GM, GMAC gyrate on bailout, ResCap plan; builders gain as Lennar cuts loss; Smurfit Stone rocked by warning

By Paul Deckelman and Paul A. Harris

New York, Dec. 19 - Bonds of General Motors Corp. and its 49% owned GMAC LLC financing subsidiary were jumping around on Friday, mostly at higher levels, helped by the news - finally official - that the troubled automaker, along with sector peer Chrysler LLC, will be getting a federal bailout, in the form of $17.4 billion of emergency loans to keep either from sliding into bankruptcy.

Meantime, GMAC, also seeking to avoid a trip to Chapter 11, announced plans to exchange bonds of its Residential Capital LLC unit for a stake in GMAC's industrial banking subsidiary which is now held by ResCap - an unusual move which some observers believe is a tactic GMAC is using to convince more ResCap bondholders to tender their securities in its ongoing exchange offer for ResCap and GMAC bonds. GMAC needs that exchange offer to succeed if it is to be allowed to convert the industrial banking unit into a full-fledged commercial bank eligible for federal bailout money.

Elsewhere, bonds of Lennar Corp. and such sector peers as Centex Corp. and DR Horton Inc. were seen better after Lennar, a Miami-based homebuilder, reported a lower quarterly loss from a year ago.

Its prediction of a wider quarterly loss when it reports its results sent Smurfit Stone Container Corp.'s bonds several points lower.

News reports that Donald Trump is supposedly mulling over the option of taking his troubled casino company, Trump Entertainment Resorts Inc., private had little impact on the company's bonds.

New-deal activity remained shut down on Friday, although there was still some talk around that a benchmark-sized deal from a double-B rated issuer could surface on Monday, led by Goldman Sachs. Meanwhile, the Kansas City Southern Railway Co. bond issue that priced earlier in the week was seen continuing to firm smartly.

Market indicators climb again

The widely followed CDX High Yield 11 index of junk bond performance, which jumped 2 full points on Wednesday and then added another 1 point on Thursday, continued its amazing surge on Friday, with a trader quoting it at 76¾ bid, 77¼ offered, up ¾ on the session. The KDP High Yield Daily Index meantime jumped by 45 basis points to 49.06, while its yield tightened by a notable 29 bps to 16.20%.

In the broader market, advancing issues kept their lead over decliners, again beating them by a nearly five-to-three margin. Overall market activity, reflected in dollar volumes, was little changed from the pace seen in Thursday's session.

GM gyrates on bailout news

The news that the federal government will in fact rescue troubled GM and Chrysler - and the full details of the plan, released by the White House - helped to spur active trading in the former's bonds, with its benchmark 8 3/8% bonds due 2033 as the most actively traded junk issue, with about $25 million of the paper changing hands, a market source noting that the levels swung goofily between lows around 13 bid - down about 2 points from where they had ended on Thursday - and highs above 20.

A trader saw the bonds around 16 bid, which he called "almost unchanged," and suggested that news of the auto bailout - which had been widely expected - was an anticlimax. All suspense over whether there would even be a bailout, and one that would come in time to keep GM and Chrysler from skidding off the road and into a ditch, had been resolved the week before, when the Senate failed to approve a House-passed measure to which amendments had been proposed, and the White House had announced that the two troubled carmakers would in fact be bailed out.

Another trader said the GM bonds were up 2 points after the initial announcement, but said that they then came back down after that. He saw them ending unchanged around 15.

A third saw those bonds up a point at 15.5 bid, 17.5 offered.

But another market source said that while the bonds had bounced back from their earlier lows and had mostly traded in a 17-19 context in the afternoon, some late trading in small odd-lots had pushed the issue's closing levels down to around where it had begun the day.

Looking at other GM paper, a trader saw its 7.20% notes due 2011 a point better at 19.5 bid, while its 7.70% notes due 2016 "really were a mover - wow," ending at 18 bid, well up from 13.75 on Thursday. However, despite the steep bond-price action, neither the latter issue - or the former, for that matter - were at all actively traded, with neither registering as much as $10 million turned over.

GM is the main beneficiary of the bailout plan - its stands to get $9.4 billion of fresh cash up front, along with another $4 billion later on, while the smaller Chrysler will get $4 billion. Their domestic arch-rival, Ford Motor Co., has said it does not need any federal aid, other than a standby line of credit, but has been in the curious position of arguing strongly in favor of Washington bailing out its main competitors in the interest of avoiding the auto industry disruption that would follow the bankruptcy of one, or both of the other two members of the traditional Big Three.

But along with those carrots is a big stick - the bailed out carmakers must show by March 31 that they will be able to restructure themselves and remain viable - otherwise, the government can call its loan and force anyone who can't make such a demonstration into bankruptcy. To adequately restructure, the government says the carmakers much cut labor costs, and must sharply reduce their debt loads by negotiating settlements with bondholders and other such creditors.

Apart from GM, Ford's 7.45% bonds due 2031 were seen down a point at 23.5 bid, 25.5 offered.

GM gambles to save swap effort

In announcing the bailouts for GM and Chrysler, and the needs for their various stakeholders to make concessions so the carmakers would remain viable, president Bush also indicated that GMAC's efforts to restructure its debt were a part and parcel of GM's own survival plan, since the financing arm's continued viability is seen as a key condition to GM's possible recovery.

GMAC's bonds were also trading busily during the day, as the Detroit-based lender faced a 5 p.m. ET early tender deadline on its offer to swap new bonds, preferred stock and cash for $38 billion of outstanding bonds issued by GMAC and by ResCap, its mortgage subsidiary. GM needs to get participation of holders of 75% of those bonds to participate if it is to raise enough capital to allow it to file for commercial bank status, seen as a necessary step if GMAC is to hope to have access to federal bank bailout funds. However, as of Thursday, it only had the participation of holders of 58% of those bonds, with several large bondholders, including Pacific Investment Management Co., reportedly shunning the offer, even though GMAC had improved its terms.

Against that backdrop, GMAC announced plans to swap any ResCap bonds which are tendered under the offer for a stake in GMAC's industrial banking subsidiary which is now held by ResCap. Some observers believe GMAC is more or less warning ResCap holders who also have credit-default swap contracts on those bonds protecting them against a default event it is in their interest to tender their bonds under its offer, calling it a highly unusual move to gain compliance with its exchange offer (see related story elsewhere in this issue).

With all of that going on, a trader said "the shorter end of the GMAC curve seemed like there were some quotes all over the place." He saw its 5.85% notes coming due on Jan. 14 "on a wild ride," pegging them at an 83-84 context early in the morning, on "a couple of small trades there," but later, the bonds "whooshed up" to 88-90 - "most of the trades happened at 88," he said - calling that called up 10 points from the lows on Thursday, when the bonds "went on a ride down, to the high 70s. He noted that "there's not a whole lot of time left on those" notes.

He saw its 5 5/8% notes coming due in May at 69 bid, 70 offered, up 5 points from Thursday's lows on "decent volume, a lot of activity in those."

A second trader said that GMAC was 'just drifting down."

However, a third trader saw the 8% bonds due 2031 at 31 bid, 34 offered, which he said was up 4 points.

Another market source said that on a round-lot basis, the GMAC long bonds were up some 2 points at 33 - but said that was well up from the smallish closing trades on Thursday that had dropped those bonds down into the mid-20s.

A trader meanwhile saw ResCap's 8½% notes due 2010 at 28 bid, 30 offered, which he called "maybe down a point" from 30 bid, 32 offered on Thursday. He said that the bonds had traded as high as 33 bid earlier Thursday, but "now the bid side [Thursday] is the offered side, and I'm just seeing quotes. I don't know how much was [actually] traded."

Lower Lennar loss pushes bonds higher

Outside of the autosphere, participants saw some strength in the homebuilding sector, despite the continue dreadful numbers about their industry recently coming out of both Washington and private industry groups like the National Association of Realtors.

But on Friday, there were numbers of a different sort - not-so-bad quarterly results for Lennar Corp., whose bonds were better. That in turn apparently gave some strength to debt of sector peers DR Horton and Centex

Lennar's 5.60% notes due 2016 were up 3 points at 61 after the company reported a fiscal fourth-quarter loss of $811 million, or $5.12 a share, improved from a company-record loss of $1.25 billion, or $7.92 a share, a year earlier. Lennar attributed the improvement to cuts in land expenditures brought on by the brutal conditions in the residential real estate market.

On an adjusted basis, excluding unusual items, the company lost 51 cents in the quarter - about one-fourth of the red ink analysts were expecting.

Spurred on by Lennar's luck, sector peer DR Horton's 5 5/8% notes due 2016 were seen up more than 6 points at 62 bid, while Centex's 7 7/8% notes due 2011 gained a surprising 6 points to the 89 level.

Smurfit Stone sinks on loss projection

Smurfit Stone Container's 8¼% notes due 2012 were one of the few big losers seen around, down some 4 points to around the 20 level.

The Chicago-based packaging manufacturer warned that it likely will show a wider fourth-quarter loss than Wall Street estimates, and will be "significantly lower" than the third-quarter figures due to the recent swift decline in demand.

Trump 'going private' reports draw little response

A trader saw "no activity in the bonds" of Trump Entertainment Resorts Inc., estimating the 8½% notes due 2015 at 12 bid, 14 offered, apparently little moved by news stories suggesting that company chairman Donald J. Trump was mulling whether to take the gaming concern private or otherwise inject capital.

"Maybe they were quoted higher," he said, "but there was no activity."

The Financial Times reported on its website that Trump is studying the option of going private even as the Atlantic City, N.J. wrestles with the problem of a missed $53.1 million bond interest payment, which was supposed to have been paid at the beginning of this month but which was not, as the company invoked the standard 30-day grace period; that latter period is set to expire at the end of this month. The company said when it missed the payment it would pursue discussions with lenders to restructure its capital structure over the period.

Trump, the non-executive chairman and public front man, owns 24% of the company, which emerged from a bankruptcy reorganization in 2005.

Kansas City Southern bonds keep chugging along

A trader saw Kansas City Southern's new $190 million issue of 13% five-year senior unsecured notes at 95 bid.

That was up from the 93-94 context being quoted on Thursday - and well above the 88.405 mark at which the Kansas City, Mo.-based railway operators' bonds priced late Monday to yield 16½%, as an enticement to investors to buy the deal.

Another one-deal week

As with the preceding week, the week beginning Dec. 8 saw a single junk bond deal clear the market.

On Monday Kansas City Southern Railway Co. priced a $190 million issue of 13% five-year senior unsecured notes (B2/BB-) at 88.405 to yield 16½%.

The deal was oversubscribed, and the yield came at the tight end of the 16½% to 16¾% yield talk, while the coupon came on top of talk.

Morgan Stanley was left bookrunner for the notes, which were issued to address the pending June 2009 maturity of the company's $200 million of 7½% senior notes.

One more deal possible

Although the fast approaching holidays have significantly thinned the ranks in the junk market already, one more deal is thought possible before the high-yield primary closes the books on 2008.

Beginning Thursday and continuing on Friday, word circulated that a benchmark-sized issue from a double-B rated issuer could come on Monday via Goldman Sachs.

On Friday sell-side sources, one of whom professed some knowledge of the possible transaction, said that the underwriter might be keener to get a deal out there than the thus-far unnamed company.

That's partly because the company will no doubt be aware that it could face historic interest rates for doing a junk deal now.

The above-mentioned Kansas City Southern deal involved a 13% note and a 16½% yield. The previous week's El Paso Corp. deal came with a 12% coupon and yielded 15¼%.

Reverse inquiry interest

Both El Paso and Kansas City Southern were the subjects of reverse inquiry on the part of accounts, informed sources said.

The motivation to prod qualified issuers - highly rated ones from defensive sectors - to bring deals now is not that difficult to understand, say junk market watchers. Investors that have exposures to such credits, and like them, are keen to increase that exposure at a time when companies must pay massive rates, and make other concessions to the rocky conditions of the market.

The Kansas City Southern note that priced last week came with a yield more than double the one on bonds it priced just last May.

The new five-year El Paso paper is non-callable. The new five-year Kansas City Southern bond, meanwhile, becomes callable in three years, but at par plus the full 13% coupon, rendering it non-callable for all practical purposes, sources say.

Given all that, and the fact that junk is staging a late-year rally, investors might disrupt their holiday shopping for a chance to increase exposure to a highly rated issuer coming with a benchmark-sized deal, sources said Friday.

"All that's missing is the issuer's name," one quipped.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.