Thornburg dives despite swing into black; Abitibi off as pulp prices fall; Cott fizzles on bearish guidance

By Paul Deckelman and Paul A. Harris

New York, Aug. 26 - Thornburg Mortgage Inc.'s bonds - which had firmed solidly Monday ahead of the company's release of its second-quarter numbers - gave it all back on Tuesday, traders said, even though the Santa Fe, N.M.-based lender reported a quarterly profit versus an ocean of red ink in the previous quarter. While the numbers appeared better, Thornburg also warned that a new round of margin calls seeking more loan collateral could prove to be its undoing.

Also on the downside, AbitibiBowater Inc.'s bonds fell in tandem with a slide in its share price, after an analyst cautioned that pulp prices are on the slide.

Soft drink maker Cott Corp.'s bonds, and its shares, were likewise lower on an anything-but-bubbly 2008 outlook, and its withdrawal altogether of its previously issued 2009 guidance.

Even as the secondary side continued to sleepwalk through the last few sessions ahead of the upcoming Labor Day holiday break at the end of this week, the primaryside remained already on holiday, with no new-deal developments seen.

Market indicators remain mostly easier

Back among the established issues, a trader said Tuesday that the widely followed CDX index of junk bond performance was off by 1/8 to 3/16 point, quoting it at 92¼ bid, 92½ offered. The KDP High Yield Daily Index meantime dipped by 4 basis points to end at 70.24, while its yield rose by 1 bp to 10.69%.

In the broader market, advancing issues led decliners by a narrow margin. Activity, represented by dollar volume, jumped 56% from the anemic levels seen on Monday, although by any objective standard, volume remained restrained.

"It's a little more active" than Monday's dealings, a trader said, "but it seems like trading was spread out. I wouldn't say there was any high-volume name or sector today that stood out."

Beyond a couple of relatively active issues, such as General Motors Corp.'s 7.20% notes due 2011, Thornburg's bonds and Community Health Systems Inc.'s 8 7/8% notes due 2015, "it pretty much thins out and spreads out after that, with just a few million [dollars of bonds] here and there across just about every sector."

He continued that "you gotta think today and [Wednesday] for guys that want to get anything done, to get something done," before what is expected to be a semi-holiday-like session on Thursday, even though it will theoretically be a full-day trading session, and, of course, before Friday's abbreviated session directly going into the holiday break.

With things so "spread out," he reiterated, "there was no focus on one sector, or one name, unless it's in the news. Otherwise, it seems like there's [just] adjustments to portfolios and specific situations, or you're watching the Treasury market go up and the stock market go down, or the other way around. We seem to get caught in the middle of that, with not a lot of action."

Another trader said that what's been happening over the last few deadly-dull sessions is "there's a couple of hours of activity early on, from 9 a.m. to 11 a.m. [ET] - there's a flurry of activity, and then it just stops."

He added that this pattern "is only going to get [more] abbreviated as the week goes on."

Thornburg throttled despite quarterly profit

A trader saw Thornburg Mortgage's 8% notes due 2013 ending at 71.5 bid, having fallen from Monday's closing level of 75.

Another trader who saw the bonds in that same 71 bid, 72.5 offered area, which he called down 1½ points on the day, noted that the mortgage provider's year-over-year numbers "were terrible - but they did have a small profit, [mostly due to big one-time gains from the sale of assets and decreases in the fair value of certain items], and their bailout plan has received ample support by investors."

However, while bond investors were seeing a half-empty glass, equity players were ignoring potential negatives and accentuating the positive. Thornburg's New York Stock Exchange-traded shares - considered by many to be a nearly worthless penny stock - zoomed as much as 55% at one point early in intraday dealings, to a high of 62 cents per share, before coming off that peak and settling for half that gain. They still ended up 9 cents per share, or 22.50%, at 49 cents, on volume of 50 million shares, about 7½ times the usual turnover.

Thornburg - among the hardest-hit of mortgage lenders since the advent of the mortgage lending crisis a year ago, even though it does not do subprime mortgages - reported that in the second quarter, it had net income available to common shareholders of $412.3 million, or 84 cents per share, well up from $78.1 million, or 66 cents per share, in the year-earlier period. The year-over-year quarterly gain stood in stark contrast to its first-quarter loss of $3.306 billion, or $20.64 per share.

However, while the net earnings showed substantial improvement on a year-over-year basis, as well as sequentially, the company said that the latest gain was largely due to those big one-off gains, including a $536.9 million fair-value gain related to a liability; a $24.9 million fair value gain related to senior subordinated notes; a $14.3 million net gain on the sale of certain assets; and a $23 million gain on the extinguishment of debt.

It said that after eliminating these special items, adjusted income for the quarter was $22.7 million. Net interest income was $53.3 million - just 48% of the $102.3 million for the same quarter of 2007.

While the numbers, at first blush, seemed to represent an improvement, presumably fueling the big stock surge, company executives were considerably less sanguine on their morning conference call with analysts and investors.

Given the sharp deterioration in the mortgage securities market - which has pretty much choked off the company's efforts to generate operating funds by selling securities backed by its mortgages, forcing it to turn to outside sources of capital - Thornburg's chief executive officer, Larry Goldstone, lamented that "whoever thinks it's being fixed and getting better out there - it's not."

The virtual drying-up of the mortgage securities market has forced Thornburg to turn to outside lenders for capital on what the CEO called "onerous" terms. Threatened with possible bankruptcy earlier this year when counterparties for some of its short-term mortgage-backed borrowing demanded additional collateral as the worth of the company's mortgage securities eroded, Thornburg managed to keep the wolves from its door at that time by entering into a $1.35 billion rescue plan with investors led by MatlinPatterson Global Advisers LLC.

One provision of that rescue package called for Thornburg to conduct an exchange offer for some of its preferred stock. Holders of at least two-thirds of each of four classes of those preferred securities must tender their shares. Thornburg said that more-than two-thirds majority of each of the four classes had, in fact, tendered their shares as of this past Friday, although the percentage of series F preferred holders had fallen to an uncomfortably close 68.8% from over 90% just a few days earlier - and holders of all of the classes retain the right to withdraw their shares, right up to the now-extended Sept. 3 deadline. Even so, Goldstone expressed optimism that the tender offer would be completed, allowing the company to remain solvent.

But in announcing its results after the market close on Monday, Thornburg revealed a new threat - possibly to its very existence. Recent downgrades in the ratings of its various mortgage-backed securities have further eroded the value of those securities, sparking a new round of margin calls demanding further payment. Last Thursday, Thornburg paid $219 million to settle such calls, but said that it could face at least another $25.9 million of such calls.

It warned that given these potential liabilities - and Thornburg bluntly said in its Securities and Exchange Commission filing that "...[t]here can be no assurances that the company will be able to reach a successful resolution with any or all of the counterparties to the Override Agreement or that the company will not receive further margin calls . . . or that the company will not receive margin calls from one or more of the counterparties that will exceed the balance of the Liquidity Fund," out of which it has been paying its margin calls so far - there remains "substantial doubt about the company's ability to continue as a going concern for the foreseeable future."

Abitibi beaten to a pulp

Elsewhere, a trader saw a fair amount of activity in AbitibiBowater's 8.55% notes due 2010, quoting them trading at 56 bid on a round-lot basis, about a point lower than recent levels.

Another market source, however, saw the bonds going out at just under 54.625, well below Monday's finish at 58, although that nearly 4 point plunge came mostly on a series of smallish late-session trades, with here and there a sizable block at that same level.

The Montreal-based forest products company's NYSE-traded shares meantime lost 37 cents, or 5.53%, ending at $6.32, on volume of 993,000, about 25% above the usual activity level.

The bonds and shares retreated even as an analyst for UBS Securities, Gail Glazerman, said in a research note that prices for long-fiber northern bleached softwood kraft pulp cannot be sustained at current levels. Glazerman said that those prices for the pulp industry benchmark commodity are coming off a more-than 12-year high level as global pulp inventories swell due to weakening demand and new supply coming on the market, combined with what she termed "particularly aggressive" moves by some pulp buyers, notably in Asia, to demand that suppliers cut prices in order to move product.

Cott bonds off amid gloomy forecast

Another loser was Cott, whose Cott Beverages Inc. 8% notes due 2011 were seen by a trader to have fallen as low as 86 bid, 87 offered before going home at 87 bid, still off 2 or 3 points on the session in fairly busy trading from previous bid-side level around 89 or 90.

Another trader said the bonds had opened Tuesday's dealings around 88 and then had slid 1½ points to 86.5 bid, 88 offered. Yet another had them going out at 86.75 bid, down 2½ points on the day, on "lots of" odd-lot trading, particularly as the day wore on, after a fair number of large-block trades earlier in the session.

The Mississauga, Ont.-based soft-drink bottler's NYSE-traded shares slid 41 cents, or 16.60%, to end at $2.06. Volume of 1.48 million shares was more than three times the usual daily handle.

Cott - which cans and bottles store-brand soda for retailing giant Wal-Mart Stores Inc., among other customers - lowered its outlook for its 2008 operating profit and completely retracted its previous guidance for next year's earnings.

As recently as July 31, when it reported its second-quarter results, Cott had predicted that its operating profit for 2008 would rise by anywhere from 50% to 70% of its 2007 profit of $36.3 million, implying an operating profit of between $54.45 million and $61.71 million.

However on Tuesday it said that 2008 operating profit would likely come in anywhere from 28% below the 2007 level to just 5% above it, which translates to a range of between $26.1 million at the low end and a maximum of $38.1 million.

Cott also withdraw its previously offered 2009 guidance.

The company's interim CEO, David Gibbons, declared that "we are no longer on track to deliver our targets." He explained that the "disappointing results we have seen over the past few weeks, at the beginning of our most critical quarter, indicate that we will fall substantially short of our expectations for 2008."

Smithfield seen mixed after loss

Also in that same food and beverage sector, traders gave a mixed assessment to Smithfield Foods Inc.'s bonds after the largest U.S. pork producer and processor sell into the red in the fiscal first-quarter on skyrocketing commodity costs.

One saw its 7¾% notes due 2017 losing ¼ point in round-lot trading to end at 90, on only a couple of trades. Another saw those bonds offered at 90.25, while he saw the Smithfield, Va.-based company's 8% notes due 2009 up ½ point at 99.75 bid, 101 offered.

Smithfield lost $12.6 million, or 9 cents per share, in the fiscal quarter ended July 27, versus its year-earlier earnings of $54.6 million, or 41 cents per share. It cited the impact of sharply higher prices for agricultural commodities like corn and soybean meal, which it uses to feed its millions of hogs.

Fat yields push up GM '11 bonds

In the autosphere, a trader said that General Motors' 7.20% notes due 2011 "may be the most active" GM issue in Tuesday's market, quoting them up 3/8 point at 63.875 bid. He saw the benchmark GM 8 3/8% bonds due 2033 off ½ point at 49.5 bid, while GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2033 were unchanged at 51.5.

At another desk, a trader saw the GM and Ford benchmarks "pretty much unchanged" at 48 bid, 49 offered and 51 bid, 53 offered, respectively.

Yet another saw the GM '33 bonds down ½ point at 48 bid, 50 offered, while the Ford long bonds "continued to drop" to 50 bid, 52 offered, down ½ point. He saw the GM 7.20s at 63 bid, 65 offered, down ½ point on the day; he said the bonds have been actively traded of late because "they have a great yield going for them," north of 28%, versus the recent 17.5% to 18% yield on the 8 3/8s.

A market source at another desk said the 7.20s may have been the most actively traded issue, including a number of large-block trades in the 64-65 region, before going out at 65.5, up nearly 3 points on the session.

One of the traders saw GM's 49%-owned automotive finance unit GMAC LLC's 8% bonds due 2031 down ½ point at 53 bid, 55 offered. Among the shorter GMAC issues, its 6 7/8% notes due 2012 were seen down 1½ points at 58 bid, and its 7¾% notes due 2010 were up almost a point at 80 bid.

Community Health bonds active, but unchanged

Traders saw some brisk dealings in Community Health Systems' 8 7/8% 2015 bonds; one called the Franklin, Tenn.-based hospital operator's paper "kind of active," but said that they were "relatively unchanged" at bid levels between 100.5 and 101.

Elsewhere, a trader saw relatively busy dealings of over $12 million in Public Service Co. of New Mexico's 7.95% notes due 2018. He saw the utility operator's bonds ending at 99.5, down from 100.75 at the end of last week. "That stuck out in the end, today," he said.

SunGard plans $700 million sale

No issues were priced during the Tuesday primary market session.

SunGard Data Systems Inc. is expected to price $700 million of senior unsecured notes in September to refinance the bridge loan related to its acquisition of a majority stake in GL Trade, a market source told Prospect News.

Goldman Sachs & Co., Citigroup and Lehman Brothers will lead the deal. KKR Capital Markets is one of the initial lenders.

The bonds are expected to have terms and conditions and covenants substantially consistent with those relating to the company's 2013 notes.

The financing also includes a $300 million credit facility.

First the backlog

Efforts in September will be concentrated on cleaning up the backlog, and professed no visibility on new corporate issuance, according to a high-yield syndicate official who spoke to Prospect News late Thursday.

However, the source added, new corporate deals probably will surface in the post-Labor Day time frame, and estimated that presently the market is extracting a new issue premium of between 50 to 100 basis points.

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