Masonite under pressure; WCI convertibles take a tumble; Vertis slips; Blockbuster weaker; GM loans lower

By Stephanie N. Rotondo

Portland, Ore., July 15 - Whether the recent "shell shock" had worn off or something else had inspired investors Tuesday, the distressed bond market saw a surge of activity.

"A lot traded today for sure," a trader said. "For the first time, either the shell shock wore off or people realized they can't just sit there and do nothing."

But even with the increase in volume, the marketplace was "still kind of crappy," another source said.

For instance, Masonite International Inc.'s bonds lost about 5 points, while its bank debt fell about 2 points. The decline came on the back of a lender call in which the company said it might breach is covenants regarding EBITDA.

Meanwhile, WCI Communities Inc.'s convertible bonds ended 20 points weaker, just one day after the homebuilder announced it had disbanded its restructuring committee. But for all the action in the convertibles, the straight bonds were largely inactive.

Vertis Communications Inc. announced that it filed its pre-packaged Chapter 11 restructuring plan, as did American Color Graphics. The filings were a key step in completing a previously announced merger of the two companies. Though the filing was expected, Vertis' debt still closed a touch softer on the day.

A Netflix/Microsoft partnership might have caused Blockbuster Inc.'s bonds to lose ground. There was no news to cause the 2-point decline in the movie renal chain's bonds, and one trader speculated that the latest development at Netflix could have "negative implications."

General Motors Corp. announced a series of restructuring steps it would take to ensure its longevity through the difficult economic climate. But instead of encouraging investors, the plan seemed to do the opposite. The automaker's bank debt was mostly quoted lower, while the corporate debt also dipped.

Possible covenant breach pressures Masonite

Masonite's bonds lost a good 5 points after the door marker said it would likely breach two covenants of its credit facility.

A trader quoted the 11% notes due 2015 at 43.5 bid, 45.5 offered. At another desk, the debt was placed at 43 bid, 45 offered.

Masonite's term loan B also lost some ground on Tuesday as lenders were still mulling over the company's covenant amendment proposal, according to a trader.

The term loan B was quoted at 88½ bid, 89½ offered, down from 90¾ bid, 91½ offered, the trader said.

The Ontario-based company said that its EBITDA would not meet the requirements under the covenants, based on preliminary figures for the most recent quarter. If the covenants are in fact breached, that could trigger a default.

Masonite said it is in talks with its lenders to amend the terms of the facility, but the company noted that the negotiations could fall apart.

Though the company assures that it has enough cash on hand to operate, the housing slump has made its mark on financials. During the first quarter of 2008, revenue fell 18%.

But Masonite is not the only one facing hard times. Ply Gem Industries Inc., which manufactures siding and fencing materials, among other things, has also suffered. In the month it has been on the market, Ply Gem's recent 11¾% notes due 2013 have fallen about 10 points from their issue price. A trader said the paper fell 2 to 3 points on the day to end at 87.5 bid, 88.5 offered. The 9% notes due 2012 were 4 points weaker at around 48.

Realogy Corp.'s 10½% notes due 2014 fell 2 points to 64 bid.

WCI convertibles tumble

Elsewhere in the housing sector, WCI Communities' 4% convertible notes due 2023 fell about 20 points on the back of the company's dissolution of its restructuring committee.

However, while the "converts were off a good bit, there was not much going on in the straight bonds," a trader said.

The trader said the 4% convertibles fell from the 80s to the low-60s during the session. But he saw only one trade in the 9 1/8% notes due 2012 at 37.5.

Another trader pegged the convertibles at 60 bid, 65 offered.

Early in the session, a source said WCI was "pretty much unaffected" by the news released Monday. At that point, he called the 4% notes 80 bid, 85 offered.

The Bonita Springs, Fla.-based homebuilder said Monday that is had dissolved its restructuring committee. The committee was charged with evaluating restructuring proposals from "interested investors, including affiliates." But the only bid received was one from billionaire investor Carl Icahn, a major shareholder in the company. WCI stated it was not engaged in talks with Icahn regarding his proposal.

"This doesn't surprise us, because we don't believe anyone would buy WCI with its present debt load in place," wrote Gimme Credit analyst Vicki Bryan in an afternoon note. Icahn has a 15% stake, which has lost about 90% of its value, she adds.

Bryan goes on to say that she believes the "face value of the company's $1.7 billion in debt is more than the company is worth." Current restructuring efforts, including its plan to swap the convertible paper and some of its bank debt for other debt, do not seem to be going well. If their current efforts fail, Bryan opines, the company could be forced into bankruptcy.

Vertis files Chapter 11 plan, notes slip

Vertis' paper was "off this morning on the news, but not too much," a trader said.

The trader was referring to the news that Vertis, along with American Color Graphics, had filed their respective pre-packaged bankruptcy plans. The filings are a key step in completing a merger of the two entities, and the trader called the development "expected."

The trader pegged the 10 7/8% notes due 2009 at 20 bid, 25 offered, the 9¾% notes due 2009 at 87 bid and the subordinated paper at 2 bid, 5 offered.

At another desk, a trader saw the 9¾% notes at 91 bid, 92 offered and the 10 7/8% notes at 18 bid, 19 offered.

Another trader placed the subs at 2.75 and saw the 10 7/8% notes around 19. He added that the latter had not traded since last week, when it was in the high-20s, and that the bonds were quoted in the previous session at 15 bid, 25 offered.

In a press release, Vertis announced that it received nearly 100% approval of its bankruptcy plan. According to the release, the restructuring plan will reduce debt of the combined company by about $1 billion.

Vertis Communications is a Baltimore-based provider of print advertising and direct marketing solutions to retail and consumer services companies.

Blockbuster bonds losing ground

A partnership between Netflix Inc. and Microsoft Corp. might have been what was weighing on Blockbuster's bonds Tuesday.

The Dallas-based movie rental chain's 9% notes due 2012 fell as much as 2 points during trading. Traders across the board placed the debt at 79 bid, 80 offered.

There was no Blockbuster-specific news, but on Monday, the company's biggest rival Netflix unveiled its plan to team up with Microsoft to stream movies and television shows through the Xbox 360 gaming system.

When asked if that had caused the damage to the company's debt, a trader said it was possible.

"That definitely could have negative implications for Blockbuster," he said.

Among other retailers, Bon-Ton Stores Inc.'s 10¼% notes due 2014 slipped to 58.5, though a trader said the bonds "didn't trade much."

The trader also saw Claire's Stores Inc.'s paper weaker, the 10½% notes due 2017 at 38.5 bid, 39.5 offered and the 9 5/8% notes due 2015 around 40.

GM loans slip on restructuring steps

General Motors' revolver was lower and its term loan was unchanged to weaker, depending on which trader was asked, after the company announced further restructuring and liquidity enhancing steps to deal with the weak U.S. economy, record high fuel prices, shifts in consumer vehicle preferences and the lowest U.S. industry sales volumes in a decade.

The company's revolver was quoted at 82 bid, 83 offered, down from 83 bid, 84 offered, one trader said.

"You would think it would be higher on the news," the trader said regarding the revolver. "It didn't fall until later in the day. Initially after the news it was unchanged at 83, 84 but then it came in with the rest of the market."

Meanwhile, the term loan was quoted at 79 bid, 81 offered by two traders. However one of those traders said the paper was unchanged on the day and that no activity was seen in it, while the other trader said it was down about half a point from previous levels.

On the topic of the overall cash market performance, the third trader disagreed with the assessment that the entire market was down. "Cash market was a mixed bag. Didn't have a strong direction either way," the trader added.

Over in the corporate debt, a trader said the automaker's bonds were quoted "a little more actively than normal," though he added, "Not a lot actually traded."

The trader said there was only one round lot trade in the benchmark 8 3/8% notes due 2033 at 51.5. He said the bonds traded at 54 to start the day and then fell to 53.5 before hitting the 51 mark.

"There was definitely some volatility there," he said.

GM to bolster liquidity

On Tuesday morning, GM said that although it has ample liquidity to meet its 2008 funding requirements, it is taking additional measures to bolster liquidity to protect against a prolonged U.S. downturn and that it anticipates it will report a significant second-quarter loss.

The newly announced liquidity actions include a combination of asset sales and capital market activities, and operating and related measures. The cumulative impact on cash through 2009 is projected to be about $15 billion.

At the end of first-quarter 2008, GM had liquidity of $23.9 billion, with access to U.S. credit facilities of an additional $7 billion.

Under this latest plan, GM hopes to raise additional liquidity of $4 billion to $7 billion through asset sales and financing activities.

The company also is looking at its assets for possible sale or monetization, which is expected to generate about $2 billion to $4 billion of additional liquidity.

Also, the company expects to continue to access global markets to raise additional liquidity and is initially targeting at least $2 billion to $3 billion of financing.

The company went on to say that it has gross unencumbered assets of over $20 billion, which could support a significant secured debt offering, or multiple offerings, that would far exceed the initial target.

More headcount reductions

Other aspects of the new initiatives include further salaried headcount reductions in the United States and Canada in the 2008 calendar year, health care coverage for U.S. salaried retirees over 65 will be eliminated, no new base compensation increases for U.S. and Canadian salaried employees for the remainder of 2008 and 2009 and no annual discretionary cash bonuses for the company's executive group in 2008.

These benefit changes, salaried headcount reductions and other related savings will result in an estimated reduction in cash costs of more than 20%, or $1.5 billion, in 2009.

Additional structural cost reductions of about $2.5 billion are expected in General Motors North America, partially achieved through further adjustments in truck capacity and related component, stamping and powertrain capacity.

The company will reduce and consolidate sales and marketing budgets, and engineering spending in 2008 and 2009 will be held at 2006 to 2007 levels. These operating actions, combined with the benefits of the 2007 GM-UAW labor agreement, are targeted to reduce North American structural cost from $33.2 billion in 2007 to approximately $26 billion to $27 billion in 2010, a reduction of $6 billion to $7 billion.

In addition, the company is revising its capital spending plan and reducing about $1.5 billion in expenditures versus prior plans, and spending for non-product programs will also be significantly reduced, while powertrain spending will be increased to support the development of alternative propulsion and fuel economy technologies and small displacement engines.

GM also said that aggressive actions are being taken to improve working capital by approximately $2 billion in North America and Europe, primarily related to the reduction of raw material, work-in-progress and finished goods inventory levels as well as lean inventory practices at parts warehouses.

Other plans include suspending future dividends on common stock, which is expected to improve liquidity by about $800 million through 2009 and deferring about $1.7 billion of payments that had been scheduled to be made to a temporary asset account over the balance of 2008 and 2009 for the establishment of the new UAW VEBA.

For the liquidity planning purposes, the company used assumptions of U.S. light vehicle industry volumes of 14 million units in 2008 to 2009, lower U.S. share of about 21% and continued elevated average oil price estimates ranging from $130 to $150 per barrel by 2009.

"We are responding aggressively to the challenges of today's U.S. auto market," said Rick Wagoner, chairman and chief executive officer, in a news release. "We will continue to take the steps necessary to align our business structure with the lower vehicle sales volumes and shifts in sales mix. We remain committed to bringing to market great products that target changing consumer preferences for more fuel-efficient vehicles.

"The actions announced today are difficult decisions, but necessary to respond to the current auto market conditions," Wagoner continued in the release. "Even under conservative planning scenarios, GM is well-positioned to withstand the U.S. market downturn and emerge a stronger company.

"We have a solid position in the rapidly growing emerging markets, a global operating framework that allows us to respond to changes in the U.S. market, a commitment to technology leadership, and an ever stronger and competitive product line-up."

GM is a Detroit-based automotive company.

Broad market weaker

VeraSun Energy's 9 3/8% notes due 2017 were quoted at 50 bid, 52 offered, while Aventine Renewable Energy Holdings' 10% notes due 2017 were deemed "kind of lower' at around 61.5.

After losing ground in the previous session, Six Flags Inc.'s 9 5/8% notes due 2014 continued to soften, ending down 3 to 4 points to the mid-40s.

Sara Rosenberg contributed to this article.

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