Thornburg, ResCap bonds softer on financial sector troubles; Herbst, other gaming names slide

By Stephanie N. Rotondo

Portland, Ore., March 17 - The one thing distressed debt investors did not need to hear in the current economic climate is more bad news.

But that is what they got Monday, as Bear Stearns Cos. neared collapse, only to be saved by JPMorgan Chase & Co.

In the government-backed buyout, JPMorgan will pay $240 million - about $2 per share - for the fifth-largest U.S. securities firm. That price is about 90% less than Bear Stearns' value just last week.

With many in the financial sector hit with liquidity problems, Bear Stearns was essentially given no other option but to take the deal, after cash shortage concerns prompted investors to withdraw $17 billion in just two days.

The Bear Stearns debacle also added fuel to rumors that other big names, such as Lehman Brothers, were facing potentially life-threatening crisis of their own. As a result, investors once again shied away from the junk bond arena.

"People are not focused on high yield," one trader said. He added that the high-yield index was down "as much as 1.5 points at one point" during the trading day.

Another trader said there was "not a lot" of action in distressed territory.

"Everybody is watching Bear Stearns," he said. "It is all Bear Stearns."

The trader noted that overall the market was at least 1 point weaker.

"There wasn't a ton that went on today," said another source. "I think everyone was frozen what with everything going on with Bear Stearns."

As turmoil continued to escalate, the financial sector as a whole turned lower. Specifically, Thornburg Mortgage Corp.'s bonds, which tried to rally early last week but could not hold on to those gains, remained a weaker credit, losing at least 5 points on the day. Among other mortgage lenders, Residential Capital LLC was also seen drifting lower.

In the gaming sector, Herbst Gaming Inc.'s debt was "hit further," a trader said. With no fresh news to prompt the move, the trader said sector weakness was to blame. Other names in that arena, such as Trump Entertainment Resorts Inc. and Tropicana Entertainment LLC, also known as Wymar Operating, also closed softer.

Thornburg, ResCap weaker

Thornburg Mortgage's debt continued to fall as more troubling news out of the financial sector weighed on the already struggling company.

One trader called the 8% notes due 2013 down 3 points at 38 bid, 39 offered. Another pegged the bonds at 37 bid, 40 offered, while yet another source placed the bonds at around 40, down from the mid-40s on Friday. The source also commented that the name was "pretty volatile."

Meanwhile, the rest of the struggling mortgage lender lineup was not faring so well either.

"Anything in the financial sector was dragged down with concerns [about the broader market]," a trader said.

The trader said ResCap's floating-rate notes due 2008 slipped to the mid- to high-50s from the low-60s previously. Another source called the 8 7/8% notes due 2015 a point lower at around 45.

Declining bonds are not new to either Santa Fe, N.M.-based Thornburg or to Minneapolis-based ResCap. Both financial institutions were hurt during the subprime mortgage meltdown due to their exposure to that area. As such, both companies have continued to post losses and are continuing to struggle to stay afloat.

Recently, Thornburg was hit with a plethora of margin calls that severely depleted its liquidity. In fact, the company was unable to meet some of the margin calls, which thrust the lender into default on its JPMorgan loan - which in turn triggered cross-defaults - and also on its reverse repurchase agreement with Morgan Stanley.

And, as the losses and write-downs pile up at ResCap, the market has wondered how much support its parent, GMAC LLC, will continue to give its offspring. Though the two parties entered into a new financing agreement in late February, it remains to be seen just how long the life support will last.

Casinos betting a losing hand

It seems these days investors are unwilling to take a gamble in the gaming sector, which has definitely yet to hit the jackpot.

Case in point, Herbst Gaming continues to slide as its 7% notes due 2014 were "hit further" to end at 16 bid, 17 offered.

Earlier this month, the casino operator suffered downgrades from both Moody's Investors Service and Standard & Poor's, both of which cited the news that the company had retained Goldman Sachs as its financial adviser.

Elsewhere in the sector, Trump Entertainment's 8½% notes due 2015 fell 1 point to 66, while Tropicana's 9 5/8% notes due 2014 closed at 51 bid, 51.5 offered, down from Thursday's levels at around 53. A trader noted there were not many trades in that name Friday.

Another source quoted Isle of Capri Casinos Inc.'s 7% notes due 2014 at 68, down nearly 2 points, and Station Casinos Inc.'s 6% notes due 2012 at 79.75, also down nearly a deuce.

At another desk, a trader pegged MGM Mirage Inc.'s 7 5/8% notes due 2017 at 89, down from Friday's level of 81.

The historically "recession proof" sector has struggled through the economic downturn, as gamblers are choosing instead to stay home instead of spending their loot at the slots. Other factors, such as smoking bans on both sides of the country, and new gaming centers springing up along the East Coast, have wrecked havoc on casinos in Nevada and Atlantic City alike, to say nothing of the areas in between.

Broad market tidbits

A trader said WCI Communities Inc. released its fourth-quarter earnings Monday, which he dubbed as "horrible." Still, he said the "bonds are not even quoted."

"I am trying to trade them, but there is nothing to trade," he added.

The Bonita Springs, Fla.-based homebuilder reported a wider loss of $459.8 million for the forth quarter, compared to a loss of $64.6 million the year before. The company attributed the sharper decline to a drop in housing demand and to one-time charges.

Meanwhile, Pep Boys - Manny, Moe & Jack's 7½% notes due 2014 slipped 4 points to around 84.

"The bonds have not really moved in the retail down draft," a trader said, "except for today."

At another desk, a trader saw Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2014 were weaker by 1 to 1.5 points at 75 bid, 76 offered.

Another trader saw Community Health Systems Inc.'s 8 7/8% notes due 2015 at 98 bid, 99 offered and USEC Inc.'s 6¾% notes due 2009 at 97 bid, 97.5 offered.

Meanwhile, Warner Music Group Corp.'s 7 3/8% notes due 2014 ended the day at 76 bid, 77 offered.

A trader said he believed that Scotia Pacific Co. LLC would delay filing its 10-K. The company's 7.71% notes due 2028 edged lower to close at 69 bid, 71 offered.

Charter Communications' paper continued to drift lower. A trader placed the 11% notes due 2015 at 67.5 bid, 68 offered, down a half point to 1 point.

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