Tesoro gains as Tracinda drops tender; Countrywide off despite assurances; Finlay falls on bearish outlook

By Paul Deckelman and Paul A. Harris

New York, Nov. 27 - Tesoro Corp.'s bonds were seen better on Tuesday in apparent response to the news that billionaire investor Kirk Kerkorian is dropping his plans to tender for an additional 16% of the San Antonio, Tex.-based energy refining company's shares.

Elsewhere, Finlay Fine Jewelry Corp.'s bonds were definitely not glittering, hurt by the company's announcement of what one trader called a "bad quarter" as well as its projection that the important upcoming holiday shopping season would be "challenging."

Countrywide Financial Corp.'s bonds were seen mostly lower despite efforts by a company executive to reassure investors at a conference that the Calabasas, Calif.-based mortgage lender's liquidity is adequate and is not threatened by recent negative developments at Freddie Mac.

Primaryside players, meantime, were hearing that the latter's upcoming $6 billion offering of preferred securities is generating significant interest among junk bond accounts, despite its anticipated investment-grade rating.

Activity level revives

Overall, there were slightly more advancing issues than decliners, while total market volume jumped about 60% from Monday's sleepy session, the first day back after the long Thanksgiving Day holiday break. But while there was a slight bias towards the gainers, the KDP High Yield Daily Index was down 0.19 to 76.98, while its yield widened by 4 basis points to 8.79%

"Things were kind of choppy," a trader said. "I was surprised that with the strength in equities [the bellwether Dow Jones Industrial Average jumped 215 points to 12,958.44, with broader market indexes up as well], we didn't see a similar push in spreads, relative to what we would see if we were down 200 points on the Dow on the day."

Tracinda withdrawal fuels Tesoro rise

A trader saw Tesoro's bonds "a little bit better" on the news that Tracinda Corp., the investment vehicle of billionaire tycoon Kirk Kerkorian, had decided to withdraw its previously announced offer to acquire an additional 16% of the company via a tender offer, on top of the nearly 4% it already owned.

He quoted Tesoro's 6½% notes due 2012 up 1½ points at 99 bid, par offered, while pegging its 6 5/8% notes due 2012 up 1¼ points at 98.25 bid, 99.25 offered.

At another desk, a source saw the 6 5/8s ending at 98.75 bid, up 1¼ points, although that was about a point less than its intraday peak level earlier in the session. Another source saw the 6 5/8s little changed but figured the 61/4s up about a point at 99.25.

Tesoro's New York Stock Exchange shares, on the other hand, fell $3.04, or 5.88% to end at $48.65. Volume of 7 million shares was about 1½ times the norm.

Tracinda announced that it was terminating its offer to buy 16% of the shares at $64 per share in view of Tesoro management's recent adoption of a shareholder rights plan which would act as a poison pill against any effort to mount a hostile takeover for the company. Under terms of the plan, a shareholder rights offering would triggered by any attempt to buy more than 20% of the company. Tesoro, on the other hand, claimed to be "surprised" by Tracinda's decision, noting that even if Tracinda had gone ahead with the tender offer and had gotten its additional 16%, that would not have triggered the rights plan. It also noted that the plan contained a provision under which a "qualifying offer" might be exempted from the rights plan.

Tracinda and Tesoro each claimed to be favoring the interests of the company's shareholders.

Countrywide off despite reassurances

Elsewhere, Countrywide Financial's 6¼% notes due 2016 were seen by a trader to have fallen 1 point to 58 bid, 59 offered. He also saw its 3¼% notes due 2008 unchanged at 87 bid, 88 offered. At another shop, a trader pronounced the company's bonds "mostly lower," noting that the 61/4s were trading with "a 58 handle" for most of the day.

A market source saw the widely traded 61/4s ending up slightly at 59, helped off its earlier lows by some large-block trading late in the session - but its 5 5/8% notes due 2009 were seen off 2½ points on the day at 74.5.

Yet another source called the 61/4s down nearly a point at 59, although its 4 1/8% notes due 2009 were actually up more than a point at 73.5, both on brisk trading volume.

Countrywide's recently battered NYSE-traded shares, meantime, gained 33 cents, or 3.82%, to close at $8.97 on volume of 45 million, somewhat above the usual activity level.

Countrywide, hard-hit by the credit crunch and recently reeling from suggestions that its liquidity could dry up because of troubles at Freddie Mac - a major buyer of mortgages from companies like Countrywide which itself has now run into some financial trouble - was in a damage-control mode on Tuesday.

Its managing director of investor relations told an audience of investors at a Friedman, Billings, Ramsey conference in New York that Countrywide's liquidity and capital are adequate to meet the company's operating and growth needs and to fund all debt maturities through 2008 without raising new debt. He also said that the bad news from Freddie Mac or other government-sponsored enterprises would not have a material impact on Countrywide's ability to fund its loans, and defended the more than $50 billion of advances which the company got from a branch of the Federal Home Loan Bank, borrowing which came under attack Monday by frequent Countrywide critic Sen. Charles Schumer, D.-N.Y. (see related story elsewhere in this issue).

Countrywide's bonds and shares got clobbered last week after government-sponsored mortgage financier Freddie Mac reported that it lost $2 billion in the third quarter, and said it reserved $1.2 billion for bad loans. Analysts predicted that those losses and the slowdown in the housing market could severely limit Freddie Mac's ability to purchase pools of mortgages from lenders such as Countrywide, which generate capital to keep making new loans by securitizing massive bundles of loans they have written and selling them, either to private-sector investment banks or to government-sponsored enterprises such as Freddie Mac and its larger companion, Fannie Mae. While investment banks have recently been pulling in their horns as far as buying loans from the mortgage lenders, the GSEs had seemed like reliable financing sources of last resort - until last Tuesday's Freddie Mac results led to market fears that this funding source too could dry up.

ResCap comes in from highs

Also on the mortgage front, a trader saw Countrywide competitor Residential Capital LLC's bonds "continuing to soften a touch off the highs from [last] Wednesday and Friday. It feels like some shorts got covered and they kind of went back to reality a little."

ResCap, another trader said, "was one of the more active names," with its longer-dated issues, such as its 2013 and 2015 paper "weaker on the day. The bonds are trading closer to 60, down from recent levels" to which they had moved last Wednesday when ResCap announced it was tendering for several of its short-dated issues and said that parent GMAC LLC might also buy some ResCap bonds on the open market or in other transactions to help the company, and was committed to stabilizing the troubled Minneapolis-based lender.

"The short bonds popped up about 12 to 15 points," the trader said, "and the longer-dated bonds were up 8 or 9 points" on that good news. He said that with that news having been in the market since Wednesday, "they gave back a little of it [Monday] and gave back more today [Tuesday] on profit-taking."

ResCap's 7½% notes due 2013, another trader said, were down about 2 points on the session at 60 bid, 62 offered.

GMAC dips

GMAC's bonds meantime were lower, as the market reacted to Moody's Investors Service's warning that if it were to do anything to bail out ResCap other than act as a simple conduit for new funds coming from GMAC's own corporate parents, 51% owner Cerberus Capital Management and 49% owner General Motors, the ratings agency might lower GMAC's ratings to match ResCap's.

While a trader saw GMAC's 8% notes due 2031 half a point lower at 80 bid, 81 offered, another source saw its 6 7/8% notes due 2012 down 1 point at 81, while its 6¾% notes due 2014 were seen down more than a point at 77.5, and its 6 7/8s due 2011 off more than 2 points at 81.

Finlay falls on projection

A trader saw Finlay's 8 3/8% notes due 2012 down 4 points at 69 bid, 71 offered, citing what he called the "bad quarter" which the New York-based jewelry retailer reported on Tuesday.

A market source at another desk quoted the bonds down 3 points at 72 bid, while yet another source saw them ending essentially unchanged on the day at 71 - after first having fallen as low as 68.5.

Finlay's Nasdaq-traded shares meantime plunged 85 cents, or 21.36%, to $3.13, on volume of 56,000 shares, about 1½ times the usual turnover.

That followed the company's announcement that it had a net loss in the fiscal third quarter ended November 3 of $7.5 million, or 82 cents a share. While that was actually an improvement from its year-ago loss of $7.9 million, or 88 cents a share, Finlay warned that the current quarter would be "challenging," and predicted a loss for the year from continuing operations of 20 to 35 cents a share.

New deal activity could pick up

For the second consecutive day the primary market generated no news.

But a secondary trader observed that "over in investment-grade land, we've seen a bunch of new issuance - I wouldn't be surprised if we see that coming very shortly in high yield-land. If we see some stability in prices, we'll see a lot of companies rush to the market before the year end."

An informed source said that high yield bond accounts are expected to become involved in a benchmark-sized offering of Freddie Mac perpetual preferred stock (expected ratings Aa3/AA-/A+).

The deal, which is not to exceed a maximum size of $6 billion, is being led by Lehman Brothers and Goldman Sachs & Co., and is expected to price later this week.

Blob of leverage

A money manager from a mutual fund, whose focus includes high yield bonds, told Prospect News on Tuesday that what distinguishes the present downturn in the junk bond market from preceding downturns is "a blob of leverage" which is currently hanging over the capital markets.

Typically economic stress arises against a backdrop aggressive interest rate tightening on the part of the Federal Reserve, the money manager said.

In such a scenario you expect the economy to have significantly slowed down, accompanied by an uptick in defaults.

However GDP increased at an annual rate of 3.9% in the third quarter of 2007.

Meanwhile defaults are below 1.0%.

Yet against this seemingly sanguine backdrop high yield spreads have gapped out to significantly above the long term average, the investor said.

Michael Reiner, high yield strategist for Bear Stearns & Co., concurred: the yield to worst spread of the Bear Stearns High Yield Index was 638 bps on Monday, up from an all-time tight of 261 bps on June 5, 2007. The average spread is 511 bps.

"How can you have spreads gap out from historic narrows in the spring, to above the long term average, when defaults are only 1.0%, and the last reported GDP number is still positive, and the Fed has been easing aggressively?!" the investor demanded.

The money manager had an explanation at hand.

The Fed Funds rates were so low for so long, making so much money available that there was a positive spread for the yen carry trade, and "an incredible proliferation of leveraged financial structures - the CDOs, the CLOs etc., which have ballooned up to be so much bigger than the fundamental sector from which these securities came."

The investor added that in spite of the recent easing of the Fed Funds rate, and with the Fed "aggressively pumping money into the system," liquidity nonetheless seems to be drying up.

"It's because the size of these financial leveraged structures is so large, so disproportionate to the subprime sector they came from, that it's drying up all the liquidity," the investor said.

"Clearly, if it has had such a dramatic impact on spreads - and on the financial markets, and on the dollar and the Libor spread - it must be really big because it's not correlated with unemployment or falling GDP or rising defaults.

"That makes this a very peculiar crisis."

Wary of defaults

Having made reference to historically low high yield default rates, this money manager does not look for those rates to remain perched below the 1.0% line much longer.

The investor reasons that the percentage of low-single B and triple C bonds now in the market - with their higher propensities for defaults - is historically high.

Once again Bear Stearns high yield strategist Reiner supported this buy-sider's color.

In a Tuesday email message to Prospect News, Reiner stated that the percentage of C-rated paper within the Bear Stearns High Yield Index is at all-time highs (since 1998), at nearly 25% of the index.

Historically, this percentage has hovered around 15% and, at the beginning of 2007, C rated bonds made up 20% of the index, the strategist added.

Most of the increase in weight of the C rated category can be attributed of the large amount of LBO financing this year, Reiner commented.

The Sequa deal

Once again on Tuesday the primary market's topic du jour was Sequa Corp.'s $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+) via Lehman Brothers.

An informed source characterized the bond deal as day-to-day.

The deal was originally expected to price during the pre-Thanksgiving week, but was delayed in order for bond investors to have an opportunity to see the Sequa $1.2 billion seven-year term loan price and trade.

On Tuesday Prospect News learned that the term loan is expected to price Wednesday with a 325 bps spread to Libor at an original issue discount of 95. Original guidance at launch was in the 98 area, sources said.

The bank deal is expected to be oversubscribed at 95, a market source said.

The bond deal is expected to launch shortly after the loan breaks for trading, and price late this week or early next week.

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