Asbestos bonds, bank debt up; Delphi, GM better, Movie Gallery continues climb

By Paul Deckelman and Sara Rosenberg

New York, May 9 - Asbestos names such as Owens Corning were on fire in both the distressed junk bond and bank debt markets, pushed up by all kinds of rumors about possible recoveries or potential financing.

The bonds of General Motors Corp. and its bankrupt former subsidiary Delphi Corp. were accelerating upward, pushed, at least one trader said, by statements from GM chief Rick Wagoner to the effect that progress was being made in the talks between the two companies and their unions aimed at avoiding what would surely be a disastrous strike against Delphi.

And Movie Gallery Inc.'s bonds continued to rise ahead of Thursday's scheduled release of earnings data.

A junk bond trader saw Owens Corning's bonds up seven points on the day, citing rumors that the bankrupt Toledo, Ohio-based insulation market will raise capital through a rights offering to its equity holders.

He saw Owens Corning's 7½% notes due 2018 at 100.5 bid, 101 offered.

A second trader saw those notes also up seven points, at par bid, 101 offered, and saw its 7% notes due 2009 at 99 bid, par offered, also up seven points.

Another trader saw the 7½ notes at 99 bid, 100 offered, and quoted them up five points on the day, while the 7s were also up five points, at 98 bid, 99 offered.

"All of the asbestos bonds were up," one of the traders said. He saw the bonds of bankrupt Lancaster, Pa.-based floorcovering maker Armstrong World Industries Inc. "riding on Owens Corning's coattails," as another trader said.

Armstrong's bonds, such as its 6½% notes and 7.45% notes, were seen around 81 bid, 82 offered. One trader pegged that as a 3 point gain on the day, although another said it was more like a 1½ point rise.

A trader also saw the bonds of bankrupt Southfield, Mich.-based automotive brake systems maker Federal-Mogul Corp. - an asbestos-challenged company just like Owens Corning and Armstrong - firm to 62 bid, 63 offered from prior levels around 60.5 bid, 62.5 offered.

In the bank debt market as well, asbestos-challenged companies were a prime focus, as names like Armstrong, USG Corp. and Owens Corning all posted gains, with Armstrong being the most volatile and active of the three, according to a trader.

He saw Armstrong's bank debt close out the day at 80.5 bid, 81.5 offered, up from previous levels of 76 bid, 77 offered.

During Tuesday's trading hours, bids on Armstrong got as high as 84 and as low as 78, before levels settled in the low-80 context.

Bankrupt Chicago-based building products maker USG's bank debt closed out the day at 145 bid, 146 offered, up from previous levels of 143 bid, 145 offered, the trader continued.

And Owens Corning's bank debt closed out the day at 156.5 bid, 157.5 offered, up from previous levels of 156 bid, 157 offered, the trader said.

"There were lots of rumors flying around in the morning. Speculative rumors on recoveries, potential settlements, it runs the gamut," the trader explained.

Movie Gallery keeps heading higher

Elsewhere, a trader saw Movie Gallery's 11% notes due 2012 at 62 bid, 63 offered, up from 60 bid, 61 offered on Monday and well up from levels in a 57-58 bid context on Friday.

The bonds of the Dothan, Ala.-based Number-Two U.S. home video rental chain operator have been firming over the past week, along with the company's bank debt, despite the lack of any firm news out on the company.

Traders in both markets chalk the rise up to investor optimism about first-quarter earnings, scheduled to be released Thursday.

"Buyers continue to push that one northward on no real news," a junk trader said. "Many people are expecting better earnings than everybody else is expecting, thinking that they'll beat the Street."

Analysts on average think the company will show about 15 cents a share of earnings - although some expect Movie Gallery to display an actual loss. While that 15 cents would be well down from year-earlier per-share earnings of 58 cents, it would be well above fourth-quarter earnings of two cents per share.

The investors have been heartened by recent earnings releases from Movie Gallery sector peers such as Netflix Inc., an internet-based movie delivery service and Dallas-based Blockbuster Inc., Movie Gallery's larger rival in the brick-and-mortar video rental store chain business. Although both companies compete with Movie Gallery and at least some of their success comes at Movie Gallery's expense, the investors feel that their better results signal better times ahead for the whole movie-delivery industry, including Movie Gallery.

Dana rises

In the automotive realm, a trader saw the bonds of bankrupt Toledo-based auto parts supplier Dana Corp. up anywhere from half a point to a full point, though on no news; he quoted its 5.85% notes due 2014 a point better at 80.25 bid, 81.25 offered, and its 7% notes due 2028 at 81 bid, 82 offered, half a point up.

GM gains on CEO comments

But the main area of sector interest was GM's bonds, with its benchmark 8 3/8% notes due 2033 seen by one trader at 74.5 bid, 75.5 offered, which he said was a point up on the day.

Meantime, a trader said, "the stock was up 10%" - technically speaking, it gained 9.55% on the day, or $2.25, to close at $25.50 on the New York Stock Exchange; volume of 25.2 million was better than twice the norm - "and it's almost at $26 now, which is quite impressive. The bonds and shares, he said, had risen "strictly on [GM chairman and CEO] Wagoner's comments regarding having a positive outlook on negotiations with Delphi."

The GM chief, speaking to reporters Tuesday in Detroit, was quoted by news services as having said that "we have made some progress."

He added that "I can't really give you a prediction right now as to when that might be resolved, but we think it's important for all of us that we get it resolved in a constructive way."

He further said that GM has stockpiled some parts in case Delphi's workers go on strike - but he believes a strike can be avoided.

"We strongly believe there are solutions that will work for all the parties," he added.

GM's fate is seen closely entwined with that of Delphi, its former parts subsidiary, which was spun off in 1999.

Delphi, which filed for Chapter 11 protection from its junk bond holders and other creditors last fall, contends that the wage-and-benefit structure that it inherited from GM at that time is economically unsustainable and was a factor in forcing it into bankruptcy.

Delphi wants to void the union contracts covering over 33,00 hourly workers and replace them with what it calls more manageable terms, including wage and benefit cuts of up to 40% from current levels.

Delphi and its unions were squaring off Tuesday in front of the U.S. Bankruptcy Court for the Southern District of New York, which is overseeing the company's reorganization.

The components supplier was asking bankruptcy judge Robert Drain for permission to junk the contracts - but the unions, for their part, strenuously object to any suggestions that the hourly workers' pay be cut. They argue that doing so would unfairly punish the hourly employees for the mistakes of management, and have threatened to strike if the company is granted the authority to void the contract and moves to do so.

UAW members are in the process of voting on whether to authorize a strike, with the voting expected to be completed within the week, while members of another Delphi union, the International Union of Electrical and Communications Workers, have already given their leaders the power to begin a walkout.

Such a strike, should it occur, would be disastrous for GM, which is heavily dependent on a smooth flow of parts from its former subsidiary to sustain production at a time when it is trying to turn its fortunes around, partly via the introduction of new vehicles that it hopes will become strong sellers. GM and Delphi combined lost some $2 billion the last time Delphi was struck, back in 1998, when one of the company's plants was shut down for nearly eight weeks, and analysts and other observers warn that, with GM having been weakened in recent years by sagging sales, reduced market share and its own high labor-related costs, any kind of prolonged Delphi strike this time around could cause an event once thought to be virtually unthinkable - a bankruptcy filing by the world's largest carmaker .

Tuesday's hearing was the first of three days of hearings this week that the court has scheduled on the company's motion, with the possibility of extending the hearing by adding additional dates. A separate motion that would allow Delphi to reject unprofitable GM contracts will take place next month.

Delphi's bonds, another trader said, were mixed on Tuesday, "with no rhyme or reason," its 7 1/8% notes due 2029 up ¼ point at 72.25 bid, 73.25 offered, but its 6.55% notes due 2006 off ¼ at 73.25 bid, 74.25 offered.

The first trader meantime said that it was Wagoner's comments about progress in the Delphi talks that really pushed the GM bonds and shares up, with little real impact from the revised first-quarter earnings figures GM released after the close on Monday. While GM had initially reported a loss for the quarter, it now classifies the result as a profit.

"Maybe the bonds were up a quarter point" early in the session on the revised numbers, he said, "but nothing great. The real movement was based on his comments, not on the restatement news."

"They magically snatched victory from the jaws of defeat," another trader quipped in reaction to the revised GM earnings data.

GM - which on April 20 had reported a net loss for the quarter ended March 31 of $323 million (57 cents per share) - said in a filing with the Securities and Exchange Commission that after making certain changes to the results to reflect the accounting for a health care settlement and other adjustments, it actually turned a profit for the period instead of a loss - $445 million (78 cents per share).

GM said it changed the way it accounted for an initially reported $681 million ($1.20 a share) charge related to a health-care settlement with blue-collar retirees, after discussions with securities regulators.

Excluding special items, GM reported adjusted net income for the quarter of $184 million (32 cents per share) versus its initially reported adjusted loss of $529 million (94 cents per share).

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