Thornburg shoots up after dodging bankruptcy; Nortek off on 10-K delay; Ipalco deal expected Wednesday

By Paul Deckelman and Paul A. Harris

New York, April 1 - Thornburg Mortgage Inc.'s bonds firmed smartly on Tuesday on the news, announced late Monday night, that the company had indeed raised $1.35 billion of fresh capital through the sale of new debt and warrants to buy stock - the funds it needed to avoid possibly sliding into bankruptcy.

The Thornburg news - as well as Wall Street's sudden belief that the worst may now be over for the financial names and that the economy may be stronger than everyone expects, views that started the second quarter with a bang in the stock market - helped to lift junk names in general, though on decreased activity. Thornburg sector peer Residential Capital LLC was a winner.

Homebuilding names like Standard Pacific Corp., Hovnanian Enterprises Inc. and even WCI Communities Inc. were seen generally better, even as Washington reported that the level of residential construction activity in February slid for the 24th consecutive month, hitting lows not seen in nearly five years. Centex Corp. got a boost on news of an asset sale.

On the downside, Nortek Inc.'s bonds fell several points in active trading, after the Providence, R.I.-based maker of ventilation, security, storage and home technology products and corporate parent NTK Holdings Inc. said they would delay filing the required 10-K annual report with the Securities and Exchange Commission.

In the primary market, Ipalco Enterprises, Inc. was heard getting ready to bring a quickly-shopped offering of nearly $400 million to market, with pricing expected as early as Wednesday.

Market compass points northward

Tuesday was the so-called "roll day" for the widely followed CDX index of junk bond performance - the semiannual starting fresh with a clean slate. So the Series 9 index, which on Monday had stood at 89 1/8 bid, 89 5/8 offered, gave way to the new Series 10, which a market source saw at 93¼ bid, 93½ offered. Another saw the mid-bid-ask point slightly above 93 3/8.

Meanwhile, the KDP High Yield Daily Index rose by 0.20 to end at 73.50, while its yield narrowed 6 basis points to 9.79%.

In the broader market, advancing issues led decliners by a three-to-two margin. Overall activity, reflected in dollar volumes, declined by 8% from Monday's levels.

"Stocks led the day," a trader said, "and really set a better mood."

Spurred on by the news that Lehman Brothers had successfully priced an upsized $4 billion offering of convertible preferred securities in order to shore up its liquidity position, while Switzerland's UBS AG plans to issue new shares to help bolster its balance sheet after reporting a big loss and ousting its chairman, Wall Street kicked off the new quarter in style, with the bellwether Dow Jones Industrial Average zooming 391.47, or 3.19%, to finish at 12,654.47 - the eighth-biggest point gain ever for the Dow, and the third time in two weeks it has come close to a 400-point daily gain, or has surpassed it. Broader equity indexes were also strongly higher.

With equities convincingly leading the way, junk followed along.

"With the Dow up 400 points," another trader said, quite a few things "were stronger." Among them, he said, were Solo Cup Co.'s 8½% notes due 2014, at 85 bid, 86 offered, and Graham Packaging Co. LP's 9 7/8% notes due 2014 at 86 bid, 87 offered, both up a point, he said, on no real news.

A buy-side source said that the dealers are attempting to sell off inventory related to the backlog of hung LBO risk (see related story in this issue).

The buy-sider added that hedge funds, depending upon their positions, spent the day either putting on leverage or taking it off.

Thornburg coming up roses

But the big winner on the day, clearly, was Thornburg Mortgage. A trader said that "financials are the name of the game today" and called Thornburg's 8% notes due 2013 "up 7 or 8 points" to around a 67 bid, 68 context. "A lot" of bonds traded, he said.

A market source said the bonds had gone home on Monday at 57 bid, saw them open at around 62, and then push up to 70 late in the day, a gain of some 13 points.

But another trader cautioned that that last round-lot trade he had seen was actually around 67 or 68, with the 70 quotes being smaller odd-lot pieces.

Thornburg "finally got their deal done," said a trader who saw the bonds up about 7 points on the day at a wide 65 bid, 67 offered.

On Monday, those bonds had gyrated wildly around, bouncing from the upper 50s to the middle 60s and then back again on investor uncertainty over whether the Santa Fe, N.M.-based mortgage provider would be able to generate the $1.35 billion of fresh capital it was aiming for by the twice-extended deadline of Monday's close of business. There had been no immediate word as Monday's session wound down whether Thornburgh had in fact met its financing goal, had failed to raise the necessary capital, or had gotten another extension from the lenders.

But on Monday night, the company issued a statement indicating that it had sold the bonds, which carry an initial coupon of 18% and mature in seven years, as well as the warrants, which allow the warrant holders to buy new shares at a penny apiece and had also provided for investor participation in some of its assets, allowing them to get monthly payments which Thornburg receives as principal payments on its portfolio of mortgage securities.

Thornburg gets $1.15 billion up front from the transaction, with the other $200 million to be held in escrow until it completes a planned tender offer for a portion of its preferred stock. Once that occurs, and once shareholders okay an increase in the number of shares the company can issue - shares which it will need to fulfill the warrants portion of its deal - the interest rate on the notes will drop to 12%.

Thornburg will use the funds to meet margin calls issued by five lenders who have loaned the company some $5.8 billion via short-term, mortgage-backed borrowing. The lenders began demanding more collateral when the underlying value of the mortgages backing its borrowings began to deteriorate sharply amid the ongoing credit crunch. Those margin calls had threatened to push the company into bankruptcy when it became apparent that while it had paid the initial round, it had no way of paying the subsequent series of calls.

Thornburg last month reached agreement with the lenders to freeze any new margin calls for a year while it attempted to pay off the ones it had already received, and agreed to raise at least $948 million in new capital. An initial financing plan involving the issuance of $1 billion of new convertible debt fell through when the company's common stock began sliding on the threat of the large dilution the shareholders faced, prompting Thornburg to come up with its new plan; while the company originally faced a deadline of last Thursday for having the financing in place, the lenders agreed to extend its time first to Friday and then to Monday, to give Thornburg the opportunity to complete the deal.

While the financing plan will massively dilute Thornburg's existing stock float - the company acknowledged in its announcement that it may issue up to 4 billion new shares and that existing shareholders will only have a 5.5% stake in the company when all of the planned financial transactions are completed - shareholders still expressed a collective sign of relief that Thornburg was able to avoid bankruptcy, in which case the stockholders would likely recover even less than the 5.5% and could end up with nothing at all. The New York Stock Exchange-traded shares ended up 24 cents, or 19.83%, at $1.45. Volume of some 44.5 million shares was about three times the norm.

ResCap on the rise

With Thornburg leading the way, other junk financial names were generally better. A trader saw Residential Capital's bonds "still in the low 50s," but with its 6½% notes due 2013 up a point or two at 50 bid, 52 offered. "A decent size" of those bonds traded, he said.

Another market source saw ResCap's 8 7/8% notes due 2015 2 points better at 51.

Realogy Corp.'s 10½% notes due 2014 were seen up more than 2 points, approaching the 70 level.

But Countrywide Financial Corp.'s bonds seemed to be of little interest. A trader said he "didn't see much" doing with those bonds; the 3¼% notes coming due on May 21 remained at 98 bid, par offered, while its 6¼% notes due 2016 were at 79 bid, 81 offered.

Homebuilders heard better

With the mortgage and real estate names mostly better, and many Wall Streeters acting as though they believe that better days lie ahead, credit-wise, those positive feelings seemed to carry over to the bonds of homebuilders, which depend on a strong credit sector to facilitate their sales. The builders were seen mostly higher - even though the Commerce Department began the day with bad news, reporting that construction spending in the United States in February was down 0.3% overall, its fifth straight monthly fall, and private homebuilding was completely in the dumpster, falling for the 24th straight month to hit a $4.569 billion annual rate - the slowest pace seen since May 2003.

But that appeared to not faze homebuilder investors. While a trader saw Standard Pacific's 7% notes due 2015 at 72 bid, 73 offered, "about where it was" previously, and also saw Hovnanian Enterprises' bonds "pretty much where they were," with its 8 5/8% notes due 2017 at 76.5 bid, another trader said that Standard Pacific's 6½% notes due 2010 were up a point at 75.5 bid, 77 offered, while Hovnanian's 8 5/8% notes due 2017 were also a point better at 76 bid, 78 offered.

WCI Communities' bonds - which had fallen anywhere from 3 to 5 points on Monday - recovered some of those gains, with its 6 5/8% notes due 2015at 49, "up a couple of points," a trader said, and its 9 1/8% notes due 2012 a point or 2 better at 51. "I didn't see much trading in them," he said, "not at all - but what trades did happen were up around a point. "

A trader saw Dallas-based homebuilder Centex's 5¼% notes due 2015 at 81.5 bid, 81.75 offered, up from Monday's levels around 79.75 bid, 81 offered. He cited the news that the company had agreed to sell a portfolio of undeveloped lots to a joint venture led by RSFPartners Inc. for $455 million in cash, although that is less than the approximate $528 million book value of the holdings. About 8,500 lots in 27 neighborhoods scattered across 11 states - mostly in California and Nevada - are being sold. Centex will retain a 5% stake in the joint venture that is buying the lots.

"This transaction is consistent with our near-term goals of reducing our land supply and generating cash," said Timothy Eller, Centex's chairman and chief executive, in a statement. "This land sale accelerates our move to a more asset-light operating model, sharpens our focus on strategic markets and consumer segments, reduces future land development cash obligations and monetizes a meaningful portion of our deferred tax asset."

Delayed filing a negative for Nortek

On the downside, Nortek Inc.'s 8½% notes due 2014 were "down about 4 or 5 points," a trader said, "in very active" dealings, after the company and corporate parent NTK Holdings said they would delay their 10-K filings.

He saw the bonds go as low as 70 before coming off that low to end at 71, versus Friday's round-lot price of 75. Another market source also saw that 4 point fall to 71, although a trader at another desk saw the bonds going home at 70 bid, 72 offered, which he still considered a 4 point loser.

Nortek blamed the delayed filing on the need to go through the complex reporting procedures under the terms of the Sarbanes Oxley Act, as well as "the recent continued downturn in the economy and the financial markets [which] caused [NTK Holdings and Nortek] to reevaluate certain ... accounting and financial disclosure requirements...[and]have negatively impacted [the companies'] ability to timely finalize its accounting documentation and analysis."

Another market source, seeing the bonds down nearly 4 points at 71, said that the credit was one of the more actively traded issues on the day Tuesday.

"In this market," the first trader said, something like that would be enough "to spook investors." However, he added that "it is not only nervous holders who are spooked" generating activity in the bonds. "There are vultures at some of the hedge funds that look to dive on this injured prey, and that is part of the volatility that's created on such potentially bad news.

"It's not like this comes out and every holder of Nortek 81/2s starts selling their bonds. Sure, there's a percentage of that - but immediately there are investors who take advantage of the negative news to put short positions on - and this is certainly a reason to jump in. Where there's smoke - there's fire."

Ipalco plans $335 million

In the primary, Ipalco Enterprises, Inc., a subsidiary of AES Corp., plans to price a $395 million offering of eight-year non-callable senior secured notes (Ba1/BB) on Wednesday.

Merrill Lynch & Co. and Lehman Brothers are joint bookrunners for the debt refinancing deal from the Indianapolis-based holding company for Indianapolis Power & Light Co.

In other news bearing upon the primary market, Macrovision Corp. set an April 9 bank meeting for its $500 million term loan B.

Macrovision expects to begin marking an anticipated $150 million offering of high-yield bonds in mid-April.

Initially the company had anticipated launching the deal around the end of the first week in April.

JP Morgan and Merrill Lynch & Co. are leading the bond deal as well as the term loan B.

Proceeds will be used to help fund the acquisition of Gemstar-TV Guide International, Inc. in a cash and stock transaction valued at $2.8 billion.

Elsewhere Thornburg Mortgage Inc. announced the completion of its $1.35 billion private placement of senior subordinated secured notes with warrants.

Although there were a couple of sources who expressed interest in the deal early in the week, by late Monday high yield observers were telling Prospect News that the Thornburg Mortgage notes were strictly of the private placement universe.

"Early on we heard that the notes would be Rule 144A for life," a high yield syndicate official told Prospect News late Tuesday.

"Then there was a press release disclosing that it would be a traditional private placement," the source added, noting that no high yield league table credit would accrue from the transaction.

© 2015 Prospect News.
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