Mortgage plan aids lenders, builders; E*Trade up, Delphi bounces; Unisys prices; funds add $43,000

By Paul Deckelman and Paul A. Harris

New York, Dec. 6 - The long-awaited rescue plan to head off foreclosure for hundreds of thousands of subprime borrowers finally made its official debut Thursday, its provisions pretty much as expected. Despite the essentially anticlimactic nature of the news, bonds of troubled mortgage providers like Countrywide Financial Corp. and Residential Capital LLC got a solid boost. So did homebuilders such as Hovnanian Enterprises Inc. and Standard Pacific Corp., which need an end to the subprime lending crisis in order for their sales to revive.

E*Trade Financial Corp. - which also writes mortgages, among its other on-line activities, and which has been hurt by the subprime debacle - was up for a third straight day, continuing to bounce back from the severe beating which the company's bonds had taken over several previous sessions.

Also seen on the comeback trail were the badly battered bonds of Delphi Corp., which had been beaten down over the previous several sessions, including Tuesday's 10 to 12 point across-the-board slide.

Overall, the junk market continued to rally with equities on Thursday, with sources marking the high yield as much as a quarter of a point higher on the session.

One syndicate official told Prospect News that following a strong start on Thursday morning the market sold off a little, and then rallied back, not quite recovering all the ground it gave up during the middle part of the day.

In the new-deal market, Unisys Corp. priced a downsized offering of 8-year notes. Its existing bonds were meantime pushed downward by introduction of new supply from the high-tech company.

Also in the primary arena, price talk emerged on NewPage Corp.'s upcoming add-on issue of 10% notes due 2012, while SPX Corp. was heard by syndicate sources to be getting ready to hit the road Friday to market its half-billion dollar offering of seven-year senior notes.

Funds see small inflow

As trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $43,000 came into the funds. That move into the black follows a sharp loss the previous week, ended Nov. 28, when $471.7 million more left the funds than came into them, the fourth straight weekly outflow, and the fifth outflow in the previous 10 weeks.

With 48 weeks now in the books, that left the 2007 cumulative outflow totals at $2.352 billion. While strong inflows had been seen in the first half of the year, building up to some $1.6 billion, those inflows pretty much dried up beginning mid-year, coinciding with the subprime-induced market credit crunch, and the pretty much steady drumbeat of outflows since then - interrupted by occasional inflows - wiped out that big early bulge and left the fund flow figures deep in the red, at least for those funds which report on a weekly basis.

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, most recently, hedge funds.

Unisys downsizes

In primary news, Unisys priced a downsized $210 million issue of 12½% eight-year senior notes (B2/B+) at 98.719 to yield 12¾% on Thursday. Bookrunners were Bear Stearns, Banc of America Securities and Citigroup.

The debt refinancing and general corporate purposes deal from the Blue Bell, Pa., information technology services provider was downsized from $250 million.

NewPage price talk

Meanwhile NewPage set price talk for a $456 million add-on to its 10% senior secured second-lien notes due May 1, 2012 at 10% to 10¼%.

Goldman Sachs & Co. is the bookrunner for the tap, which is expected to price on Friday afternoon.

The original $350 million issue priced at 98.773 to yield 10¼% on April 22, 2005.

SPX brings $500 million

Elsewhere, one roadshow start was heard, albeit a brief one.

SPX will start a roadshow on Friday for its $500 million offering of seven-year senior notes (Ba2).

The roadshow is scheduled to conclude on Monday.

Banc of America Securities LLC and JP Morgan are joint bookrunners for the deal from the Charlotte, N.C., engineering solutions provider to the energy and power industries.

Proceeds will be used for general corporate purposes which may include financing the acquisition of APV, a manufacturer of process equipment and engineering solutions primarily for the sanitary market. APV is currently a division of Invensys plc.

Tribune cuts high yield bridge

Tribune, the Chicago-based media company, revealed on Thursday that it plans to reduce its $2.1 billion bridge loan commitment to $1.6 billion through the use of $500 million of available cash.

The $500 million portion will come out of the high yield bridge, an informed source said.

In the first stage of the public-to-private transaction, which was completed a few months ago, Tribune completed a cash tender offer for 126 million shares at $34 per share and refinanced its existing credit facilities.

In the second stage, Tribune is buying all the remaining outstanding shares of the company.

The transaction is expected to close before the end of the company's 2007 fiscal year following satisfaction of the remaining closing conditions, including the receipt of a solvency opinion and completion of the committed financing.

In order for the company to be able to complete the second stage of the public-to-private transaction, a leverage condition must be met. If the leverage condition is not met, the second stage is "dead," a bank loan trader told Prospect News.

As a result of the company deciding to reduce its bridge, people started to assume that this reduction was necessary in order for the leverage condition to be met, and if that's the case, then the next financials that get released by the company will likely be negative, the trader explained.

"People view the change in the size of the bridge as a negative. Leverage is lower [because of the paydown] so that's good but the company is doing crappier and crappier so that's bad.

"It's kind of a double-edged sword," the trader said, adding that the expectation is that leverage is not really down because numbers won't be good.

Existing Unisys bonds head lower

Unisys' outstanding bonds - which have been weakening ever since the market first heard talk that the company was going to issue some new debt - moved lower in the wake of the new deal's pricing. A market source saw the company's 6 7/8% notes due 2010 down 1 point at 94 bid.

Another market source meantime reported that its 8% notes due 2012 were 1½ points down at 86.5 bid.

Market gets a lift from mortgage plan

Apart from new deal-influenced activity, traders saw a market that was pretty much popping, on improved volume, or as one trader colorfully put it, "rockin' and rolling." In a similar vein, yet another trader said that the market was "movin' and groovin'."

Advancing issues outnumbered decliners by about a five-to-four ratio, and overall volume was up nearly 11% from Wednesday's levels. A trader saw the widely followed CDX junk bond performance index up 3/8 point at 96 1/8 bid, 96 3/8 offered. Among other market barometers, the KDP High Yield Daily Index, which had risen 0.08 on Wednesday, gained another 0.03 to 77.96, although its yield rose 1 basis point to 8.55%.

A trader saw the market - particularly the troubled sectors like mortgage providers and builders - "definitely firming up - even [problem plagued homebuilder] WCI has been bouncing a little."

He did say that "we didn't see as much of a run as you would expect with the Dow up 175 [points]. We saw a little bit of short-covering. I think people are still cautiously optimistic - and [Friday's] payroll number is going to be huge. I think people are waiting to see what happens there before they really dive in." The Labor Department is scheduled to release its report on non-farm payroll growth for November at 8:30 a.m. ET; while Wall Streeters are generally expecting relatively modest growth of around 80,000 jobs, the stage was set for a possibly much stronger number when ADP, the big payrolls processor, reported on Wednesday that by its count, private-sector employers added some 189,000 jobs last month - three times greater than the market's forecast.

With junk players playing it a little cautiously ahead of the all-important statistic Friday, "I didn't see the volume and the price action that I would have thought we'd see" Thursday with the release of the subprime rescue plan, the trader said. "I think you saw some squaring up by accounts, and dealers getting their bets in line before [Friday]. We'll see if we get that kind of follow-through after the number."

That having been said, the big news of the day was the rescue plan, the general outline of which had been circulating in the market for about a week and which thus really came as no big surprise. In a nutshell, there will be a five-year freeze on the upward resetting of mortgage rates for subprime adjustable-rate loans which are scheduled to reset from Jan. 1, 2008 through July 31, 2010. The freeze will be available only to homeowners who have not fallen behind on their payments at the lower introductory "teaser" rates at which they took out those mortgages. Another requirement is that the houses be owner-occupied - a condition which would exclude people who bought homes as investment properties, hoping to profit from the housing boom by either "flipping" the properties through a quick sale at a higher price or renting them out.

The plan, negotiated between the Bush administration and mortgage industry participants and formally announced by president Bush, has no shortage of critics; a number of Democratic politicians called it a case of "too little, too late" - particularly several of the senators who themselves are running for White House, as well as many consumer advocates. They said it will do nothing to help people whose homes are already in foreclosure now, or whose loans are resetting before the Jan. 1 start date or have reset, or those who have fallen behind even in paying at the "teaser" rate because of the generalized economic stress. On the other hand, it was derided in some quarters as unwarranted government intervention in the market, in effect rewarding bad behavior on the part of homebuyers who borrowed more money than they could afford to pay back or who didn't read the fine print on their mortgage documents warning them about the scheduled rate rise, as well as banks extending big loans to poor credit risks.

Managing director Bill Featherston of J. Giordano Securities in Stamford, Conn., for instance said that the plan "will generate resentment - people like you and I, we pay our mortgages every month. Why should we pay for some guy who speculated on the market to bail him out of his problems?"

Countrywide better

But junk bond players obviously liked the plan, lifting the securities of companies hurt by the subprime lending debacle, among them Calabasas, Calif.-based Countrywide, the nation's largest mortgage lender.

Its 6¼% notes due 2016, which had finished at 61 bid on Wednesday, were seen by a market source to have opened slightly higher around 61.5, but then to have moved steadily upward to about the 64 level in busy dealings including many large-block trades.

Among its shorter issues, the 3¼% notes slated to come due next May were seen having gained more than a point to around 91.75 in very active trading, although they came down from their peaks above the 92.5 level.

Its 5 5/8% notes due 2009 were seen to have moved up to about the 81 level, a 2 point gain on the day, before coming down from that peak and back down to just below Wednesday's closing price at 79. However, its 4% notes due 2011 were up as much as 3 points on the day and were seen ending up around 2 points at 76.5

A trader at another desk saw the 61/4s up 2 points at 63 bid, 64 offered.

ResCap bonds also better

A trader saw Countrywide competitor Residential Capital "definitely up," although he said that it "wasn't completely off the charts."

He saw its 6% notes due 2011 firm to 66.75 bid, 67.5 offered up about ½ point or a point, but saw its subordinated bonds jump anywhere from 3 to 5 points, its floating-rate notes due 2009, which he characterized as "one of the more volatile ones," zooming to 49 bid, 50 offered from a wide 46 bid, 51 offered previously. He noted that the latter bonds "were down in the 20s" before ResCap's Nov. 21 announcement that it was tendering for some of its bonds, "when people were concerned about them filing [for Chapter 11]," although that issue was not among those covered by the buyback. "They fell from 37 to 25 in a day, when ResCap was really under pressure."

He also saw the floaters due June 2008 - one of the bonds being tendered for - up 1 point at 84, around the takeout price outlined in the tender offer.

ResCap's 8 3/8% notes due 2015 rose 1½ points to 66 bid.

Another trader said he saw "not much movement" in ResCap's 6½% notes due 2013 - which, he noted, now carry an 8% coupon thanks to step-ups trigged by ratings downgrades. He quoted the bonds at 65 bid, 67 offered, though that was up from 63 bid, 65 offered previously.

In other mortgage names, he saw just a ½ point move in Thornburg Mortgage Inc.'s 8% notes due 2014, to 83.5 bid, 85.5 offered.

Builders benefit from plan

Another segment seen benefiting from anything that stops the cascade of foreclosures and restores homebuyer confidence is the homebuilders.

Among them were Hovnanian, whose 6 3/8% notes due 2014 were up 2 points at 72.5 bid. At another shop, the Red Bank, N.J.-based builder's 6¼% notes due 2016 were quoted up 2½ points at 70 bid.

Another homebuilder given a boost was D.R. Horton Inc., whose 8% notes due 2009 firmed by a point to 98 bid.

The news also helped homebuilders considered particularly troubled by the downturn in real estate that even preceded the subprime meltdown and resulting credit contagion.

A trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 jump to 79 bid, 80 offered. He meantime saw Standard Pacific Corp.'s 7% notes due 2015 also up 4 points on the bid side at 70 bid, 71 offered, while Tousa Inc.'s 8¼% notes due 2011 were 5 points better at 45 bid, 47 offered. However, Tousa's subordinated debt was still languishing at 3.5 bid, 5.5 offered or 5.5 bid, 7 offered, the trader opining that "I don't think they're gonna bounce" even on the subprime bailout news.

He also saw WCI Communities Inc.'s bonds little changed, noting "you don't see much activity in them." He saw its 9 1/8% notes due 2012 "still within the same range" at 55 bid, 57 offered

Another market source saw the WCI bonds move up to just under 57 bid, a gain of nearly 2 points on the day.

A trader elsewhere saw Beazer's 8 5/8s up 2 points at 78 bid, 80 offered.

E*Trade rebound continues

Another mortgage-linked name is that of the on-line brokerage E*Trade Financial, whose bonds had taken a beating about a week ago and on Monday on investor unease over the $2.55 billion bailout of the New York-based financial services company by a syndicate led by Citadel Investors Group.

But after having those second thoughts about the deal, which will give Citadel about a 19% stake in the company and a seat on its board, along with new 12½% bonds, while E*Trade still faces large problems, market players this week began having third thoughts about it, coming to the conclusion that maybe it will work out after all.

That spurred a rise in the bonds on Tuesday and Wednesday, and that rebound continued Thursday. Its 8% notes due 2011 were up 4 points at 82.5 bid, 84.5 offered, a trader said. Another market source saw the bonds up 5¼ points at 83.75 bid.

Delphi bonds turnaround

Another big turnaround story that bond players were watching was Delphi.

The bankrupt Troy, Mich.-based automotive parts maker's bonds were "all up 5 points," a trader said, with the 6.55% notes that were to have matured last year at 61 bid, 63 offered, its 6½% notes due 2009 at 61.5 bid, 63.5 offered, its 6½% notes due 2013 at 60 bid, 62 offered and its 7 1/8% notes due 2029 at 62 bid, 64 offered.

Another trader saw the 2009s 5 points better at 61 bid, 62 offered.

The bonds were seen better on talk that Highland Capital, along with other bondholders, might be submitting an alternative reorganization plan.

A trader said the potential new plan could have intrigued bondholders, who were hoping for a better deal. Currently, unsecured creditors will receive just under 78% of their claims in new stock in the reorganized company and the opportunity to participate in a rights offering. Bondholders will receive 90% of their claims in new stock.

Another trader said the word was that the Highland-led plan would include an over $2 billion rights offering backed by the bondholders. But, as the current plan all ready has approval from the official committees, it was possible that Delphi could ignore the alternative.

"If [the alternate plan] doesn't work out for [Highland], then they will probably just sue [Delphi]," a trader said.

Stephanie N. Rotondo contributed to this report

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