Michaels Stores return to profit helps bonds, but loans weaker; Sallie Mae uncertainty looms

By Stephanie N. Rotondo and Sara Rosenberg

Portland, Ore., Aug. 25 - Trading in the distressed debt market remained subdued, traders reported Tuesday, though there was some firmness overall.

Michaels Stores Inc. reported its second-quarter results during the session. A return to profit helped the company's bonds move higher, but its bank debt moved in the opposite direction.

Meanwhile, SLM Corp. remained an active name. But after a few days of moving up, the student loan lender's debt was seen holding steady. Some market players speculated that there was some uncertainty for the name, as a student-loan reform bill makes its way through Congress.

Michaels mixed post-numbers

Michaels Stores' capital structure ended the day mixed after the company reported a return to profit for the second quarter.

One trader called the bonds better, placing the 11 3/8% notes due 2016 in the mid-80s - "that's up a couple," he said - and the 10% notes due 2014 at 94 bid, 95 offered, a 2- to 3-point gain.

Another trader pegged the 11 3/8% notes at 85¼ and the 10% notes at 941/2.

"Price action wise, in the retail space, Mike's was really the only notable," the first trader remarked.

But the arts and crafts retailer's term loan B headed downward during market hours, according to a trader.

The term loan B was quoted at 88¼ bid, 89¼ offered, down from 89 bid on Monday, the trader said.

For the quarter, the company had net income of $2 million, compared with a $30 million loss for the same period last year.

Net sales for the quarter were $807 million, a 1.4% increase over the prior year's net sales of $796 million.

And, adjusted EBITDA for the quarter increased 16.4% to $85 million from $73 million in the second quarter of 2008.

As of Aug. 1, the company's cash balance was $36 million. Second quarter debt levels declined $70 million to $3.964 billion compared with $4.034 billion as of the end last year's second quarter, availability under the revolver was $526 million and, a $5.9 million amortization payment was made on the term loan.

"A corporate-wide focus on sales and creating a fun customer environment in our stores coupled with a strong emphasis on expense control has led to improved sales and operating results for the quarter," stated John Menzer, chief executive officer, in the earnings release. "Michaels will continue to deliver exciting new merchandise during the third quarter and we are looking forward to the offerings we have planned for the fall and holiday seasons.

"The economic outlook for the second half of 2009 is still uncertain but our focus is clear," Menzer added. "We will focus on sales through creative and inspirational merchandise offerings at a great value, improved store execution, and an unwavering commitment to customer satisfaction."

Michaels Stores is an Irving, Texas-based specialty retailer of arts, crafts, framing, floral, wall décor and seasonal merchandise for the hobbyist and do-it-yourself home decorator.

Sallie Mae uncertainty looms

SLM, or Sallie Mae as it is more commonly known, was among the day's big traders - as per usual - though traders noted that price movement was relatively nonexistent.

A trader said about $35 million of the 8.45% notes due 2018 traded between 76 and 761/2.

"That's right where it's been, so nothing special there," he said.

Another trader also called the debt largely unchanged.

"It's been a little better in general," he said. "I think it moved up a little Friday and then a little yesterday. But today, it's unchanged for the most part."

Sallie Mae has been making headlines recently as it seeks to have a voice in the Obama administration's student loan reform. But some market players are not seeing much progress.

President Obama is seeking to reform student loan lending and, in July, a bill was passed that would bypass lenders like Sallie Mae, allowing the federal government to loan money directly to college students. Though there has not been a definitive answer on that proposal - the bill still has to pass the Senate, which is expected to discuss the matter next month - the proposed lending standards have created just enough uncertainty for Sallie Mae to pause.

"We expect Sallie Mae will find a way to demonstrate its usefulness to the federal government, but the uncertainty over how legislation will affect the company's business model, combined with persistent credit losses in the private lending portfolio, warrant a cautious outlook in considering this credit," wrote Kathleen Shanley an analyst with Gimme Credit LLC, in a report to clients.

Sallie Mae is already in danger of losing its investment grade status - and it already trades on high-yield and distressed desks. Moody's Investors Service previously dropped its rating on SLM to Ba1 and Standard & Poor's is also considering a downgrade.

Elsewhere in the financial realm, Washington Mutual Inc.'s senior bank paper, like the 5.55% notes due 2010, "traded up," a trader said.

The trader quoted the bonds at 30 bid, 30.5 offered, up 1 point.

CIT Group Inc.'s bonds were also among the more actively traded issues on Tuesday, with its 4¼% notes due 2010 - which on Monday had shot up by 3.25 points, to just under 63 - giving back nearly 2 points of that gain, to finish around 61 bid, though still well up from the levels just under 60 at which it had finished last week, a market source said.

Some of the company's other issues were even more actively traded, with a source seeing the 5.60% notes due 2011 bonds trading at 60 bid, with more than $15 million having changed hands by mid-afternoon, and its floating-rate notes due in March of 2010 hanging in at 51 bid, on more than $12 million traded. CIT's 7¾% notes due 2012 were pegged at 57 bid, and its floaters due in November 2010 at 59.

Broad market moves up

Among other distressed issues, Idearc Inc.'s 8% notes due 2016 "have been somewhat active here and there," a trader said. He called the debt "a little bit better" on the day at 7¼ bid, 7½ offered.

American Axle & Manufacturing Inc.'s 5¼% notes due 2014 were also better at 69 bid, 70 offered.

Fairpoint Communications Inc.'s 13 1/8% notes due 2018 lost 1.5 points on the day, to finish at around the 16 level.

Paul Deckelman contributed to this article.

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