses up to $40 million in Charley

On Monday Fairfax announced in a press release that its initial estimate of losses relating to Hurricane Charley will be in the range of $35-$40 million.

This initial estimate is based on a preliminary review and consultation with its insurance and reinsurance companies including Odyssey Re, Crum & Forster and Northbridge, the press release stated, adding that it is still too early to calculate the exact losses.

No big liquidity problem in junk

One capital markets buy-side source said Monday that despite $504.1 million having exited high-yield mutual funds over the past four weeks, and a $4.925 billion cumulative net outflow for the year to date, according to the Prospect News analysis of data from AMG Data Services, high yield continues to be a liquid asset class.

"I certainly don't get a sense of illiquidity," the source said, noting that the end of August "is always the least liquid time in the world.

"I believe there are a lot of non-mutual fund high yield-type searches out there, which is unsurprising given what happened in 2003," the source added.

"Except for a couple of the more difficult deals in recent weeks, such as PanAmSat [$1.01 billion 10-year (B1/B+) at par on June 30 to yield 9%], I think new issues are getting done at fairly decent prices, which does not suggest that there is a big liquidity problem.

"The mutual funds flows are not that interesting. They tend to follow performance in the near-term. And performance has been not that interesting."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.