What is going on here?
For some reason, this story from today's Pittsburgh Post-Gazette set off my internal radar.
What is going on here? Why would the largest investment houses on Wall Street be sinking money into bankrupt airline stocks? I'm getting a fuzzy deja vu flashback to the mysterious trading just before 9/11, with airline stocks being sold short by individuals who appeared to have inside knowledge of the pending attack.
But what are the insiders betting on this time? Do they know that Peak Oil is a scam and they're hoping to make a killing when fuel prices suddenly drop in the future, maybe the near future? Are they anticipating another act of terror or manufactured disaster that will somehow increase the value of airliine stocks? Are railways or other modes of transportation about to be targeted? I put it to you ladies and gentlemen:
Heard on the Street
Heard on the Street: Why were savvy investors in Delta, Northwest?
Friday, September 16, 2005
By Gregory Zuckerman, The Wall Street Journal
Who would be foolish enough to buy up the shares and debt of struggling Delta Air Lines and Northwest Airlines? Some of the smartest investors on Wall Street, that's who.
In recent months, hedge funds including Ziff Brothers Investments LLC and Kingdon Capital Management LLC, as well as money managers like Charles Schwab Corp.'s U.S. Trust Corp., Wellington Management Co. and Deutsche Bank AG all piled into shares of the airlines, according to regulatory filings. And in recent days, a rush of hedge funds bought up Northwest's debt, betting that the airline would avert a bankruptcy filing.
Bad call. Northwest and Delta both made voluntary Chapter 11 filings Wednesday. Delta's shares, which hit $4 in June, Thursday were at 75 cents, up 5.6 percent, in 4 p.m. composite trading on the New York Stock Exchange. Northwest tumbled 53 percent Thursday to 88 cents in 4 p.m. composite trading on the Nasdaq Stock Market, after trading above $6 in June.
New York-based Ziff reported Aug. 10 that it had built a new position of almost 5.3 million Northwest shares, or about 6 percent of the airline's outstanding shares. For its part, Wellington established a new position in Delta during the second quarter of this year, buying up 5.3 million shares, though the Boston-based firm reduced its position in Northwest to 2.4 million shares from about 5.1 million in the first quarter, according to regulatory filings.
Others got out in the nick of time, though not without having losses. On July 28, large hedge fund SAC Capital Advisors LLC said it had added 2.8 million shares to an existing 2.1 million-share position in Northwest, while on July 14 SAC reported that it added 5.8 million shares to a 3.7 million stock position in Delta, according to FactSet Research Systems Inc. People close to the firm say SAC exited these big positions a few weeks ago, selling Northwest stock when it was still around $3 a share, avoiding some of the pain. But SAC still lost money on the trades.
Regulatory filings provide a snapshot of holdings on a certain date, of course, and the investors may have adjusted their positions, or offset them with other trades. Still, all the buying is surprising because it came in the face of persistent worries about the impact on airlines of hefty fuel and labor costs, onerous pension obligations, strained union relations, brutal competition and a history of well-regarded hedge funds getting burned by betting on airlines.
Representatives of Ziff, Kingdon, Deutsche and Wellington declined to comment.
So what were these guys thinking? Some of these investors say they were hopeful that Northwest could forge a closer relationship with it unions, helping to send shares close to $10. Others viewed the investments as inexpensive ways to bet that oil prices would fall. Had jet-fuel prices dropped, instead of soaring after Hurricane Katrina, the airlines would have been much healthier, and the stocks likely would have climbed. Indeed, shares of other airlines, such as AMR Corp. and Continental Airlines rose over the summer as business travel picked up.
The days leading up to Northwest's bankruptcy have seen particularly strong buying of the airline's debt, traders say. One reason they had hope: Northwest never arranged debtor-in-possession financing from creditors, usually a precursor to a bankruptcy filing, suggesting to the investors that the airline wasn't about to file. Northwest has said that it decided against a DIP because it believes it has sufficient cash and most of its assets already are pledged.
Some sophisticated investors are trying to establish large positions to gain a seat at the table when the airlines' fates are negotiated. Still others are hoping that the airlines could end up merging with rivals or think Congress will step in to provide pension relief.
Thursday, trading in the debt was heated, as some traditional money-management firms and mutual funds sold bonds, while some investors covered short positions, or bets against the price of the bonds, by buying back the debt. In recent weeks, others traded "recovery swaps." These new instruments are an obligation to buy the cheapest bond within 30 days of a default, an attractive investment for those convinced that the value of the debt will rise during the bankruptcy process.
Northwest's most heavily traded bonds, those maturing in 2008, traded at about 24 cents on the dollar Thursday, down from 26 cents late Wednesday and from about 34 cents last week. Though the equity of the airlines likely will be wiped out, there likely is some value to the bonds at these levels, some say, because the bonds will be converted into equity in the airlines when they emerge from Chapter 11.
"I can't guess the value of jet fuel in 18 months when the airlines emerge, but there is some value to the bonds at these levels," said David Feinman, managing director at Havens Advisors LLC, a New York hedge fund. He says he hasn't yet purchased debt of the airlines, though he has wagered against the shares of the carriers. "But you better have a strong stomach and a lot of patience to get involved at this point."
That hedge funds continue to place big bets on airlines is somewhat surprising given the poor track record many of the best in the business have in divining the future of this notoriously challenging business. Legendary investors Michael Steinhardt and Julian Robertson both suffered big losses from stakes in US Airways Group. Warren Buffett made money investing in US Air but not before writing off 75 percent of its value and calling it a "mistake." Carl Icahn had a difficult ride after gaining control of Trans World Airlines in 1986. In all, more than 100 airlines have filed for bankruptcy in the past 25 years.
\"...if the American people ever find out what we have done, they will chase us down the streets and lynch us.” George H. W. Bush, Sr., 1992.