Thornburg continues slide; Radian off on delayed filing; bad dreams for Sealy; FairPort deal launching

By Paul Deckelman and Paul A. Harris

New York, Mar. 4 - It was another prickly session for Thornburg Mortgage Inc.'s debt and equity investors Tuesday, as the troubled mortgage company's securities retreated again in line with a ratings downgrade from Moody's Investors Service and cautionary soundings from Fitch Ratings.

Other mortgage-exposed names going along for the downside ride including Countrywide Financial Corp. and E*Trade Financial Corp. - the latter seen hurt by negative commentary on its selection of its chairman, Donald Layton, as its new chief executive officer. Mortgage insurer Radian Group Inc. - whose bonds trade like distressed junk despite their nominal investment-grade ratings - lost ground, along with the Philadelphia-based company's shares, on investor reaction to its having to delay its scheduled 10-K filing with the Securities and Exchange Commission.

Apart from the financial sphere, Sealy Corp.'s bondholders were anticipating a sleepless night after the Trinity, N.C.-based mattress manufacturer said that it expects lower first-quarter sales on continued weakness in its domestic business.

In the primary market, high yield syndicate sources were hearing that FairPoint Communications Inc. - which is merging with Northern New England Spinco Inc., a subsidiary of telecom giant Verizon Communications Inc. - is likely to launch a $540 million issue of 10-year notes late in the week.

Market measures seen mixed

A market source saw the widely-followed CDX index of junk market performance up a bit around the 87 7/8 mark. However, the KDP High Yield Daily Index lost 0.14 to end at 73.55, while its yield widened by 4 basis points to 9.74%. In the broader market, declining issues led advancers by a five-to-three margin. Overall activity, reflected in dollar volumes, jumped by about 41% from Monday's levels.

A trader said that there seemed to be "a lot of activity," with two-way flow. He said "it was one of those days where our accounts were saying that it was quiet but we didn't see that."

However, he characterized market activity as "choppy out there - sloppy and dislocated."

Continued trouble for Thornburg

Thornburg Mortgage's 8% notes due 2013 were seen down for a second straight session, sliding another 7 points to around 66.5 bid on heavy trading, some of it in large-sized blocks, a market source said.

At another desk, a trader saw the bonds at 66 bid, 68 offered but called that down only 4 points on the day. Another market source called the bonds down 4½ points at the 67 level.

"It bounced a little later in the day," a trader said, "but it's definitely not a pretty picture."

Those bonds had gone on a roller-coaster ride on Monday in response to the news that the company was facing more margin calls on its reverse repurchase mortgage agreements, first falling some 15 or 16 points into the mid-60s from prior levels in the 79-80 neighborhood, and then bouncing off those lows later in the day to finish in a 72-74 bid context after Thornburg said that it had sold nearly $1 billion of mortgage-backed securities to shore up its liquidity position.

Thornburg's New York Stock Exchange-traded shares - which on Monday had swooned as much as 60% early in the day before also coming off their day's lows, while still ending down more than 50% - were again lower Tuesday, although the plunge was nowhere nearly as dramatic as Monday's; they finished down 76 cents, or 17.59%, at $3.56. Volume of 24 million shares was about four times the norm.

Whatever boost Thornburg had gotten from its announcement late Monday of new funding proved to be short-lived and apparently failed to impress investors, as both the bonds and shares resumed their respective slides.

Moody's Investors Service said Tuesday that it had downgraded the company's senior unsecured debt to Caa2 from B2 and had also cut its preferred stock to Ca from Caa1, keeping the ratings under scrutiny for possible additional downgrades.

Moody's actions "reflect further substantial deterioration in Thornburg's liquidity position due to increase in funding and valuation volatility for the REIT's portfolio of non-conforming single family assets," analyst Philip Kibel said in his downgrade message. He noted that between Valentine's Day and last Wednesday, Thornburg had received and met over $300 million in margin calls on its reverse repurchase agreements, "which erased Thornburg's liquidity cushion" - only to then get $270 million in additional margin calls, which it has been mostly unable to meet. Kibel noted that the Santa Fe, N.M.-based mortgage originator "is currently in default with one reverse repurchase agreement counterparty. "

The analyst said that Thornburg's ability to sell an adequate amount of assets or raise additional funds in the current market is "highly uncertain," although he acknowledged that Thornburg "continues to maintain strong asset quality." As of Dec. 31, 60-plus-day delinquent loans and other obligations made up just 0.44% of its $24.7 billion of securitized and unsecuritized loans. But he noted what he called the "heightened" potential that the REIT could default on its senior unsecured bonds.

Fitch Ratings also weighed in on Thornburg's troubles, affirming its issuer default rating at CCC, its senior unsecured notes, such as the 8s, at CCC- and its subordinated notes at CC. While noting Thornburg's having been able to raise $230 million in January by selling common and convertible preferred stock, and also acknowledging the $992 million collateralized mortgage debt transaction announced Monday, Fitch said it "remains concerned that Thornburg's short-term funding profile continues to expose the company to margin calls. These margin calls have substantially reduced the company's available liquidity and may require Thornburg to sell assets, likely at values below original cost."

Other financials feel the pinch

Other mortgage-related names continued to decline along with the Thornburg bonds. Countrywide Financial's 6¼% notes due 2016 were being quoted down 5 points at 79, while Residential Capital LLC's 8 7/8% notes due 2015 were seen down 1½ points at 51 bid.

A trader saw E*Trade Financial's 8% notes due 2011 off 2 points at 84.5 bid, 86.5 offered, while its 7 3/8% notes due 2013 were likewise down by a deuce at 75, "on a bad report by Merrill Lynch about their CEO," he said. The New York-based online brokerage and mortgage company's Nasdaq-traded shares were off 35 cents, or 8.06%, to finish at $4.99 on volume of 60 million shares - about 1½ times the usual turnover.

E*Trade on Monday appointed its current chairman, Donald Layton as CEO. The selection of the former J.P. Morgan executive did not go over well with everyone on Wall Street - Merrill Lynch issued a research note which was decidedly unenthusiastic, suggesting the company should have gone outside to get its new CEO. Layton also raised some eyebrows in a TV interview as he downplayed the likelihood of putting the company up for sale.

Also among the financials, a trader said that mortgage insurer Radian Group was "the name in the news" following its announcement Monday that it would delay filing its 10K because of difficulty assessing what its exposure to collateralized debt obligations is. He saw its 7 ¾% notes due 2011 off 3 points at 75 bid, 77 offered. Radian's NYSE-traded shares fell 74 cents, or 10.87%, to end at $6.07, on volume of 3.8 million shares, about 1 ½ times the usual activity level.

Another nominally investment-grade financial name seen taking it on the chin, another trader said, was New York-based iStar Financial Inc., even though the company's real estate lending is in the commercial sphere - though this includes multi-family dwellings - rather than single-family residential that is at the center of the current credit crunch.

He said that while he wouldn't call what the company was facing a meltdown, as is the case potentially with some of the residential lenders, still, "it's not that far off in terms of the [credit-default swap spreads] seem to be widening out 100 bps each day."

He saw the company's Baa2/BBB/BBB 4 7/8% notes due 2009 being offered at 92 "going out the door - but I was trading them up around 95-96 only about a week-and-a-half ago, or two weeks."

He said that the bonds were driven down by bad numbers which iStar recently released. It said last Thursday that net loss allocable to common shareholders for the fourth quarter was $78.7 million, or 62 cents per share, compared with earnings of $79.2 million, or 65 cents per share, a year ago. The company fell into the red mostly because of charges related to the impairment of two credits and a significantly higher provision for loan losses. Excluding the special items, the company earned 74 cents a share - well below the approximately $1.05 that Wall Street had been looking for.

Fallen angels move into junk land

"We con tinue to see buyers at lower levels," the second trader said. "Things seem to be a little dislocated. We're starting to see more and more fallen angels."

For example, he said, credits like Owens Corning "recently downgraded, are starting to drift into our market. We're seeing paper move from investment-grade hands into high-yield hands."

Moody's last week downgraded the Toledo, Ohio-based insulation maker's 6½% notes due 2016 and 7% notes due 2016 - issued with investment-grade ratings last year as part of the financing when the company emerged from a long bankruptcy restructuring - to Ba1, while Standard &Poor's revised its outlook downward.

Elaborating in this vein, the trader opined that "it's starting to look like "2000 and 2001 again - we're starting to see Sprint and Nextel coming back to our world. We're not trading them yet - but more and more accounts are starting to take a look at it."

Overland Park, Kan.-based Sprint Nextel Corp.'s bonds have been badly battered since the Number 3 U.S. Wireless carrier said last week that it had lost nearly $30 billion in the most recent quarter and had been forced to draw a sizable chunk of its revolving credit facility availability. Fitch Ratings downgraded it to junk status, while S&P put it under review for a possible similar downgrade and Moody's lowered its outlook on the company to negative. Both junk and high-grade traders are quoting it in dollar-price terms rather than on a spread-versus Treasuries basis.

The trader noted that in 2000 and 2001, when "the internet [dot-com] bubble burst, things got really choppy and sloppy. Sprint came our way then, and its coming back our way again [now]." He saw the Sprint bonds "softer by about ½ point on the day."

Sprint Capital Corp.'s 6.90% notes due 2019 were seen at 78.25 bid, while Sprint Nextel's 6% notes due 2016 settled in around 74.

Builders relatively quiet

A trader said that despite the well publicized retreat in names like Thornburg, and other mortgage names and REITs like iStar and Countrywide, "you would think that would weigh on the builders - but I'm not really seeing that much activity in them. If we went to go do something with the builders, would it be there, or would it be points lower? But I'm not seeing the activity that I would expect."

Another trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 up a point at 77 bid, 78 offered. He saw Hovnanian Enterprises Inc.'s bonds like its 6 3/8% notes due 2014 down a point at 67 bid, 68 offered, while Standard Pacific Corp.'s 7% notes due 2015 were unchanged around 70 bid, 72 offered.

Sealy slips lower

A trader saw Sealy's 8¼% notes due 2011 down 3½ points at 86.5 bid, 88.5 offered, and blamed the downturn on the mattress manufacturer's bad quarterly projections. Another market source saw them 4½ points down at 87.5.

Sealy said in an SEC filing that it expects no more than a mid-to-high-single-digit decrease in first-quarter sales as continued weakness in its domestic business is expected to offset strong international sales.

Sealy said that while December and January sales were pretty much in line with expectations, February was another story, with sales falling well below forecasts.

Sealy also said that its material costs continued to be pressured by rising commodity prices.

FairPoint to launch this week

In the primary, Northern New England Spinco, Inc. (FairPoint Communications Inc.) expects to launch a $540 million offering of 10-year senior unsecured notes (B3/B+) late this week, according to a company source.

Banc of America Securities, Lehman Brothers and Morgan Stanley are the underwriters.

The financing also includes a $2.03 billion senior secured credit facility (Ba3/BB+). The retail bank meeting is set for Thursday.

Lehman Brothers, Morgan Stanley, Bank of America, Deutsche Bank, Wachovia, Merrill Lynch and CoBank are leading the bank deal.

Proceeds will be used to help fund FairPoint's merger with Spinco, Verizon Communications Inc.'s wireline operations in Maine, New Hampshire and Vermont.

Whittling the bank risk

A leveraged markets sell-sider told Prospect News that there has lately been movement in the loan portion of the LBO risk overhang, with dealers moving that risk off their balance sheets into the hands of investors.

The bond portion of the risk has not been moving as much, the sell-sider added, noting that bond sales have been hampered because a lot of companies are now in the blackout periods for their fourth quarter 2007 audits.

The source reckons that the total risk overhang is now less than $200 billion, having started at "$300 billion and change."

On Tuesday the sell-sider reckoned that the bond portion of the risk is $65 billion to $70 billion, and the bank loan portion somewhat less than double that amount.

Blocks of bank loan risk, in the range of $300 million to $500 million have moved, the source added, and mentioned that some of the risk is related to ServiceMaster Co., U.S. Foodservice Inc., Harrah's Entertainment Inc. and others.

"The two big ones that haven't funded yet are BCE and Clear Channel," the source said, adding that Basell/Lyondell hasn't been marketed yet.

"Most of the other names are moving."

When asked what types of investors are participating in the risk, the sell-sider replied that hedge funds are involved.

"They can play in a lot of different markets: the municipals market, the mortgage market, the auction rate market, etc.," the sell-sider remarked.

Also involved are private equity firms and traditional high yield investors.

The latter are starting to put money to work, the source added.

"We're seeing the first wave of capital come in and view a lot of these loans, whether it is the recent ones that have been done with Libor floors so that there is a quasi-fixed rate aspect, and/or the ones that came at deep dollar discounts which investors believe afford them protection."

The waiting game

Elsewhere another high yield syndicate source from a different institution, who spoke late Tuesday morning with the equity markets deeply in negative territory, said that the primary market remains quiet.

What will bring it to life, the source added, is stability - in junk and in equities especially.

Those markets don't necessarily need to retrace recent losses, the official said. However the volatility must cease in order for the high yield new issue market to meaningfully regenerate.

Should that happen - should stability return for a couple of weeks - deals will come, the source said.

Asked what sort of deals, the syndicate official mentioned the postponed $235 million tranche of Axcan Intermediate Holdings Inc.'s eight-year senior unsecured notes (B3/B-), part of a restructured LBO financing.

That deal was pulled in mid-February at the same time Axcan priced a $228 million issue of 9½% seven-year senior secured notes (Ba2/BB-) at 98.737 to yield 9½%.

Axcan also eliminated a proposed $385 million institutional term loan B, replacing it with the senior secured notes and a $165 million term loan A.

The syndicate official who spoke on Tuesday recounted that the Axcan LBO came together in the post-correction period in the leverage markets.

"It could come back if things improve," the source said.

"Everybody is going to be fighting for yield.

"If credit quality is a concern Axcan will be fine.

"If credit quality is not a concern, and people are just looking for what has the greatest yield, there will be a lot of junk out there competing against it."

However, the official added, investors have already familiarized themselves with the credit aspect since a portion of the capital structure has already been completed.

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