Abitibi makes strong recovery amid weak trading; autos recover; junk players marvel at Bear debacle

By Paul Deckelman and Paul A. Harris

New York, March 14 - AbitibiBowater Inc.'s bonds - particularly the shorter-dated paper issued by the company's underperforming Abitibi-Consolidated operating unit - were seen having firmed smartly on Friday, along with the Montreal-based forest products company's battered shares, apparently given a lift by investor optimism over the outcome of the company's Thursday presentation to its lenders.

Abitibi was the only strong feature in an otherwise lackluster market, with activity levels reduced by such factors as the well-attended Lehman Brothers high yield and leveraged loan conference still going on in Orlando, Fla., and the distracting impact of another spectacular train wreck that grabbed everyone's attention - the second one of the week. Just as bond market denizens, along with other Wall Streeters, watched with ill-disguised glee at the start of the week as the political career of the financial industry's old nemesis, Eliot Spitzer, come crashing down in spectacular fashion amid lurid revelations of the self-styled "Sheriff of Wall Street's" taste for high-priced ladies of the evening, junk marketeers were equally fascinated and lulled into inactivity in their own market at the end of the week watching the seeming implosion of the venerable Wall Street institution, Bear Stearns Cos. Number-Five U.S. brokerage Bear's bonds and shares plunged on Thursday amid new rumors of liquidity problems and then went into an absolute free-fall on Friday on the news that its liquidity situation had become so perilous in the space of just 24 hours that the Federal Reserve and another Wall Street giant, JP Morgan Chase, had to step in with an emergency rescue plan to keep Bear from going down the tubes.

The fact that such a drastic step was even necessary sent a chill down the spines of a lot of would-be market participants, and sent them scurrying for the sidelines.

Against the backdrop of relative inactivity, automotive issues like General Motors Corp., GM's domestic arch-rival Ford Motor Co. and their respective lending arms, GMAC LLC and Ford Motor Credit Co. - which had all gotten battered around on Thursday - were for the most part seen having bounced back on Friday.

The primary arena meantime remained becalmed.

Market indicators seen easier

A trader saw the widely-followed CDX index of junk market performance having eased 5/8 point to 86½ bid, 87 3/8 offered, a level that he termed "pretty awful." Meanwhile, the KDP High Yield Daily Index lost 0.07 to end at 72.45, while its yield pushed out by 3 basis points to 10.05%.

In the broader market, declining issues led advancers by a nearly five-to-three margin. Overall activity, reflected in dollar volumes, fell by 8% from Thursday's levels.

Hear the Bear roar

"Everybody was watching the collapse of Bear Stearns," declared one junk trader who was hard-pressed to find levels going on in other names.

With Bear Stearns' slide - and its effect on overall financial market behavior - dominating the financial news coming across the screens Friday, "it was tough getting accounts to focus on anything else," said a second trader. "Very few people were willing to commit capital to anything [Friday]. We'll have to see where it goes on Monday."

A third noted that amid the general financial-sector carnage, "people just quit quoting junk around 11 a.m. [ET], and the CDX went quiet."

Despite Bear Stearns' nominal investment-grade ratings - which it managed to hang on to Friday despite ratings down grades from each of the three major agencies - junk traders were actively watching its bonds, some of which are trading at dollar-price levels more appropriate for distressed junk bonds.

One trader, for example, noted that the Bear Stearns 2 7/8% notes coming due on July 2, fell about 20 points on the session to the 77 level, a slide that he called "unbelievable." With a yield of nearly 107%, he opined, "if I were in the market, this would be a good bet for a personal account," with such a fat yield and the prospect that JP Morgan and the Fed had stepped in to save Bear Stearns and likely would not then step back and let it go under should the company encounter further trouble. "I think an investment like that would be a home run."

Bear Stearns' bonds dominated the list of most active high-grade issues - all of them battered down to very junky levels in the 60s or 70s. Maybe the most active was its 7¼% notes due 2018 - the company priced $300 million of the bonds at just a shade below par on Jan. 29 - but barely six weeks later, the bonds were being quoted as low as 74 bid, before going out a bit off that low, at 79 bid, down more than 6½ points on the day. Another big loser was Bear's 5.70% notes due 2014, seen down some 14 points on the session at 68.5, and its 6.95% notes due 2012, seen off more than 11 points, through at a relatively solid 83 level.

At those kind of prices, one of the traders said, "nobody is paying to the spreads," which had, in some of those cases, ballooned out beyond 1,000 bps over Treasuries - the traditional indicator that a particular credit is considered distressed.

Abitibi stands tall

Back among the purely junk issues, a trader saw AbitibiBowater's 6.95% notes coming due April 1 jump to 70 bid, 72 offered from prior levels at 63 bid, 65 offered and saw its 5¼% notes coming due on June 20 at 67 bid, 69 offered, up from 60 bid, 62 offered on Thursday. However, he saw the company's 8.85% bonds due 2030 unchanged at 36 bid, 38 offered.

"It didn't move," he said. "Just the shorter ones moved."

At another desk, a market source saw the June bonds trading as high as 70 bid, up some 9 points on the session.

And yet another source had the 6.95s at just over 71 and the 51/4s brushing 70, both up around 7 or 8 points on the day.

Abitibi's shares were also solidly higher.

The rise follows by a day the scheduled lender meeting at which the company's Abitibi-Consolidated subsidiary presented the details of its proposed $1.5 billion refinancing plan, which would, among other things take out the 2008 bonds via an exchange offer to the noteholders.

There was no formal announcement to the market about the meeting, other than AbitibiBowater filing an 8-K notice with the Securities and Exchange Commission, including the text and graphics for its presentation. Despite the lack of a company announcement, posters on investment-oriented internet bulletin boards on Friday attributed the steep gains in both the shares and the bonds to positive sentiment that the refinancing would in fact take place, giving the underperforming Abitibi-Consolidated more breathing room and financial flexibility by enabling it to take out the roughly $500 million of bonds set to mature this year and next.

Autos back in the drivers' seat

Several market sources saw the automotive convoy - which had been driving downward on Thursday in response to a Morgan Stanley equity analyst's bearish earnings projections for both GM and Ford - switching lanes Friday and getting back to the upside.

Ford's benchmark bond issue, the 7.45% paper due 2031, was among the most widely traded issues on the session, quoted up about ¼ to ½ point at the 64 level. That was also the case with GM's big issue, the 8 3/8% notes due 2033, also among the most actively dealt, at around the 70 market, up ½ point.

A source saw Ford Motor Credit's 8¾% notes due 2010 some 3 points better, above the 90 level, while GMAC's 6% notes due 2011 were also seen up a trey at 72.

But while GMAC's 6 7/8% notes due 2012 were quoted up nearly a point at 70 bid, its most widely held and traded issue, the 8% bonds due 2031, gyrated around the upper 60s and lower 70s before coming to rest at 67 bid, a source said, down more than 4 points. However, a trader at another desk said the 8s had already been down there at the end of Thursday's dealings, and called the 67 bid, 69 offered finish unchanged on the day.

Thornburg ends the week quietly

A trader said that GMAC's wholly-owned mortgage unit, Residential Capital LLC's 6½% notes due 2013 held steady at 45 bid, 47 offered, although another market source saw ResCap's 8 7/8% notes due 2015 up a point at 46.

In that same sector, Thornburg Mortgage Inc.'s 8 notes due 2013, after gyrating wildly all week, were unchanged Friday at 44 bid, 46 offered.

Those bonds - which had been beaten down as low as 28 going home the previous Friday, shot explosively upward at the beginning of the week, particularly on Tuesday, finally peaking at around 50 on Wednesday. They were helped by new Federal Reserve moves to ease capital market liquidity, a feeling among some investors that the previous week's selling had been overdone, and the Santa Fe, N.M.-based mortgage provider's own statements that it was in talks with its lenders on taking care of the more than $1 billion of margin calls it had received over the previous two weeks on its billions of dollars of short-term borrowings from those lenders.

However, that rally came to an abrupt halt on Thursday, when the bonds fell back to around the 44 level from 50 previously, on investor response to the news that Thornburg had received a notice of default on some of its margin calls from Morgan Stanley - this on top of a similar notice of default the week before from JP Morgan Chase. Both lenders have maintained that they intend to exercise their full legal rights under the default notices.

Sealy goes back to sleep

Another one of Thursday's big movers which failed to follow through on Friday was the 8¼% notes due 2014 of Sealy Mattress Corp. The Trinity, N.C.-based Number-One U.S. mattress and bedding producer's bonds had fallen as much as 5 points on Thursday on the largely unexpected announcement that the underperforming company's chairman, president and chief executive officer, David J. McIlquham, had resigned from his positions. That happened just a week after Sealy had warned investors of relatively weak first-quarter results amid slowing sales and higher raw-materials processes.

Primary quiet

The high yield primary market failed to generate news on Friday.

Hence the week to March 14 came to a close having seen a single $500 million proceeds tranche of new junk clear the market.

In a Tuesday drive-by, Charter Communications Operating, LLC priced $520 million face amount of 10 7/8% second-lien notes due 2014 (B3/B-) at 96.106 to yield 11¾%.

JP Morgan, Credit Suisse and Deutsche Bank Securities were the bookrunners for the debt refinancing deal, which came on top of price talk and was well oversubscribed, according to sources close to the transaction.

Ere the Ides of March

By any measure, 2008 issuance to Friday has been anemic. All told the market has seen slightly more than $8.6 billion of issuance in 10 dollar-denominated tranches since the first of the year.

By way of comparison, 2007 issuance to the March 14 close was just under $40 billion in 101 deals.

However some market sources maintain that the $8.6 billion figure is misleading because $6.335 billion of it came in the form of a late January two-part deal from Harrah's Entertainment Inc.

The Harrah's deal, they add, was part of the backlog of hung LBO bond risk, and much of it is believed to remain on the balance sheets of the underwriters.

That backlog is now believed to be at or perhaps slightly under $70 billion, counting LBO bond deals yet to come and funded high yield bridge loans.

Apart from the Harrah's deal, sources point out, 2008 issuance renders up a picture of a primary market that is all but stultified.

According to Prospect News data, at Friday's close - one day before the Ides of March - the 2008 new issue market has seen $2.27 billion of non-backlog related bonds in eight dollar-denominated tranches.

Looking to Spring

When the second half of March gets underway on Monday, the new issue market, apart from the aforementioned backlog, is expected to remain extremely quiet.

Only one deal is on the road.

FairPoint Communications Inc. is marketing a $540 million offering of 10-year senior unsecured notes (B3/B+), a merger deal via Banc of America Securities, Lehman Brothers and Morgan Stanley, which is expected to close before the end of the week.

Beyond FairPoint investment bankers say they have visibility on potential junk issuers who intend to place bonds.

Most of those, however, will bide their time until the volatility in the credit market wanes, sources say.

© 2015 Prospect News.
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