Autos up as plans hit Hill, despite poor sales; better tone seen, but Nova 'down huge' on warning

By Paul Deckelman and Paul A. Harris

New York, Dec. 2 - Tuesday was the day that the embattled Big Three automakers had to hand in the homework assignment recently given to them by congressional leaders - detailed plans about how General Motors Corp., Ford Motor Co. and Chrysler LLC plan to turn the fortunes of their companies around if Washington gives them $25 billion of assistance. They have their work cut out for them on that score, as all three companies - along with foreign-based rivals like Toyota and Honda, which also maintain U.S. production facilities - reported a steep falloff in November sales versus year-ago levels. Still, bonds of GM, Ford and their respective auto-loan financing arms were up across the board on investor hopes that the legislators will like what they see in the carmakers' plans and help them out.

Automotive optimism - helped by Ford's assertion that it has enough cash to make it through 2009 and might not need government help - was a factor as stocks bounced partially back from the sound drubbing which they took on Monday, which in turn provided some encouragement for the junk market, which also turned higher, albeit modestly.

Among the gainers were such names as Sprint Nextel Corp., Freeport McMoRan Copper & Gold Inc. and Pilgrim's Pride Corp. - even as the latter's investors adjusted to the Pittsburg, Tex.-based chicken producer's new status as a bankrupt.

But one name clearly on the downside was Nova Chemicals Corp., whose bonds fell anywhere from 7 to 10 points after the Canadian chemical manufacturer warned that 2009 sales would likely be off sharply.

Market indicators on the rebound

The widely followed CDX High Yield 11 index of junk bond performance, which fell by 1¼ points on Monday, gained back ¼ point during Tuesday's session, a trader said, quoting it at 73 bid, 73¼ offered. The KDP High Yield Daily Index meantime rose by 9 basis points to 48.27, although its yield also increased by 3 bps to 17.26%.

In the broader market, advancing issues led decliners by a narrow margin. Overall market activity, reflected in dollar volumes, was nearly 60% above the pace seen in Monday's session.

A trader said that "generally, there seemed to be a better tone to high yield. But except for a few news-specific issues," he "really didn't see much of a rally" going on in Junkbondland on Tuesday.

For instance, he saw Community Health Systems Inc.'s 8 7/8% notes due 2015 - seen by some as a proxy for overall market movements because of its large size, great liquidity and widespread distribution - up by 3/8 point at 80.875, but the Franklin, Tenn.-based hospital operator's bonds were "not very active," with only about $6 million traded.

Such a lack of enthusiasm stood in contrast to what was happening on Wall Street, which was solidly higher, though volatile; the bellwether Dow Jones Industrial Average, which had slid nearly 680 points on Monday, one of its worst one-day showings ever as it broke a string of five straight gains, pushed up by more than 260 points in early Tuesday dealings, then gave it all back at mid-afternoon as it dipped into the red, but rebounded from that loss to finish up 270 points, or 3.31%, at 8,419.09. The broader Standard & Poor's 500 and Nasdaq composite indexes each finished up more than 3% as well. Shares were seen helped by factors such as the Federal Reserve announcement that the central bank plans to extend the life of several key programs aimed at loosening the credit markets and restoring stability to the financial sector; market giant General Electric Co.'s statement that it expects to pay a dividend, this despite projections that fourth-quarter results be around the low end of its previous guidance; and Ford's cautiously confident projection about being able to perhaps go it alone, without help from Uncle Sam other than a stand-by line of credit.

Autos drive higher on Hill hopes

A trader saw the Dearborn, Mich.-based Number-Two U.S. auto producer's 7.45% bonds due 2031 up 2 points on the session at 26 bid, 28 offered, while its larger domestic arch-rival, GM's benchmark 8 3/8% bonds due 2033 improved by a point to 21 bid, 23 offered, as those two carmakers, plus Chrysler, delivered their turnaround plans to Congress.

A second trader saw the Ford long bonds get as high as "a 28ish" context during the session, while yet a third saw those bonds trading on a round-lot basis at 26.125, up more than 3 points from prior levels, on volume of $15 million. He meantime saw the GM benchmark issue, also on a round-lot basis, at 22.375 bid, up from Monday's 20 close, with $13 million of the bonds changing hands.

A trader saw Ford's 4¼% bonds due 2036 "pretty active" around 29 bid, 30 offered, while its 9.30% bonds due 2030 shot up nearly 5 points to the 22 area.

Apart from those long benchmark issues, traders saw the carmakers' shorter bonds pushing higher as well - GM's 8¼% notes due 2023 at 21.25 bid, up from 20 on Monday and its 7 1/8% notes due 2013 at 25 bid, up from 22.

While the parent carmakers' bonds were mostly doing well, GM and Ford's respective financial arms - GM's 49%-owned GMAC LLC and Ford's wholly-owned Ford Motor Credit Co. - were doing even better. A market source saw GMAC's 6 7/8% notes due 2012 up nearly 9 points at the 41 bid area, in busy round-lot dealings.

A trader who saw both GM and GMAC paper "up anywhere from 2, 3, 4 points, across the board," saw the latter's 6 7/8% notes due 2011 trading in round lots at 43 bid, up from around 39 on Monday, while its 8% bonds due 2031 had pushed up to 30 bid from 26 bid, 26.75 offered. GMAC, and GM, he said, were higher as "everybody's zeroing in on what [the carmakers] are going to get" from Washington, with the market essentially dismissing the latest terrible sales numbers. GMAC's 5 5/8% notes coming due in May were seen up a deuce at 72 bid.

At another desk, a trader also saw those May '09 bonds at 72, but saw them having risen 5 points on a round-lot level, from 67 previously, on $12 million traded, "so there was quite a pop there." He saw the 2031s at 29.5 bid from 25.75, on volume of $9 million, and saw GMAC's 6 7/8% notes due 2011 as its most active issue, with $19 million traded and the bonds up more than 4 points, round-lot, at 43.375. Its 6 7/8% notes due 2012 also gained 4 points, to 40 bid.

Meanwhile, Ford Credit's 7 3/8% notes coming due next Oct. 28 were at 66 bid, 67 offered versus 63 on Monday, "so those are up," a trader said, while the bonds were quoted at another shop up more than 4 points to above the 67 level, with $14 million traded. Its 7% notes due 2013 gained more than 3 points to push above 47 bid.

The bonds did well despite the sour sales statistics released during the session; Ford reported a 31% fall in November domestic sales of cars, light trucks and SUVs from year-earlier levels, GM saw sales swoon by 41%, and Chrysler did the worst of all, skidding 47% year over year. If misery loves company, the Big Three had plenty of both; Toyota and Honda's U.S. sales for the month both plunged more than 30%, and Nissan's nosedived by over 40%. The consolidated 37% industrywide sales slide took sales down to their lowest levels since 1982. More bad news for all of the carmakers came from overseas, which had been the lone bright spot in recent months for the beleaguered U.S. giants; sales plunged in both Europe and Asia, until now regarded as strong sales regions for everyone.

Investors were looking past that not-unexpected bad news, and focusing their hopes on the turnaround plans which the domestic carmakers brought to Congress. For at least two of the companies, the initial news was not very encouraging. GM said that it needs $18 billion of loans, including $4 billion by the end of this month, a sum which chief operating officer Fritz Henderson said is "crucial" to the company's ability to keep operating.

Some $12 billion of the funds would come in the form of a term loan, including the December money, and another $6 billion in the former of a credit revolver for use if market conditions deteriorate. GM anticipates using $10 billion to $12 billion of the money by the end of March, and said that it expects to fully repay the loans by 2012. However, if market conditions deteriorate, GM will at least begin to repay loans by then.

Henderson said GM hopes to chop the company's massive debt load by as much as $36 billion by giving bondholders the opportunity to swap out of their existing bonds for new paper.

Chrysler also said it needs some of its cash right away, if not sooner. The privately held company said it needs a $7 billion bridge loan by the end of the year; that would be in addition to $6 billion from an already-approved Energy Department program aimed at encouraging the manufacturers to make fuel-efficient cars. The Number-Three domestic producers said it anticipates spending $11.6 billion in the first quarter, including $8 billion to parts suppliers. It said it would be "well-positioned" to begin repayment of the federal loans in 2012, including a $1 billion payment that would still leave it with some $12 billion of liquidity by 2012.

Ford's situation is not quite as bad as its peers; the company said that all it wants is a $9 billion standby line of credit to stabilize its business, and it does not expect to tap the funds - that is, unless one of its other rivals went bankrupt, throwing enormous additional stress on the whole industry. If all goes well, Ford expects to at least break even or perhaps turn a pretax profit in 2011.

Each of the plans also envisions cutting labor costs, downsizing their factory operations and dealer networks - and in GM's case, unloading several of its car lines - and developing new fuel-efficient small and mid-sized cars.

Each also has numerous symbolic bows aimed to ingratiate the carmakers with a largely hostile Congress, with CEOs Rick Wagoner of GM and Alan Mulally of Ford promising to forgo their usual handsome salaries to work for $1 a year, as Chrysler's Robert Nardelli already does. There will also be sharp limits on other executive compensation and the sale of company-owned jet aircraft.

The CEOs are expected to drive themselves to Washington from Michigan, for testimony before the relevant Senate and House committees Thursday and Friday. Depending on the outcome of those sessions, congressional leadership is talking of possibly having bills ready for submission to the two houses by Monday.

Many names better

Elsewhere, traders saw a generally better tone, with many credits firmer by multiple points in busy dealings. A trader saw Sprint Nextel's 6% notes due 2016 having pushed up to a round-lot level of 60 from 57 on Monday, with $19 million of the bonds changing hands.

He saw no fresh news out that might explain the rise in the Overland Park, Kan.-based wireless provider's paper, but noted that just a couple of weeks ago, those bonds had been steadily losing ground, perhaps by a point or more on the day. "Just like we gapped down then, now we do gap up as well," he offered.

Another fairly active Sprint issue was its floating-rate notes due 2010, which moved up to 76.75 from 75 on Monday, with $10 million of the bonds traded.

At another desk, a market source saw the Sprint 7 3/8% notes due 2015 at about the 44 bid level, up more than 2 points on the day.

Another active gainer, the first trader said, was Freeport McMoRan. While he saw the Phoenix-based mining company's 8 3/8% notes due 2017 down ¼ point on the day at 70.75, on a very busy $33 million of bonds traded - "an awful lot of volume to just move ¼ point," he noted - the company's other issues were meantime up, though on lesser volume. Its 8¼% notes due 2015 gained 1½ points, to 73.5 bid, while its floaters due 2015 firmed by a point to 62.

Freescale Semiconductor Inc.'s 10 1/8% notes due 2016 were seen up as much as 5 points, to the 30 level, while the Austin, Tex.-based chipmaker's 8 7/8% notes due 2014 were up nearly 2 points at 37.5.

Pilgrim's Pride pushes up

A trader saw Pilgrim's Pride's 7 5/8% senior notes due 2015 close at 20 bid, up from 15.875 on Monday, with an "active" $18 million of the bonds changing hands, a day after the company announced its Chapter 11 filing. He saw the company's 8 3/8% subordinated notes due 2017 down 1½ points on the day to 2 bid, with $6 million of the bonds traded.

The wide disparity, he said, reflects the fact that investors "have more hope that they will get some kind of a recovery with the senior tranche; nowadays, there's not going to be anything left for any sub piece in a troubled credit."

Another trader quoted the bonds trading flat, or without their accrued interest, at 19 bid, 20 offered, up some 4 points on the day.

Nova Chemicals nosedives

On the downside, a sizable loser was Nova Chemicals' 6½% notes due 2012, which a trader saw down 7 points at 60 bid, 61 offered; he said that the company had warned that its fourth-quarter sales could drop as much as 25%.

Another market source also saw the bonds around 60, but pegged them down as much as 10 points on the day.

A trader at another shop said that "I don't know what it was - but somebody had said that anything [2012] or later were down huge." He saw both the 6.5s down around 10 points, in that same 60ish context, and said that "If the '12s were down 10," its other issues, like its floating-rate notes due 2013 and its 7 7/8% bonds due 2025, "have got to be down at least 10 [points] too."

The Toronto-based manufacturer, at an investor conference in New York, also said that it would cut its capital spending and lower production to cope with reduced demand for its products.

Tronox misses coupon payment

In that same sector, chemical maker Tronox Worldwide LLC's 9½% notes due 2012 - which on Monday had more than doubled in price to finish at 10 bid - were seen having dropped to 8.5 on Tuesday after the news that the struggling company had elected not to make its scheduled interest payment on the bonds.

The Oklahoma City-based manufacturer of titanium dioxide pigment used in paint, coatings, plastic and paper said in a Securities and Exchange Commission filing that it had not made the scheduled Dec. 1 payment of $16.625 million on its $350 million of outstanding bonds, instead invoking the standard 30-day grace period. Parent company Tronox Inc. said that it is in the process of "evaluating all strategic options including mitigation of environmental liabilities and capital restructuring." Last month, the company had warned in an SEC filing that it would consider seeking protection from its creditors under Chapter 11 if other options, including land sales and development opportunities, were not successful.

A market source said that the bonds had been trading in the lower 20s about a month ago, but had gradually come down into the low-to-mid teens, before finally falling into the single digits before the market's Thanksgiving holiday break, apparently on the news that it had been forced to go to its bank debt lenders for a waiver of its credit facility covenants, a respite that will last through Friday.

The bonds had bounced back to around 10 in Monday's trading.

The exchanges

A combination of ongoing new issue activity in the high-grade market that is turning out high-coupon issues from investment-grade companies that are household names, and an unfolding series of debt restructuring junk bond exchange deals have closed the high-yield primary for the foreseeable future, sources reiterated on Tuesday.

Realogy Corp. said Tuesday that it received $237.06 million of commitments for second-lien incremental term loans at the Nov. 26 early commitment date for an exchange that offers bondholders up to $500 million of the loans.

JP Morgan is leading that exchange.

The second-lien term loans will be added under the accordion feature of the company's existing credit facility which matures on April 14, 2014.

Realogy will exchange bondholders into the second-lien loans in the following order: holders of $850 million of 12 3/8% senior subordinated notes due 2015 at $0.36 on the dollar, $1.7 billion of the 10½% senior cash-pay notes due 2014 at $0.49 on the dollar and $582.2 million of 11%/11¾% senior toggle notes due 2015 at $0.46 on the dollar.

The company said no more than $125 million can come from the senior subordinated notes and no more than $175 million from the toggle notes.

Litigation faces Realogy

In the same press release Realogy disclosed that the deal faces possible litigation on three fronts.

The trustee under the toggle notes indenture, Bank of New York Mellon, believes Realogy would be failing to comply with its agreements under the bond indenture if the exchange is consummated.

Also, trustee and noteholder High River LP filed a complaint in the Court of Chancery of the State of Delaware seeking, among other things, declaratory relief that the offer would constitute a breach of the toggle note indenture.

High River is also seeking declaratory and injunctive relief that completion of the transactions would constitute fraudulent transfers by the company of its assets. A hearing is set for Dec. 15.

Meanwhile similar allegations surfaced in a letter from a law firm that claims to represent holders of more than 25% of Realogy's cash pay notes, demanding that the company terminate the exchange.

The company said it believes the allegations are without merit and that it intends to vigorously defend against any steps taken to interfere with the exchange offer.

GMAC extends offer

In other debt restructuring news, Tuesday, GMAC LLC said it delayed the withdrawal deadline and early delivery date on exchange offers and tender offers for $38 billion of GMAC and ResCap debt securities, a deal that was launched on Nov. 20.

The deadline and delivery date were moved back by one day to Dec. 5.

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

GMAC also plans to distribute supplements to confidential offering memoranda previously distributed on the GMAC and Residential Capital, LLC offers, containing changes to the terms and conditions of those offers.

GMAC also said it is in discussions with federal regulatory authorities regarding, among other things, seeking bank holding company status and has submitted an application to the U.S. Treasury to participate in the capital purchase program created under the Emergency Economic Stabilization Act of 2008, which is conditional upon becoming a bank holding company.

In connection with this initiative, GMAC said it is considering raising and maintaining significant amounts of additional capital to meet regulatory requirements related to bank holding company status.

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