Momentive slides on numbers, warning, but Charter climbs post-results; market awaits MGM results, clarity on debt

By Paul Deckelman and Sara Rosenberg

New York, March 16 - Momentive Performance Materials Inc.'s bonds slid badly on Monday after the company reported wider losses for fiscal 2008 versus a year earlier and warned that it may be unable to maintain compliance with the leverage covenants in its credit facility.

But a wider loss and even the news - admittedly not-unexpected - that it will skip making a scheduled bond interest payment could not choke off a rise in Charter Communications Inc.'s bonds and bank debt, as holders looked beyond the immediate negatives to focus on what they believe will be a healthier debt picture once the St. Louis-based cable-TV operator restructures through the bankruptcy courts.

The possibility that Idearc Inc. may file for Chapter 11 rattled some in the market last week, although it looks like bank debt players have resigned themselves to the idea, taking its paper a little firmer. However, the Dallas-based telephone directory company's bonds - trading for no more than 3 cents on the dollar now, at the most -- remain roiled by the notion.

There was little or no bond market response to the not-unexpected bankruptcy filing of Primus Telecommunications Group Inc., which took place late in the trading day.

Market players meanwhile waited the long-delayed release of MGM Mirage's 2008 fourth-quarter and full-year results, now scheduled after the close on Tuesday, and are also hoping for some updated information from the troubled Las Vegas-based gaming giant on how it intends to deal with its mounting debt problems. A published report Monday said the company and its banks were talking about offering up its casinos as collateral in exchange for covenant relief.

Momentive mauled on numbers, warning

Momentive Performance Materials' bonds dropped sharply after the Albany, N.Y.-based company, which provides specialty high-technology materials products to the silicone, quartz and ceramics markets, reported wider losses for fiscal 2008 versus a year earlier, and warned that it may have a hard time staying in compliance with its credit facility financial covenants.

A trader said that the company's bonds were "definitely down a good bit" from previous levels, quoting its 11½% senior subordinated notes due 2016 at 11 bid, 12 offered, down from prior levels at 17, while seeing its 9¾% senior notes due 2014 as "active" in the mid-20s, down at least 7 points from prior levels in the lower 30s.

Another trader saw the latter issue as one of the session's most active bonds, pegging them at 24.25 bid, down 32 at the close Friday, on volume of $24 million.

He said that the 111/2s had slid to 12 bid from 16 on Friday, on volume of $3 million, while the company's 10 1/8% notes due 2014 were trading at 14, well down from the last previous round-lot level of 24, back on March 4.

The bonds were beaten down after the company reported that while its net sales rose 4% last year to $2.639 billion from $2.538 billion a year earlier, its other financial measures showed a clear deterioration. Its net loss nearly quadrupled to $997.1 million from $254.3 million in 2007, and it swung to an operating loss of $836.6 million versus year-earlier operating income of $82.2 million. Adjusted EBITDA fell 15.6% year-over-year to $377.1 million from $447 million previously.

Momentive said that the fourth quarter had seen "dramatic and in many ways unprecedented declines in demand for our products, which significantly impacted our adjusted EBITDA" - and things don't seem to be getting any better.

The company said that over the first 11 weeks of the current quarter, it has "continued to see weak demand in all regions across all major product segments and we expect more of the same for the remainder of the quarter. While we have seen deflation in certain raw materials, the impact of this effect has been marginal in comparison to the drop off in product demand."

Against those challenging conditions, Momentive projected first-quarter revenue in the range of $410 million to $440 million and adjusted EBITDA of $5 million to $15 million, both well behind its year-ago pace, as well as a GAAP operating loss of $60 million to $75 million.

Momentive also warned that although it was in compliance with the senior secured leverage ratio covenant of its credit facility as of Dec. 31 - the covenant sets a maximum ratio between its total senior secured net debt and its trailing 12-month EBITDA of 4.25 to 1 - it "may have difficulty" complying with that covenant going forward if "weak demand stemming from the global economic downturn continues throughout 2009 and we experience sufficient declines in sales and EBITDA for which we cannot compensate with restructuring or business optimization initiatives."

Momentive also noted that it drew down $90 million of its remaining revolving credit availability on March 10 in order to "preserve our financial flexibility and access to capital in light of the current volatility of financing markets," leaving unused capacity of $28.1 million under the revolver and $7.1 million under its synthetic letter of credit facility at that time. Momentive said it expects to have total debt, net of cash, of between $2.85 billion and $2.91 billion at the end of the current first quarter.

Charter gains despite wider loss.

Also on the earnings front, Charter Communications' bonds and term loans headed higher during the trading session following the company's release of fourth-quarter earnings and the news that a bond interest payment will be skipped.

A trader saw Charter's 10¼% notes due 2010 firm to 86 bid, up a point from Friday, although he said this took place on "not a lot of trading." He saw more activity in the company's CCO Holdings LLC 8¾% notes due 2013 which traded up to 83 bid from prior levels at 80.5 bid, 81 offered, on "some trading."

Another trader saw Charter's 11% notes due 2015 at 10 bid, 11 offered, which he called "up 4 or 5 points" on the news, while another suggested that "short-covering" might be behind that bond's rise. At the other end of the price spectrum, its Charter Operating 8% notes due 2012 gained more than 2 points to close just below 92.

A trader at another shop opined that market players known that "they're going to be filing for bankruptcy within the next month, and people just want to make sure that the [company's previously announced] restructuring plan doesn't get derailed."

In the bank debt market, Charter's old term loan was quoted at 77 bid, 78 offered, up from Friday's levels of 76¾ bid, 77¾ offered, and the new term loan was quoted at 89¼ bid, 90¼ offered, up from 88½ bid, 89½ offered, the trader said.

"The numbers were okay. They skipped the bond coupon today - maybe more cash for the banks," the trader remarked.

Some improvements

For the three months ended Dec. 31, 2008, Charter had a net loss of $1.495 billion, or $3.96 per common share, compared to a net loss of $468 million, or $1.27 per share, in the previous year. However, the company said that the increase in net loss resulted primarily from an impairment charge, and was partially offset by the increase in sales of our bundled services and improved cost efficiencies.

Heartening its bond and debt-holders, Charter actually reported gains in some financial measures.

It said that its pro forma adjusted EBITDA totaled $619 million for the fourth quarter, an increase of 10.1% versus the pro forma results for the year-ago quarter of $562 million.

Actual adjusted EBITDA for the quarter was $620 million, an increase of 9.7% versus $565 million in 2007.

Fourth-quarter pro-forma revenues were $1.653 billion, an increase of 7% from the year-earlier period.

Actual revenues for the quarter were $1.656 billion, up from $1.553 billion.

As was previously reported, Charter - which had $21.66 billion of debt on its books at the end of 2008, roughly evenly split between outstanding bonds and bank debt, recently reached an agreement in principle with an ad hoc committee of debt holders on the terms of a financial restructuring aimed at reducing its $11 billion of bond debt by approximately $8 billion. That restructuring is expected to be implemented through a Chapter 11 filing that will take place on or before April 1.

With the plan in mind, one of Charter's subsidiaries, CCH II LLC, consequently did not make its scheduled interest payment on Monday on certain of its outstanding senior notes.

The governing indenture for the notes permits a 30-day grace period, and according to its agreement with the bondholders, Charter expects to make its bankruptcy filing prior to the expiration of the grace period.

Primus heads for Wilmington

Another communications company - McLean, Va.-based Primus Telecommunications Group - announced late Monday that it had reached agreement with various noteholders on the terms of a consensual financial restructuring aimed that reducing its principal debt obligations by approximately $315 million, or over 50%, reducing interest payments by over 50% and extending certain debt maturities.

Primus will implement the restructuring plan via a voluntary Chapter 11 filing which the company made on Monday with the U.S. Bankruptcy Court for the District of Delaware.

A trader said that because the filing came so late in the day, hitting the news wires around 5 p.m. ET, there was little market reaction.

He saw the company's 12¾% senior notes slated to come due on Oct. 15 trading at 5 bid, 8 offered before the news, with no trades seen afterward. He also saw its 8% subordinated notes maturing on Aug, 15 at pre-news levels of 6 bid, 8 offered, while its 14¼% senior secured notes due 2011 at 32 bid, 34 offered pre-news, but again, no post-news trading.

Idearc loan lifted, but bonds thrash around

Idearc Inc.'s term loan was a little stronger on Monday now that the market has had a few days to come to terms with the company's recent announcement that it is considering filing for Chapter 11, according to a trader.

The term loan was quoted at 30½ bid, 31½ offered, up from Friday's levels that were in the area of a 29½ to 30 bid and a 30½ to 31 offer, the trader said.

However, the company's 8% notes due 2016, which had already been beaten down to around 2 or 3 cents on the dollar even before the company said last Thursday that it was evaluating various restructuring options, possibly including bankruptcy, gyrated at mostly lower levels on Monday.

A market source said the bonds, which had finished Friday at over 3, opened Monday at 1 and proceeded to fall even below that, before coming off those lows. While they came back above the 3 level in round-lot trading, smaller trades late in the day brought the bonds back down to around 2 at the close.

Idearc said it would consider its options for restructuring its capitalization and debt service obligations as a result of possible non-compliance with the leverage ratio sometime in the first half of 2009, and a default resulting from its auditors having issued a going concern opinion in its Dec. 31, 2008 financial statements.

Some alternatives being considered by the company include a pre-packaged or similar plan of reorganization under bankruptcy laws.

The company went on to say that even if a pre-packaged reorganization cannot be agreed upon, it will likely file for Chapter 11 anyway.

The largest shareholder of Idearc, Jack Corwin, sent a letter to each member of the board of directors on Monday urging that bankruptcy could be avoided by pursuing other readily available alternatives, according to a news release.

According to Corwin, Idearc has sufficient cash on hand - $510 million at year-end 2008 - to pay down enough of its outstanding debt to avoid the need for a bankruptcy, and failure to do so would be a breach of the board's fiduciary duty to its shareholders.

"Where alternatives may exist for companies to avoid bankruptcy it is highly unusual for a corporation to choose the route of bankruptcy at the risk of damaging their business and harming their employees and other stakeholders," Corwin added in the release.

MGM releasing numbers

Traders saw MGM Mirage's bonds mostly unchanged to slightly better, though on not much trading, as the company announced plans to release its long-delayed 2008 fourth-quarter and full-year numbers after the close Tuesday. Players were said to also be looking for some kind of increased clarity as to what the company plans to do about its deteriorating debt and liquidity situation, even as the Bloomberg news service was reporting that it was considering putting up casino properties as collateral in return for easier covenants from its bankers.

A trader saw MGM's most active issue, its 6¾% notes due 2012, essentially unchanged at a touch over 40 bid, on $9 million traded, and saw its 6% notes coming due on Oct. 1 as also unchanged at 64 bid, with $8 million changing hands. However, he saw the company's 8 3/8% notes due 2011 at 21 bid, up from 18 - "a real mover," he called it, although there was only volume of $3 million.

At another desk, a trader saw MGM's secured 13% notes due 2013 having "moved up a little," to 83 bid, 84 offered from previous levels at 82, and said there seemed to be some "good size" to it.

However, a different market source quoted MGM's 6 5/8% notes due 2015 down more than a point at 38.

Bloomberg reported that MGM was in talks with its banks, seeking to modify lending terms on its unsecured debt and avoid default by perhaps pledging some of its many casino properties as loan collateral.

The report attributed its information to an unidentified source said to have knowledge of the discussions.

Neither MGM Mirage nor Bank of America Corp., the administrative agent for the company's $7 billion senior unsecured credit facility, would confirm the specific details of the Bloomberg report, other than a general statement from the casino company that talks with its financial partners are "ongoing," that it is "evaluating every possible option" and "will explore all serious and credible possibilities."

MGM Mirage, hard hit by the gaming industry downturn, warned back on March 3, when it said it would delay filing its 10-K annual report for 2008 with the Securities and Exchange Commission, that it might be in breach of some of its credit facility covenants, which would constitute a default and allow its lenders to accelerate its loan and demand payment and which could also trigger cross-default provisions in some of its other debt instruments, such as its numerous bond issues. The company faces a Tuesday deadline for filing its 2008 year-end and fourth-quarter reports with the SEC. Those reports are expected to include a "going concern" warning from the company's auditors, raising the possibility that it may slide into bankruptcy.

Plenty of properties

MGM Mirage may be cash-strapped, but has no shortage of properties should it decide the play "Let's Make A Deal" with lenders; it outright owns nearly two dozen hotel, casino or other resort properties, many on the famed Las Vegas Strip or elsewhere in Nevada, as well as in such other jurisdictions as Mississippi, Illinois and Detroit. It also owns 50% stakes in the Borgata resort in Atlantic City, N.J., the MGM Grand resort at the Foxwoods Casino in Connecticut, and the MGM casino in the Macau gaming enclave in China. Additionally, it is 50-50 partners with Dubai World on the ambitious CityCenter project in Las Vegas, largely built but needing at least another $1.2 billion to finish construction, and has other projects under development but not yet built in Abu Dhabi and Atlantic City.

Whether the company opts to put up one, some, many or even most of its casinos or other properties as collateral to secure its loan and buy off its impatient bankers is a complex question, since MGM Mirage is essentially a gaming conglomerate cobbled together since 2000 by the original merger of what were then MGM Grand Inc. and Mirage Resorts Inc., followed by the subsequent acquisition of Mandalay Resort Group. MGM Mirage inherited bonds of predecessor companies such as Mandalay and the latter's old Circus Circus Enterprises Inc. unit, as well as issuing its own debt, with the numerous bond issues having differing and potentially contradictory indenture clauses permitting or in some cases, limiting, the offering of collateral.

Decoding the indentures

In a research report, Covenant Review LLC - a New York-based company specializing in detailed legal analysis of bond indentures and credit facility covenants of companies engaged in restructurings or other special situations - declared that MGM's situation "is a good example of what happens when multiple bonds are issued under multiple indentures by different companies that are merged together." Company founder Adam B. Cohen speculated: "It may be that MGM and the lenders consider possible security packages, but decide that it's just too complicated to try to manage around all of the covenants."

On the other hand, Cohen theorized that the lenders "may be much better off going into bankruptcy as secured lenders six months from now, rather than as unsecured parties battling on par against bondholders now."

Should MGM Mirage and its lenders decide to go that course and be "bold and creative" in structuring such a collateral agreement, Covenant Review projected that holders of the MGM Mirage secured 13% notes due 2013 that the company issued late last year "should expect to receive equal and ratable liens" with the bank debt holders, since their covenants provide much tighter protection than most of the company's other bonds. Cohen said that this is "not surprising, given the timeframe" during which the indenture for those bonds was negotiated and executed. The $750 million of bonds priced last Oct. 31 - well after the credit crunch had begun and the gaming industry had gone into its steep swoon.

Cohen also that the $100 million of 7¼% debentures due 2017 issued by the old Mirage Resorts might either be secured or else be tendered for by MGM, and predicted that because of the legal difficulty in securing them without then having to also secure other bond issues, the $150 million of 7 5/8% senior subordinated debentures due 2013 issued by the old Circus Circus might have to be tendered for, either for cash or in a debt exchange.

Analysts also raised the possibility that MGM could actually transfer a property to bondholders in exchange for debt or, transfer it to an investor who would then buy out certain of the bondholders by paying them a premium over the current market value of their bonds, bringing down the company's total debt load an improving its covenant ratios, while avoiding the need to sell a property outright at currently depressed price levels.

Cohen said that speaking generally, such a course "would be possible," though there would be some limitations on the total number of properties transferred generally, with respect to MGM Mirage bonds, or the number of properties transferred out of a specific entity, like the properties owned by Mandalay Resort Group subsidiaries with respect to Mandalay Resort legacy bonds.

The Bloomberg report further stated that Evercore Partners has been hired to help MGM Mirage restructure its debt.

WaMu well-bid for, Lehman is liked

Elsewhere, a trader said that Washington Mutual Inc. "continues to move higher," with the bankrupt Seattle-based savings bank operator's subordinated holding company paper , like its 8¼% notes due 2010 trading around 67 continuing the upside move seen at the end of last week.

Another trader saw those bonds in a 66-68 context, which he called "similar to where it was" on Friday, though up from the lower-60s range seen earlier last week, while the company's senior holding company paper, like the 4% notes that had been scheduled to come due this past Jan. 15, at 86 bid, 87 offered. He saw the company's bank debt trading at 23.5 bid, 24.5 offered.

Also among the financials, a market source saw Lehman Brothers Group Holdings' 5¼% notes due 2012 up some 3 points, around the 15 bid mark, while the failed New York-based investment bank's 4¼% notes due 2010 finished around that same price, up ½ point on the day.

Dana steady, despite lower numbers

Back in the bank-debt market, Dana Holding Corp.'s term loan was unchanged on Monday at 28 bid, 32 offered after the Toledo, Ohio-based automotive components company came out with quarterly numbers, according to a trader.

For the fourth quarter, Dana reported a net loss of $256 million, compared to a net loss of $257 million in the prior year, loss from continuing operations of $256 million versus $228 million, and a net loss from continuing operations of $2.64 per share, compared to a loss of $1.52 per share.

Net sales for the quarter were $1.521 billion, down from $2.157 billion in the three months ended Dec. 31, 2007.

"We continue to respond to difficult market conditions through aggressive cost-reduction and efficiency actions, comprehensive operational restructuring, and being responsive to our customers," said John Devine, chairman and chief executive officer, in a news release.

"These are unprecedented times that make any projections uncertain. We believe we are taking the difficult actions necessary to survive in the current environment and compete over the long term. There can be no assurances, however, if the global economy deteriorates substantially beyond our planning assumptions.

"We expect 2009 to be even more challenging than 2008, but we believe Dana is prepared with plans to continue re-sizing our operations, improve operational performance and margins, and maintain adequate liquidity and earnings," Devine added.

In its earnings release, Dana revealed that fourth quarter EBITDA dropped to a negative $3 million from a positive $112 million for the same period in 2007, driven by the impact of lower vehicle production.

Free cash flow was negative $50 million for the quarter, compared to $83 million for the prior year period, primarily due to lower earnings for the quarter.

At year end, the company had cash balances of $777 million, total liquidity of $866 million and net debt of $474 million.

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