Thornburg bonds slide on default notice; FarPoint to hit the road; funds see $77 million inflow

By Paul Deckelman and Paul A. Harris

New York, March 6 - Thornburg Mortgage Inc.'s bonds went into a freefall Thursday, swooning more than 20 points on the session down to levels in the 30s, as junk market participants reacted badly to the news that the troubled Santa Fe, N.M.-based mortgage originator had received a default notice from one of its lenders - which in turn had triggered cross-default notices on many of its other obligations, the latest in a series of shocks seen since just the end of February. Thornburg's shares also collapsed as bankruptcy rumors swirled around the troubled company.

The Thornburg news helped to throw a pall over the junk market in general - one trader called it "a pretty ugly day." Sector peer Countrywide Financial Corp.'s bonds were particularly hard hit, seen down about 5 points on the day.

Outside of the financials, Blockbuster Inc.'s bonds rose after the Dallas-based video rental industry leader reported better-than-expected fourth-quarter numbers.

Rite Aid Corp. paper was also better, helped by a gain in February same-store sales, the key performance metric in the retailing industry.

In an otherwise nearly still primary sphere, FairPoint Communications Inc. announced that it will start a roadshow on Monday for its $540 million offering of 10-year senior unsecured notes (B3/B+), via Banc of America Securities, Lehman Brothers and Morgan Stanley.

The acquisition financing also includes a $2.03 billion senior secured credit facility.

Fund flows up $77 million on the week

And as trading wound down for the session, 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, $76.8 million more into funds that report on a weekly basis than left them. It was the second consecutive inflow, following the $34.7 million cash infusion seen in the previous week ended Feb. 27.

The latest results continued the recent departure from the negative fund-flow trend which has dominated for most of this year. With 10 weeks now in the books, outflows have been seen in six of them, versus four inflows, according to a Prospect News analysis of the AMG figures.

Net outflows since the start of the year have totaled about $657.8 million, according to a market source.

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

Monthly-reporting funds showed a $237.8 million inflow in the week ended Wednesday, bringing their cumulative 2008 net inflow to $453.2 million.

Taken in the aggregate - that is, combining the cumulative fund-flow totals for both the weekly and the monthly reporters - $204.6 million more has left the funds than has come into them, the market source indicated.

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 heading south

A trader said that the widely followed CDX index of junk market performance was off buy over a point Thursday at 87 bid, 87½ offered. Meanwhile, the KDP High Yield Daily Index lost 0.11 to end at 73.68, while its yield pushed out by 3 basis points to 9.72%.

In the broader market, declining issues led advancers by a five-to-three margin. Overall activity, reflected in dollar volumes, fell by 18% from Wednesday's levels.

A trader called the session "a pretty ugly day," and said that there was "not a lot of liquidity."

Another declared that "the market is crappy," with the exception of energy-related names, which he said were "pretty much the only sector that was hanging in there. Everything else was in the toilet."

Thornburg tumbles on new troubles

Easily the biggest loser on the session in terms of price, as well as being the most actively traded issue, was Thornburg Mortgage's 8% notes due 2013. Those bonds were seen down some 20 points on the session, in heavy trading that included a lot of large-block transactions, knocked completely for a loop by the latest bad news to bedevil the mortgage company.

A trader said the notes started at 60 bid, 62 offered, then plunged as low as 36 bid, 38 offered before climbing back to 40 bid, 42 offered. "There is some paper moving around," he said, in an understated comment on the heavy activity level.

Another trader said Thornburg "got crushed," also seeing the bonds ending at 40 bid, 42 offered.

Those bonds - which had fallen about 3 or 4 points on Wednesday, down to the lower 60s - were seen by a market source as having lost another 5 or 6 points in after-hours trading as evening fell Wednesday, retreating to the upper 50s as word spread through the by then mostly deserted trading desks that the company had received a default notice from JP Morgan Chase Bank NA - which in turn triggered cross-defaults on many other obligations.

That was merely a prelude to Thursday's complete capitulation, which saw the bonds immediately opening up around 12 or 13 points lower, around the 45 bid level, according to the source, and continuing to spiral downward from there. The bonds went as low as about the 35 level, before they climbed slightly from that nadir to end around 40, in heavy size dealings.

Thornburg's bonds had traded above par until last August, when they began sliding precipitously as the lender experienced liquidity troubles in the wake of the subprime lending meltdown-inspired credit crunch, falling as low as around 60. They managed to climb back up to around the 90 level and pretty much stayed there until late February, when the bonds began cascading downward again as Thornburg revealed it was being hit with hundreds of millions of dollars of margin calls on its borrowings.

Thornburg's New York Stock Exchange-traded shares meantime plummeted $1.75, or 51.47%, to $1.65. At one point, they were off an astounding 63%, at $1.26. Volume of 60 million shares was almost 10 times the norm. Those shares have fallen more than 90% from their 52-week high of $28.40, reached last May 1, and were still trading over $11 before its margin-call disclosure on Feb. 28.

Thornburg revealed in an 8-K filing with the Securities and Exchange Commission made Wednesday after stock markets had closed that it had received a notice of default from JPMorgan, dated last Thursday, for failing to meet a margin call of about $28 million on some $320 million of reverse repurchase agreements - a form of collateralized short-term borrowing - that Thornburg had entered into with JPMorgan. The latter said that it would exercise its legal rights - while it did not specify its next move, these rights include the power to liquidate pledged collateral, and the power to demand full repayment immediately. Thornburg also said that the notice of default automatically triggered cross-defaults under all of its other reverse repurchase agreements with other counterparties and under its secured loan agreements. It said the amount involved as "material."

That triggered speculation that the company could be forced into bankruptcy - although even before that news hit, the dreaded "B-word" had been bandied about. Jefferies & Co. analyst Richard Shane, for instance, said in a research note to investors on Wednesday afternoon that Thornburg faced at least a one-in-four chance that it would have to liquidate, based on the sharp recent fall in the value of mortgage-related assets. That slide over the past few weeks had prompted some $570 million of margin calls against Thornburg since Feb. 14, even though the credit quality in its portfolio is stellar - unlike many other troubled lenders, Thornburg had assiduously avoided doing any subprime lending, the rocks against which other lenders had foundered, preferring instead to concentrate on "jumbo" loans of $417,000 or more usually made to affluent individuals. But that selectivity was to no avail - Shane said the whole mortgage market "is "experiencing a daily unwinding as leveraged investors are forced to liquidate positions."

With the news of the default out there, other observers also added pessimistic predictions. Standard & Poor's cut its ratings on Thornburg's senior unsecured debt to CC from CCC+ previously, and lowered the company's preferred stock rating to C from CCC- before. Fitch Ratings slashed Thornburg's issuer default rating to RD - an indication that the company is in default under at least one obligation though it continues to honor its others - from CCC previously. It also cut the company's senior unsecured notes and its senior subordinated notes to C from their previous levels at CCC and CC, respectively. Later in the day, Moody's Investors Service weighed in with downgrade in Thornburg's senior unsecured debt rating to Ca, from Caa2, and said it was under review for a possible further downgrade.

On the equity side, RBC Capital Markets analyst Jason Arnold said that a bankruptcy filing "is a more likely outcome" for the company than Thornburg being able to resolve its capital and funding needs; he said that "with other lenders seizing assets, Thornburg would have limited access to liquidity and limited means" to tackle its money problems. The company, he said in a report ominously titled "Game-Over at Thornburg?", now appears to be on the ropes." He halved his stock price target to $1 per share and rated the company an "underperform."

Bear Stearns also downgraded the stock to "underperform" and warned that the company is in a very difficult situation. "It may be unable to meet additional margin calls without reducing its mortgage holdings," the analysts wrote in a note to clients. "It may also incur losses as securities are sold." They said the company's holdings could fall by as much as $5 billion during the first quarter, in the process producing a $500 million loss.

Countrywide takes a tumble

Thornburg's slide dragged other sector names down with it, among them Countrywide.

A trader saw its 3¼% notes coming due in May down a point at 95 bid, 96 offered, but also saw its 6¼% notes due 2016 ending at 72.5 bid, 75.5 offered, well down from recent levels around 78 bid, 80 offered.

Another market source also saw the Calabasas, Calf.-based mortgage lender's bonds down solidly on the strength of several large trades at day's end, which took them to just under the 74 mark from prior levels around 79.

Besides being pulled lower by Thornburg's woes, Countrywide was dealing with its own problems as well on Thursday - for openers, the Illinois attorney general subpoenaed Countrywide, seeking information that might help either confirm or disprove charges that black and Latino borrowers were unfairly steered to some loans, particularly in Chicago.

And on Friday, according to news reports, Countrywide's chief executive officer, Angelo Mozilo, will be in the hot seat on Capitol Hill as a House committee questions him and ousted Merrill Lynch CEO Stanley O'Neal and Citigroup's deposed leader, Charles Prince, on how they were paid millions of dollars in salary and stock options at a time when their company shares were nosediving because of the three financial firms' heavy exposure to the sub-prime mortgage crisis. Mozilo, for instance, was paid $1.9 million in salary in 2007, received $20 million in stock awards based upon performance and sold millions of dollars worth of stock.

ResCap steady, E*Trade firms

Also in the mortgage sector, a trader called Residential Capital LLC's 6½% notes due 2013 unchanged at 52 bid, 54 offered.

E*Trade Financial Corp.'s 8% notes due 2011 - which had struggled over the past several sessions on the apparent dismay in some quarters of Wall Street with the New York-based company's elevation of its chairman, Donald H. Layton, to also assume the CEO's job - were ½ point better in busy trading at 86 bid.

Bond insurer MBIA Inc.'s 14% notes due 2033 were down 2 points to 95 bid, 97 offered.

Good show for Blockbuster

Apart from the financials, Blockbuster's 9% notes due 2012 were seen up more than 1½ points to 83.5 in active trading - although they were well off the day's peak level of 87.

That followed the news that the company had earned $38.1 million, or 18 cents per share, in the fourth quarter, well up from $8.3 million, or 4 cents a share, a year earlier. Excluding special one-time items like severance costs, the company earned $54.9 million, or 26 cents per share - beating Wall Street's expectations of around 20 cents per share of adjusted profit. The better figures were attributed to cost cuts and restructuring.

Sales a tonic for Rite Aid

Also seen higher was Rite Aid, whose 8 1/8% notes due 2010 were quoted at 99.5 bid, up more than 2 points on the session, although another market source saw its 8 5/8% notes due 2015 down a point around the 77 mark.

That followed the Camp Hill, Pa.-based Number-Three U.S. drug store chain operator's announcement that the important same-store sales figure measuring performance at stores open at least a year - the key retailing industry metric - rose 2.2% in February from a year earlier. Pharmacy same store sales increased 2.1%, although this was curbed somewhat by the negative impact from new generic introductions. Front-end same store sales were up 2.5%.

Total drugstore sales for the period increased 50.8% to $2.613 billion from $1.733 billion for the same period last year, reflecting Rite Aid's absorption last year of the Brooks Eckerd drugstore chain.

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