Refco bonds, bank debt, gyrate around at lower levels; market wonders "who's next" for Chapter 11

By Paul Deckelman and Sara Rosenberg

New York, Oct. 14 - Refco Inc. bonds and bank debt were once again bouncing around all over the place at mostly lower levels in response to the latest negative developments to emerge in the fast-moving saga of the troubled New York-based financial services concern.

Elsewhere, traders said that some market participants are expecting one or more last-minute Chapter 11 filings by companies on shaky ground that want to take advantage of the old federal bankruptcy laws, which are scheduled to be replaced by newer, tougher laws come Monday.

Refco's bank debt was being quoted anywhere from the low 60s to the low 70s throughout the session Friday as the company announced the unwinding of positions at its brokerage unit, which resulted in an additional ratings downgrade, and a private lender call was held.

Towards the end of the day, the bank debt was quoted at 64 bid, 68 offered - but it had been seen as low as 61 and as high as 72 bid, 74 offered during trading hours, one trader said.

A second trader had the high of the day quoted slightly wider at 70 bid, 75 offered.

By comparison, on Thursday, the bank debt closed out the session around the 72 bid, 74 offered context, but had been seen as high as 86 bid, 88 offered Thursday morning and as low as 57 bid, 60 offered in the afternoon hours.

Prior to the onslaught of the company's scandalous news around a week ago, which led to the arrest on securities fraud charges of its now-deposed chief executive officer, Phillip R. Bennett, the bank debt was being quoted right around 101.

That bank debt volatility was replicated in its battered 9% notes due 2012 - which a week earlier had been breezing along at levels around 108 - but which on Friday were heard to have been knocked down into the mid-to-upper teens, before firming off those lows to end bid around 30 - still a 10-point drop on the day in the securities' price.

A trader noted that "even on the first day when all this broke [Monday for the equity market, Tuesday in the debt markets, which had been closed on Monday for Columbus Day], they traded down to 90" from the pre-news 108 level, and just kept going south. Shocked investors reacted to the cascade of bad news by taking the bonds down from 90 into the upper 70s on Wednesday, and then down to 40 on Thursday, and to 30 on Friday.

In Friday's dealings, the trader said, "right off the bat" the bonds had notched low trades around 16, with "some real trades" at 18 or 19, with the high tick for the day that he saw as good as 38, before the bonds fell back to end at 30. "Nice volatility."

Another trader saw the 9% notes "trading in a range today, a big range," with the issue hitting an early low of 15-20, and "a bunch of trades" in the teens, before the bonds firmed up to close around 29 bid, 31 offered.

"Wow," he exclaimed when he checked to see just how low the bonds had gone before they came off their lows, and then added a scatological expletive. "And to think that a couple of days ago, we had them at 75-77 - and at 108 a few days before that," he chuckled, mirthlessly.

"The whole day was Refco," said yet another trader, who saw low trades in the 23 area and high trades around 33, before the bonds "leveled off" and settled in around 30.25 bid, 31 offered.

And another said that Refco's ride "had been wild," before the bonds settled at 30 bid, 33 offered.

The first trader, in calling Refco's fall over the past several sessions "absolutely a total disaster," opined: "I don't think anybody has any idea what it's really worth."

Refco has been on everybody's radar lately as people have been watching a slew of negative events unfold ever since the bombshell disclosure about an approximately $430 million receivable owed to the company by an entity controlled by Bennett, broke early this past week.

Bennett was said to have repaid the receivable in cash, including all accrued interest. However, the impact is still being felt as problems with previous and upcoming financial statements resulted from the alleged fraud, ratings downgrades and then more downgrades were announced, and most recently, Refco business units are being unwound.

On Friday, the company announced that its regulated broker-dealer, Refco Securities LLC, has initiated the process of unwinding proprietary and client positions. Refco Securities will only be engaging in security transactions to offset and liquidate outstanding long and short customer and proprietary positions.

In reaction to this announcement, Standard & Poor's downgraded Refco's senior secured debt to CC from B-.

"These announcements indicate that a technical default by Refco Group on its rated debt is almost certain to occur and that a payment default is highly likely due to Refco Group's negative tangible net worth and the deterioration of its franchise," S&P said. "The CC rating indicates a high vulnerability to nonpayment," S&P added.

The S&P downgrade was not the first such blow that Refco had received from the agencies this week. On Thursday, Moody's cut the senior secured bank credit facility rating to Caa2 from B2 and S&P cut the corporate rating to B- from B+. Prior to that, on Tuesday, Moody's had dropped the company's senior secured credit facilities to B2 from B1 and S&P had dropped the company's senior secured debt to B+ from BB-.

The Thursday downgrades had been were sparked by the company's announcement that the liquidity within its non-regulated subsidiary, Refco Capital Markets Ltd., was no longer sufficient to continue operations, causing a 15-day moratorium on all activities of Refco Capital Markets to be imposed.

Refco said at that time that it had retained as special advisors to its board of directors Arthur Levitt, formerly chairman of the SEC and chairman of the American Stock Exchange, and Eugene A. Ludwig, formerly U.S. Comptroller of the Currency, and currently chief executive officer of Promontory Financial Group LLC and Promontory Financial Group LLC.

Goldman, Sachs & Co. has been retained as the company's financial advisor.

The company also disclosed earlier this past week that, as a result of the burgeoning scandal, its financial statements for the periods ended Feb. 28, 2002, Feb. 28, 2003, Feb. 28, 2004, Feb. 28, 2005, and May 31, 2005 can no longer be relied upon and the company's 10-Q filing for the period ending Aug. 31 will likely be delayed because of the current audit committee investigation.

The first bond trader was of the opinion that "there's a lot more to this story than we've heard. If their only problem was this loan that Bennett took, and he repaid it in full, with interest [Bennett was reported to have cut a $433 million check to Refco to take care of the matter] - then why do they have a problem?"

He agreed with the proposition that disclosure of the complex receivables arrangement - which had been buried deep within Refco's financial structure and essentially went unreported up till now - likely spooked investors who have adopted an attitude of "where there's smoke, there's fire" in wondering what other unpleasant surprises might be waiting to be uncovered next.

"And I think they're probably right. There's got to be something else. The whole thing doesn't make any sense."

He noted that the receivables, some dating back to 1998, had been described in the media as "uncollectible" - "which would mean those receivables would be worthless if they're uncollectible. You're telling me that Bennett took $400 million out of his own pocket and gave it to them for worthless receivables? The whole story doesn't make sense. There's something else there that will take a long time to come out."

He reiterated that "I don't know what the value of this thing is. I'm pretty sure the equity has no value [Refco's New York Stock Exchange-traded shares, which had closed at $28.56 on Friday, Oct. 7, before the storm broke, fell to $10.85 by Wednesday, and then declined further, to $7.90 in pre-market trade before dealings were indefinitely suspended Thursday]. "Whether there's anything left over for [holders of] the bonds? I don't think anybody has any clue."

Another bond trader the whole Refco mess - coming as it does in the wake of the well publicized problems that brought down such companies as Enron Corp., Adelphia Communications Corp., WorldCom Inc. and Tyco Corp., as well as such key figures from those companies as Adelphia founder John Rigas, WorldCom chief Bernard Ebbers and Tyco's former high-living bon vivant CEO, Dennis Kozlowski, all of whom were convicted of various financial offenses, "raises anew the questions about corporate governance, the whole Sarbanes-Oxley matter. People will now be hesitant" to invest in some companies.

He said that Refco's problems were very unfortunate, noting that he had done lots of business with them in the past - but, "as much as I feel badly about what's happened to them, hey, people gotta play by the rules."

Delphi bonds rise

Elsewhere, traders saw Delphi Corp.'s bonds, now all trading on top of one another since the Troy, Mich.-based auto electronics manufacturer's bankruptcy filing, at 61.5 bid, 62.5 offered, well up from 58 bid, 58.5 on Thursday.

One attributed the rise to "short covering," after the bonds had gotten whacked around following the Chapter 11 filing.

Delco, Lear lower

An auto supplier which is not bankrupt, but whose subordinated bonds are "trading almost like they're bankrupt," one trader said, was Delco Remy. He saw its notes "go down in sympathy" with those of interior and seating components maker Lear Corp., which was the subject of market rumors - apparently denied by the company - that it had significantly drawn down its bank credit line.

He quoted the Delco Remy subordinated 9 3/8% notes and 11% notes, both due 2011, at 47 bid, 49 offered, while its 9 5/8% senior notes due 2011, "which people think are money-good" were falling to 86.5 bid from levels at 90 bid, 92 offered earlier in the week.

On the other hand, Collins & Aikman Corp.'s 10¾% notes due 2011 firmed a point, to 49 bid, 51 offered, said a trader in distressed bonds.

However, he saw Tower Automotive's 12% notes due 2012 at 86 bid, 88 offered, "looking about two points lower," while the bankrupt Novi, Mich.-based automotive frame maker's 5¾% convertible notes due 2024 were "way up" from Thursday's 42 bid, 44 offered, to 51 bid, 53 offered on Friday.

He said he was not aware of anything specific going on at Tower.

Outside of the automotive sphere, not much was happening, with Delta Air Lines Inc.'s notes hanging in around 18 bid, 20 offered, Northwest Airlines Corp.'s at 27 bid, 28 offered, and United Airlines corporate parent UAL's notes half a point better, at 14 bid, 15 offered.

Predicting the next filings

Another trader in distressed bonds said that with not that much going on in his market apart from the Refco debacle, participants were playing a grim guessing game - sort of the Wall Street equivalent of the popular, though macabre, "dead pools" that speculate on who will be the next celebrity to die.

"Everyone was sitting there wondering who's going to file [for bankruptcy] before the Sunday night deadline," he said. With changes in the federal bankruptcy laws toughening them up for debtors slated to take effect on Monday, debtor companies looking to seek bankruptcy protection under the older, more lenient rules, technically had until 11:59 p.m. on Sunday evening to get their filings in. While most bankruptcy cases are typically filed during regular business hours from Monday through Friday, weekend filings are not unheard of - Delphi filed the weekend of Oct. 8-9.

There was, of course, speculation that the badly staggering Refco might be a candidate - especially if, as some market participants believe, the revelations of Bennett's purportedly illegal dealings represent only the tip of the iceberg and there are other shoes waiting to be dropped.

The trader also theorized that "you've got FLYi [the corporate parent of the troubled Independence Air], which I'm surprised is still around," especially given the well-publicized troubles of the airline industry, which has seen Delta and Northwest recently join UAL and upstart carrier ATA Airlines in bankruptcy, while US Airways Group just emerged from Chapter 11 as a unit of AmericaWest Airlines.

"So there could be a couple of surprises coming out of the woodwork" to greet market players on Monday morning - or maybe not. "I don't know," he said.

"I would be surprised if you don't see some - but who knows who they're going to be."

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