Countrywide crushed as bankruptcy buzz roils market; Young gets hung; rental names routed; Nasdaq plans deal

By Paul Deckelman and Paul A. Harris

New York, Jan. 8 - Bankruptcy rumors about troubled mortgage giant Countrywide Financial Corp. made the rounds of the financial markets Tuesday, battering the Calabasas, Calif.-based lender's bonds and striking down its stock, even though Countrywide issued a statement denying any plans to file. The bad karma spilled over to other mortgage names such as Residential Capital LLC and Thornburg Mortgage Inc.

But housing issuers - whose bonds have lately more of less risen and fallen in tandem with the mortgage names - were seen as mixed. While some traders and other market sources saw the sector's bonds generally lower, in line with weak November pending-sales numbers and bad quarterly results from one of the more solid names in the group, KB Home, others saw some of the beaten-down sector's bonds on the rebound, particularly such hard-hit names as Hovnanian Enterprises Inc. and Tousa Inc.

But another sector linked in with the builders and mortgage - companies that rent heavy equipment to construction companies - was getting bulldozed, traders said, with losses posted for bonds like United Rentals Inc. and Neff Rental Inc.

Outside of the homebuilding/construction equipment/mortgage lender axis, traders saw sizable losses throughout the market on what several called "a pretty ugly day." as junk bonds took their cue from equities and headed south. Notable losers included Young Broadcasting Inc. and Charter Communications Inc.

In the primary arena, syndicate sources heard Nasdaq Stock Market Inc. getting ready to turn to the junk bond market for $625 million in funding.

Most indicators point lower

A trader saw the widely followed CDX junk bond performance index down 5/8 point on the day to 92¾ bid, 93 offered, while the KDP High Yield Daily Index continued to slide, falling another 0.30 to end at 76.18. Its yield widened 7 basis points to 9.04%.

In the broader market, declining issues took a nearly three-to-two lead over advancers. Market activity, as measured by dollar volume, jumped about 44% from Monday's levels.

"Everything was lower," a trader exclaimed, and he wasn't too far from the truth. "Nothing was better."

He said "everything was pretty weak. The high yield market was seriously under pressure, that's for sure."

On top of the disruptive effect that the latest chapter in the Countrywide saga had on the overall market, "the [stock] market crapped out late," with the bellwether Dow Jones Industrial Average down nearly 240 points, "and that kind dragged everything down with it."

A senior high yield syndicate official marked the broad market ½ to 1 point lower on Tuesday.

Countrywide calamity roils market

One of the biggest losers, in active dealings, was Countrywide, whose bonds and shares headed southward as renewed bankruptcy speculation swirled around the controversial company.

A distressed trader said he had started watching Countrywide's bonds just that day, quoting the 6¼% notes due 2016 at 44 bid, 46 offered, well down from prior levels around 51 bid, while its 3¼% notes due 2008 dropped to 83.5 bid, 84.5 offered from levels near 90 on Monday. Its 5.80% notes due 2012 fell to 63.5 bid, 64.5 offered from 66, while its floating-rate notes coming due in May of this year were at 81.5 bid, 83.5 offered, down from levels near 90.

Another trader said Countrywide got "decimated," while a third said that "got crushed," the 31/4s down 6 points at 81.5 bid, 83.5 offered, the 61/4s at 44 bid, 46 offered, down 7, while its 5 5/8% notes due 2009 lost 6 points to end at 62.5 bid, 64.5 offered.

Countrywide's New York Stock Exchange-traded shares, meantime, plunged $2.09, or 27.4%, to $5.55, their lowest close in more than a decade. At one point, the shares were down more than 30%, matching the lows they hit in October 1987, when Wall Street suffered one of its largest one-day drops ever.

There was no shortage of bad news out there for Countrywide, which barely avoided bankruptcy in the summer when its funding sources dried up amid the subprime lending meltdown; it was forced to draw on credit lines and got a $2 billion cash infusion from Bank of America in return for a sizable issue of preferred shares. Now, the dreaded "B-word" has surfaced again.

In the credit default swaps market, the cost of protecting Countrywide debt against an event of default such as a bankruptcy widened out to 500 basis points plus 30% up front, seen as a sign that many players in that market fully expect such an event soon. On Monday, those CDS contracts had been trading at 500 bps plus 20% up-front money.

Countrywide was forced to issue a denial, declaring that "there is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action."

Despite the denial, and Countrywide's assertions that it has sufficient liquidity to conduct its business, talk of a bankruptcy continued. The Egan-Jones credit-rating agency warned that Countrywide "is severely challenged and might falter if it does not receive an infusion of at least $4 billion within the next couple of weeks."

Besides the bankruptcy talk, another negative factor was Lehman Brothers cutting its fourth-quarter earnings estimate for Countrywide to 20 cents per share from 36 cents per share.

The brokerage, in a research note, pointed out that after the subprime market collapsed over the summer, Countrywide, like other lenders in that area, essentially shut down its subprime operations to instead focus on originating better-quality "conforming" loans that can pass muster with Fannie Mae and Freddie Mac, whose guidelines have now become the standard for any company which hopes to generate cash by selling pools of those loans to investors. But while those loans are considered safer, they are also considerably less profitable than the riskier subprime loans were - leading Lehman analyst Bruce Harting to cut his earnings estimate.

"While Countrywide's transition to originating mostly [government-sponsored enterprise] conforming mortgages has reduced balance sheet risk caused by its non-conforming originations, the dramatic decline in Countrywide's earnings power this transition has caused has kept Countrywide's creditors nervous about the company's liquidity," the analyst wrote in a research note.

He also cautioned that Countrywide will likely face additional pressure because the weakness in the overall housing market has depressed total loan volume as well.

And as if that weren't enough, Countrywide - one of the lenders already under fire from consumer advocates and politicians for allegedly deceptive high-pressure sales tactics in offering risky loans to borrowers who could not afford them - has been accused of fabricating documents in a bankruptcy case. The New York Times reported charges, detailed in court documents, that Countrywide sent out dunning letters to one of its erstwhile borrowers in Pennsylvania even after her bankruptcy proceeding was completed and her debt legally discharged. The company denies any wrongdoing.

Countrywide's problems helped to drag the whole mortgage sector down. A trader saw Residential Capital's 6% notes due 2013 off 4 points at 54 bid, 56 offered. ResCap's 8 3/8% notes due 2015 lost 1¾ points to end at 56 bid, while Thornburg Mortgage's 8% notes due 2013 moved down to 81.5 bid, 83.5 offered from 84 bid, 86 offered.

E*Trade Financial Corp.'s 8% notes due 2011 were 4 point losers at 78.5.

Housing names seen mixed

Bad news for the mortgage sector usually translates to bad news for the housing sector which depends on the continued extension of credit to homebuyers as its lifeblood - but the sector was something of a mixed bag on Tuesday.

A trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 unchanged at 73.5 bid, while Standard Pacific Corp.'s 7% notes due 2014 lost a point to 65 bid, 66 offered. WCI Communities Inc.'s 9 1/8% notes due 2012 were down ¾ point to 55 bid, 57 offered.

Another market source meantime saw Hovnanian's 6 3/8% notes due 2014 down a point at 67.

But another trader saw better levels for the sector, with Tousa's 10 3/8% notes due 2012 up 2½ points at 11 bid, 13 offered, Standard Pacific's 9¼% notes due 2012 up 2 points at 44 bid, 46 offered, and Hovnanian's 6½% notes due 2014 at 66 bid, 68 offered, up 2 points.

Despite a wider fourth-quarter loss, a source saw KB Home's 7¾% notes due 2010 up 1½ points at 93.5, while Tousa's 7½% notes due 2015 up some 2 points to around the 11 mark.

Rental bonds get routed

A trader said the whole equipment-rental sector - which depends heavily on renting bulldozers and other heavy equipment to building companies - was on the downside. "They're getting beat up the hardest," he said. He saw Ashtead Group plc's 9% notes due 2016 "down in the low 80s, which is really their low-water mark," while Rental Service Corp.'s 9½% notes due 2014 at 85.75 bid, 86.75 offered, down from recent levels "in the high 90s."

Another trader saw Neff's 10% notes due 2015 at 42 bid, 44 offered, down 4 points on the day, while a market source at another shop pegged the bonds at 43 bid, down 4. United Rentals' 7% notes due 2014 were down 2½ points at 78.

"That sector just got beat up," the first trader reiterated.

He also saw lower levels for cement provider U.S. Concrete Inc.'s 8 3/8% notes due 2014, quoting the bonds at 86 bid, 86.5 offered - down "not that much " from 87 a week ago, but down about 4 points from levels seen near the end of December.

Young, Charter take it on the chin

Outside of the homebuilder and mortgage-linked names, traders said most names were lower in line with the stock decline.

"Everything just got clobbered," said one.

Young Broadcasting was one victim. A market source saw its 10% notes due 2011 at 68 bid, down 10 points on the session. Another trader saw the bonds around the 69 level, and said that was about 10 points below where they had last been seen trading back in mid-December. There was no immediate word what was behind the drop. The company's nearly worthless penny-stock shares were also down sharply on the day, with no news seen about the TV station operator.

Meanwhile, Charter Communications continued to lose ground, its 10% notes due 2014 falling from a 52 bid, 54 offered open all the way down to 42 bid, 44 offered, before coming off those lows to end at 45 bid, 47 offered. Its 8 3/8% senior notes due 2014 meantime lost ½ point to end at 93 bid, 94 offered.

Another trader saw Charter's 11¾% notes due 2014 down 10 points at 47 bid, 49 offered. He said that something was "obviously happening" with the troubled St. Louis-based cabler - but he didn't know what.

Nasdaq plans deal

Meanwhile primary market news was in scarce supply.

New York equities exchange Nasdaq Stock Market disclosed that it intends to issue $625 million of senior unsecured notes (Ba2/BB+) and put in place $1.575 billion of credit facilities.

An informed source identified Banc of America Securities and JP Morgan as joint lead arrangers and joint bookrunners for the debt offerings.

The source said that Nasdaq met with bank lenders on Monday in New York, and on Tuesday in London, but declined to outline timing for the bond deal.

Proceeds will be used, in part, to fund Nasdaq's acquisition of OMX Group, Inc. - a transaction which will close in mid-to-late February.

Challenging circumstances

Informed sources continue to tell Prospect News that the underwriters will shortly attempt to move some of the backlog of LBO-related hung risk, irrespective of the present volatility in the capital markets.

"If we're in a challenged high yield market, that makes the underwriters' jobs harder," one syndicate official said on Tuesday.

"But people expect that volatility will be the norm going forward.

"We're just going to have to put some of these things out there."

The source added that underwriters are pushing ahead on the CDW Corp. and Harrah's Entertainment Inc. bank loans.

The official added that if the CDW $2.2 billion term loan prices and trades well, an offering of high-yield notes could come to market in late January. However, the source added, the January timing for the bonds basically hinges on the bank deal being a blowout. Otherwise the bonds will come later.

The $1.94 billion bond portion of the LBO financing includes $890 million of eight-year senior cash-pay notes, $300 million of eight-year senior PIK toggle notes, both Caa1/CCC+, and $300 million of 10-year senior subordinated notes (Caa2/CCC+).

JP Morgan, Lehman Brothers, Deutsche Bank Securities and Morgan Stanley are the underwriters.

Meanwhile, the sell-side source added, Harrah's Entertainment Inc. is expected to launch its $9 billion bank deal - a $2 billion revolver and a $7 billion term loan - next week.

Some sources in the junk market are expecting Harrah's bonds to follow on the heels of the bank deal. The sell-sider who spoke to Prospect News on Tuesday said that the bonds are expected first quarter business.

The bond portion of the Harrah's LBO financing is comprised of $6.025 billion of senior unsecured notes.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JP Morgan and Merrill Lynch are the underwriters.

Natural resources deals

Apart from the LBO backlog, two "corporate" deals are presently roadshowing in the high yield market.

Atlas Energy Operating Co./Atlas Energy Finance began a roadshow on Tuesday for a $400 million offering of 10-year senior notes (B3/B), a debt refinancing deal via JP Morgan and Wachovia Securities.

Meanwhile Southwestern Energy Co. began a roadshow on Monday for a $400 million offering of 10-year senior bullet notes (expected Ba2/confirmed BB+) led by JPMorgan, Banc of America Securities LLC and RBS Greenwich Capital.

Both are debt refinancing deals emanating from the "natural resources" sector, one sell-side source pointed out on Tuesday.

"They are the kind of stories that the market likes to hear right now," the source asserted, adding that it would not be too surprising to see other natural resources-related issuers approach the new issue market, principally to refinance debt.

However, the banker added, the present turbulence in the capital markets is worrying even to prospective issuers from sectors which investors consider recession-proof.

"So far we have seen no real January effect to speak of, and that's not great news," the sell-sider said, referring to customary increases in stock prices seen during January, trailing December price declines believed to be triggered by investors seeking to create tax losses to offset capital gains.

This banker - noting that the Nasdaq was off 2.36% on Tuesday while the Dow Jones Industrial Average ended the day 1.86% lower and the S&P 500 finished 1.84% lower - commented that rumors that Countrywide Financial might file bankruptcy, coupled with a Federal Reserve report that consumer credit outstanding saw its biggest increase since last August, helped to corrode investor sentiment on Tuesday.

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