GMAC gyrates, ResCap rises on bank plan, debt swap; autos up, then fade on bailout news; funds out $122 million

By Paul Deckelman and Paul A. Harris

New York, Nov. 20 - GMAC LLC's bonds were gyrating around Thursday, with some of its issues seen solidly higher, helped by the troubled automotive and mortgage lender's official filing of an application to become a commercial bank - and then be able to grab a piece of the $700 billion federal bank bailout pie.

GMAC also got a boost from the Detroit-based company's announcement of an exchange offer for some $38 billion of outstanding bonds issued by GMAC and by its wholly-owned mortgage lending subsidiary, Residential Capital LLC. The latter's bonds were also better on the day, with the gains coming against a backdrop of continued erosion in most other high yield names.

Bonds of GMAC's 49% owner, General Motors Corp., and the latter's main domestic arch-rival, Ford Motor Co., zig-zagged around in tandem with the carmakers' New York Stock Exchange-traded shares, which first were down on investor gloom about the prospects for a government bailout of the beleaguered industry, then shot up on news reports that a bipartisan group of congressional negotiators has hammered out a possible compromise proposal - only to surrender most, if not all, of those gains toward the close when it became evident that the Democratic congressional leadership would not allow a vote on the plan; the leaders instead demanded that the carmakers themselves draw up a plan to show how they would use any bailout funds Congress may vote them when it comes back in early December, to transform their once-powerful but now struggling industry back into a viable one.

Outside of the autosphere, most names were seen lower, some by multiple points, as a continued mood of resignation and capitulation seemed to become more entrenched. However, one notable exception was the problem-plagued retailer Bon-Ton Stores Inc., whose battered bonds - already been beaten down almost as low as they can go, down to the lower teens from a 75-80 context at the beginning of the year - firmed by a couple of points after releasing fourth-quarter numbers that were not as bad as investors had feared.

Primaryside activity remained in the deep freeze, a situation that is not expected to change anytime soon.

Funds fall by $122 million on week

And as trading was wrapping up for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday, $121.8 million more left the weekly-reporting funds than came into them.

That broke a small winning streak of two consecutive inflows, including the $157 million cash infusion reported last week for the seven-day period ended Nov. 12; over the last 10 weeks, including the latest results, there have been seven outflows, including a skid of five straight through the week ended Oct. 15 that totaled about $1.706 billion, according to a Prospect News analysis of the AMG figures. Net outflows in that 10-week period have totaled about $1.387 billion, according to that analysis. That recent run of mostly outflows stands in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10, when inflows were seen in seven of those eight weeks, according to the analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 23 weeks, dating back to the week ended June 18, with 11 inflows and 12 outflows seen, the funds have still lost a net $1.55 billion during that time, according to the analysis, mostly due to large cash losses last month -- $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 -- and the massive $651.2 million outflow seen in the week ended June 25, which was the biggest single cash loss of the year. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter now more than half done, inflows, after that slow start, remain ahead, with 26 inflows versus 21 outflows seen in the 47 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $364.1 million, down from $485.8 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

Meanwhile, there was no change in the flows of funds which report on a monthly basis rather than a weekly one. For the year-to-date, those monthly funds show a net inflow of $2.578 billion. On an aggregate year-to-date basis - that is, consolidating the net inflows of the weekly reporting funds and the monthly reporters - the total net inflow stands at $2.942 billion.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Market indicators slide continues

The widely followed CDX High Yield 11 index of junk bond performance, which lost 2¼ points on Wednesday, tumbled by another 3 points on Thursday, a trader said, quoting it at 70 bid, 70½ offered. The KDP High Yield Daily Index meantime plunged by 124 basis points to 48.01, while its yield ballooned outward by 51 bps to 17.20%.

In the broader market, advancing continued to trail decliners by a margin of more than two to one. Overall market activity, reflected in dollar volumes, was little changed from Wednesday's pace.

A trader said that "everyone wants to run into a bomb shelter right now." Generally, he said "when you get an 'offers-wanted' list, meaning that you have buyers out there, it's a great thing - because everyone's a seller, no one wants to buy anything right now. There's general weakness across the board."

He said that the announcements from GMAC "really aren't helping things, but they are creating a lot of volatility." He said there was "a lot of flow trading going on."

Overall, however, he said that "a lot of people don't know what to make of it. You don't necessarily have people taking huge positions in things, but just being able to trade back and forth.

"There are very few one-point markets. Everything is two-, three- and four-point markets out there right now."

He allowed that while people "aren't really quite sure what to think of [the market] yet - but at the same time, people are moving into and out of things, so there's money to be made and trades to be done."

Another trader said that "everything is trading was down, with the possible exception of GMAC." He said, for instance, "even the safe havens" like Community Health Systems Inc. were lower, in line with the general market for which its 8 7/8% notes due 2015 serve as something of a proxy. Those bonds, in the lower 80s a couple of days ago and around 78 on Wednesday, moved further downward, to between 75 and 76 bid, "and that's a new low" for the Franklin, Tenn.-based hospital operator's issue.

About the only name that he saw, outside of GMAC, that did not fall was Nuveen Corp., which was unchanged. He saw the financial company's 5½% notes due 2015 trading at 20 bid and the 5% notes due 2010 around 35.5, "up off their lows and unchanged for the last couple of days."

A syndicate official noted the drop in the CDX index and said with a gasp: "That's very remarkable.

"The commercial real estate market is becoming a huge concern for people," the official added.

"There is a story out there that General Growth hired a restructuring advisor."

And of course the auto sector remains a concern, the source added.

Cash bonds were 3 points lower Thursday morning, according to a trader for a high-yield mutual fund who doubted that they had rebounded.

GMAC swells on swap, bank plan news

GMAC's bonds were among the most actively traded issues on Thursday, and among the most volatile. Some - though by no means all - were seen up handsomely.

A trader saw its widely held 8% benchmark bonds due 2031 open up around 5 or 6 points on the session at 33 bid, 35 offered, apparently helped by the news that GMAC has formally filed to become a bank, and thus be able access federal Troubled Asset Recovery Program bailout money, as well as by the announcement of the big debt-exchange plan. However, he said that after that morning rally had boosted the bonds "up 5 or 10" points from their Wednesday levels, they gave all the gains back and closed at 28 bid, 30 offered, unchanged. "They went up - but then they came back down."

Another also saw the GMAC 8s pretty much unchanged at 29, although he had its 5 5/8% notes slated to come due this coming May 15 - the most active GMAC issue traded, with over $25 million changing hands - up a full 10 points on a round-lot basis to 72 bid. But GMAC's 6 7/8% notes due 2011 moved down to 38 bid from 39, he said, "so it was actually down a point."

A third trader said that GMAC was "all over the place," with the 8s falling as low as 26 before closing at 29. The trader said the 5 5/8% notes were seen moving in round-lots around 70 and in odd-lots "all over the map" bouncing between 59 and 69.

At another desk, a market source estimated that the 8s managed to gain a little more than a point to close out at 26 - but the big winners were the 6 7/8% notes due 2011, which zoomed more than 8 points in busy dealings, to 41.5 bid. The source saw the '09 bonds likewise 8 point gainers, to the 70 level. GMAC's 7.25% notes due 2011, on the other hand, were quoted down 5 points to around 40.

The cash-hungry GMAC said in a regulatory filing that "as a bank holding company, [it] would obtain increased flexibility and stability to fulfill its core mission of providing automotive and mortgage financing to consumers and businesses." It would be eligible for financing under the Treasury-administered TARP program, and as a bank would also be able to directly borrow funds from the Federal Reserve's discount window on very favorable terms. It recently won approval to participate in a Fed commercial-paper facility aimed at pumping liquidity into that market, which had been frozen for some weeks before the Fed began buying CP. GMAC further said in its filing that it is "in discussions" with the Federal Deposit Insurance Corp. about participation in the latter agency's debt-guarantee program.

But GMAC also cautioned in its filing that before it can officially convert to a bank, it has to raise $2 billion in capital from third parties or existing investors to qualify for bank status under the Tier 1 capital ratio, a measure of a lender's ability to absorb losses. It warned that such financing was by no means assured.

GMAC also outlined the details about its debt-swap offer to holders of GMAC and ResCap bonds. Holders of some $38 billion of bonds, out of the $61 billion of outstanding unsecured long-term debt, are eligible to participate. Under the complex offer, GMAC is offering to buy back notes for as little as 55 cents on the dollar in cash, or, if holders choose, they can exchange their existing bonds for an equivalent principal amount of new senior notes and preferred stock (see related story elsewhere in this issue). ResCap holders will meantime tender their bonds at a rate of as little as 20 cents on the dollar.

A market source saw Residential Capital Inc.'s 8 7/8% notes due 2015 as much as 4 points better, around the 11 bid mark. The troubled Minneapolis-based mortgage lender's 6 3/8% notes due 2010 were up 3 points, to 10 bid.

Ford, GM jump around on bailout possibilities

While some GMAC bonds were better, 49% owner General Motors' paper was seen gyrating around, first down, then up, and then back down again, as hopes for a government bailout of Detroit waxed and waned. Ford's bonds were seen following suit.

A trader saw GM's 8 3/8% bonds due 2033 finish down 1 point on the day at 14 bid, 16 offered, also after having been higher earlier on news that a compromise on a federal bailout for the big carmakers might be struck. He saw Ford's 7.45% bonds due 2031 ending down 2 points at 17 bid, 19 offered. "Everything [in the sector] went up a little, but then came back down, he declared."

Another trader saw the GM benchmark bonds down 2 points at 13.5 bid, 15.5 offered, while the Ford long bonds lost 4 points to 18 bid, 22 offered.

At another desk, the GM benchmark bonds were seen at 11 bid, 15 offered late in the day.

Yet another trader saw the GM 8 3/8s at 14.75 bid, down from 15.875 on Wednesday, with its 7.20% notes due 2011 last traded in a round lot at 20, down from 21 previously.

He said that the GM and GMAC bonds came off their earlier highs when it became apparent there would be no vote today, or any time soon, on the compromise auto bailout plan.

He saw Ford bonds following a similar pattern, with its 7.45% notes were down a point on the day at 19.5 bid.

He also saw Ford's 5.80% notes coming due on Jan. 12 at 88, up ¼ point on mostly odd-lot trades. "Retail [investors] just loves that short paper," he said.

Early news reports indicated that hope for a vote on a bailout was fading - the Democratic leadership of the House and Senate, which had hoped to have a vote at mid-week on a plan to loan the financially faltering GM, Ford and Chrysler some $25 billion of TARP money, withdrew plans for a vote on Wednesday when it became apparent that such a plan did not have sufficient votes to pass over the opposition of the White House and Republican senators, particularly those from such Southern states as Alabama and South Carolina which are home to auto factories operated by major Japanese and European carmakers who compete with the traditional Big Three for the U.S. car-buying public's dollar.

However, around mid-day, there were news reports that a bi-partisan group of Midwestern senators, including Democrats from Michigan and Republicans from Ohio and Missouri, which also are home to Big Three assembly plants, would propose a compromise bill which would give the carmakers temporary funds from an already approved program aimed at getting them to adopt more fuel-efficient technologies - the basic plan the White House suggested - while also tacking on features from the shelved Democratic measure, including curbs on executive pay, a government stake in the companies and more federal oversight of their operations.

However, market enthusiasm quickly faded when it became apparent that House speaker Nancy Pelosi and Senate majority leader Harry Reid would not allow the plan to be presented for a vote; most Capitol Hill Democrats are opposed to using the technology funds to meet the general financial needs of the carmakers. Instead, Pelosi and Reid said that Congress would take up the issue when it returned from its Thanksgiving recess in early December - but would want the carmakers to show the legislators in detail how they planned to spend any money they might be given. Hearings would commence Dec. 2, and a vote could come on Dec. 8, they said.

Bon-Ton up on not-bad numbers

Outside of the autosphere, a trader said that it was "interesting" that Bon-Ton Stores' bonds "actually were up," with its 10¼% notes due 2014 pushing up to 14 bid from prior levels at 12 after the company's results were released. The rise was especially notable, he said, because "it's a retailer, and the retailers have gotten hammered" of late.

Another trader said the Bon-Ton bonds "look like they might have been up a little," gaining 2 points intraday before giving back ½ point to end up 1¾ points at 13 bid, 15 offered. He said that "the numbers were not as bad as people thought that they would be."

The York, Pa.-based department store operator posted a net loss of $14.3 million for the 13-week period ended Nov. 1, compared to a net loss of $19.4 million for the year-ago third quarter, although the 2008 results included a favorable tax benefit adjustment of $7.0 million.

Bon-Ton also downwardly revised its full-year fiscal 2008 EBITDA guidance for the third time this year, citing the continued worsening of economic conditions during the third quarter. However, Bon-Ton also said that it will stay focused on augmenting its liquidity and using positive free cash flow to reduce debt (see related story elsewhere in this issue).

Non-Bon-Ton retailers retreat again

Bon-Ton's new strength did not carry over to its peers in the hard-hit retailing arena. Among other store operators, a trader saw Neiman Marcus' 9% notes due 2014 at a final round-lot level of 40 bid, down from 44 previously, and its 10 3/8% notes due 2015 also at 40, down from 43; those bonds now trade at yields of 30% and 32%, respectively, he said.

At another desk, a market source saw the Neiman Marcus 9s down 2½ points to the 41 area.

Toys 'R' Us Inc.'s 7 7/8% notes due 2013 were down by a deuce at 52 bid.

Rite Aid Corp.'s 10 3/8% notes due 2016 fell as low as 60 bid, before coming off that low to 62, down 1 point on the day on $8 million traded. Its 8 5/8% notes due 2015 were quoted at the 26 level, down more than 2 points on the day.

Gaming sector slippage continues

In the gaming sector, a trader said that MGM Mirage's 13% notes due 2033 - which priced at 93.132 on Oct. 31 - traded at 78 bid, 79 offered, well down from Wednesday's levels around 84. The Las Vegas-based casino giant's established 6 5/8% notes due 2015 were seen at 49 bid, down some 5 points on the day.

Isle of Capri Casinos Inc.'s 7% notes due 2014 lost more than 2 points on the day to end at 41.5 bid.

GMAC: a gun to the head

Against the backdrop of dramatic downward price moves in the secondary market, and 5%-plus drops in the major U.S. stock indexes, the primary market unsurprisingly remained quiet.

Market watchers remain focused on what appears to be a continuing parade of "restructuring" exchange deals, including the big offer announced by GMAC for $38 billion of some outstanding GMAC and Residential Capital, LLC debt securities to increase capital.

Banc of America Securities, Citigroup, Goldman Sachs and JP Morgan are leading the deal.

GMAC is offering to purchase and/or exchange any and all of several notes series for either new securities, consisting of a combination of newly issued senior guaranteed notes for the old GMAC notes maturing prior to 2031 or a combination of new guaranteed notes and newly issued 8% subordinated notes due 2018 for old GMAC notes due 2031, and newly issued 5% perpetual senior preferred stock.

Three issues of GMAC bonds due 2009 mature in two months, observed one sell-sider.

"They had been trading at 70, with a juicy yield," the source said.

"It's the exact same situation that ResCap was in before.

"Even though the yield looks juicy, if this type of 'gun-to-the-head' deal doesn't happen its one step away from kicking the bucket.

"I think it gets done."

Meanwhile a trader was looking at the sunny side.

"If they can get this done it's pretty much a win-win situation," the source said.

"You can argue that Cerberus should put in more.

"But it's going to give you eligibility for $6 billion of preferred and $12.5 billion of government credit.

"So it should be seriously considered."

Opportunistic

Apart from the GMAC deal there are several exchanges in the market which sources are characterizing as restructuring deals in which companies are attempting to monetize price depreciations of their securities by exchanging bondholders into paper that tends to be better secured and in some cases longer dated, at draconian discounts to par.

Some of these trades have been labeled by market observers as "opportunistic."

The Hovnanian Enterprises, Inc. exchange, via Credit Suisse, targets seven outstanding issues in exchanges that offer bondholders new 18% senior secured notes due 2017 at prices between $0.40 and $0.47 on the dollar, depending upon the issue.

The early consent date expired on Nov. 4. However a source close to the deal said that the bondholders did not face a substantial penalty for failing to get in before the early deadline.

The termination date is Monday.

One sell-sider said on Thursday that the Hovnanian bonds trade illiquidly.

"People know they're out there but you don't hear much about them because they are so locked up, presumably from guys who got it at much higher prices," the source, adding that the Hovnanian exchange is more of a "deleveraging" play than a distressed one.

Neff: the human side

Elsewhere Neff Corp.'s 10% notes due 2015 traded at 22 on Thursday, according to a sell-side source.

The Miami-based equipment rental company is offering a new Libor plus 350 basis points term loan to holders of those notes due 2015 at $0.45 on the dollar.

This sell-sider, who spoke during the waning hours of the Thursday session in New York, had a hard time finding things to like about this "opportunistic" deal.

"Your recovery rates won't be any better with the term loan because you will still be under the ABL," said the sell-sider.

"You will be above the second-lien lenders. But is there going to be anything left?"

This official also invited Prospect News to consider the "human side," adding that there were investors who bought in the 40s and 50s, believing in the enterprise value, and concluding that there was something left.

"They truly believed in the company, and now they know they were wrong," the sell-sider said.

The floodgates

The sell-sider also sounded a cautionary note about the recent spate of restructuring exchanges which prevail upon bondholders to lock in price depreciations.

"These deals are testing the water," the sell-sider warned.

"It's like some of those early seven-times leveraged PIK toggle deals we saw when the market was hot.

"They tested the market. It worked and everyone started doing it.

"It just takes one or two transactions to get done."

The sell-sider also pointed to an exchange deal launched one week ago by Realogy Corp., which offered to exchange some of its outstanding notes for up to $500 million of new second lien incremental term loans at prices ranging from $0.36 to $0.50 on the dollar.

"Say, for example, the Realogy deal gets done," offered the sell-sider.

"Then you have companies and private equity people concluding that there are a lot of investors willing to take losses, and deciding to stuff people with more deals like this, resulting in huge losses for people who bought at higher prices.

"So even if the deal is appealing you might be reluctant to take it for fear of opening the flood gates."

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