Builders unfazed by Tousa bankruptcy, sector firms; techs rebound; Forbes seven-year deal hits road

By Paul Deckelman and Paul A. Harris

New York, Jan. 29 - To the surprise of exactly nobody, troubled homebuilder Tousa Inc. finally threw in the towel on Tuesday and announced that it had filed for Chapter 11 status - but the rest of the homebuilding sector, in the words of one trader, "shrugged off" that unhappy development and surged higher, apparently carried upward on financial market hopes that the Federal Reserve will indeed announce a 50 basis point interest rate cut on Wednesday, even though some new economic figures released Tuesday seemed to indicate that the economy may not be stumbling into a recession.

Among the homebuilders seen catching a break were well-situated recent fallen angels like D.R. Horton Inc., mid-range companies like Hovnanian Enterprises Inc. and more troubled operators like Beazer Homes USA Inc. and WCI Communities Inc.

Mortgage companies, whose financial health is intertwined with that of the builders - were mixed on the day, with upside seen for Residential Capital LLC. Rival Countrywide Financial Corp.'s bonds were seen little changed on the day, which actually was a pretty good performance considering that the Calabasas, Calif.-based top independent mortgage lender reported a wider-than-expected fourth quarter loss Tuesday.

Apart from the builders and mortgage names, tech issues like Freescale Semiconductor Inc. and Unisys Corp. - recently hard hit by indications of a slowing in demand for microchips and other computer-related goods and services - were seen bouncing back from that oversold condition.

Overall was good news-bad news in the leveraged markets on Tuesday.

The bad news, which didn't impact the junk market, per se, was that CDW Corp.'s term loan was pulled due to market conditions.

The good news was that the junk index was up for the second consecutive day, while the new Harrah's Entertainment Inc. 10¾% senior cash pay notes, which priced on Monday, continued to trade up in the secondary, and Forbes Energy Services LLC, an independent oilfield services company, launched a new $200 million junk offer.

One investor pointed out that December durable goods orders rose 5.2%, larger than the expected 1.6% rise; excluding transportation, orders still rose a respectable 2.6%, the source added.

"This doesn't exactly paint a picture of an economy that is in a recession," the source commented.

Market compasses point northward before Fed

A market source saw the widely followed CDX index of junk bond performance up about a point on the session at 92 3/8 bid, 92 5/8 offered. The KDP High Yield Daily Index was up 0.22 on the day at 75.83, while its yield narrowed by 5 basis points to 9.13%. In the broader market, advancing issues led decliners by a better-than two-to-one ratio, while overall market activity, reflected in dollar volumes, was up nearly 57% from Monday's reduced levels.

"The market continues to have a firm tone ahead of the FOMC meeting," which began on Tuesday and which wraps up Wednesday, with an announcement expected; most observers believe that the Fed's policy-setting committee will likely announce a 50 bps cut in key interest rates, on top of the surprise 75 bps cut in its federal funds target and discount rate a week ago.

Expectations for a rate cut "seem to have been priced in" to current trading levels, another trader said - even though some economic data Tuesday seemed to indicate that maybe the economy is not as badly off as everyone fears, with Washington reporting that December's durable-goods orders were up 5.2% - more than triple the roughly 1.6% to 1.8% rise Wall Street had been expecting.

On top of that, the private Institute for Supply Management, which churns out closely watched reports on manufacturing-sector and non-manufacturing economic activity, reported upward revisions for each category versus the originally reported December levels.

Even if an interest rate cut is not announced, or if the committee opts for a 25 bps rate cut rather than the hoped for 50 bps - and some analysts now believe that is a distinct possibility - the signs that the economy has some life still left in it were the probable catalyst for an equity surge; after going up and down all day, stocks pushed upward late in the day and the bellwether Dow Jones Industrial Average finished up nearly 100 points, while broader market indexes were also solidly higher.

Fixed income - which often moves in opposite directions from equity, on the assumption that signs of economic health that are good for the one carry with them the seeds of inflation, which is bad for the other - in the case of junk, in particular, ended up trading in tandem with shares, up to a point.

"The market just seems to have a mind of its own," the first trader said. "We are tracking equities higher - but even earlier in the day, when equities weren't doing much, we continued to see better buyers pretty much across the board."

Builders ignore Tousa, head higher

If any area exemplified the better buying trend on Tuesday, it was in the recently hard-hit homebuilders, which improved, even as one of their number, Hollywood, Fla.-based Tousa - the former Technical Olympic - announced that it was seeking protection from its junk bond holders and other creditors via a Chapter 11 filing with the U.S. Bankruptcy Court for the Southern District of Florida, in Fort Lauderdale, just the latest piece of bad news for a sector which has already seen more than its share of such news over the past two years

Tousa said that it had obtained the support of more than half of its senior noteholders for a restructuring plan and was filing for bankruptcy in order to implement it.

Noting that the bankruptcy filing had been widely anticipated for some time now -Tousa had been in trouble since it announced major problems with its Transeastern Homes joint venture in September 2006 - a trader said that the filing, was "no surprise," and had little or no negative impact on other housing names, which were generally well bid for. "I really think that if anything, people kind of shrugged it off."

He said that "we saw better buyers for the cash [bonds of the] builders. The cash builder game had gone away for a while, and it was mostly [credit-default swaps]-driven, but in the past two weeks, I've seen a resurgence [in trading for the cash bonds of builders rather than in their CDS contracts], which is good to hear."

That revival, he said, may be an indicator that "people are getting more comfortable with the fallen angels" in the sector, many of them former junk bonds which managed to push into the rarified atmosphere of investment grade when the sector was doing well, but which are now returning to their junk roots. Among them, he said, were such names as "the D.R. Hortons, the Rylands and the Toll Brothers of the world."

Among those better-quality homebuilder names, D.R. Horton's 4 7/8% notes due 2010 moved up to 91.5 bid, 92.5 offered, about a point above where they had opened. KB Home's 7¾% notes due 2010 were likewise up a point at 95.75 bid, 96.75 offered.

Among the junkier names in the segment, the trader saw "better buyers" in Standard Pacific Corp. and Meritage Homes, "just to name a few," with Meritage's 6¼% notes due 2015 going out at 69 bid, 71 offered, versus Monday's levels at 65 bid, 68 offered. Its 7% notes due 2014 were "up at least a point" at 70 bid, 72 offered.

Hovnanian Enterprises' 6 3/8% notes due 2014 tacked on 4 points to end at 71 bid, while its 8 7/8% notes due 2012 were up 3½ points to about the 52 level.

Among other troubled homebuilders, another trader saw Beazer Homes' 8 5/8% notes due 2011 some 1½ points better at 76 bid, 78 offered, while its 8 3/8% notes due 2012 gained 2½ points to the 75 level. Standard Pacific's 7% notes due 2015 were a point better at 67 bid, 68 offered. WCI Communities' 9 1/8% notes due 2012 were up 2 points at 56 bid, 58 offered.

Tousa bonds rise on filing

Tousa's own bonds were up.

A trader saw Tousa's senior bonds about 6 points higher, quoting the 8¼% notes due 2011 at 48 bid, 50 offered, and the 9% notes due 2010 at 49 bid, 51 offered. Among the junior bonds, he saw the 10 3/8% notes due 2012 and the 7½% notes due 2011 and 2015 at 11 bid, 15 offered, up 2 points on the bid side.

Noting that the bankruptcy filing had been widely anticipated for some time now, and that at least "several" of the company's bonds had already been trading flat, or without their accrued interest after missed interest payments earlier this month, "now [all of them] are definitely flat. I don't know why they rallied so much," he said.

Mortgage names seen mixed

Among the mortgage names, which have been moving pretty much in tandem with the builder bonds, since the health of one industry is inextricably tied to the other, Residential Capital's 6½% notes due 2013 were 3 points better at 64 bid, 66 offered, about the same level to which its 8 3/8% notes due 2015 had risen to, while ResCap parent GMAC LLC's 8% bonds due 2031 rose 1½ points to 83.5 bid, 84.5 offered.

Countrywide Financial's bonds were unchanged, despite the company's report of a larger-than-expected fourth quarter loss. A trader saw the 6¼% notes due 2016 at 82 bid, 84 offered, while the 3¼% notes slated to come due on May 15 were at 96.5 bid, 97.5 offered. The loss of $422 million, or 79 cents per share, stands in stark contrast to Countrywide's year-earlier earnings of $622 million, or $1.01 per share. It was also considerably worse than the roughly 30 cents per share of red ink which Wall Street had been expecting.

But the bigger loss is apparently not scaring off Countrywide's rescuer, Bank of America, which saved the company from a likely slide into insolvency by announcing last month that it would buy the mortgage firm for $4 billion. B of A chief executive officer Kenneth Lewis said at an investor conference Tuesday that the loss was pretty much was his bank had been expecting and that the acquisition was still "a go."

Elsewhere in the financial sector on Tuesday, a trader said that New York-based bond insurer MBIA Inc.'s 14% surplus notes due 2032 - which had gyrated wildly at lower levels earlier this month following their Jan. 11 par pricing, pushed lower by the threat of ratings downgrades for MBIA and sector peer Ambac Financial Group Inc. - were seen Tuesday unchanged at 93 bid, 94 offered; the bonds had returned to near-par levels on news that New York insurance regulators and major banks were working on a funding plan that could inject as much as $15 billion into the struggling industry, securing the triple A credit ratings of MBIA, Ambac and others.

Tech bonds move up

Outside of the builders, mortgage companies and others financially tied into the whole credit-crunch problem, high-tech names were seen having moved up after going down last week on such factors as disappointing numbers for semiconductor leader Intel Corp. and for major semiconductor customer Motorola Inc. - the former corporate parent of Freescale Semiconductor and still its largest single customer.

A market source saw Freescale's 8 7/8% notes due 2014 at 80.5 bid, up nearly 2 points.

Another source that particular bond up 1½ points on the day at that same 80.5 price. The Austin, Tex.-based chipmaker's other bonds were also seen up in brisk trading with its 10 1/8% notes due 2016 up nearly a point around the 70 level while its 9 1/8% notes due 2014 were a point better at the 75 level.

Unisys Corp.'s 6 7/8% notes due 2010 were up 3 points to 94.5 bid, while the Blue Bell, Pa.-based high tech solutions company's 8% notes due 2012 were up 3 points to around the 87 bid level.

New Harrah's trade around

A trader said that the new Harrah's 10¾% cash-pay notes due 2016 "continued to march upwards." He said that those bonds - which priced at par on Monday but then quickly fell to around the 90 level - ended Tuesday at 91.375 bid, 91.625 offered, "at least" 1 point above Monday's close.

He said the company's 10-year 10 ¾% PIK toggle notes - which would step up to 11½% should the interest be paid in-kind - "finally emerged. I didn't see anything in the Street in those yesterday [Monday], but they showed their head out there" Tuesday. He quoted the bonds, which fell into the 80s shortly after pricing - around 85.25 bid, 86.25 offered.

Forbes launches $200 million

In the primary, Forbes Energy Services began a roadshow on Tuesday for a $200 million offering of seven-year senior secured notes via Jefferies & Co.

Credit ratings remain to be determined.

The Alice, Tex.-based independent oilfield services company will use the proceeds to repay debt and for general corporate purposes.

The deal is expected to price next week.

Forbes Energy Services is one of only two deals presently believed to be in the market.

The other, also from an issuer which emanates from the energy sector, is Petroleum Development Corp.'s $250 million offering of 10-year senior notes, which had been expected to price before the end of last week.

Morgan Stanley is the left bookrunner for the deal which, like the Forbes Energy offering, is being done to repay debt and for general corporate purposes.

However market sources tell Prospect News that it has been "radio silence" with respect to the Petroleum Development offering.

One sell-side source, not in the deal, said that the underwriters are no doubt hustling to secure the best print possible for Petroleum Development.

Nevertheless, the source said, the company doesn't especially need to come now. And given the present sell-off in junk, Petroleum Development may ultimately conclude that it would be better to wait.

No fundamental shift

With no issues pricing during the Tuesday session, the week's big news remains Harrah's pricing of $6.335 billion of senior notes in two tranches on Monday.

The bond sale included approximately $4.9 billion of eight-year senior cash-pay notes which were priced at par to yield 10¾%, and approximately $1.4 billion of 10-year PIK toggle notes which were also priced at par to yield 10¾%, with a 75 basis points PIK toggle coupon step-up.

Sources estimate that one-quarter to one-third of the new Harrah's LBO financing notes are placed with the high yield accounts, and the rest remain on the balance sheets of the underwriters.

Meanwhile a $3 billion tranche of Harrah's Libor plus 300 basis points term loan, which underwriters have been marketing at 350 basis points discount to par, is widely perceived to have been spurned by the buy-side.

On Monday market sources told Prospect News that one investment bank in the Harrah's syndicate had sold its portion of the term loan at a much steeper discount to par than 350 basis points, signaling disarray among the syndicate members.

After Tuesday's close, a senior high yield syndicate official, not in the Harrah's deal, spotted the new Harrah's cash-pay notes due 2016 at 91¼ bid, while the toggle notes due 2018 were 84 bid.

"People are playing the relative value between the new issue that was quasi-placed and the existing Harrah's bonds," the official remarked.

Prospect News asked whether or not a more purposeful flow of the LBO backlog could be expected at deep discounts to par, given Monday's buzz that at least one bank did just that with respect to the Harrah's loan.

"There's a lot of scuttlebutt around Harrah's about the syndicate breaking, and certain banks being out there aggressively selling on the loan side," the source confirmed.

"There is some anecdotal evidence that points toward that.

"I don't think there has been a fundamental shift to where dealers are looking to distribute paper more aggressively than they had been previously.

"There are certain situations where, because of hedging strategies or just because of aggregate exposure, individual banks decided to trade out of securities.

"That's what appears to have happened with Harrah's.

"It's not a fundamental shift, but rather it's individual trades."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.