Delphi dives on renewed bankruptcy fears; Cellu-Tissue off as acquisition scrubbed

By Paul Deckelman and Paul A. Harris

New York, Oct. 7 - Delphi Corp.'s bonds, already stumbling, on Friday were tumbling, with its most widely traded issue falling at least eight points on the session as investor fears intensified that the troubled Troy, Mich.-based automotive electronics manufacturer will soon declare bankruptcy. The fall in the bonds took place in tandem with a freefall in the company's stock, which lost half of what little value it still had in very heavy trading.

Delphi, a bond trader said, "was the name of the game" in an otherwise relatively quiet and abbreviated pre-holiday session, which saw the debt markets close at 2 p.m. ET ahead of Monday's Columbus Day celebration, although, in actuality, "everything was over by 10 o'clock [a.m. ET]," another said. Through an odd quirk, the pure debt markets were scheduled to be closed on the 513th anniversary of the discovery of America, while the equity markets - including equity-linked debt, such as convertibles - were scheduled to do business as usual on Monday.

Cellu Tissue Holdings Inc.'s bonds were seen down several points on word that a planned buyout of the East Hartford, Conn.-based paper products company had fallen through.

Shortly past the mid-point of Friday's abbreviated pre-Columbus day session a high yield syndicate official said that the market overall continued to soften, and was trading down by as much as half a point.

The official added that although junk had continued to widen throughout the first week of October, the bleeding seemed to have slowed somewhat.

"Within a week at the end of September, it seemed like the entire market was off by 25 basis points in terms of yield," the source said.

"We've seen some more weakness this week, but not as dramatic."

Traders said primary market activity was meantime non-existent Friday.

Delphi's 6.55% notes due 2006 was the most heavily traded issue and suffered the steepest drop, traders said, with one quoting Delphi's benchmark bond at 60 bid, 62, offered, well down from Thursday's close at 68 bid, 70 offered.

He also saw the company's 6½% notes due 2009 fall to 57 bid, 59 offered from prior levels at 64 bid, 66 offered, while the 2013 61/2s dropped to 58 bid, 60 offered from 63 bid, 65 offered, and its long bond, the 7 1/8% notes due 2029, retreated to 56 bid, 58 offered from 61 bid, 63 offered.

At another desk, a trader said that while the automotive sector opened about a point down, Delphi was "definitely much weaker, on bankruptcy concerns," although he saw a lesser fall than the first trader, pegging the 6.55s at 64.5 bid, 65.5 offered, which he said was down about four points on the day. The 6.55s were "the real active one," while "you didn't see that much" of the 7 1/8s, which he had falling about that same four points, to 55 bid.

Yet another trader saw Delphi riding a roller coaster on Friday, opening at 60 bid, 62 offered, way down from the 69 bid, 70 offered level at which he had seen those bonds close on Thursday. With Delphi's hometown paper, The Detroit News, reporting that a bankruptcy filing could come as early as Friday, "people thought they might file," he said, and then, "when they didn't file, the bonds moved back up," to around 65 bid, down only four points on the session.

But the bonds did an about-face and went back down to close around 62 bid, 63 offered, which he called a seven-point drop on the day, after "the union guy said that bankruptcy is inevitable" - an apparent reference to comments by Henry Reichard, chairman of the International Union of Electrical Workers-Communication Workers of America's Automotive Conference Board, who was quoted in a news interview as having said that "it looks like the inevitable is at hand with the bankruptcy filing."

The union leader - whose electrical workers group represents about 8,000 of Delphi's 185,000 employees - said that he did not think that Delphi would be able to work things out with its unions and with former corporate parent General Motors Corp. before the Oct. 17 deadline Delphi has set.

That's the date new changes in the federal bankruptcy code make it tougher for filing debtors - and Delphi, which does not want to go into bankruptcy after that date and fall under the new rules - has said that it must have union concessions and a concrete agreement by GM to help it cut its costs in place by then.

Delphi, which inherited labor costs well above those of other auto-parts makers when it was spun off from GM in 1999, now wants GM and the United Auto Workers union to help it stay out of bankruptcy by cutting those costs. It has reportedly proposed cutting the hourly wage-and-benefits package that some 30,000 UAW members at its plants now enjoy to about $16 to $18 per hour, total, from current levels as high as $65 an hour - the kind of compensation automakers like GM pay, but not auto parts makers. The cash portion of that compensation could fall as low as $10 an hour - a 64% cut from what the union workers now make.

Delphi also reportedly wants GM to give it as much as $6 billion in financial help while it restructures.

Also on the labor front, UAW vice president Richard Shoemaker on Friday told Detroit radio station WJR that while GM must also agree to help out its one-time unit, no matter what kind of labor-cost concessions the union may agree to - but as far has he knows, GM hasn't started negotiating with Delphi and has not yet formally agreed to take part in its problem child's financial restructuring. A GM spokesman refused to comment on Shoemaker's assertions.

Later in the day, the union's president, Ron Gettelfinger, said he's willing to seek ways to avert a bankruptcy.

The markets noted another sign Friday that Delphi was headed toward the bankruptcy courts - it improved the severance plan for its key executives as a means of inducing them to not jump ship should the company go into Chapter 11. The company said in a Securities and Exchange Commission filing that 21 executives - though not chief executive officer Robert S. Miller - would receive 18 months of severance, plus at least a portion of their bonuses should Delphi terminate their employment or they leave for "good reason." That's an improvement from the prior 12-month maximum, which Delphi felt was not competitive enough to allow it to retain its key personnel.

With all of that going on, the third trader said, Delphi's other bonds were also on the slide Friday. The 7 1/8s, he said, "don't have as far to fall" as the 6.55s, but he saw them gyrating around the same way as the shorter bonds did, falling from Thursday's 62 bid, 63 offered close to 58.5 bid, 59.5 offered as trading opened Friday morning, and then went as high as 61 when there was no immediate filing, and then backed off that high after the unionist's comments, to close at 58.5 bid, 59.5 offered, the same as the opening price. "The market awaits news," he said, "but it was being shut down at 2 p.m. [ET] and nobody is sure what's going to happen.

He also saw the 6½% 2013 notes at 60.5 bid, 61.5 offered, down from 64 bid, 65 offered Thursday, and the 2009 61/2s at 60 bid, 61 offered, also down from 64 bid, 65 offered. "They're all trading with accrued [interest] - right now."

"That's where all the trading has been" during Friday's session, he said. Delphi's New York Stock-Exchange-traded shares, meantime were "getting murdered," he opined, as the stock nosedived $1.08 (49.09%) to close at $1.12, a new all-time low, on volume of 93.8 million shares, more than 11 times the usual turnover.

Other auto names down

With Delphi skidding so badly, traders said, just about the whole junk auto sector was also headed lower, although nowhere near as badly, and on much lighter trading. One trader even saw GM's 7 1/8% notes due 2033 firmer at 85 bid, although he did not see any trades in the giant carmaker's benchmark issue, the 8 3/8% notes due 2033, which have recently hovered just below 80.

A trader saw ArvinMeritor Inc.'s 8¾% notes due 2012 down a point at 94.5 bid, 95.5 offered, with the Delphi-inspired bad sector karma apparently strong enough to overcome what would normally be greeted by the market as some positive news - the Troy, Mich.-based automotive systems maker announced the sale of its off-highway brake business to Carlisle Braking Products, for about $39 million. The divestiture of the off-highway brake unit is sale is part of ArvinMeritor's ongoing strategy to focus on its core products within its light vehicle systems and commercial vehicle systems businesses.

Another trader saw the 83/4s at 94 bid, 95 offered, which he called down a point, and said that other automotive bonds down about a point on the day included Dura Operating Corp.'s 9% notes due 2009 at 67 bid, 68 offered, its 8 5/8% notes due 2012 at 86 bid, 87 offered, Goodyear Tire & Rubber Co.'s 7.857% notes due 2011 at 95.5 bid, 96.5 offered, and Dana Corp.'s 6½% notes due 2009 at 89 bid, 90 offered.

A market source at another desk saw TRW Automotive Inc.'s 9 3/8% notes due 2013 and Tenneco Automotive Inc.'s 10¼% notes due 2013 each down a point, at 108 bid and 111 bid, respectively.

Cellu-Tissue plunges

Apart from the automotive area, several traders said that Cellu-Tissue Holdings' 9¾% notes due 2010 tumbled as much as eight points in Friday's dealings, on news that the planned acquisition of the paper products maker by Kohlberg & Co. had been terminated.

One trader, calling it "the oddball story of the day," saw the bonds open at 93 bid, 95 offered, well down from Thursday's close at 101 bid, 102 offered, before ending at 95.5 bid, 96.5 offered.

He noted that had the deal gone through, the new owners would have had to have made a change-of-control offer to buy back the bonds at 101, the level they held before word spread that the deal was off.

Another trader confirmed that the normally little-seen bonds were indeed trading down around the 93 bid, 95 offered level from 101-102, on the terminated merger accord.

Blockbuster higher on covenant compliance

The trader also saw Blockbuster Inc.'s 9% notes due 2012 notes jump 2½ points to 83.5 bid, 85 offered - a rare large gainer in a mostly down market - after the Dallas-based video rental store chain operator reported that its soon-to-be released third-quarter results would show that it was in compliance with its debt covenants for the period.

That reassuring news on the debt covenants comes after Blockbuster - faced with sagging sales - had twice asked its creditors for covenant compliance waivers this year. It more than offset several negatives announced at the same time late Thursday, including a 1% drop in same-store sales in the quarter from year-ago levels, and the fact that Blockbuster will reach its goal of 2 million online subscribers to its new internet-based movie rental system later in 2006 than it originally expected.

Even so, equity holders as well gave the announcement rave reviews, taking its NYSE-traded shares up 97 cents (21.80%) to $5.42 on volume of 16.9 million, more than four times the norm.

Calpine gains

A market source saw Calpine Corp.'s bonds better, with its 8¾% notes up a point at 71 bid after the San Jose, Calif.-based power generating company announced that it has completed the sale of its Ontelaunee Energy Center in Pennsylvania to LS Power Equity Partners for $225 million, less transaction costs.

The sale of the 550-megawatt facility near Philadelphia is the third of four planned power plant sales, which the company announced in June as part of its ongoing strategic initiative to reduce its $18 billion debt load down to $15 billion and to optimize its power plant portfolio. Since launching its strategic initiative in May, Calpine has completed more than $2 billion of asset sales. Net proceeds from the latest transaction will be used to reduce debt as permitted by the indentures on its bond debt and its lending covenants.

Quiet Friday in the primary

The primary market produced no news whatsoever on Friday. No issues priced and no roadshow starts were heard.

Hence the first week of October came to a close having seen $826 million of junk price in six dollar-denominated tranches, taking year-to-date issuance to $79.16 billion in 310 tranches.

Compare that to the year 2004 which by the Oct. 7 close had seen $104.9 billion price in 420 tranches.

With primary market volume remaining dramatically lower on a year-over-year basis, 2005 high yield returns, as reported by the various indexes, are also drifting lower. Sources say that the indexes are now registering mid 1% to low 2% returns for 2005.

On Friday the Bear Stearns High Yield Index showed a 0.22% drop in value for the week to Oct. 6, cutting its year-to-date return to just under 1.3%.

As returns hover not far above the break-even point Prospect News asked the above-quoted syndicate official to predict whether the asset class would close out 2005 in positive or negative territory.

"Basically flat," the source responded.

"Where interest rates are perceived to be heading up there will continue to be a negative tone to the market," the official added.

"Existing high yield assets that are rate-sensitive will continue to trade off. It remains to be seen whether people will scoop stuff up from the bottom of the barrel."

The sell-sider also said that whether junk ends the year above or below the balk line could come down to how fallen angel bonds are factored in.

"That could impact returns," the source said. "Ford and GM sold off dramatically when they became high yield, and have rallied since then.

"If you include them at the trough returns will look better. But if you include them after they have already rallied, and they start to slide again, that's 13% of the high-yield market, and will definitely have a negative impact."

The official added that there is more fallen angel supply expected before the end of the year.

Mutual fund outflows not indicative

The source also said that neither the $69.4 million outflow from the high-yield mutual funds for the week to Oct. 5, as reported by AMG Data Services, nor the previous week's much larger $1.3 billion outflow, were necessarily indicative of the present liquidity of the asset class.

"If we saw several weeks of $1 billion-plus outflows it could become significant," the source said, adding that the weekly funds flows numbers have come to be of decreasing importance as a liquidity indicator with the rise of hedge funds and alternative managers.

"Everyone we talk to still says that they have cash," the official said.

"The market feels weak but I don't think that it means people are seeing money fly out the door, except maybe the mutual funds.

"Hedge funds certainly have plenty of money."

Sparse calendar

Going into the three-day Columbus Day weekend, the Prospect News forward calendar contained just over $1.5 billion of business believed to be in the market.

Of that, approximately $1 billion from three issuers is business that sources expect to see completed before Friday's close.

Included are:

* Chinese conglomerate Fosun International Ltd., with $500 million of eight-year senior notes (Ba3/BB-) via Morgan Stanley and Citigroup, with preliminary guidance of 8½% to 9%;

* Traga Resources Inc.'s $350 million of eight-year notes (B2) via Credit Suisse First Boston, Merrill Lynch & Co. and Goldman Sachs & Co.; and

* Doane Pet Care Co.'s $150 million 10-year senior subordinated notes (Caal/B-) via Lehman Brothers.

Two other pending transactions, from issuers whom sources believe to have concluded their roadshows, are Middletown Rancheria Gaming Enterprises $50 million offering of seven-year senior unsecured notes, via Jefferies, and Comsys IT Partners Inc.'s $150 million of eight-year senior notes (B2/B-), via Wachovia Securities and Merrill Lynch.

Sources told Prospect News on Friday that no news surfaced on either of those deals during the week of Oct. 3.

Finally, although no roadshow start had been heard as of Friday's close, Roundy's Supermarkets Inc.'s $325 million two-part offering is apparently poised for launch. A company source told Prospect News that the Bear Stearns and Goldman Sachs-led deal is October business.

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