The bonds of several bankrupt companies that plan to pay their unsecured creditors back with equity when they emerge from Chapter 11 traded down last week. The volatility was due to continued turmoil in the equity markets. Asbestos, auto and airline bonds were particularly active, said traders.
The bonds of Armstrong World Industries continued to drop after they reached a high of 90 on May 12. Armstrong's 9 3/4% '08 bonds fell to 79 3/4 from 84 the week before. Its 6 1/2% '05 bonds fell three-and-a-half points to 80. Armstrong's bonds and bank debt had climbed 10 points after Owens Corning, another bankrupt manufacturing company plagued by asbestos liabilities, came out with a plan of reorganization similar to Armstrong's (CIN, 5/19). Under Owens Corning's plan of reorganization, bondholders will receive cash and equity when it emerges. A spokeswoman for Armstrong said a confirmation hearing of the company's reorganization is scheduled for August. Bondholders will receive both cash and equity in the reorganized company.
Owens Corning's bonds fell five points to 108. The bonds traded as high as 125 May 12 following its plan of reorganization announcement. Owens Corning announced May 10 that it had reached an agreement with creditors on a plan -- its sixth since it filed for Chapter 11 bankruptcy protection in October 2000 (5/15). Bondholders will receive common stock in the company, while bank creditors will receive cash. A trader said the bonds have tumbled as the market has tried to estimate where the debt will trade when it converts into equity. "It is partly a correction," said a trader about Owens' bond debt falling. "The market is trying to gauge where it will trade when they emerge."
Delphi Corp. and Dana Corp. were two auto names that also traded actively. Bondholders could either receive equity, cash or a mix of both when they emerge, said the trader. Dana Corp.'s 7% '29 bonds were down three points to 79. Dana filed for bankruptcy on March 3. A Dana spokesman would not comment on Dana's plan of reorganization and said no bankruptcy court proceedings have been scheduled to discuss a plan. Delphi's 7 1/8% '29 bonds dropped two points to 74. It rebounded four points, however, after Merrill Lynch raised its rating of General Motors on signs that GM's cost cutting measures are moving faster than expected. Delphi is a large supplier to GM. Delphi says in a release that it expects to emerge from Chapter 11 in the first half of 2007. A spokeswoman would not comment on the plan of reorganization, saying a plan has not been finalized yet. Northwest Airlines was another bankrupt company to see its bonds fall, with its 6 5/8% '23 bonds dropping four points to 50.
