WaMu holdco paper remains active on bankruptcy news, paring losses; bid lists weigh on broad market

By Stephanie N. Rotondo

Portland, Ore., Sept. 29 - Washington Mutual Inc.'s bonds headed higher Monday, trading closer to expected recovery levels, traders reported.

"There was some acknowledgment that there is a fair amount of money in the holding company," one trader said.

The gains came after the company filed for Chapter 11 protections on Friday.

But despite the large amount of activity in WaMu and other financials, many investors seemed paralyzed as they waited to see how a vote on the government's $700 billion bailout plan would shake out.

"The market was just frozen," one trader said.

Once news hit that the bailout plan had been voted down by the House of Representatives, the market went into a virtual freefall, with the Dow Jones Industrial Average losing 777.68 points on the day and distressed bonds down 3 to 6 points across the board.

A trader opined that government officials would revisit the plan, make some changes and resubmit it for a vote.

"They got to keep somebody happy," he said.

The trader went on to say that Wall Street did not solely cause the problems facing the economy today. "Main Street is the problem, not Wall Street," he said.

Lax lending standards and a push to build more homes - and then sell them to under-qualified buyers - put pressure on the market, he said. And, "at some point these ignorant politicians are going to realize" that.

WaMu active, pares losses

Washington Mutual's holding company paper regained a fair amount of ground during Monday trading, with some traders saying the debt was trading closer to expected recovery levels.

One trader placed the debt, such as the 4.2% notes due 2010, around 50, noting that the bonds hit a high of 53. Another trader said the senior unsecured holding company paper got as high as 54, before coming back slightly to close at 51 bid, 53 offered.

As some traders predicted, WaMu filed for bankruptcy protections on Friday after federal regulators seized control of the company and sold the banking operations and loan portfolio to JPMorgan Chase & Co. for $1.9 billion. In a court filing on Friday, the Seattle-based financial institution said it had $8.1 billion in debt and $32.8 billion in assets.

Recovery models have already started to emerge. Independent research service CreditSights said Monday senior unsecured bondholders could receive as much as 80% of their principal value. However, subordinated noteholders should expect limited recovery.

The recovery model assumes that the company's debt will remain at the holding company, which is estimated to have about $4 billion in cash.

"With that said, there is still significant uncertainty over whether this cash will remain at the parent company," CreditSights said. There is a possibility that the cash could be moved to the banking business to settle FDIC claims, it said.

According to Gimme Credit analyst Kathleen Shanley, "If funds are trapped at the bank and end up being viewed as unsecured debt, recoveries could be lower than implied by the parent company's apparent liquidity." In a morning report, Shanley wrote that given the circumstances, "we would sell the senior debt at current levels."

Elsewhere in the financial sector, Wachovia Corp.'s bonds were sent into the high-70s on the news of a sale to Citigroup. However, distressed traders said that company's bonds were still trading at high-grade desks.

Lehman Brothers senior debt declines to 13.5, a trader said.

"It was a combination of the market and they got a lower than expected price for Neuberger Berman," he said.

Lehman said Monday that is sold its Neuberger asset management business to private equity firms Bain Capital LLC and Hellman & Friedman LLC for $2.15 billion, a figure much lower than estimated. Earlier figures placed the value between $8 billion and $10 billion

The acquisition includes the asset management unit, along with the private funds investment group, but not the major direct private equity businesses.

Bid lists pressure market

Despite the heavy action in financials, especially WaMu - a trader said 15 out of the top 20 active names according to Nasd Trace were WaMu issues - trading was generally deemed light.

"Trading was definitely not as active as it has been in recent weeks," a trader said.

But the circulation of bid lists, along with the massive declines in the broad market, weighed heavily on the distressed arena.

"It seems like there was a lot of forced selling," a trader said, calling the market down generically 3 to 6 points.

Another trader said that JPMorgan was rumored to have a liquidation list out, while Credit Suisse reportedly was circulating a loan list.

"Away from these lists, there are probably not a lot of stories to tell," he said.

Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2015 fell 5 points to 55, while Charter Communications Inc.'s 11% notes due 2015 dropped to 66, the trader said. Another trader saw Charter's 10% notes due 2014 down 2 points to 36 bid.

Claire's Stores Inc.'s 9¼% notes due 2015 lost 1 point to 41 bid.

Idearc Inc.'s 8% notes due 2016 were 2 points lower at 29 bid. Sector peer R.H. Donnelley Corp.'s 8 7/8% notes due 2016 were quoted down as much as 5 points at 35 bid. Donnelley-owned Dex Media Inc.'s 8% notes due 2013 fell more than 3 points to 47 bid.

Trading in Pilgrim's Pride Corp. was almost nonexistent, traders said, though the company received a covenant waiver from its lenders.

One trader said the 7 5/8% notes due 2015 moved up to the high-60s, while the 8 3/8% notes due 2017 ended in the low-50s. Another trader quoted the 7 5/8% notes at 68 bid, 71 offered, which he called "a point off of Friday's lows and unchanged from Friday's close."

"There were a lot of quotes, but not a lot of trades," he said.

Neiman Marcus' 9% notes due 2015 fell 6 points to 83 bid, according to one market source. Another placed the debt around 86.

Spectrum Brands Inc.'s 7 3/8% notes due 2015 dropped more than 6 points to finish at 42 bid.

Paul Deckelman contributed to this article.

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