Thornburg gyrates on deal details; CIT bonds plunge; Abitibi short bonds up, new deal coming next week

By Paul Deckelman and Paul A. Harris

New York, March 19 - Thornburg Mortgage Inc.'s bonds continued their recent string of wild gyrations, seen up as much as 15 to 17 points on an intraday basis following the release of details about the troubled jumbo mortgage lender's margin-call moratorium deal with its lenders - only to give almost all of those gains back later in the day and end only modestly higher.

CIT Group Inc. became the latest in the growing line of ostensibly investment-grade companies whose bonds plunged sharply down to distressed junk bond level after the financial services concerns ratings were downgraded by all three agencies amid concerns about its ability to access the capital markets.

On the upside, AbitibiBowater Inc.'s short-dated bonds jumped as the Montreal-based forest products company announced improved terms for its pending exchange offer for nearly $500 million of existing bonds slated to come due this year and next.

Primaryside players, meantime, heard that the company is likely to bring a $415 million offer of secured notes to market next week.

Elsewhere in the new-deal realm, syndicate sources heard price talk on FairPoint Communications Inc.'s upcoming issue of 10-year notes.

Market indicators mostly point higher

A trader saw the widely-followed CDX index of junk market performance - which had jumped 1¾ points on Tuesday - as having eased about 1/8 point Wednesday to 87 7/8 bid, 88 3/8 offered. Meanwhile, the KDP High Yield Daily Index rose 0.26 to end at 72.62, while its yield tightened by 7 basis points to 10.01%.

In the broader market, advancing issues again topped decliners by a five-to-four margin. Overall activity, reflected in dollar volumes, fell by some 26% from Tuesday's levels.

"The market opened with a slightly positive tone," a trader said, "but that changed quickly with the downside in equities," which failed to hold the substantial gains notched in Tuesday's session; the bellwether Dow Jones Industrial Average, which zoomed by 420.41 points Tuesday to close at 12,392.66, gave back 293 of those points on Wednesday to finish at 12,099.66.

"Every time that we think that we've hit a floor," the trader continued, "something new comes out that just destroys the confidence that [the junk market] was starting to build earlier in the day, or the day before."

Other high yield players questioned whether Tuesday's rally, sparked by the Fed's decision to cut the Fed Funds rate by 75 basis points, can be sustained.

"There seems to be a lot of suspicion out there that it may not have legs," said a syndicate official.

"There was a lot of short covering on Tuesday. And today people were setting new shorts."

Meanwhile a buy-side source, speaking just before the close, marked the broad high-yield market up perhaps ½ point on the day.

"But it was a weak half, if you know what I mean," the buy-sider added.

This source, who also saw a lot of short covering on Tuesday afternoon and even more on Wednesday morning, said that the market rallied pretty hard during the first half of Wednesday.

"But it was the hedge funds," the buy-sider added.

"We're seeing the fast money jump back and forth over the fence."

Thornburg goes on a wile ride

One of the most actively traded issues was Thornburg Mortgage's 8% notes due 2013, which on Tuesday had moved up sharply into the lower 50s from prior levels in the mid 40s after the Santa Fe, N.M-based mortgage lender announced that it had reached an agreement with five lenders to freeze for a year any margin calls that would require the company to put up more collateral to secure its short-term mortgage-backed reverse repurchase agreement borrowing.

The bonds were "very volatile," a trader said, seeing the notes jump as much as 15 points right after details of its margin-call moratorium deal were announced. But after the bonds got as high as 67.5, "then they came almost all the way back down" to end at 53 bid, 56 offered, up just 3 points on the day.

Another trader saw the bonds at 57 bid, 59 offered, up from 51 bid, 53 offered on Tuesday, but well off the day's highs.

Thornburg's behavior was "very confusing," another trader said, noting that on Tuesday, "the company sounded like they were a survivor," having managed to stave off the banks trying to make it cough up more collateral for a full year. "Then today [Wednesday], the stock loses half of its value, literally" - the company's New York Stock Exchange-traded shares plunged to $1.50 from $2.93 at the close Tuesday.

He pointed out that the requirement that Thornburg raise $948 million within seven business days sounded like "an extreme turnaround from [Tuesday's] news, where they had a year."

Thornburg said that it would raise the additional needed capital by selling convertible notes, and would also give the lenders warrants to buy 47 million shares, or about 27% of the company. The potentially dilutive effect on the existing shares, as well as Thornburg's decision to suspend its stock dividends for a year, were seen as the catalyst behind the massive stock slide.

On the bond side, meantime, the trader said that "quite a lot" of bonds had traded - more than $25 million had changed hands by mid-afternoon, far ahead of the next-busiest issue - "and they were all over the place." He saw the bonds get as good as 67.5, before coming down from that peak and ending at 56.75, up around 3 points from where they had gone out on Tuesday.

Helping to push the bonds lower was Thornburg's warning that if it did not meet the conditions laid down by the lenders, it could conceivably be forced into bankruptcy.

Financials mostly steady

In that same sector, a trader saw "no change" in Countrywide Financial Corp.'s bonds, with its 6¼% notes due 2016 remaining at 62 bid, 64 offered, while it 3¼% notes coming due on May 21 still at 94 bid, 95 offered, while Residential Captial LLC's 6½% notes due 2013 were 1 point better at 45 bid, 47 offered. A trader saw E*Trade Financial Corp.'s 8% notes due 2011 "up a little" at 81 bid, 83 offered, a 2 point gain.

CIT swoons to distressed levels

Another lender fallen upon hard times is CIT Group - and despite its nominal status as a high-grade credit, junk traders were actively watching and quoting the New York-based company's bonds.

One said that its paper "was all over" after downgrades in its ratings from Moody's Investors Service and Fitch Ratings. Their actions Wednesday followed a similar downgrade Tuesday by Standard &Poor's, and left the company's bond ratings at A3/A-/A.

A market source quoted its 4.65% notes due 2010, issued by its CIT Group Funding Co. of Canada as ending just below 71, down 18 points on the day, in busy trading.

In downgrading the credit, Moody's said that "the downgrades and review reflects CIT's reduced funding flexibility amidst severe credit market dislocations and expected weaker profitability stemming from higher borrowing and credit costs."

It added that "the current credit market environment is challenging the strength of CIT's liquidity profile to a degree not previously experienced by the firm. Moody's has often cited CIT's reliance on confidence-sensitive wholesale funding, primarily institutional unsecured debt, as a principal constraint to its credit profile."

CIT is just the latest in a line of financial companies whose bonds cascaded down to cheap junk levels, attracting the attention of high yield investors and traders. That list includes Countrywide. MBIA Inc.'s recent 14% surplus note issue, and last week, Bear Stearns.

Abitibi bonds jump on better exchange terms

Back among the purely junk issues, AbitibiBowater's bonds were up as the company announced an improved formula for its exchange offer aimed at taking out nearly $500 million of notes coming due this year and next. A trader saw the 6.95% notes due April 1 up 5 points at 74 bid, 76 offered.

Another trader also saw those bonds at 74 bid, 76 offered, up 7 points on the session, while its 5¼% notes coming due June 20 were likewise 7 points better at 72 bid, 75 offered. Its 8.85% bonds due 2030 rose 2 points to 37 bid, 39 offered.

Under the amended offer, for every $1,000 in principal of the existing bonds tendered, 2008 debtholders will receive $550 in new 15½% senior unsecured notes due 2010 and $550 in cash. Holders of the 2009 issue will receive $850 in new notes and $250 in cash. Under the original terms, holders of the 2008 notes would have gotten $500 cash and $500 principal amount of new notes per $1,000 principal amount of the 2008 notes, while holders of the 2009 notes would have gotten $750 principal amount of new notes plus $250 in cash per $1,000 principal amount of the notes tendered.

FairPoint sets talk

Wednesday produced some primary market news.

FairPoint Communications Inc./Northern New England Spinco, Inc. set price talk for $540 million of 10-year senior unsecured notes (B3/B+) at the 11½% area.

Pricing is set for early next week.

Banc of America Securities, Lehman Brothers and Morgan Stanley are joint bookrunners.

Proceeds will be used to help fund the merger with Spinco, Verizon Communications Inc.'s wireline operations in Maine, New Hampshire and Vermont.

A buy-side source commented that the FairPoint price talk is considerably higher than the rates which the company had contemplated when it came to the market.

"There is a lot of deeply discounted telecom paper out there right now," the buy-sider added.

"In order to get people to pay attention to a par issue that's callable in five years they had to come with some yield."

Also on Wednesday, Abitibi-Consolidated Co. of Canada launched its $415 million offering of three-year non-callable senior secured notes (B1).

That deal is also expected to price next week.

Goldman Sachs has the books.

Abitibi also sweetened up its concurrent exchange offer by upping the price and adopting an indenture for the exchange notes so that they will come with covenants like those of the new senior secured notes.

In addition Abitibi reduced the minimum tender condition for the notes due in 2009 to 75% from 90%.

The tender condition for the notes maturing in 2008 notes remains at 90%.

The company announced that an informal group of noteholders holding both 2008 notes and 2009 notes, representing $324 million of the total $496 million of notes in the exchange offering, negotiated and supports the terms of the revised offer.

A market source not in the deal said that the tweak to the exchange offer will likely be sufficient to get the transaction done.

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