Thornburg flies on $500 million preferred sale; Jo-Ann Stores off on bad numbers; small fund inflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - Thornburg Mortgage Inc.'s bonds jumped in busy trading Thursday on the news that the embattled Santa Fe, N.M.-based residential mortgage lender is getting a big capital infusion from a convertible preferred stock sale, and company optimism about the role it expects to play in a more profitable mortgage market going forward.

However, the company's good news did not translate into any sector strength that would benefit the bonds of such other mortgage-related names as Residential Capital Corp. and ResCap's corporate parent, GMAC LLC. Bonds of the latter's competitor, Ford Motor Credit Co., were also seen lower.

Jo-Ann Stores Inc.'s bonds were seen down about 2 points on the session after the Hudson, Ohio-based crafts retailer reported a wider-than-expected second-quarter loss. But supermarket operator SuperValu Inc.'s bonds were on the upside.

At mid-afternoon a high yield syndicate official said that activity in the high yield secondary market had been extremely quiet.

However the source said that the broad market was as much as ¼ point lower on the day.

Meanwhile there was no news in the primary market on Thursday.

Slight inflow

Late Thursday a market source told Prospect News that AMG Data Services has reported a slight inflow to the high yield mutual funds for the week to Aug. 29. However this source did not provide a dollar amount.

That slight inflow snaps a streak of 11 consecutive outflows which totaled more than $3.8 billion. Earlier in the day a high yield portfolio manager said that the mutual funds and insurance funds are not seeing huge redemptions, and added that cash in those funds is pretty stable.

The source added that presently the mutual funds are sitting on at least 10% cash, and added that even a $500 million weekly outflow "may not be a big deal."

Primary market

At Thursday's close only one deal was believed to be in the market.

The Downstream Development Authority of the Quapaw tribe of Oklahoma is hoping to price its $235 million offering of eight-year senior notes (B-) via Banc of America Securities in September.

Looking beyond that single project-financing deal, high yield market watchers are tuning into the leveraged loan market where First Data Corp. is expected to attempt to syndicate all or part of its $14 billion term loan soon after the Labor Day break.

A portfolio manager from a high yield mutual fund told Prospect News on Thursday that the whisper going around on the loan factors in a substantial original issue discount (perhaps five points or more) ending up with an interest rate of approximately 11½%.

This investor said that high yield observers will be keen to know if in fact the first-lien debt comes with such a high coupon.

"It could have a big impact on the junk market," the source asserted.

Pressed to say where a trailing issue of unsecured junk bonds might price relative to the loan the investor said that the high yield tracking CDX index is presently trading about 160 basis points behind the leveraged loan tracking LCDX.

So, the buy-sider continued, you might assume that for an average credit the high yield bonds would come approximately 160 basis points behind the bank loan.

However in a situation where the bank loan is six times leveraged, and the bonds are 10 times leveraged - a hypothetical set of numbers, but one that approximates the First Data deal, according to the source - you might expect the bonds to price closer to 300 basis points behind the loan.

This high yield investor also has heard that Alltel Communications Inc. could come with its $15.5 billion credit facility during the post-Labor Day week.

As to junk bonds, however, neither the buy-sider nor the other market sources who spoke to Prospect News on Thursday and earlier in the week professed to have visibility on any deal.

As far as the LBO financings go, sources advise Prospect News that the loan syndications must meet with at least a modicum of success before the bonds can be brought to the new issue market with any degree of confidence.

However a building consensus of sell-side sources looks for activity to pick up in the high yield primary market when trading resumes after Labor Day on Tuesday.

Underwriters will attempt to bring deals, said one high yield syndicate official on Thursday.

"There are probably a lot of corporates in the woodwork that are going to try to come," the official added.

Capital infusion lifts Thornburg

Thornburg Mortgage's 8.30% notes due 2013 - which were trading around par at the beginning of August, then got pounded down to the mid-50s by mid-month on investor panic over the mortgage industry's troubles, but which since then had clawed their way back to the lower 80s - were seen having pushed as high as above 90 in early dealings Thursday, before coming off that peak level to steady for a while around 86.5, up 4 points from Wednesday's close at 82.5.

However by the afternoon, the bonds had resumed their rise, moving to the 91 area, but again could not hold onto that peak, finally declining to around 87 - still up almost 5 points on the day.

A trader at another desk quoted the bonds at 87 bid, 88 offered, up 6 points on the day, while another saw them at 87.75 bid, 88.75 offered, which he called up 4 points on the day. Trading was described as fairly active for an otherwise slow pre-holiday session.

Thornburg's New York Stock Exchange traded shares zoomed $2.44, or 23%, to $13.09, on the announcement, before falling back from that peak to end at $11.81, up 65 cents, or 5.82%. Volume of 10 million shares was not quite three times the norm.

Thornburg - whose shares and bonds felt the fallout from the subprime mortgage debacle as banks cut funding to mortgage lenders, even though the company is by no means a subprime operator - said that it had sold $500 million of series F cumulative convertible redeemable preferred stock for net proceeds to the company after expenses of $473 million. It granted underwriters led by bookrunner Friedman, Billings, Ramsey an option to buy an additional $75 million at the same price.

Thornburg said in a news release that with the new capital infusion from this offering, combined with the actions the company took earlier in the month to enhance its liquidity position, including the sale of $20.5 billion of primarily AAA-rated mortgage-backed securities and a significant reduction in its borrowings, it believes that it is now positioned to capitalize on what it expects will be "a more profitable mortgage market." It also reaffirmed its intention to pay its second quarter dividend on Sept. 17.

Thornburg further announced that it had resumed funding existing loans in its pipeline this week, and said that it is negotiating the financing of approximately $1.4 billion of prime hybrid adjustable-rate mortgage loans in a securitization transaction. If the transaction is consummated, the company expects to use the proceeds of the financing to reduce its borrowings under the ARM loan warehouse financing lines by approximately $1.4 billion and allow the company to begin to increase its loan fundings.

When Thornburg announced the sale of the $20.5 billion of MBS assets on Aug. 20, it estimated that it would take a capital loss on the deal of $930 million, but has now since revised that down to $863 million - and says that there might be additional recoveries as well, further decreasing that loss.

The company statement said that the convertible preferred offering, by augmenting Thornburg's liquidity position, will allow the company to "begin to return to its more normal operations of originating mortgage loans and acquiring high quality mortgage-backed securities for its portfolio."

Other mortgage and lender names mixed

While the almost $500 million capital infusion was seen by investors as great news for Thornburg, traders said that the deal didn't have much in the way of coat-tails that might lend some support to some of the other mortgage and credit names in the market which have been similarly getting pushed lower over the last few weeks, whether they had significant subprime exposure or not.

A trader said he had seen no sign on either ResCap or its corporate parent, GMAC.

However, at another desk, ResCap's 7½% notes due 2013 were seen down ¼ point at 73.5 bid, while its owner, GMAC, saw its 7¼% notes due 2011 quoted down as much as 2¼ points at 91 bid in busy dealings. And yet another source quoted the GMAC 6 7/8% notes due 2012 off ¾ point at 87.

However, another market source told a different story, seeing ResCap's 6.88% notes due 2015 up 1¼ points, just below 74 bid, while GMAC's 7¾% notes due 2010 were seen finishing at 93.5 bid, up nearly ½ point.

Ford Motor Credit's 7¼% notes due 2011 were pegged down nearly 5 points at 90.5 bid, in active dealings.

A trader said he saw the latter's corporate parent, Ford Motor Co., and Ford's arch-rival, General Motors Corp. - 49% owner of GMAC - both off slightly, with GM's 8 3/8% notes due 2033 off ¼ point at 79.75, while Ford's 7.45% notes were also ¼ point easier at 74.

Jo-Ann off on loss

A trader saw Jo-Ann Stores' 7½% notes due 2012 down about 2 points on the session, offered at about 90.5, with no bids seen, versus levels about 90 bid seen on Wednesday.

Jo-Ann's NYSE-traded shares meantime fell $3.06, or 12.37%, to $21.67. Volume of 1.2 million shares was about triple the usual activity level.

The bonds and shares declined after the company reported late Wednesday that its second-quarter net loss narrowed to $18.4 million (76 cents a share), from $21.2 million (90 cents a share) last year - an improvement, but still a larger loss than the 66 cents that analysts on average had expected. Revenue rose 7% to $388.5 million from $363.2 million - better than the $377 million of sales Wall Street had been looking for, while same-store sales rose 7%. The bonds and shares declined even though Jo-Ann also upped its fiscal 2008 earnings forecast to a range of 60 cents to 70 cents a share.

The trader said that while the disappointing numbers did Jo-Ann's bonds in, things were "so deadly quiet" ahead of the upcoming holiday weekend (which will see an abbreviated session Friday) that there was "no trading at all" in retailers Payless Shoe Source Inc. and Burlington Coat Factory, even though both had numbers. He saw the former's bonds steady at 94.25 bid, 95.25 offered, and the latter unchanged at 90 bid, 91 offered.

SuperValu higher

One retailing name other than Jo-Ann which was seen moving about was SuperValu, parent of supermarket giant Albertsons. There was news out that unionized grocery workers in Seattle had ratified a new contract with Albertsons and several other large chains.

SuperValu's 7 7/8% notes due 2009 were quoted by a market source up as much as 3.5 points to 103.75. Another source saw its 7½% notes due 2012 down a point at 103.

Overall, traders remarked on the extreme slowness of the day, and the likelihood that Friday's half-session would be slower still. One saw the widely followed CDX index of junk bond performance off ¼ point at 94 5/8-95 1/8. Among other stock indexes, the Banc of America Securities High Yield Broad Market Index was up 0.02% on the day, with a year-to-date return of 0.65%. The KDP High Yield Daily Index was off 0.01 at 78.30, its yield edging up 1 basis point on the day to 8.34%.

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