Nortel extends gains in mostly quiet pre-holiday session; ResCap bid up; Ford Credit firms

By Paul Deckelman and Paul A. Harris

New York, Dec. 24 - The high yield market went through the motions on Thursday, with a few bonds actually trading around - but most participants were watching the clock and counting down to the time when they could make an exit to get an early start on the Christmas holiday break. Volume levels were described as very low, with most issues seen unchanged.

One name which did firm, on some volume, though, was Nortel Networks Corp., whose bonds had already strengthened smartly on Wednesday in response to positive tax, asset-sale and financing news from the bankrupt Toronto-based telecommunications equipment maker. They were seen up about another point or so Thursday as the news-driven rally continued.

Also seen firmer on some volume was Ford Motor Credit Co., although no real news on the Number-Two carmaker's loan-financing arm was immediately seen.

Residential Capital LLC - a division of General Motors Corp.'s former loan-financing arm, GMAC LLC - was reported to be on billionaire investor Warren Buffett's shopping list. That news brought out bidders for some of ResCap's bonds, but no real trades in the credit took place; however, a trader predicted that ResCap might have some upside momentum when people return from the holiday break on Monday.

The news that YRC Worldwide Inc. had once again extended the equity-for-debt exchange offer it has made for its junk bonds, along with several convertible issues, had little impact on the bonds, which continued to languish amid tepid noteholder support for the exchange scheme.

The high yield primary market, meantime, remained on its holiday hiatus, the forward calendar essentially cleared after last week's final big bond-pricing binge.

Market indicators steady to firmer

Among statistical measures of market performance, a market source saw the CDX Series 13 index unchanged on Thursday to end at 99 7/8 bid, 100 1/8 offered, after having risen by ¼ point on Wednesday. The index thus ends the holiday-shortened week up from the 98 bid, 98½ level at which it had finished the previous week on Friday, Dec. 18.

The KDP High Yield Daily Index meanwhile was up by 6 basis points on Thursday at 71.05, after having gained 4 bps on Wednesday. Its yield narrowed by 2 bps, to 8.11%, after having come in by 1 bp the previous session. The index thus improved modestly from the previous week, which saw it end at 70.81, with a yield of 8.18%.

Traders generally agreed that not much was going on, with the bond market officially finished for the day and the week by 2 p.m. ET - but in actual practice, done much earlier than that, ahead of Friday's full market shutdown.

"Call everything pretty much unchanged," one said. "I didn't see any quotes in anything."

Even around mid-morning, a second trader suggested that "things are shutting down in New York. It's pretty quiet out there."

Yet another reported that "everyone's cutting out." At his normally well-populated shop, he quipped "maybe three people are in."

Nortel still heading northward

For a second session in a row, Nortel Networks' bonds were seen going up, having shot solidly higher on Wednesday amid positive news and then continuing upward during Thursday's half-session.

Its 10¾% notes due 2016 - which on Wednesday had jumped as high as 68 bid, 68½ offered from prior levels around 62-63, on relatively brisk volume for an otherwise dull day of more than $10 million - were seen continuing up to around 69½ bid on Thursday.

A market source who had seen those bonds going out Wednesday at 66½ called them up another 3 points on the day, to 69½ Thursday, on round-lot volume of more than $8 million - quite a relatively busy showing on one of the slowest days of the year.

The source also saw Nortel's other bonds - its floating-rate notes due 2011 and 10 1/8% notes due 2013 - rise to a 68-69 context from prior levels in the lower 60s, although on considerably less volume than the 103/4s enjoyed - perhaps only one or two large trades on the session for each.

Nortel's 6 7/8% bonds due 2023, which had recently traded in the lower 30s, were seen having zoomed to a 42½ bid closing level, though again, on only limited trading.

The 10¾% bonds had jumped on Wednesday on the news that the Canadian telecom equipment maker had reached a favorable settlement of a big tax bill from Uncle Sam, agreeing to pay the IRS $37.5 million to do away with $3 billion of tax claims accumulated between 1998 and 2008, which works out to about 1¼ cents on the dollar.

Nortel - which is currently in the process of selling off its assets to repay creditors - also announced a sale of its Carrier VoIP and Application Solutions assets to Texas-based Genband Inc. for a stalking-horse price of $282 million, which would-be buyers will have to top when those assets are actually auctioned off.

And Nortel further said that it had entered into a funding agreement to pay intercompany claims among parent Nortel and its various subsidiaries.

Ford Credit firmer, Ford as well

Another fairly busy credit in an otherwise lackluster market on Thursday was Ford Motor Credit Co.'s 9¾% notes due 2010, with a market source seeing more than $8 million traded.

The bonds were seen up about ¾ point on the session, trading slightly above the 104 mark.

No fresh news was seen on the Dearborn, Mich.-based company, which is the auto-loan finance arm of Number-Two domestic carmaker Ford Motor Co.

The latter's benchmark 7.45% bonds due 2031 - which on Wednesday had firmed, along with other Ford issues, as Ford reported progress in its efforts to sell its money-losing Volvo division - improved slightly Thursday to 88 5/8, though on smallish volume of only about $1 million.

ResCap bid up on Buffett buzz

A trader said that Residential Capital's bonds "were bid up" on a story in Thursday's editions of the New York Post indicating that billionaire Warren Buffett is in talks to buy the troubled mortgage lender, currently owned by GMAC LLC. However, he said that "there were not enough people [in] to react to it, because there weren't that many offerings."

He called the ResCap bonds up a point or two, with the bellwether 9 5/8% notes due 2015 bid around 781/2-80, versus a 75-76 a week ago, "but nobody has an offering."

A second market source however, saw ResCap's 8 3/8% notes due 2010 easing to around the 57 mark, down some 5 points from prior level, but noted that there were just a couple of smallish odd-lot trades driving the bonds down to that level.

The ResCap paper, the first trader said, "is going to have some momentum, it's definitely going to gain in strength here" once people return to the market on Monday after the Christmas holiday shutdown, but for now, "a bid without an offering doesn't make a trade.

"But they are being bid up a good couple of points."

The Post - attributing its information to unidentified sources - reported that Buffett, along with partners Appaloosa Management and Avenue Capital, "is said to have large debt positions in ResCap."

It speculated that the tycoon - known as "the Oracle of Omaha" for the savvy financial maneuvers which have made him arguably the richest man in the world - might be interested in buying ResCap for its mortgage servicing portfolio rather than its mortgage origination business. The Post cited a source who said that if interest rates rise, Buffett "could do very well servicing mortgages that would then take longer for borrowers to pay, leading to more profits" - although the downside there is that if the recession deepens, "an increase in delinquencies could hurt margins."

The paper further noted that an affiliate of the Buffett-controlled Berkshire Hathaway Corp. had recently bought bankrupt commercial real estate lender Capmark Financial Group's $240 billion loan servicing portfolio along with its mortgage origination operations for a fraction of that - $468 million. It quoted a spokesperson for GMAC as declining to comment on the story and dismissing it as mere "speculation," and it had gotten no confirmation of the story from Berkshire Hathaway.

The first trader said that Minneapolis-based ResCap operates "in a tough space," given the continued problems of the mortgage industry and the housing industry to which it is inevitably tethered. He added that "there are still a lot of doubters" in the junk market about the desirability of investing in the mortgage industry.

Little YRC activity on extended deadline

A trader said that YRC Worldwide's 8½% notes due 2010 "keep drifting down," mostly on odd-lot trading. He said that the bonds, which had been around 60-61 several days ago, were now bid around 57-58 following the news that the company had once again extended its equity-for-debt offer for those bonds and several series of convertible notes.

"That company just has a lot of non-believers," he said. "People just don't have any faith in it."

The Overland Park, Kan.-based trucking company is trying to take out the $150 million of 8½% notes that are slated to mature on April 15, as well as about $386 million of contingent convertible debt, by offering the holders a combination of common stock and convertible preferred stock. It has already warned that it must wrap up the debt exchange by Dec. 31 in order to gain open access to its $106 revolving credit line and to begin deferring payment of lender interest and fees of approximately $25 million per quarter under its recently amended credit agreement and asset-backed securitization facility.

A failure to accomplish this, it has cautioned, would make its liquidity position "unsustainable," and likely force it into bankruptcy.

The original terms of the exchange offer required a minimum tender threshold of 95% of total amount of outstanding junk and convertible paper being tendered for, but bondholder response has fallen far short of that, causing the company to seek - and get - approval from its lenders to drop that minimum tender condition to 70% of the outstanding principal amount of 8½% notes and 85% of the outstanding principal amount of convertibles on a combined basis.

However, it has still struggled to win approval from the holders, prompting it to extend the exchange offer several times, most recently to 11:59 p.m. on Monday from the previous deadline of this past Wednesday night. As of the old deadline, holders had tendered 53% of the 8½% notes and 90% of the combined 5% and 3.375% convertible notes, in total 80% of the company's outstanding notes - versus 35% of the 8½% notes and 91% of the 5% and 3.375% notes for a total of 75% at the previous expiration date on Dec. 15.

Nothing the low level of participation by the 2010 bondholders, the trader warned that "they're going to have to sweeten [the offer] up" to get more holders on board.

"There are no believers yet," he said, "so the bonds are just drifting in no-man's land."

He added that with the company's stock only trading around $1 per share, "I don't think that [bondholders] want equity. If you are a bondholder, what are you going to do with an exchange for a $1 stock?" he demanded, suggesting that many holders might just prefer to hang onto their bonds, "and stay up in the capital structure and take your chances there, force it into bankruptcy and hope the company's worth it."

The Teamsters' union, which represents the company's drivers, has charged that some investors would profit from a bankruptcy by having hedged their positions with credit-default swaps contracts - and accused several major investment houses of actually promoting those derivatives and thus eroding the company's chances of avoiding bankruptcy. At least one house named in the union's protest - Goldman Sachs & Co. - declared that it neither has any positions in or makes any markets in YRC bonds or CDS contracts.

To convince bondholders to go along with the deal rather than allow the company to slide into bankruptcy, the trader meantime said that "they're going to have to sweeten the pot - but I just don't know what they can offer. They really don't have that many options."

Six Flags still flying

Elsewhere from the distressed-debt precincts, a market source saw Six Flags Inc.'s bonds continuing to firm, despite a dearth of fresh news out about the bankrupt New York-based theme park operator.

Six Flags' 9 5/8% notes due 2014 were being quoted up nearly 2 points on the session at above 32 bid. That follows Wednesday's gain of more than a point. The bonds were trading around the mid-20s a week ago.

Clear Channel bonds hold levels

A trader said that while he had not seen any of Clear Channel Worldwide Holdings Inc.'s recently issued new bonds trading on Thursday, "they're still hanging right in there" around 103 5/8 bid, 103 7/8 offered on the $2 billion B tranche of the San Antonio, Tex.-based media company's 9¼% notes due 2017, with the $500 million of identically termed A tranche notes trading about a point behind that.

The two tranches priced at par on Dec. 18 to yield 9¼%.

McJunkin moves up

The trader also said that McJunkin Red Man Corp.'s $1 billion of 9 ½% senior secured notes due 2016 was "starting to gain a little momentum, in thin trading, creeping up a little bit" to 97¾ bid, 98 offered, albeit in very light trading, after having previously traded only at, or even below, its issue price. The Tulsa, Okla.-based maker of industrial pipes, valves and fittings had priced its mega-deal at 97.533 on Dec. 16 to yield 10%

Primary quiet, little expected

The high-yield primary market saw no activity during the Dec. 24 session, according to a syndicate official.

It is possible, though unlikely, that some news bearing upon the month of January may emerge during the week ahead, the banker added.

Meanwhile, moving into the end of the year, the January forward calendar has just two deals carrying over from the old year.

Birch Communications, Inc. is attempting to place $100 million of six-year senior secured notes (B3/CCC+).

Proceeds from the deal, which is being led by Knight Libertas Capital Group, will be used to repay outstanding debt, to purchase outstanding warrants for its common stock and for general corporate purposes, including future acquisitions.

Also, Formation Metals Inc. moved the sale of 102,041 units of notes and shares into the New Year, according to Leianne Emery, the company's business improvement director.

The deal had been expected to close during the pre-Christmas week.

The units will be comprised of $100 million of five-year senior secured notes and C$60 million of common shares.

The notes will bear interest at 10% for the first two years, after which the rate steps up to 12%.

The units are offered at 98.00.

Jennings Capital Inc. is the lead agent.

Formation is a Vancouver, B.C.-based metals mining and refining company.

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