Sealy slides amid exec shakeup; autos off; Abitibi plans three-year deal; funds see $191 million outflow

By Paul Deckelman and Paul A. Harris

New York, March 13 - Sealy Mattress Co.'s bonds fell out of bed Thursday in the wake of the underperforming company's announcement that its chairman and chief executive officer had resigned.

Automotive issues - particularly Ford Motor Co. and its Ford Motor Credit Co. financing arm - were seen lower after a Morgan Stanley analyst issued bearish projections about the Number-Two U.S.-based carmaker. He also panned Ford's larger rival, General Motors Corp., causing that company's bonds, and those of its GMAC LLC financial affiliate to retreat as well.

Also in retreat Thursday was Thornburg Mortgage Inc., the big run-up in the Santa Fe, N.M.-based mortgage originator's bonds having apparently run its course, as investors took some profits and reacted to the latest negative news - another notice of default on margin calls connected with its short-term borrowings.

And it was yet another down day for AbitibiBowater Inc.'s bonds - particularly the short-dated issues scheduled to be redeemed this year and next. In the primary arena, meanwhile, details emerged on Abitibi's planned three-year secured bond issue - part of the Montreal-based forest products company's approximately $1.5 billion refinancing effort, some of the proceeds of which will be used to pay off the existing 2008 and 2009 bonds.

Elsewhere, high yield syndicate sources were expecting the Scotland-based oilfield services company Abbot Group plc to launch a big new bond issue sometime later this month or early next.

Fund flows off by $191 million on 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, $190.5 million more left those funds than came into them. That broke a two-week streak in which net inflows had been seen, including the $76.8 million cash infusion recorded in the previous week, ended March 5.

The latest results represented a return to the negative fund-flow trend which has dominated for most of this year. With 11 weeks now in the books, outflows have been seen in seven of them, versus four inflows, according to a Prospect News analysis of the AMG figures. Net outflows from the weekly reporting funds since the start of the year have totaled about $848.3 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.

While those normally positive monthly-reporting funds did actually show a $6.5 million outflow in the latest week - in contrast to the previous week's $237.8 million inflow - their cumulative 2008 net inflow stayed well in the black, at $446.7 million, the market source said.

But taken in the aggregate - that is, combining the cumulative fund-flow totals for both the weekly and the monthly reporters - yields a solidly negative number, with $401.6 million more having left the funds this year than has come into them, the 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 hedge funds.

Market indicators heading south

A market source saw the widely-followed CDX index of junk market performance having eased to around the 87 mark. Meanwhile, the KDP High Yield Daily Index lost 0.32 to end at 72.52, while its yield pushed out by 9 basis points to 10.02%.

In the broader market, declining issues led advancers by a nearly two-to-one margin. Overall activity, reflected in dollar volumes, fell by 14% from Wednesday's levels.

A trader, when asked the rhetorical question what was new and exciting, replied: "Not a whole lot. Today was one of those days when you came in thinking the sky was falling - there were no bids around. Then equities seemed to turn around with the S&P news" that the ratings agency had predicted that the wave of subprime related writedowns by major financial institutions had more than reached its halfway mark and should now start to subside. But while the news that the worst is over had a galvanizing effect on stocks, helping them to cut their sizable early losses and end only modestly lower, "we [junk] kind of did nothing from there."

He noted that the Lehman Brothers conference which has drawn portfolio managers and other decision makers down to Orlando, Fla. This week, combined with the continuing attraction of televised Big East tournament college basketball, made for a session that was "as quiet as I've seen it for a while. It made Monday look active - and Monday was brutally slow."

No soft landing for mattress king Sealy

A trader said Sealy Mattress' 8¼% notes due 2014 "were down at least 5 points" on the day around the 82 area. Another who saw them ending at 82 bid, 84 offered only called then down 2 points, since he had quoted them around an 84-85 context on Wednesday.

A market said the bonds had fallen about 2½ points on the day to 83, but another called them full 5 point losers at 82, in brisk size trading, as investors reacted to the news, released late Wednesday, that the company's chairman and chief executive officer had stepped down.

Parent company Sealy Corp.'s New York Stock Exchange-traded shares meantime fell 41 cents, or 5.02%, to end at $7.75, on slightly higher-than-normal volume of 708,000 shares.

The Trinity, N.C.-based maker of the well-known Sealy, Stearns & Foster and Bassett brands of mattresses and box springs - it is in fact the Number-One maker of bedding products in North America - said after the close of trading on Wednesday that that David J. McIlquham had resigned from his positions, effective immediately. He has been replaced on an interim basis as CEO by the president of its domestic Sealy North America division, Lawrence J. Rogers, who will serve while the company seeks a permanent CEO. The former chairman and CEO of W.R. Grace & Co., Paul Norris - up until now a Sealy director and a senior advisor to Sealy's largest shareholder, Kohlberg Kravis Roberts & Co. - will become the company's non-executive chairman. McIlquham also relinquishes the post of company president; there was no immediate word on a successor in that job.

In its statement announcing the executive changes, Sealy said that McIlquham and the company's board had determined that it was "in the best interest of the company to seek new leadership to achieve the company's long-term goals and initiatives." The statement said that McIlquham will seek other opportunities and spend more time with his family.

The shakeup comes about a week after Sealy warned in a Securities and Exchange Commission filing that it expects no more than a mid to high single-digit decrease in first-quarter sales, as continued weakness in its domestic business is expected to offset strong international sales. Sealy said that while its December and January sales were pretty much in line with expectations, February was quite another story, with sales falling well below forecasts. It further said that its material costs continued to be pressured by rising commodity prices. The disclosures caused the bonds to fall several points from their prior levels around 90 bid. The bonds began the year bid in a 95-97 context. Meanwhile, Sealy's shares have slid over 30% since the start of the year.

Thornburg rally comes to an end

Thornburg Mortgage's 8% notes due 2013 slid by 8 points Thursday to 42 bid, 45 offered, a trader said, noting that the company "got another default notice" on its reverse repurchase agreement margin calls.

"The party is over," another trader said, referring to the three-day run-up in the bonds that had taken them all the way up to Wednesday's closing level around 50 bid from 28 bid late Friday.

A trader who saw the Thornburg bonds get down to the 43 bid, 45 offered mark noted that the bonds "gave a little back" from their recent gains. "I didn't see much activity in them, personally." He further opined that with Thursday's relatively thin market liquidity, "a couple of million bonds trading" could translate to a sizable price move.

Thornburg, a trader said, "was definitely lower." He said that the only $1 million round lot traded at 43.5 bid, well down from the 50-area trades seen on Wednesday; odd-lot trading brought the bonds to about 45.5, versus a context of 48-53 seen Wednesday.

Another trader quoted the bonds going home at a wide 44 bid, 48 offered, down from 50 bid, 52 offered on Wednesday.

Thornburg's NYSE-traded shares meantime swooned by 59 cents, or 20.70%, to $2.26, on volume of 33.3 million - almost triple the norm.

The Thornburg rally fizzled out as investors reacted to the news - announced after the markets closed late Wednesday via an SEC filing - that Morgan Stanley had sent the company a notice of default after it failed to meet a $9 million margin call on its reverse repurchase agreements, used as a source of short-term financing. Morgan Stanley had lent Thornburg $49 million and the company said it "has exercised or will exercise its rights under the agreement." That notice followed a similar notice from JP Morgan Chase, concerning $28 million of margin calls on the more than $300 million of borrowings.

All told, Thornburg has received margin calls totaling more than $1 billion; it said it is in talks with its banks on crafting a way to meet all of its obligations.

Among other mortgage names, a trader saw Countrywide Financial Corp.'s 6¼% notes due 2016 dip a point to 62 bid, 64 offered, while its 3¼% notes coming due on May 21 were unchanged at 94 bid, 95 offered.

Another market source saw the 61/4s 2 points lower on the day, just below 63 bid.

Residential Capital LLC's 6½% notes due 2013 lost a point to end at 45 bid, 47 offered. A market source elsewhere saw ResCap's 8 7/8% notes due 2015 down a point at 45.

A trader saw bond insurer MBIA Inc.'s 14% surplus notes due 2033 unchanged at 96 bid, 98 offered; they were "lower earlier, but then they came back," he said.

Auto names ride in the breakdown lane

The big automotive benchmark names were lower, traders said, after Morgan Stanley analyst put the whammy on both Ford and GM.

A trader saw Ford's 7.45% bonds due 2031 down ½ point at 63 bid, 64.5 offered - but the carmaker's Ford Motor Credit paper was the real loser. A market source said that Ford Motor Credit's 9¾% notes due 2010 fell more than 6 points on the session to 87.5. At another desk, the Ford Credit 7% notes due 2013 were down 1½ points at 75.5 bid, while its 8% notes due 2016 lost more than 2 points, easing to 75.

The whole Ford complex was towed lower after Morgan Stanley analyst Jonathan Steinmetz, in a research note to investors, said that the investment house was cutting its earnings estimates for the automakers following "poor February U.S. sales, poor fourth quarter results" and a new weaker U.S. industry sales forecast.

Steinmetz upped the size of the per-share loss he expects from Ford this year to 40 cents - nearly triple his earlier estimate of red ink in the 15 cents per share range.

The analyst was also pessimistic about GM's likely performance this year, predicting the largest automaker will lose $1.30 a share this year - a mirror image of his previous estimate of a $1.30 per share profit. He lowered his 12-month target for GM's stock price to $27 from $30, and projected that GM will produce about 175,000 fewer vehicles in North America this year than in 2007, or about a 4% falloff.

Those somber forecasts pushed Ford's shares down to a 16-year low and GM's to the lowest they've seen in two years, and also drove GM's bonds down. A trader saw the latter's benchmark 8 3/8% bonds due 2033 down 2 points to 70 bid, 71 offered, while its 7.20% notes due 2011 were off more than 3 points at 84 bid. Another source saw GM's benchmark bonds down 2 points at the 69.5 bid level in active trading, while 49%-owned GMAC's 7% notes due 2012 dropped nearly 3 points to the 70 level.

Broad market generally lower

Among other issues, a trader saw Freescale Semiconductor Inc.'s 9 1/8% notes due 2014 down 2 points at 73.5 bid, 74.5 offered; restaurateur Denny's 10% notes due 2012 lost a point to 92.5 bid, 93.5 offered. HCA Corp.'s 9 5/8% notes due 2016 fell a point to 102 bid, 103 offered. Mohegan Tribal Gaming Authority's 8% notes due 2012 lost a point to 90 bid, 92 offered, in line with a generalized downturn in the gambling names, a trader said.

More angst for Abitibi

A trader saw AbitibiBowater's 6.95% notes slated to come due on April 1 at 63 bid, 65 offered, down from 67 bid, 69 offered, while its 5¼% notes maturing on June 20 were at 60 bid 62 offered, down from 63 bid, 65 offered. He saw the 8.85% bonds due 2030 unchanged at 36 bid, 38 offered.

At another desk, a trader said the 6.95s fell as low as below 65, from levels around 67.5 on Wednesday, before ending at 65.375, "so the paper is lower, definitely under pressure." He saw the 51/4s at 61 bid, down from 62 bid, 63 offered on Wednesday.

However, yet another trader saw the Abitibi 7.95% notes due 2011 unchanged in a 63 context.

The bonds have slid badly from their prior levels - including quotes not too far from par in the 6.95s - since Abitibi unveiled plans to only partly pay the holders of the 2008 and 2009 bonds in cash for their maturing notes; the remainder of the consideration would be in new notes.

Abbot Group plans $615 million

Scotland's Abbot Group plc is expected to launch a $615 million equivalent offering of high-yield notes in late March or early April, pending market conditions, sources told Prospect News on Thursday.

The notes, which are expected to come with a 10-year maturity, will possibly feature dollar- and euro-denominated tranches.

The Royal Bank of Scotland and Goldman Sachs & Co. will run the books.

The notes are part of the $2.16 billion financing backing First Reserve's acquisition of Abbot Group, an Aberdeen-based oilfield equipment and services provider.

A high yield syndicate official in Europe commented on Thursday that the junk market there is "pretty dead."

Elsewhere on Thursday, a buy-side source familiar with the deal said that AbitibiBowater Inc. expects to price $415 million of three-year non-callable senior secured notes in the 13% area.

Goldman Sachs & Co., which is leading Abitibi's $1.583 billion debt refinancing package, will be the bookrunner.

Timing on the bond deal remains to be determined.

Meanwhile the company held a bank meeting on Thursday morning to kick off syndication on its $450 million 364-day senior secured term loan.

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