Lehman remains the focus; Burlington Coat, VeraSun pressured by rating cuts; broad market mixed

By Stephanie N. Rotondo

Portland, Ore., Sept. 18 - Lehman Brothers Holdings Inc., along with other finance-related names, continued to be at the forefront of trading Thursday, even in the distressed arena.

Over the last week, Lehman's bankruptcy filing has been felt throughout the market. Traders have been almost singularly focused on financials and volatility has increased dramatically. But some see that as a good thing.

"Everybody wants the market to rebound," a trader said. "But this volatility is just incredible."

"At least Lehman is giving us something to do and something to look at," said another trader. "It's been nice."

Traders saw the investment bank's debt hit its low before rebounding some by the end of the day, a trend seen in the market at large as well.

Meanwhile, both Burlington Coat Factory Warehouse Corp. and VeraSun Energy got downgraded due to their respective difficulties in the market. As a result, the companies' bonds ended the day heavier.

Lehman remains the focus

Lehman bonds hit their low early on in Thursday's session, but managed to regain some ground by the end of the day.

One trader said Lehman's senior debt, such as the active 6 7/8% notes due 2014, traded as low as 12.5 in the morning, but ran up to 15.5 bid, 16.5 offered by the close. Another also saw them hit 12, finishing at 16 bid, 17 offered.

The first trader also saw Lehman's subordinated debt hit 0.25 bid, 0.50 offered.

"Fedders [Corp.'s] bonds are worth more than Lehman subs," he quipped.

The trader also said that a variety of recovery models have started to come out. He said he has seen scenarios in which the senior debt is worth 12 cents on the dollar worst case, to 17 cents worst, all the way up to 20.

"Guys are getting more comfortable with recoveries," he said.

On Thursday, a report surfaced that indicated the Treasury Department was considering establishing an entity much like the Resolution Trust Corp. during the savings and loan crisis of the early 1980s. The organization would take banks' bad debt in an effort to stop other companies from going down the drain.

One trader opined that creating such an entity now would be a good idea. The group's intervention would not necessarily stop broader market bankruptcies from occurring, but could deter a financial hemorrhage.

"Some middle ground would be good," he said.

But another source pointed out that there are some major differences between then and now. For example, the RTC essentially inherited its assets from failed banks. Now, those assets would have to be purchased.

"The private sector should do that," he said.

And, "who is going to run it?" he asked. "Is [Henry] Paulson going to run it and get a piece of the upside? Go out with a bang?"

Burlington, VeraSun hit by downgrades

Downgrades placed some pressure on Burlington Coat Factory's bonds, as well as those of VeraSun Energy.

A trader quoted Burlington's 11 1/8% notes due 2015 at 65 bid, 66 offered, while another saw the debt offered at 65. Another trader said he saw the paper at 63 bid, 65 offered early in the session.

Standard & Poor's dropped the company to B- from B, calling the outlook stable. S&P attributed the rating cut to the company's continued weak financial performance, as well as the belief that challenges due to the economy are not yet over.

Meanwhile, VeraSun's 9 3/8% notes due 2017 opened around 34.75 before falling to 33, a trader said.

"I think that left some sellers out there," he noted, adding that "somebody is quoting them at 31 [bid], 36 [offered]."

Moody's Investors Service downgraded the ethanol producer due to declining liquidity, weak cash margins and working capital, among other things. The rating cut came on the back of the company's filing with the Securities and Exchange Commission that said VeraSun had to exit some hedges in July due to the impact of increased margin requirements on its liquidity.

Broad market mixed

Idearc Inc.'s 8% notes due 2016 inched upward to around 35 bid, one source said, while another saw the debt moving closer to 36. The slight gains came one day after the company said it was looking to turnaround the business through expense reduction and internal improvements at the CL King Best Ideas Conference in New York.

Meanwhile, sector rival Dex Media Inc.'s 8% notes due 2013 firmed 2 points to end at 56 bid.

NRG Energy Inc. announced Wednesday that it terminated its exchange offer and consent solicitation on its 7¼% notes due 2014, 7 3/8% senior notes due 2016 and 7 3/8% senior notes due 2017.

"In this extraordinary financial environment, and given the response to the exchange offer so far, it is clear that now is not the ideal time for bondholders to give proper consideration to the merits of our offer," David Crane, president and chief executive officer, said in a news release.

But the company's bonds managed to hold tight, its 7 3/8% notes due 2016 closing at 94 bid, 95 offered and its 7¼% notes ending at 94.5 bid, 95.5 offered.

A trader said he had not "seen much of Masonite [International Inc.] this week," even as the company secured a forbearance agreement with its lenders and as a lender agent imposed a payment block on the company's senior subordinated notes. He pegged the 11% notes due 2015 at 26 bid, 28 offered, adding, "I think there was a buyer around."

Ashtead Group LLC's 8 5/8% notes due 2015 closed the day at 88.5.

OSI Restaurant Partners' 10% notes due 2015 were quoted at 50 bid, 52 offered, though a trader said he saw the paper trader in the high-40s early in the session.

"We were seeing things bounce back a little," he said. "The market clearly got a boost towards the end of the day."

General Motors Corp.'s benchmark 8 3/8% notes due 2033 were called "pretty active," but ended essentially unchanged around 50.

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