Thornburg slides on financing skepticism; CIT plunge continues on drawdown; funds shed $141 million

By Paul Deckelman

New York, March 20 - Thornburg Mortgage Inc.'s bonds got pounded down to the low 30s on Thursday amid investor skepticism that the beleaguered mortgage originator will be able to meet its goal of staying out of bankruptcy by raising nearly $1 billion within the week.

Thornburg was accompanied on its slide downward by bonds of another lender - CIT Group Inc., whose nominally investment-grade securities were being widely quoted around junk desks after falling some 20 points on Wednesday and then falling a few points more, in active dealings, on Thursday. Investors were apparently spooked by the news that the New York-based financial services company was forced to draw upon its bank credit line - because it couldn't access its regular capital market funding channels.

Apart from those twin financial disasters, traders said not much was going on in a hugely quiet, abbreviated session ahead of the Good Friday holiday which would see the financial markets shuttered that day. AbitibiBowater Inc.'s short-dated bonds continued to push strongly higher in the wake of the company's sweetened exchange offer for the holders of those 2008 and 2009 notes, although another theory attributed the strong rise to short covering.

Primaryside players meantime reported virtually no activity in their precincts.

Fund flows off by $141 million on week

And late in the day, hours after the official 2 p.m. ET close, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday, $140.7 million more left those funds than came into them. It was the second consecutive week in which a sizable outflow was seen, following the $190.5 million cash exodus seen in the previous week, ended March 12.

The latest results represented a strengthening of the negative fund-flow trend which has dominated for most of this year. With 12 weeks now in the books, outflows have been seen in eight of them, versus four inflows, according to a Prospect News analysis of the AMG figures. Net outflows from the weekly-reporting funds since the start of the year have totaled $988.9 million, according to a market source, up from $848.2 million the previous week.

However, as has been the case for most of the past year, the trend is different for those funds which report on a monthly basis rather than weekly.

For the second straight week, those normally positive monthly-reporting funds did not show an inflow - they were unchanged in the latest week, on top of the $6.5 million outflow seen in the previous week. However, their cumulative 2008 net inflow stayed well in the black, at $446.7 million, the market source said.

But taken in the aggregate - that is, combining the cumulative fund-flow totals for both the weekly and the monthly reporters - yields a solidly negative number, with $542.2 million more having left the funds this year than has come into them, the source indicated, up from $401.6 million the week before.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Market indicators mixed

A trader saw the widely-followed CDX index of junk market performance up ¼ point on Wednesday at 88 1/8 bid, 88 5/8 offered. Meanwhile, the KDP High Yield Daily Index eased by 0.03 to end at 72.59, while its yield rose by 1 basis point to 10.02%.

In the broader market, advancing issues shaded decliners by a narrow margin. Overall activity, reflected in dollar volumes, fell by some 12% from Wednesday's levels.

A trader said that apart from those specific names that had news attached to them, such as Thornburg or Abitibi, "there was no price action - even if things traded, they were just moving sideways" versus Wednesday's levels. Sectors that he watches, such as healthcare, gaming and retail, "were non-existent."

"There were some markets in things out there earlier," another trader said, "but with the early close, most firms were just half-staffed, and there wasn't a lot of desire by the buyside to get business done today."

It was a quiet and dull ending to a wild week which started out with the virtual implosion of venerable Wall Street operator Bear Stearns Cos. Inc. - although that proved to be a boon for Bear's bondholders - and which was ending with Thornburg seemingly on the road to oblivion.

The trader said that "uncertainty" seemed to be the watchword - "everyone's gotten burned over the last few months. Typically, if you go back, looking at the track record, whenever there's been speculation that there was a problem, or uncertainty, it's always come out to be bad news. I can't think of one situation lately where there's been positive news."

"Everyone," he continued, "is nervous and on the sidelines, and no one wants to commit right now, but you really can't blame everyone when you see how badly things have gotten pounded." Although he added that, paradoxically, "for investors, that creates opportunity. In this environment, there's a plethora of opportunities to find value - it's just a matter of doing your homework."

In a research note, the analysts at Fitch Ratings wrote Thursday that despite all the market turmoil, the widely followed Merrill Lynch High Yield Master II Index "managed a small gain for the week," closing up 2.433 points at 567.879 on Wednesday. The total return for the Master II Index for the week was a gain of 43 bps, cutting the year-to-date cumulative loss for the index to 3.88%, or 16.70% on an annualized basis. The yield to worst on the Master II Index declined by 10 bps to 10.95% from 11.05% a week earlier.

Fitch said that secondary market activity "slowed noticeably this week," with total volume amounting to just $14.26 billion, or a daily average of $3.6 billion, versus $19.1 billion for the week ending the previous Thursday, or a daily average of $3.8 billion. The most active issues, the analysts said, included the bonds of GMAC LLC, Ford Motor Credit Co., Charter Communications Holdings LLC, General Motors Corp. and Spectrum Brands Inc.

Thornburg bonds collapse

But traders said that those formidable names were nowhere to be seen Thursday, with Thornburg's 8% notes due 2013 occupying the center stage as they collapsed in startling fashion.

A trader saw them having swooned all the way down to 28 bid, 32 offered from prior levels at 57 bid, 59 offered, saying the company's bonds nosedived because "it's going back down the tubes - they diluted the shareholders by about 8,000%," he noted.

Another trader said "I guess they sure are" taking a nosedive - he saw the bonds ending at 31 bid, way down from Wednesday's levels in the 50s, and pointed out that they were once again trading flat, or without their accrued interest, after two days of having had that interest restored. Although the bonds had gyrated around on Wednesday, he said, "I was shocked that they didn't get hit" then, "when the stock got cut in half, from around $3 to $1.50, I was shocked that there wasn't more weakness, actually, in the bonds."

He suggested that investors "were distracted" Wednesday, but now, "having overnight to evaluate the situation, they realized how dire a situation Thornburg is actually in. If they're not able to issue this convertible security, they're through - it's over. Based on what came out [Wednesday], it seems the equity holders [many of whom chose to get out of the name] were a little more prudent in evaluating [the company], although they will be hurt the worst by the extreme dilution."

Thornburg, another trader said, "was the big mover," at 30 bid, 34 offered, which he said was down 22 points. He agreed with the notion that the steep fall in the bonds could be taken as a sign that investors don't believe the company will get its financing deal done. "It doesn't look that way," he said, "though you never know."

Those bonds had begun the week on a down note, continuing a slide which had begun at the end of the previous week on the news that the Santa Fe, N.M.-based jumbo mortgage lender had received yet another notice of default related to unmet margin calls on its short-term mortgage-backed borrowings; its banks were demanding more collateral due to the steep decline in the value of the mortgages securing the securities it used to back its borrowings. But after closing Monday in the upper 30s, they soared up to the mid-50s Tuesday on the news that Thornburg had reached an accord with five of its largest lenders - Bear Stearns, Citigroup Inc., Credit Suisse Group, Royal Bank of Scotland plc and UBS AG - who agreed to suspend issuing margin calls against the mortgage company for a year while Thornburg tried to right its situation. The bonds gyrated around on Wednesday, first pushing well up into the 60s, but then tumbling from those peak levels to end only slightly higher on the session, in the upper 50s, while the company's stock went into a complete freefall, losing fully half of its value when the details of the agreement with the banks were made public.

While the banks agreed to suspend the margin calls for a year, Thornburg for its part had just seven business days to come up with nearly $1 billion of fresh capital, or all bets would be off, and the company warned that it might be forced into bankruptcy. Thornburg announced a plan to sell $1 billion of 12% convertible notes, which if fully converted would boost the number of shares outstanding by 500% and would give the participating banks warrants to buy another 49 million shares of its stock, equivalent to another 27% of the current float, for the bargain price of a penny per share. It also said it would freeze its stock dividend for a year to conserve cash and agreed to cut certain counterparty borrowings.

After nosediving on Wednesday, the New York Stock Exchange-traded shares continued to bleed heavily on Thursday in response to the anticipated massive dilution the shares would face - raising the possibility that the convertibles sale might flop since the underlying shares those bonds could be converted into were declining so precipitously in value. They closed down 37 cents, or 24.67%, at $1.13 on volume of 51 million, about four times the usual turnover.

Big CIT slide continues

A trader said of Thornburg's worsening situation, "another one bites the dust, along with CIT," noting that the New York-based commercial lender's 4¾% notes due 2010 were trading at 70 bid, 72 offered, well down from prior levels around 83. Some CIT issues had slid more than 10 points in Wednesday's dealings.

"Anybody with any leverage, [investors] are just taking them out and shooting them in the head," the trader said. "Any kind of leverage - except for these primary dealers, who can go to the Fed window [to borrow capital to sustain their liquidity]. So they're just taking over all of these positions from these people who are in a weak position. They'll probably hold it and sell it off at a later date."

With no such access to the Federal Reserve's borrowing window, CIT Group was forced to completely draw down its $7.3 billion emergency credit line after ratings downgrades earlier in the week left it unable to finance its operations with commercial paper. CIT also said Thursday that it may also have to sell assets - billions of dollars of loans and perhaps some of its businesses - and is currently seeking a strategic funding partner.

Its numerous issues of bonds seemed to dominate the lists of the most active movers, with all of them listing badly to the downside.

A trader noted that at his desk it seemed the day's action "was all CIT," as its nominally high-grade bonds moved "from investment grade yields down to around 18% to 24%." He quoted the 4¾% notes at 67 bid, 69 offered - and frankly allowed that "we weren't following it" up until now at his shop.

Its 5.60% notes due 2011 fell to 66 bid, well down from prior levels in recent weeks at least 20 points higher.

Another trader saw the company's 3 7/8% notes coming due on Nov. 3 at 75 in odd-lot trading and at 79 in round-lot trading - a yield of 47%, "not bad for a A3/A- bond - which they won't continue to be, I'm sure they will be downgraded again" following this week's downgrades by the major ratings agencies.

Another junk bond trader said that CIT hasn't been trading at his shop - yet - "but we will be involved in CIT."

But the fall in CIT paper was by no means universal. A market source said that the company's 4¾% notes due 2010 were up more than a point at about the 71 level, while its 4.65% notes due 2010 - seen having plunged as much as 18 points Wednesday down to around the 71 level - regained a little of that on Thursday, finishing at 72.5 in busy dealings.

CIT's NYSE-traded shares plunged $2.01, or 17.27%, in Thursday's dealings to end at $9.63. Volume of 77 million shares was nearly 13 times the average daily handle.

Abitibi upside intensifies

While Thornburg and CIT were mostly hurtling lower in active dealings, a trader saw AbitibiBowater's short-maturity bonds push strongly higher for a second straight session following the company's announcement of improved terms for its exchange offer for nearly half a billion dollars of 2008 and 2009 paper.

He put the 6.95% notes due April 1 at 85 bid, 88 offered, well up from 73 bid, 76 offered on Wednesday, while its 5¼% notes due June 20 moved up to 81 bid, 84 offered from around 72 bid, 75 offered. However, he saw longer debt, such as the 8.85% notes due 2033 unchanged from prior levels at 37 bid, 39 offered.

Another market source saw the 6.95s climb to 86.5 bid, although the 8.85s hung in at the same 38 range. The company's 7 7/8% notes due 2009 firmed about a point or so to the 65 level.

The prospect that Abitibi will successfully refinance that $494 million of bonds only partly in cash, now that it has sweetened the offer it made to those bondholders, the majority of whom have indicated their cooperation, was also seen as good news by company shareholders, who took its NYSE-traded stock up $2.56, or 35.51%, to end at $9.77.

Abitibi, Fairport deals anticipated

The bond exchange is part of the company's recently announced $1.5 billion recapitalization, which will include a $415 million issue of senior secured notes due 2011, which launched on Wednesday and which is expected to price during the upcoming week.

Goldman Sachs is acting as the bookrunner for the non-callable Rule 144A/Regulation S offering, which will be sold with registration rights.

Apart from anticipation of the Abitibi deal and a $540 million offering of 10-year senior unsecured notes from Fairport Communications Inc., the primary remains subdued, with no new developments heard during Thursday's truncated session.

The Fairport deal - which is being brought to market via Banc of America Securities, Lehman Brothers and Morgan Stanley - is seen pricing early in the coming week. The Rule 144A deal, non-callable for the first five years after issue, is expected to price to yield around 11½%.

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