Thornburg continues to slide; Tropicana loan weaker, bonds better; Idearc notes moving upward

By Stephanie N. Rotondo

Portland, Ore., March 4 - Thornburg Mortgage Corp. continued to dominate distressed bond trading Tuesday amid continued concerns revolving around new margin calls and another round of rating cuts.

The mortgage arena as a whole has come under fire this week, with downgrades flying around left and right. But Thornburg is by far the leader of the pack, as margin calls and liquidity concerns have pushed its bonds at least 20 points lower already this week.

Meanwhile, bond investors are continuing to "love" Tropicana Entertainment LLC, also known as Wymar Operating, though bank debt holders are not as affectionate. A potential default has helped the casino operator's corporate debt gain for two straight sessions. That same news has weakened the bank debt over the last two days.

Idearc Inc.'s stock might be considered a risky play, but a Barron's article published over the weekend has piqued the interest of both equity and debt investors. The company's bonds, as well as its equity, edged higher yet again during Tuesday trading.

But train troubles forced some market players out of their desks early. A building collapse in East Harlem caused the Metro-North train to suspend its service, leaving some Connecticut dwellers in the lurch.

Treading water in distressed market

Despite the hubbub in the marketplace, activity in the distressed and high-yield sectors has slowed to a virtual stop.

While it is somewhat understandable why investors have become averse to anything involving risk - the negative news and economic indicators just keep coming - junk bond traders are banging their heads against the wall - sometimes literally.

"It's not worth it," said one distressed trader who has almost moved entirely out of that market. "I just sit here and bang my head against the table ... and I don't like to do that."

Another trader, when asked what was keeping him busy, quipped, "The internet, mostly."

The lack of activity is visible. According to Trace, only 938 high-yield issues traded Monday, compared to 900 issues on Friday. Of those 938 issues, 491 declined and 75 hit a 52-week low.

With the threat of a recession - or worse - looming over the horizon, some market players have turned to other things to keep them busy, like mortgage-backed securities. Still others are trying to stay optimistic.

"We are definitely going into a recession," said one trader. "Hopefully not a depression. That's what we have to say to try to stay optimistic."

And as each day comes to a close, traders and investors alike can only hope that things will get better.

Thornburg continues to fall

It has thus far been a bad week for the mortgage sector as a whole, but Thornburg Mortgage is leading the pack by far.

The lender's bonds dove nearly 15 points in the previous session on news that it was facing another $270 million in margin calls - on top of the $300 million in calls it paid last month.

As investors worried about Thornburg's ability to meet the calls, the bonds went into freefall. However, toward the end of the day, the paper rallied as the company announced it had raised additional funds.

Still, Standard & Poor's cut its rating on the New Mexico-based company. On Tuesday, other ratings agencies followed suit.

Amid the ongoing dramatics, a trader saw Thornburg's 8% notes due 2013 slide about 7 points to around 67. Another trader placed the bonds at 67 bid, 67.5 offered.

"They could not hold on to the bid from last night," he said.

Another trader saw the bonds close at 66 bid, 67 offered, while another saw the bonds at 66 bid, 68 offered but called that down only 4 points on the day. Another market source called the bonds down 4.5 points at the 67 level.

Thornburg's stock has also not been able to hold its weight. On Monday, the equity lost about 50% of its value, falling to under $5. Come Tuesday, the stock fell another 76 cents, or 17.59%, to $3.56.

Given the significant downturn of the stock and the continued struggles the company will likely face, RBC Capital downgraded the equity to "underperform" from "sector perform."

"We are concerned that TMA now has much more limited resources to meet margin demands, so more may now be at stake," RBC analyst Jason Arnold wrote in a research report. "TMA likely stands in technical default at present, which could lead other lenders to pull funding lines and seize collateral, with potentially material implications for the company's future."

"I think they file," one trader said. "The CEO could have taken extra capital and sat tight, but blew it."

Following S&P's lead, Moody's Investors Service downgraded Thornburg's senior unsecured debt to Ca from Caa1. Meanwhile, Fitch Ratings placed the company on rating watch.

But Thornburg was not the only mortgage institution to step up to the chopping block. Over the last two days, Fremont General Corp., Residential Capital LLC and GMAC LLC have all had their ratings lowered - giving more evidence that troubles in the financial sector are far from over.

For example, a trader called mortgage insurer Radian Group Inc. "the name in the news," as the company delayed filing it quarterly report due to difficulties assessing what its exposure to collateralized debt obligations is. That company's 7¾% notes due 2011 were off 3 points at 75 bid, 77 offered.

Countrywide Financial Corp.'s 6¼% notes due 2016 were also being quoted down 5 points at 79.

Thornburg Mortgage is a mortgage lender based in Santa Fe, N.M.

Tropicana loan lower, bonds rise

Tropicana Entertainment's operating company term loan once again felt like it was being met with some pressure during market hours as investors continued to react to the outcome of the company's court case with bondholders.

The trader said that the term loan was quoted at 96½ bid, 97½ offered, down from 97 bid, 98 offered on Monday. However, on Monday, there were some traders that were quoting this debt at 96¾ bid and some quoting it as wide as 96½ bid, 98 offered.

But while bank debt holders seem to be skittish, bondholders are not hesitating.

"They love Wymar [the name the company is more commonly referred to]," a trader said of bond investors, who have helped the bonds gain over the last two sessions.

The 9 5/8% notes due 2014 moved up another 2 points during trading, with the trader quoting the debt at 56 bid, 56.5 offered. At another desk, a trader pegged the bonds at 55 bid, 56 offered.

Last month, Tropicana received a notice of default and acceleration on its 9.625% notes as a result of the New Jersey Casino Control Commission's refusal to renew its license to operate the Tropicana Casino and Resort in Atlantic City.

Tropicana disagreed with the bondholders, saying that no default had occurred and therefore, the acceleration was invalid.

The dispute was taken to court, and this past Friday, the court rejected all but one of the contentions of the bondholders.

The one item that was ruled in favor of bondholders relates to the transfer of title to the assets of Adamar, which the court found to have occurred on Dec. 19, 2007.

According to the ruling, this transfer of assets will only be an event of default if it continues for 60 days after receipt of written notice from bondholders.

The first notice from bondholders is dated Jan. 28, and the second notice is dated Feb. 20 - meaning the 60-day cure period for any technical non-compliance has not expired; so, no event of default presently exists and the notes cannot currently be accelerated.

A forbearance agreement from senior credit facility lenders regarding the Atlantic City license issue was obtained back in December.

The Atlantic City property is for sale, as well as its properties in Evansville, Ind., and Vicksburg, Miss. Proceeds from these sales are expected to be applied toward repaying outstanding senior credit facility debt.

"Concerned when the sales will go through," the trader said in explanation of why the operating company term loan is trading lower following the court ruling. There is "a lot of uncertainty. Not really changing peoples' view of will it get sold, it's when. It's a horizon issue."

On Tuesday, Tropicana filed an appeal with the gaming commission over the denial of its license renewal.

Elsewhere in the gaming arena, Herbst Gaming's 7% notes due 2014 lost 2.5 points to finish below the 27 level.

Tropicana Entertainment is a Fort Mitchell, Ky.-based gaming entertainment provider.

Idearc better again

Idearc paper gained another 2 points during trading, adding to the gains received in the previous session.

A trader quoted the 8% notes due 2016 at 62 bid, 62.5 offered. Another trader called the notes up nearly 2 points to just under 62.

The phone directory publisher's debt - which had previously been on the decline - began moving up during Monday's session. The boost was attributed to a Barron's article that cited Idearc as a risky stock with high debt that could pay off if the credit market improved.

The company's stock, which had been declining over the last few sessions, also turned up. The stock closed Tuesday's session 4 cents better, or 0.75%, to $5.37.

Idearc is a Dallas-based publisher of telephone directories.

Broad market mixed

Among homebuilders, a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 up a point at 77 bid, 78 offered, while Hovnanian Enterprises Inc.'s bonds - like its 6 3/8% notes due 2014 - slid a point at 67 bid, 68 offered. Standard Pacific Corp.'s 7% notes due 2015 were unchanged at around 70 bid, 72 offered.

In the autosphere, Metaldyne Corp.'s 10% senior notes due 2013 were seen down around 2 points at 67 bid, but its subordinated 11% notes due 2012 gained more than a point to finish at around 47.

AbitibiBowater Inc.'s bonds were up about 2 points across the board, with its 6.95% notes maturing April 1 at 89 bid, 91 offered, its 5¼% notes coming due June 20, 2008 at 85 bid, 87 offered and its 8.85% bonds due 2030 at 48 bid, 50 offered. Another market source saw the long bonds up a point at 49.

In distressed retail names, Bon-Ton Stores Inc.'s 10¼% notes due 2014 lost a point to end at 65.5 bid, 66.5 offered. Claire's Stores Inc.'s 9¼% notes due 2015 were deemed 2 points better at 68 bid, 70 offered.

Quebecor World Inc.'s bonds, such as the 6 1/8% notes due 2013, were seen down a point at 42 bid, 44 offered.

Young Broadcasting's 8¾% notes due 2014 lost a point to end at 62 bid, 64 offered, while its 10% notes due 2011 were seen 2 points lower at 68 bid.

Sara Rosenberg and Paul Deckelman contributed to this article.

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