Thornburg Mortgage bounces back solidly; GMAC off on ResCap; primary quiet

By Paul Deckelman and Paul A. Harris

New York, Aug. 15 - After three days of getting the daylights pounded out of them, Thornburg Mortgage Inc. - whose bonds were trading not far from par a week ago, nearly twice the levels at which they were seen on Tuesday - moved solidly back upward Wednesday, making them again the big story in a generally restrained, wary market.

But the continued problems of any companies tied up with mortgage lending - justified or not - remained the focus of attention during the session.

GMAC LLC's bonds were seen lower, amid investor worries about GMAC unit Residential Capital Corp.'s exposure to the problem-plagued subprime sector.

And junk investors were watching the decline in the bonds of nominally investment-grade Countrywide Financial Corp. - and hearing bankruptcy rumors swirl about the nation's largest mortgage lender, a likely future fallen angel.

A hedge fund manager, specifying that on Wednesday in the stock market the S&P 500 index moved into negative territory for 2007, said that the high yield tracking CDX index was up ¼ of a point in the morning, but ended down 3/8 of a point on the day, and closed at 93 5/8 bid, 93 7/8 offered.

The source added that "some of the junkier names were down one point."

Primary market activity meantime was virtually non-existent.

Thornburg turns around, big-time

Thornburg Mortgage continued to hold center stage on Wednesday - just as it had the previous two days, when the Santa Fe, N.M.-based mortgage lenders bonds were being absolutely decimated on investor angst over its perceived difficulties in accessing the capital markets.

But on Wednesday, a trader saw those 8% notes due 2013 - which had fallen some 20 points into the lower 50s, on Tuesday - regaining that lost territory, quoting them going home at 70 bid, 72 offered - up from a close Tuesday at 56 bid, 58 offered, and well up from their early lows of the day at 51 bid, 53 offered.

"TMA was the big mover on the day," agreed another trader, who saw a rise to 70 bid from prior levels at 58 bid, 60 offered, while another quoted the bonds at day's end at 68 bid, 71 offered, which he called a 15 point advance.

"The bonds were all over the place" during Wednesday's session. "They were down by as much as 45 points on the week this morning," when the bonds cratered around 52-53, "but then they turned it back around."

A market source saw the bonds swinging wildly in a 20 point range between 53 on the low end and 73 on the high, finally going out better than a 20 point winner at just above 73. Activity in the bonds was seen as very heavy.

Thornburg's New York Stock Exchange-traded shares - which plunged more than 40% on Tuesday on 15 times the average daily turnover- were seen headed back upward on Wednesday, rising $2.95 (38.76%) to close at $10.56. Volume of 32 million shares was about 16 times the norm.

Thornburg rebounded after the company's president said in an interview on CNBC that he expects that the lender - whose bonds and shares nosedived over several sessions on signs it was having liquidity problems caused by the collapse of the market for mortgage securities, even though the company is not a subprime lender - would see some stability by next week.

"I'm hopeful that by the end of this week we will be sort of completely out of this situation," company president and chief operating officer Larry Goldstone said during the Wednesday-morning interview. "Hopefully by next week, it's going to be pretty much back to business as usual for us."

On Tuesday, Goldstone had told the business-news channel that Thornburg had absolutely no intention of seeking Chapter 11 protection, was not for sale and is taking steps to steady its situation.

Market indexes move lower

Despite the big bounceback in Thornburg - as much as 20 points, by some estimates, in heavy trading - overall activity in the junk market was to the downside.

A trader saw the widely followed CDX index of junk performance off 3/8 point at 93 5/8-94. The Banc of America Securities High Yield Broad Market Index lost 0.20%, its return for the full year cut to 0.27%. The KDP High Yield Daily Index closed at an even 78.00, down 0.20 on the day, its yield 5 basis points wider on the day at 8.42%. The index is well down from its 52-week high of 82.63

Overall, a trader said, market players were pretty much keeping their heads down, wary and skeptical in the wake of the continuing blowups coming out of the mortgage industry.

"Nobody is going to be a hero" in this environment by going out on a limb, he said.

GMAC lower on ResCap concerns

GMAC's bonds were lower as investors worried that the big automotive and residential lender might be the next victim of the current mortgage market shakeout due to the activities of its Residential Capital LLC unit.

GMAC's 8% notes due 2031 were among the most actively traded bonds of the session, falling more than 2 points to finish around 89.625, a market source said.

The company's 7% notes due 2012 were also on the downside by almost 2 points, closing at 90, while its 6 7/8% notes due 2011 lost 1½ points in brisk trading, closing around the 89 level.

Another market source saw the 8s at 89 bid, down 3½ points on the day.

ResCap's own 6 3/8% bonds due 2010 fell more than 6 points to 80, and the cost of credit default swaps contracts on those bonds has also widened out by more than 100 bps to around 520 bps - a sign some in the market feel the unit could default.

Countrywide bonds head south

And junk players noted the decline in the bonds of Countrywide Financial - nominally investment grade at Baa2/A-/A-, but now trading like a distressed high yield credit.

Its 6¼% notes due 2014 were being quoted at 76, well down from Tuesday's levels above 88.

Meanwhile, the cost of hedging against a default via CDS contracts was seen having widened out by at least 70 bps to 470 bps.

Merrill Lynch put out a research note in which it warned that the company could be forced into bankruptcy, noting that its loss of access to short-term funding could produce "an effective insolvency" in the biggest U.S. lender.

Analyst Kenneth Bruce also likened market feelings about Countrywide and other troubled mortgage lenders to the way sentiment stood "in the fall of 1998" - around the time of the Russian credit meltdown and the collapse of Long Term Capital Management.

Charter active on Allen buzz

Elsewhere, a trader said Charter Communications' 11% notes due 2015 ended at 97 bid, 98 offered, which he called unchanged on the day, though at some point, the bonds had been up by as much as 2 points from Tuesday's levels; he cited the news that the company's controlling shareholder, billionaire Paul Allen, is mulling over possible alternatives for the St. Louis-based cable operator, including taking the company private - or possibly selling it.

Allen's alternatives were revealed in a filing with the Securities and Exchange Commission. However similar language has appeared in some previous filings.

All quiet in the primary

The primary market produced no news on Wednesday.

A consensus is emerging which holds that right now in the new issue market the focus in on one deal: Sabic Innovative Plastics Holding BV's downsized $1.5 billion offering of eight-year senior unsecured notes (B1/B+).

On Tuesday the market heard that the notes are expected to price with a 10¼% yield, and are likely to be priced at a discount. Hence the issue price and coupon remain to be determined.

Pricing is expected on Monday.

An informed source told Prospect News on Tuesday that Middle Eastern institutions are in the deal, along with some European accounts.

According to this source American high yield accounts, with a few exceptions, are not expected to be involved.

On Wednesday sources roundabout the market expressed confidence that the Sabic deal will get done.

In fact, it is fair to say that much if not all of the sell-side is pulling for a tight execution.

September scenarios

Sell-side sources laid out different expectations for the post-Labor Day primary market during Wednesday conversations with Prospect News.

One high yield syndicate official said that September is expected to be a pretty big month.

"There is plenty of dry powder out there," the official asserted, but added that investors cannot be expected to step to the plate in the new issue bourse until they can be confident the new bonds they buy won't immediately sell off 2 or 3 points.

Another official, from the high yield syndicate desk of a different institution, contended that September is unlikely to get off to any kind of fast start.

"If the market starts to regain its health there may be some smaller deals," the official said, and added that the primary could see September issuance of "a few hundred million here and there."

The bigger deals won't get done without the loans getting done, for a relative value comparison, said this source, who focuses on both the high yield and leveraged loan markets.

This source added that there won't be a leveraged loan market until CLOs regenerate, which is going to take a while.

Meanwhile the big financings will be funded either via big bank commitments or big bridge commitments.

Risk participation

Again on Wednesday, Prospect News heard from sources on both the buy-side and the sell-side that there are some hedge funds looking to opportunistically participate in the risk left on underwriters' balance sheets in the wake of postponed high yield and leveraged loan deals.

"Hedge funds are all over the place in the high yield and the first lien market," one sell-sider said, asserting that some of the investors who are getting in now stand to make the biggest money.

Another sell-side source said that there is a lot of money to be put to work, and investors are looking for risk that underwriters have to sell.

"It will come together," this source asserted, but added that these transactions won't happen on high yield or bank loan trading desks.

Institutions are out there attempting to put significant amounts of money to work in bank commitments and bridge commitments, the sell-sider said.

However, there is not an active secondary market.

"It's risk participation, so there won't be a lot of visibility on it," the source added.

Another source from the sell-side concurred.

"There won't be a lot of fanfare. Basically this stuff is just going to disappear."

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