GMAC gives up gains amid continued auto uncertainty, GM bankruptcy buzz; Buffett buys into USG

By Paul Deckelman and Paul A. Harris

New York, Nov. 21 - GMAC LLC's bonds - which had mostly firmed solidly on Thursday, aided by news that the company will give holders new debt for their existing bonds - were on the slide on Friday, traders said, knocked lower by a combination of profit-taking off Thursday's surge, combined with investors having some second thoughts about the company in the wake of the continued uncertainty about the ultimate fate of Detroit's traditional Big Three car makers, including GMAC's 49% owner, General Motors Corp.

That company's bonds, and those of its main domestic arch-rival, Ford Motor Co., were being quoted all over the place - here up, here down - amid uncertainty about what may happen to them, now that the idea of a federal bailout for the car makers has been shelved unless they can come back early next month with a comprehensive business plan to show how they intend to spend the $25 billion or so that they are asking Washington to front them. Adding to the uncertainty was renewed bankruptcy talk, with the incoming Obama administration's transition team reportedly eyeing a pre-packaged Chapter 11 restructuring for the industry, even though some key players, from the Speaker of the House to the head of GM, say that idea is a non-starter.

Outside of the automotive arena, USG Corp.'s bonds firmed on the news that legendary stock market guru Warren Buffett will increase his already sizable stake in the building products manufacturer.

Generally, the session was seen as dull, with junk getting little boost from the late stock market rally sparked by the news that president-elect Obama has tapped the head of the New York Fed for the key post as Treasury secretary.

Market indicators mostly lower

The widely followed CDX High Yield 11 index of junk bond performance, which lost a full 3 points on Thursday, was up 1/8 point on Friday, a trader said, quoting it at 71 bid, 71½ offered. However, the KDP High Yield Daily Index meantime fell by 59 basis points to 47.42, while its yield gapped out by 27 bps to 17.47%.

In the broader market, advancing continued trailed decliners for a third consecutive day by a margin of more than two to one. Overall market activity, reflected in dollar volumes, was down 10% from Thursday's pace.

A trader called Friday "a quiet day overall. I think people were a little relieved that the market seemed to be a little bit better-bid first thing [Friday] morning," but then, he said, "things definitely sold off almost immediately and people were looking to hit those bids."

He saw the CDX contract open at 72 bid, 72½ offered, up from 70 bid, 70½ on Thursday, and then "it went right back down to 71 bid, 71½ offered, and there were sellers - anything that stuck out as a decent bid, was getting hit."

He noted the late stock market rally, spurred by the news making the rounds in the afternoon that president-elect Obama has decided to name the president of the Federal Reserve Bank of New York, Timothy F. Geithner, as his secretary of the Treasury, putting to rest one of the big question marks hanging over the financial markets, given the expanded powers that the Treasury secretary can exercise under the recently passed federal bank bailout bill. In his current capacity as head of the New York Fed, the largest and most important of the 12 regional Fed banks - the head of the New York Fed is a permanent ex officio member of the policy-setting Federal Open Market Committee - Geithner, 47, a former Treasury official, has played a key role in the federal response to the financial crisis, working closely with the outgoing Treasury secretary, Henry Paulson, and Fed chairman Ben Bernanke.

"I think the market has a lot of confidence [in Geithner], and so we saw stocks closed up [nearly] 500 points" - 494.13 points on the Dow Jones Industrial Average, to be precise, or 6.54% on the day, at 8,046.42, partly making up for the calamitous 873 points, or more than 10% of its value, that the bellwether market measure had plunged over the past two sessions amid continued investor angst over the credit crunch, the problems of the auto industry, and the uncertainty facing the markets and the larger economy with the coming change of administration.

The trader said that it was "hard to know" the precise junk market response to the reported choice of Geithner; he speculated that the CDX was up "one or two points" from its lows. "It remains to be seen what happens over the weekend, but my guess is we'll have a firmer opening on Monday," when Obama is expected to formally announce Geithner's selection as his Treasury chief, "and it will just kind of go that way through [the upcoming] week. We'll see."

That having been said, however, he added the caveat that "who knows? The market feels very skittish and jittery, but this [has been] a very tough week, and stuff is down huge. You had stuff trade off five, six, seven points [Thursday] and people are scratching their heads."

"There's no clear pattern," another trader said. "The Dow goes up, and down - but even with the Dow up 170 points [actually, 151 points, as it was on Tuesday, temporarily breaking out of a slump], high yield never got involved."

Everyone, he said "is just shell-shocked. Those who have cash just want to hang onto it for as long as they can - and those without cash don't want to sell at these current low levels."

One symptom of the weakness seen throughout Junkbondland, the first trader said, is the fact that at his shop, "we traded some of this very short '09 paper, good solid credits - and they were trading in a 20% type [yield] range."

Examples of such credits, he said, were Kansas City Southern, New York Times Co. and Cablevision Systems Corp. The Times' short paper was being quoted in the lower 80s and Cablevision's 2009 bonds in the low 90s. He also mentioned Sun Microsystems Inc.'s 7.65% notes coming due next Aug. 15. The latter bonds, he said, considered practically a crossover credit at Ba1/BB+, were trading at 97.5 bid, 98 offered - and yet, were still yielding around 11% - an amazing fact, considering that using the traditional standard of a distressed credit, defined as something trading 1,000 bps or more above comparable Treasuries, even that kind of a strong bond could be classified as distressed.

"The whole high yield market is distressed if you look at it that way," he opined. "You have good, solid free-cash-flow-positive companies trading in the 60s, the 70s, the 80s. There are just no buyers.

"What's gone on here is that the market is just on strike. Guys are being forced out of situations [and into selling] and this forced liquidation is just driving the market down."

Add to that, he said, is the fact that "the bank debt market is so much cheaper than the cash market. It's exacerbating the situation, So until we get some buyers of credit - some semblance of normalcy - back in the market, and the stock market stops going down by 250 points a day, [the junk market] is just going to lay around like this. There's nothing you can do."

However, things may soon change. While "relative value has gone out the window, at this point," he said that "some people are discerning" of value. He said that he had spoken to some hedge-fund managers "who have decent cash positions - they're waiting for the market to really cheapen up, to step in." That point may fast be approaching, since "I personally think we've gotten to a low. If we lay around at these kind of levels for the next couple of weeks," that may set the stage for a rally in January.

"Going into next year, with a new administration, and the potential for a massive stimulus, we could see a pretty good move up in January."

For now, though, "it's quiet. A lot of people are just worn out," and looking forward to an abbreviated upcoming week, punctuated by what amounts to a 4½ day weekend, between the market's early close Wednesday, the full closure on Thursday for Thanksgiving Day, what is expected to be a very lightly-attended and lightly traded Friday, followed by the weekend.

A high-yield syndicate official said Friday, while better, was nothing to write home about. He marked junk 7/8 of a point higher on the day, but noted that stocks advanced 6.5%.

"If you look at Friday's move in the context of Thursday's 3 3/8 points drop you're still down 2½ points," the official added.

All told it was a bad week in the high-yield, said another source who added that the CDX High-Yield 11 index fell over 8 points from Monday's open to Friday's close.

"It's not a good time right now to be a high-yield investor," a banker said, noting that internal calculations are showing some high-yield mutual funds in the red to the tune of 40% or 50%, and in some cases more, year to date.

Market bellwether moves up.

Traders saw Community Health Systems Inc.'s 8 7/8% notes due 2015 - considered by some to be a proxy for the overall market because of its great size and liquidity and widespread distribution - to have moved up to 76.5 bid on a round-lot basis, which a trader called a ½ point gain, partly reversing a week of decline.

The Franklin, Tenn.-based hospital operator's bonds had traded the previous week in the mid-80s, then closed Monday's session at 83.75 bid. From there it was all downhill - 79.75 bid on Tuesday, 78 bid on Wednesday, and 75-76 on Thursday. While the bonds seemed to have had firmed slightly off those lows, they were still ending down around 7 points or more from where they had started the week.

However, one of the traders noted that only $5 million of the bonds had traded hands - well below the usual turnover in the name, a sign of the overall quiet of the market.

A market source noted that many junk players had ditched chilly New York and other Northeast business centers to attend the Bank of America high yield conference in 70 degree-plus Orlando this week, and had likely opted not to rush back for the sake of being in on the last day of the week, their absence further dampening the activity levels.

GMAC gyrates around

A trader saw some erosion in GMAC's paper, which had shot up solidly on Thursday on the news that the embattled Detroit-based automotive and residential lender would seek to exchange cash, or new debt and preferred stock, for its existing bonds. Holders electing to receive cash would get anywhere from 55 to 85 cents on the dollar for their bonds, depending on the particular issue; holders electing to receive the new paper would receive the same total principal amount, mostly of guaranteed senior notes with the same coupon and expiration date as their current unsecured bonds, although a portion of the total consideration would also be in preferred stock, and for GMAC's widely held 8% bonds due 2031, a combination of preferred and new junior unsecured bonds, in addition to the new guaranteed bonds.

The trader saw GMAC's 8s unchanged at 25 bid, but also saw its 6¾% notes due 2014 down 5 points at 30 bid, while its 5 5/8% notes coming due on May 15 lost 3 points to 67 bid.

A market source at another desk saw even more erosion in the GMAC levels, pegging the 6 7/8% notes due 2012 down more than 2 points at 35 bid, calling the 5 5/8% 2009s down a whopping 8 points on the day at 60 bid, seeing the GMAC 6 7/8% notes due 2011 off 9 points at the 32 level, and quoting its 6¾% notes due 2014 down more than 10 points at the 23 level. Trading in the latter issue was seen as very active.

Yet another trader said that GMAC ended down from 2 points to 4 points, 2 points on the longer end and 4 points closer in. The bonds, he said, "were all over the lot, although he was able to quote the '31s at 24 bid, 26 offered and the 7¾% notes due 2010 at 48 bid, 50 offered.

"It's hard to tell where the bonds ended," he said. "It was a crazy day."

He said that trying to track GMACs levels - or for that matter, parent GM's - were complicated by the fact that "we're in a neurotic market." Investors, he said, "are wondering will [GMAC] get its license as a bank to get TARP money or not? What does this exchange offer mean? Are they [GM] filing [for Chapter 11] or not?"

All of the uncertainty, he said, added up to "definitely a lot of volatility."

GM, Ford seen mixed on bankruptcy buzz

With the failure, at least for now, of a congressional bailout effort, and news stories suggesting that president-elect Obama's transition team is looking at the possibility of restructuring one or more of the traditional Big Three car makers under a prepackaged Chapter 11 filing, GM's bonds, and Fords, were being quoted all over the place, sometimes up and sometimes down.

A trader saw GM's benchmark 8 3/8% bonds due 2033 up 2 points on the day at 15 bid, 17 offered. He also saw Ford's 7.45% bonds due 2031 up a point at 16 bid, 18 offered.

On the other hand, a trader at another shop saw the GM long bonds "down a point or so" at 17 bid, 18 offered, and quoted the Ford '31s at 15 bid, 16 offered, also "down a point or so."

Yet another trader saw the GM '33s last traded on a round-lot basis at 13.5 bid, up from 10 on Thursday, although he saw the car maker's 7.20% notes due 2011 at 18.75 bid, down from 22 on Thursday.

He saw Ford's 7.45s down 1½ points at 15.5, "The auto stuff was really all over the place," he said.

While news reports indicated that the incoming Obama administration may consider a swift, prepackaged bankruptcy for GM, Ford and Chrysler LLC and accompanying restructuring as a possible solution to the industry's financial crisis - some stories said they are already seeking advice from at least one bankruptcy law firm - House speaker Nancy Pelosi has been quoted saying that bankruptcy would be "digging a hole far too deep."

At GM, the leadership may be split on the question. While CEO Rick Wagoner has said that bankruptcy is not a viable option, The Wall Street Journal was reporting on its website Friday night that GM's board of directors is "willing to consider "all options" for the ailing auto maker, including an eventual filing for bankruptcy protection," according to unidentified persons familiar with the situation.

USG gains on Buffet investment

Outside of the autosphere, a trader saw USG Corp. - itself certainly no stranger to the bankruptcy process, having undergone a lengthy Chapter 11 reorganization earlier in the decade - as being up on the news that legendary Wall Streeter Warren Buffett will increase his stake in the Chicago-based building materials company. He saw its 6.30% notes due 2016 having "an active day," up 1 or 2 points, though on "not a lot of volume," made better by the news that it is raising $400 million, much of it from Berkshire Hathaway Inc.

Buffet's company, which already holds a 17% stake, is buying $300 million of USG's 10% contingent convertible senior notes due 2018. Fairfax Financial Holdings Ltd. will buy the rest.

Another trader saw the company's 7¾% notes due 2018 up a point at 72 bid, 74 offered.

Broader market generally lower

Among other issues, a trader said that homebuilder Centex Corp.'s 6½% notes due 2016 were "a big mover," down 7 points to a round-lot level of 57, with $12 million of the bonds changing hands.

Elsewhere, Canadian aluminum producer Novelis Inc.'s 7¼% notes due 2015 were trading at a round-lot price of 58.5, a trader said. That's down from the last previous round-lot price of 62.625 a week earlier and well down from the most recent sizable trade, $200,000 on Tuesday. "Either way, it's down big," he said, not seeing any news that might explain that drop other than the generally lower market.

Another Canadian issuer, oil sands development company OptiCanada Inc.'s 8¼% notes due 2014, were up a point at 36 bid, on $13 million of the bonds traded.

Sprint Nextel Corp.'s bonds "continued to get hit," a trader said, with the Overland Park, Kan.-based wireless company's most widely held issue, the 6% notes due 2016 down 1 point at 51 bid; however, he said that only about $1 million of the bonds had traded, a relatively low total for that credit.

He also saw Sprint's 6 3/8% notes coming due on May 1 dip to 96 bid from 97.5 earlier in the week.

Amkor Technology Inc. continued the tech sector's slide, its 7¾% notes due 2013 down some 9 points to 54 bid, although its 9¼% notes due 2016 were only ½ point off at 54.

A trader saw Tribune Co.'s 7½% notes due 2023 fall to 8.25 from prior levels around 10 earlier in the week; a Major League Baseball executive said that Dec. 1 would be the new deadline for bids on the Chicago Cubs team franchise, which Tribune has been trying to sell for months. It's the latest in a series of deadlines on the sale, which has been delayed by various factors, including a dearth of bidders willing to meet the Chicago-based media and sports entertainment company's $1 billion price.

The exchanges

The market is continuing to parse several exchange deals that have burst upon the high-yield scene since mid-November.

Kind words were hard to come by during Friday calls.

For their initial reaction a couple of sources used "C" words.

For example, there was "complicated."

That was one banker's early take on GMAC's massive $38 billion exchange and tender deal for some outstanding GMAC and ResCap debt securities.

The deal, which is being led by Banc of America Securities, Citigroup, Goldman Sachs and JP Morgan, launched Thursday.

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.

"It's almost as though they are equitizing some of the bonds," said a banker, not in the deal.

"Guys are taking a pretty big haircut, and it's not as though you're getting anything out of it," the source added.

"This is a major restructuring, and a very complicated transaction."

Another "C" word, "coercion," came from a high-yield mutual fund manager who was in no mood to talk further, or even to specify which of the several deals now in the market was being discussed.

Harrah's: locking in losses?

Another exchange deal under discussion Friday was the offer from Harrah's Entertainment, Inc.

Harrah's is asking holders of 10 existing issues of its bonds to exchange the notes for $2.1 billion of new 10% second-lien notes maturing in 2015 and 2018. Exchange prices vary, according to a market source who said that holders of the notes with the nearest maturities receive the highest compensation, while holders of the longer maturities will be compensated as little as $0.37 on the dollar.

"Why acknowledge your loss at today's levels?" one market-watcher demanded to know Friday.

"You may have to roll the dice here.

"You're locking in losses when the market is trading at 1,900 basis points over Treasuries, with consumers running for the hills.

"Why do you want to lock in your losses at those kinds of levels when even a modest uptick in the market takes you to 1,700 bps over, which is worth 10 points on your bonds?"

Quote of the week

The quote of the week goes to a banker, speaking on background, who said on Monday "Wall Street has turned into a giant restructuring operation."

In addition to GMAC and Harrah's, similar restructuring-type bond exchanges are presently in the market from Neff Corp. and Realogy Corp.

The handicapping of these deals, with respect to their chances of getting done, is all over the map. Some say bondholders will buckle. Others say not a chance.

An early indicator may come during the first part of the week ahead.

The Hovnanian Enterprises, Inc. exchange, via Credit Suisse, which 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, is set to expire on Monday.

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.

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