Charter brings six-year issue; Thornburg continues to bounce back; Toll slides on joint venture warning

By Paul Deckelman and Paul A. Harris

New York, March 11 - Charter Communications Operating LLC was heard by high yield syndicate sources to have successfully priced a quickly shopped offering of more than half a billion dollars of six-year notes on Tuesday - the first pricing in the junk market since Rock-Tenn Corp. did a $200 million deal nearly two weeks ago.

In anticipation of the deal, Charter's existing paper was seen lower against the background of a slightly more positive but generally restrained junk bond market, which failed to latch onto the coattails of a suddenly resurgent equity sector that had its best individual session since July 2002.

But one credit which bucked the generally soggy trend and exploded upward for a second consecutive session was Thornburg Mortgage Inc., helped by a combination of factors - investor sentiment that the recent bloodletting in the name had been overdone, a general rally in the mortgage and financial names on news of the latest Federal Reserve move to shore up capital market liquidity, and the news that Thornburg is trying to work out an arrangement with its lenders to pay margin calls on its mortgage-backed borrowings.

Despite that upturn, other junk mortgage names, like Residential Capital LLC, failed to benefit much.

Homebuilder names were seen largely unchanged - but Toll Brothers Inc.'s 8¼% notes due 2011 slid sharply in active dealings after the Horsham, Pa.-based builder warned that it could face large losses if its joint-venture partners can't meet their financial obligations to complete developments due to the continued industry downturn.

AbitibiBowater Inc.'s bonds struggled - particularly those which had been issued by its underperforming Abitibi-Consolidated Inc. unit before it was absorbed last year into the larger company formed by the merger with what was then Bowater Inc. This was especially true of Consolidated's short-dated paper, which the company is trying to take out via an exchange offer that pays the bondholders only part of their compensation in cold cash.

One high yield syndicate official said that whereas the stock market seems to be pricing in a shallow recession, high yield is pricing in a doomsday scenario.

Sources said that while the high yield CDX index was up nearly 1¼ points on Tuesday, cash bonds were only up marginally.

A buy-side source said that cash bonds were basically unchanged, and added that names in the financial sector, including GMAC LLC and Ford Motor Credit Co., are still very heavy.

Impeccable timing

Charter Communications Operating, LLC priced a $520 million issue of 10 7/8% second-lien notes due 2014 (B3/B-) at 96.106 to yield 11¾% in a quick-to-market Tuesday transaction.

The notes came on top of the price talk: 10 7/8% coupon to yield 11¾%.

Market watchers marveled at the timing of the Charter drive-by transaction, coming, as it did, on a day during which stocks enjoyed a massive rally.

An informed source said that the new 10 7/8% second-lien notes came at a new issue discount of approximately 150 basis points to the existing pari passu Charter Communications Operating paper, which, the source said, had been trading in a 10 3/8% context.

This official maintained that the underwriters had not seen the Fed move coming.

"The timing was in place," the source said.

"It was just great timing.

The Spitzer news seemed to create the right atmosphere, although it certainly didn't have anything to do with the financial markets; but people got a laugh.

"And of course there was a great equity rally.

"That combination of events put everyone at ease. And the deal got done."

JP Morgan, Credit Suisse and Deutsche Bank Securities were the underwriters for the notes sale with generated $499.75 million of proceeds, which will be used to pay down revolver debt.

Meanwhile Charter brought a new bank loan that was upsized to $500 million from $275 million, and priced at coupon of Libor plus 500 basis points with a 3½% Libor floor, discounted to 96% of par.

Parsing the Fed move

A money manager from a high yield mutual fund told Prospect News that the Federal Reserve's move on Tuesday is temporary.

"It provides time for the banks which are facing these huge write-offs to go out and raise more capital," the investor said.

"It does not address the overall problem.

"The low-income consumer is tapped out, with credit card debt going up, gas prices rising and the possibility of losing his house.

"The wealthy guys are facing losses on their investments, and they don't feel so wealthy anymore," the investor added.

"Right now people at both ends of the spectrum are getting hit."

Old Charter bonds off ahead of new deal

The new Charter notes priced too late in the session for any kind of aftermarket activity.

Among the company's already outstanding issues, its 8 3/8% notes due 2014 were 2 points lower at 88 bid, 90 offered. Its 8% Charter Operating notes due 2012 lost 1½ points to end at 92, while its CCH I Holdings 9.92% notes due 2014 were up 1½ points at 49. Another market source saw the CCH I 11% notes due 2015 down ½ point at the 69 level. It was among the most busily traded issues of the day.

Apart from the big new bond deal, Charter was making news in other ways on Tuesday.

It said in a filing with the Securities and Exchange Commission that its chairman and chief shareholder, billionaire Microsoft Corp. co-founder Paul Allen, had received informal inquiries from "various parties regarding potential investments or transactions involving Charter. With the consent of Charter's independent directors, Charter has recently provided a limited number of these parties certain material non-public information under nondisclosure agreements."

Charter said that it had given a limited number of these parties information they needed to decide whether to make such a deal - although it acknowledged that at the end of the day, nothing at all might come of the inquiries.

The company additionally announced the resignation of its chief financial officer, Jeffrey Fisher, who will be replaced on an interim basis by Eloise Schmitz, who until now has been Charter's senior vice president of strategic planning.

Market indicators seen mixed

A trader saw the widely followed CDX index of junk market performance up a point Tuesday to 87 1/8 bid, 87 3/8 offered. The market, he said, "took off." However, the KDP High Yield Daily Index lost 0.14 to end at 73.12, while its yield pushed out by 3 basis points to 9.86%.

In the broader market, declining issues led advancers by a five-to-four margin. Overall activity, reflected in dollar volumes, jumped 59% from Monday's anemic levels.

While the first trader saw a fairly firm market, others were not so certain.

"The markets are such a mess," another trader said, "with all of this indiscriminate selling. It's so hard to make any sense out of it - it used to be that everything had a correlation to it, but now, it's just in disarray."

He said that "levels are all over the place - down [Monday] and up [Tuesday]. While acknowledging that levels seemed better, he rhetorically asked "how real can a bounce or a rally be in high yield - there's still such an overhang of supply. I don't think we're going to run up like the stock market runs up" - stocks had their best session in more than five years on Tuesday, with the bellwether Dow industrials leaping 416 points - "I think there's going to be more resistance."

The fixed-income markets, he said "are just really fragmented. It's totally such a different type of market right now." While the concept of relative value "used to be a key part of the credit markets, now it's so difficult because there are actually times when you can buy a BB bond cheaper than you can a single-B just because of forced selling - a CDO collapses or something of that sort, a technical reason. So it's really a crazy market."

Thornburg pushes higher

The big winner of the day, a trader said, was clearly Thornburg Mortgage's 8% notes due 2013, which shot up 10 points to 44 bid, 46 offered, a trader said. At another desk, a market source saw the bonds bounce all the way back to around the 47 bid area, a gain of about 13 points, in busy size trading. Yet another source called the bonds 11 point gainers to 45.5.

It was the second straight day of gains for the Thornburg paper, which had cratered to around 28 bid on Friday when the company disclosed that it had received a big new round of margin calls on its mortgage-backed borrowings and did not have the money to meet them. Bankruptcy talk swirled around the name when it warned that it might not be able to continue as a going concern.

However, those bonds began bouncing back on Monday, moving up to around the 34 bid area from 28 on apparent market feeling that last week's selling had been overdone. And on Tuesday, the issue moved even further back upward - although it still remains several dozen points below the levels near 90 that the bonds held as recently as Feb. 27 - the day before the first of several announcements of margin calls on its short-term reverse repurchase borrowing agreements.

Thornburg - whose recently badly decimated New York Stock Exchange-traded shares more than doubled in price to $1.56 on volume of 43 million, about five times the norm - was seen by analysts and other observers being helped Tuesday by the generally better tone in the whole financial industry after the Federal Reserve announced a coordinated move with other major central banks to make some $200 billion available to the cash-strapped capital markets.

And Thornburg itself said that it was in talks with its lenders in an effort to work out terms for paying off its hundreds of millions of dollars of margin calls on its borrowings, while not being forced into insolvency. The Santa Fe, N.M-based jumbo mortgage lender had announced that it had successively gotten first $300 million, then $270 million and finally another $620 million of margin calls - demands for immediate repayment - and last week announced it had received a notice of default on some of those calls, triggering cross-defaults on many of its other obligations and threatening to sink the whole company.

No bounce for other mortgage names

But while Thornburg's bonds were sizzling, those of its sector peers were pretty much fizzling, this despite the gains which mortgage players and other financials were racking up on the equity side.

A trader saw Countrywide Financial Corp.'s 3¼% notes coming due on May 21 unchanged at 95 bid, 96 offered, and said that he didn't see anything going on with the longer-dated issues.

"It looks like all they were quoting were the short-term bonds," he said. However, another market source saw its 6¼% notes due 2016 up 1½ points at 67.

The trader meantime saw Residential Capital's 6½% notes due 2013 drop 3 points on the day to 47 bid, 49 offered, while its 8 7/8% notes due 2015 were also at 47, down 2 points on the day.

ResCap parent GMAC LLC's 8% bonds due 2031 retreated to 70.5 bid, 71.5 offered from 73 bid, 74 offered on Monday. Its 6 7/8% notes due 2012 were down 1½ points at 74 bid, while its 7% notes due 2011 were off almost 2 points at just above 46.

Homebuilder names were mostly quiet, despite the big rally in Thornburg; a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 unchanged around 75 bid, 77 offered. He saw all of Hovnanian Enterprises Inc.'s issues were unchanged at the 67 bid, 68 offered level, while Standard Pacific Corp.'s 7% notes due 2015 were also steady at 69 bid, 71 offered.

But one issue from that sector seen to take a tumble was Toll Corp.'s 8¼% notes due December 2011, seen by a market source to have swooned more than 7 points in active trading, down to about the 90 level, although Toll's 81/4s coming due in February of that year were seen to have actually risen more than a point to the 94 neighborhood.

In an SEC filing on Monday, Toll Brothers - Toll Corp. is its financing subsidiary - warned that if its joint-venture partners can't fulfill their financial obligations in the currently constrained climate, Toll could conceivably be left holding the bag.

"These joint ventures usually borrow money to help finance their activities," Toll cautioned in its filing. "In certain circumstances, the joint venture participants, including ourselves, are required to provide guarantees of certain obligations relating to the joint ventures."

A similar scenario played out last year involving another large homebuilder, Tousa Inc. - whose Transeastern joint venture in Florida came up way short on meeting its obligations, plunging its parent into financial chaos.

Abitibi gets chopped down

Elsewhere, a trader saw AbitibiBowater's 6.95% notes coming due on April 1 at 74 bid, 76 offered, down 4 points, while its 5¼% notes maturing June 20 were likewise down 4 at 72 bid, 74 offered. The 8.85% notes due 2030 dropped 6 points to 39 bid, 42 offered.

Another market source saw the 6.95s down some 2½ points to 73.5

The Montreal-based forest products company's bonds in general - and its short-dated notes in particular - have been falling ever since it unveiled plans to pay off about $500 million of bonds maturing this year and next with a combination of cash and new debt, rather than just paying the whole thing off in cash. The 6.95s, in particular, are down more than 20 points from levels in the mid-90s which they had held before the company announced its plans for only a partial cash payment on those notes.

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