Delta's Bonds for Logan Rise, Despite Junk Status

Jan. 10, 2006
Delta partially defaulted on an interest payment due Jan. 1 for the $497.6 million in bonds used to fund the new Terminal A at Logan International Airport.

Jan. 7--While a top financial rating agency has slapped the lowest junk-bond rating possible on bankrupt Delta Air Lines Inc.'s bonds for its new Boston terminal, Wall Street traders have just shrugged -- and even bid the bonds higher.

After Delta partially defaulted on an interest payment due Jan. 1 for the $497.6 million in bonds used to fund the new Terminal A at Logan International Airport, Standard & Poor's on Wednesday slashed its rating on the Delta bonds to D, the bottom of the barrel. But the move had no impact on trading of the bonds, which have continued to sell for $107 or more per $100 in face value and, in the case of several issues, have risen slightly in value over the last three days.

One key reason: Ambac Financial Group Inc. fully insures the bonds and paid up the $3.7 million of the $9 million owed that Delta declined to pay. "Ambac is behind them, so they trade like a triple-A bond," said Robert B. MacIntosh, co-director of the municipal bond group at Boston money managers Eaton Vance Corp., which bought some of the Delta bonds but sold them last year for technical tax reasons.

At the same time, Delta's public statements suggest it would fully cover the next interest payment due July 1. Delta spokeswoman Chris Kelly said the $5.3 million the airline did pay reflected the share of interest due between last Sept. 15, the day it filed for Chapter 11 protection, and Jan. 1.

"Delta is not required nor is it authorized under the federal bankruptcy code to pay" the share of interest for "the period prior to the filing" between last July 1 and Sept. 15.

Delta's actions suggest it agrees it will continue to owe and pay future interest on the terminal bonds while it remains in Chapter 11. But Kelly said she could not comment on future plans.

So far, Delta's default has mainly been a concern just for Ambac and investors who own the bonds. The Massachusetts Port Authority, under whose aegis Delta issued the bonds, has no legal obligation to repay them.

In the unlikely event Delta slashes Boston service or shuts down entirely, Massport has no legal grounds to take terminal gates back from Delta before March 2010, under terms of the 2001 bond deal.

Ambac managing director Peter Poillon agreed that Delta's actions this week indicated the airline will cover the next interest payments in full, but Poillon said, "We're going to keep all of our options open."