Residential Capital bonds gain, GMAC active; Tribune up but publishers down

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - Residential Capital Corp. bonds were seen better on the day Tuesday - even as activity in the credit-default swaps market indicated that many participants think the chances of the residential lender defaulting have increased lately in the wake of the subprime mortgage lending industry meltdown.

Bonds of ResCap's owner, GMAC LLC - the former General Motors Acceptance Corp. - were mixed, and were among the session's most actively traded issues.

Thornburg Mortgage Inc.'s bonds were seen unchanged to slightly lower, after having jumped several points Monday on the news the embattled jumbo mortgage lender would sell off some $20 billion of portfolio assets and reduce borrowings to cut its risks and restore market confidence.

Elsewhere, publishing names were lower - even as Tribune Co. shareholders okayed the $8.2 billion acquisition of the Chicago-based media giant by billionaire Sam Zell. Tribune's own bonds were up on the deal, but among the names seen on the downside were Times-Mirror Corp., American Media Operations Inc. and Vertis Inc.

The primary sector was quiet.

Sources from both the buy-side and the sell-side marked the broad market unchanged on Tuesday.

A trader said that there had been very little activity in either the high yield market or the leveraged loan market.

The trader, who focuses on both junk bonds and syndicated loans, said that the market had been tuned into a meeting that took place on Tuesday between Senate Banking Committee chairman and presidential hopeful Christopher Dodd, a Democrat from Connecticut, Federal Reserve chairman Ben Bernanke and Treasury secretary Henry Paulson, regarding the current volatility in the capital markets.

"They didn't say much," the trader commented.

"But it didn't feel like they took anything off of the table, as far as options go."

What the market is looking for, the trader added, is some indication that the Federal Reserve's Federal Open Market Committee will reduce the Fed Funds rate, which has been parked at 5¼% for more than a year, when it meets in September.

"They lowered the rate at which you can borrow at the discount window," the trader said, "but the Fed Funds rate is going to be more interesting."

The source added that a cut in the Fed Funds rate would likely afford leveraged investors some breathing room.

Looking at the market overall, a trader said the widely followed CDX index of junk performance was unchanged at 95-95 3/8. The Bank of America Securities High Yield Broad Market Index up 0.18% and got back in the black on a year-to-date basis at 0.03%. The KDP High Yield Daily Index was up 0.19 to 77.90, while its yield declined 6 basis points to 8.50%.

ResCap up, GMAC mixed

The trader said that the overall market, in his view, was "unchanged, unchanged, unchanged."

The only thing he saw really going on was activity in Residential Capital Corp.'s 6 1/8% notes due 2008, which he saw up a point to 77 bid, suggesting the possibility the mortgage industry "might get help from the government."

Its 6 3/8% notes due 2010 were up 3 points to 73.

Another trader saw ResCap's 6 1/8s up 4 points at 76 bid, 78 offered.

But even as ResCap's bonds were seen doing better, the costs of buying protection in the CDS market moved up to 500 basis points, with an upfront payment of 19% - implying a 40% chance of default, according to a JPMorgan Chase & Co. pricing model.

ResCap's bonds have fallen, prior to Tuesday, and its CDS prices risen, in the wake of the credit industry crunch arising from the subprime mortgage industry meltdown.

The gyrations of ResCap have had a ripple effect on the bonds of parent GMAC, the big automotive and residential lender.

But even with ResCap up on Tuesday, GMAC's bonds - among the most heavily traded in the market - were mixed. Its 4 3/8% notes due 2007 were up 5/8, to just above the 99 mark. However, its widely traded 8% notes due 2031 were seen down ½ point at 88 bid, while its 7¼% notes due 2011, also at 88, were off about a point on the day.

Thornburg bonds off

Out of that same troubled mortgage-lending sector, Thornburg Mortgage's 8% notes due 2013 seen 1¼ points down at 79, though up from day's lows around 76. Another trader called the bonds unchanged.

That followed the gains of about 4 to 5 points seen in the bonds, after Santa Fe, N.M-based Thornburg announced that it was selling more than 35% of its assets and reducing its borrowings to cut its risk.

It also said that it will take a loss of about $930 million on the transactions.

Besides selling the more than $20 billion of loans, Thornburg reduced its short-term borrowings by an equivalent amount.

The company said that it had sold most of its lowest-yielding assets, including unprofitable loans. The announcement said that Thornburg expects to remain profitable on an operating basis in the third quarter.

Tribune gains as deal gets OK

Elsewhere, Tribune's bonds were better as shareholders okayed the sale of the Chicago Tribune parent company to magnate Sam Zell for $8 billion.

Tribune's 4 7/8% notes due 2010 rose to nearly 85 bid, up 5 points on the session, while its 5¼% notes due 2015 were 3 points better at 75.5.

But while Tribune was up, others in that same sector were off, though nobody had an explanation. Times-Mirror's 7½% notes due 2023 were down more than 7 points to 68 bid, while American Media's 10¼% notes due 2009 were 2 points lower at 88. Ad insert publisher Vertis's 10 7/8% notes due 2009 were seen off 7 points at 83.

Primary remains quiet

The sell-side ranks are thinning as sources are looking to extend the three-day Labor Day break into 10-day vacations.

The primary market produced no news whatsoever on Tuesday.

A source in the bank loan market told Prospect News that First Data Corp. is rumored to be targeting Sept. 5 as the date to hold a retail bank meeting for its proposed $16 billion credit facility.

The deal already launched to senior managing agent banks in late May.

Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Lehman Brothers and Merrill Lynch are the lead banks on the deal.

The credit facility consists of a $2 billion six-year revolver and a $14 billion seven-year term loan B.

No word, however, on the bonds.

Early last week an informed source told Prospect News that the First Data bond deal would not come in early September unless market conditions afford at least the possibility of a favorable reception.

Bridges to cross

The trader who focuses on both the high yield and leveraged loan markets told Prospect News that neither of those markets are likely to see vigorous new issue activity in September because the dealers are apt to be focused on removing from their books the risk overhang resulting from bridge loans which have had to be funded since the market downturn began in July.

Although sell-side sources have told Prospect News that the bid-offers on some of that risk overhang have narrowed, this trader expressed doubts.

The buyers, the private equity firms and the hedge funds, want to buy down around 90, and the sellers want to be around 97, the trader said.

"If you take into consideration that the Street makes approximately two points off of a transaction, anything they sell below 98 is a loss for them," the trader added.

"So to sell it at 90 would be a pretty big hit."

The source added that the buzz on the Street is that some of the dealers are looking at "material adverse conditions" clauses in some of the LBO deals, grappling with whether it would be cheaper to pay legal fees and the breakup fees than to sell some of the risk at 90 or perhaps even lower.

"Either way it will be expensive because the private equity guys will sue, contesting any assertions of material adverse conditions," the source added.

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