Thornburg Mortgage pounded again; Sabic sets guidance on downsized deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 14 - The biggest story of the day on Tuesday, several high yield traders said, was clearly the continuing agonies of Thornburg Mortgage Inc., which fell sharply for a third straight session as investors reacted with panic to the Santa Fe, N.M. based residential lender's recent inability to access the capital markets.

Amid a generally lower junk market - likely reacting to the sharp slide in equities which saw the Dow Jones Industrial Average plunge over 200 points to just over the 13,000 level - homebuilder names such as Beazer Homes USA Inc. and Hovnanian Enterprises Inc. were particularly weak.

An official from a high yield syndicate desk said that the broad market was lower with equities on Tuesday, and added that the financial sector was down a lot, and that people also seemed to be focused on missed earnings reported by Wal-Mart Stores Inc. and Home Depot Inc.

The official added that the Tuesday junk bond market session was very quiet.

"The underwriting engine for new deals has slowed significantly," the source commented, adding that the window for beginning a pre-Labor Day junk bond roadshow is now likely shut.

Sabic sets guidance

In the primary, Sabic Innovative Plastics Holding BV set the price guidance for its downsized $1.5 billion offering of eight-year senior unsecured notes (B1/B+) on Tuesday.

The notes are expected to price with a 10¼% yield, and are likely to be priced at a discount. Hence the issue price and coupon remain to be determined.

Pricing is expected on Monday.

The bond deal initially was announced to the market as a $2.765 billion equivalent offering of eight-year notes in tranches of $1.95 billion and €590 million. The proposed euro-denominated notes have been withdrawn.

With the downsizing of the bonds, the bank deal has been upsized to $6.65 billion from $5.4 billion.

A sell-side source, not in the deal, said that both the bond and bank deals were "basically done," meaning that the debt has essentially already been placed.

An informed source who heard this did not take issue with that assertion, and told Prospect News on Tuesday that much of the demand for both the bond paper and the loan paper is from Middle Eastern institutions, with European accounts and a smattering of U.S. accounts also expected to be in the deal.

Citigroup, ABN Amro, GE Capital, HSBC and JP Morgan are joint bookrunners for the Rule 144A with registration rights notes offering.

Proceeds will be used to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic) for $11.6 billion including the assumption of liabilities.

The informed source also said that with respect to the Sabic deal there has been a "disconnect" between the European and Middle Eastern accounts on the one hand, and the U.S. accounts, on the other.

The source conceded that the pricing did not generate a lot of interest among U.S. accounts, but added that investors from the Middle East, as well as some European accounts, look at the A+ balance sheet of Sabic, and perceive this deal as an extension of that risk.

"That extension is not explicit," the source warned, "because of course if it was explicit this would be A+ paper as opposed to B1 paper."

Nevertheless, the official asserted, investors familiar with Sabic may feel they are buying the name at a big discount.

The overhang

Late last week the market began to buzz with assertions that the hedge funds are on the prowl, opportunistically looking to buy some of the risk that presently resides on the balance sheets of the big underwriters in the form of bridge loans that had to be funded in the wake of the massive sell-off in the leveraged markets, as bonds could not be placed and loans could not be syndicated.

Sources refer to this unplaced risk as "the overhang," and its size is present size is estimated to be well north of $300 billion.

As Prospect News quizzed its sources on Tuesday this situation swam into clearer focus.

Indeed the hedge funds are out there bidding, conceded sources from both the buy-side and the sell-side.

However so far no "big blocks of risk" have changed hands.

One high yield syndicate official characterized the unfolding interaction between the bargain-hunting hedge funds and the risk-laden investment banks as "price discovery."

A buyer's market

A source from a hedge fund, who focuses primarily on leveraged loans, characterized the above-mentioned overhang as "huge," and said that some of the hedge funds are bidding on select portions of it in the low 90s.

"I'm not sure they're getting hit there," the source said.

"But it's becoming a known secret."

The hedge funds reason that the underwriters are likely to be sellers ahead of what is expected to be a massive calendar for the debt markets through the rest of 2007.

In the loan market, alone, there is an expected $250 billion-plus calendar, the source asserted, and added that all of the CLO demand - representing 60% to 70% of the demand in recent months - has gone away.

Given the concerns regarding liquidity and concerns for the health of the financial institutions, "they can't just keep eating these deals," said the hedge fund source.

"And there aren't many CLOs in the pipeline, so it's hard to see where all of the demand is going to come from.

"The banks are just going to have to wear it."

Conversation but no action

Sell-side sources, meanwhile, agreed that the hedge funds are prowling, and also agreed that no big blocks of the risk overhang have changed hands as yet.

One high yield syndicate official said there has been conversation but no action.

There are hedge funds looking to take some risk off of underwriters' balance sheets, but not a lot of trades, just a lot of conversations, the official said.

"The bid-ask spread is a little wider than the banks are willing to take at this point.

"Something will probably happen, but it has not happened yet."

Meanwhile another official, from the high yield syndicate desk of a different institution, suggested that in certain cases the bid-ask spread is actually quite narrow, while in other cases it is understandably quite wide.

"On certain deals there are real buyers coming out of the woodwork, putting in real bids for massive amounts of this paper," the source said, and added that presently rumors are running rife, with buyers calling three and four times a day, whenever rumors of a counterbid are circulating.

"They are sort of demanding last look," said the official, and characterized that scenario as a "healthy atmosphere" in which to move risk, because it provides some price tension.

This official added that discovering the right price for these hung bridges is both delicate and critical to the health of the market.

"We're not out there trying to hawk this paper at discounts of 10 to 15 points," the official said.

"If you did that you would take the whole market down with you.

"We're proceeding on a case-by-case basis.

"This is going to take a while to fix."

Slow but low

Back in the secondary realm, high yield performance, as seen by major indexes, was lagging on Tuesday. A trader saw the widely followed CDX index of junk performance down ¼ point at 93 7/8--94 1/8. The KDP High Yield Daily Index, meantime, was down 0.06, to 78.20. That is well below its high for the year of 82.63.

Traders characterized the session as a generally slow one, in line with the traditional "dog days of summer" which set in around mid-August and run until after Labor Day.

Noting the pullback in stocks sparked by renewed credit-crunch fears, a trader observed that it gave junk players "one more excuse" to stay away from the market and do nothing.

Thornburg beaten down again

The major exception to the general pattern of slow, unenthusiastic trading was again Thornburg Mortgage, spending its third straight session strongly to the downside, as investors took those bonds way down - by as much as 25 points - in heavy trading sparked by the residential lender's recent inability to access the capital markets.

"Thornburg was off first thing this morning," said a trader who added "they started out bad - and they stayed that way," with the company's 8% notes due 2013 seen during the afternoon trading in a 61ish context, down at least 13 points on the session from Monday's close around 74.

Another trader saw the bonds do even worse, quoting them going home in a 50-55 context, down a full 25 points from where they had opened. Monday's mid-70s range followed a fall of about 10 points, on top of a 7 point retreat on Friday.

Several traders pointed out that it was "not too long ago," as one said, that the bonds had been trading around par.

Thornburg's New York Stock Exchange-traded shares meantime plunged $6.67 (46.71%) to $7.61 in heavy trading of 25.7 million shares, about 15 times the usual turnover. At one point during the day, trading was halted in anticipation of news out from the embattled company, which then announced that it would postpone its second-quarter dividend of 68 cents per share to Sept. 17 from the scheduled Aug. 15 in order to conserve cash in the unsettled market environment. The company also said that its book value per share has fallen to $14.28 as of Aug. 13 from $19.38 as of June 30.

And Thornburg executives further said that the company has absolutely no plans to file for Chapter 11 protection from its junk bond holders and other creditors.

Thornburg's troubles come in the aftermath of the subprime mortgage lending meltdown earlier this year, which has now spread to other sectors of the lending industry denied credit by bankers and investors - even including companies such as Thornburg which do not deal in subprime loans and whose assets are considered to be high quality.

Earlier in the session, Moody's Investors Service downgraded Thornburg's senior unsecured debt by two notches to B2, and said another cut is possible.

"These rating actions reflect further deterioration in Thornburg's liquidity position due to significant funding and valuation volatility in the single-family mortgage market, even for the prime quality assets in which Thornburg Mortgage invests," Moody's analyst Brian Harris wrote in his downgrade message.

He noted that while Thornburg's rating "continues to reflect the REIT's superior asset quality. Thornburg focuses on originating and investing in prime jumbo single-family mortgages. However, since the last rating committee, the REIT's liquidity and access to the capital markets continues to be constrained by dislocations in mortgage pricing in the jumbo mortgage market."

Builders seen a little lower

In line with the continued troubles of lenders, homebuilders have felt some of the fallout. A trader saw Beazer Homes USA's 8 5/8% notes due 2011 off about 1½ points at 82 bid, 84 offered, and saw its "shorter paper down the same, while the longer paper, like the 2013s and 2014s" was unchanged.

The builders "started out better, but then did not do so well" at the end of the day," another trader said, with the 8 5/8s heading home at 81.5 bid, 83 offered, though there were "no trades of any significance."

Yet another trader pegged Beazer's 6 7/8% notes due 2015 off a point at 78 bid, 79.5 offered, but said the problem-plagued Atlanta homebuilder's bonds "were quiet."

He saw Hovnanian Enterprises' 8 5/8% notes due 2017 down a point at 82 bid, 83 offered.

And the trader saw Technical Olympic USA Inc's 9% notes due 2010 off 2½ points at 74.5 bid, 76.5 offered,

Outside of the homebuilding sphere, the trader saw Leiner Health's 11% notes due 2012 off 2 points on the session at 85.5 bid, 86.5 offered.

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