Hedge funds are buying the bonds of bankrupt carriers Northwest Airlines and Delta Air Lines in a bet there will be a significant bounce back when they emerge from bankruptcy. Northwest's 10% '09 bonds were up two points to 28, while Delta's 10.33% '06 bonds traded up a point to the 18-19 range. Over the past month, the bonds of the two companies had fallen around 10 points as both firms headed toward bankruptcy. But since they filed, their bonds have been trading up and traders said hedge funds are the biggest buyers. Officials at Delta and Northwest declined to comment.
Bill Mastoris, a managing director of research at BNY Capital Markets, said hedge funds are betting the airlines may terminate their defined pension plans, increasing the value of the unsecured debt. Both Delta and Northwest have large pension liabilities, which the firms have tried to restructure. There could be more value in Northwest's debt, however, because it has a far smaller pension burden than Delta. According to the Pension Benefit Guaranty Corp., Delta has $10.6 billion in underfunded pension liabilities, while Northwest is underfunded by $5.7 billion.
Analysts also believe there may be more recovery in Northwest's unsecured debt because it has more valuable assets. "One reason there is more enthusiasm for a restructured Northwest is that it has lucrative international routes," said Mastoris. Delta, on the other hand, competes more with domestic airlines. Roger King, an analyst at CreditSights, said he sees value in Northwest Airlines' unsecured debt, but thinks Delta's bonds could be worthless. "Northwest has valuable route flights to Japan and the Pacific. The value of these flights provides some cover for the unsecured debt," said King. "But Delta is not in good shape. It has to seriously downsize to find a profitable level. This might leave no room for the unsecured debt to transfer into equity."
He added that Northwest is a likely acquisition target because of its valuable Pacific route flights. American and Continental Airlines are potential buyers because they have little flight capacity in the Pacific, said King. Delta also has a network of international flight routes that are attractive to other airlines, but it has such a large overhead that it could be forced to liquidate, he said.
