Linens n'Things up on 'not super bad' numbers; Thornburg falls; WCI notes firmer

By Stephanie N. Rotondo

Portland, Ore., Aug. 14 - As the Dow Jones Industrial Average dropped just over 200 points during Tuesday's trading session, traders said the distressed bond market also felt weaker in kind.

"It's a bloodbath out there," a trader said. He cited news that Wal-Mart was projecting lower profits for the year and Thornburg Mortgage Corp.'s rating downgrade, saying that investors were "spooked."

But amid the negatives, traders said Linens n'Things brought something positive to the table, as the company posted better-than-expected second-quarter results.

The bonds, which were seen very active during trading, did a "relief rally," gaining up to 5 points on the day.

And speaking of Thornburg Mortgage, the real-estate investment trust's debt hit a downward spiral, dropping at least 12 points. The movement was sparked by the aforementioned rating downgrade, attributed to liquidity pressure.

A trader called WCI Communities Inc.'s bonds slightly better, a feat that did not go unnoticed as the rest of the sector seemed to soften. The trader said the debt was active in trading and the "stock was a relative outperformer." He said the equity slipped just 10 cents, while others in the sector fell even more.

Linens n'Things results 'Not super bad'

Retailer Linens n'Things' corporate debt moved higher on second-quarter figures that were "not super bad," as one trader put it.

The trader said the floating-rate notes rallied 4 to 5 points during the session, closing at around 66.

"To me, it seemed like a relief rally and probably some short covering," he said.

At another desk, a trader deemed the debt unchanged at 65.5 bid, 66.5 offered, though he noted that the bonds moved as high as 70 during the session.

The company reported a net loss of $42 million for the second quarter of 2007, compared to a net loss of $39.1 million for the same quarter of 2006. Total net sales decreased 2.9% to $593.6 million.

"Although top line sales comparisons were difficult as expected, given the high levels of clearance in the comparable quarter last year, we did see some encouraging signs during the second quarter," said Robert DiNicola, chairman and chief executive officer, in a prepared statement.

"Comparable store sales improved sequentially by month through the quarter, and a better performance within our mix contributed to higher gross margins. As we have previously discussed, our goal is to continue to improve upon our merchandising, marketing and store line execution so that we can enjoy a more stabilized business by the end of Phase One of our long-term strategy."

Despite the wider loss, many market players did see some positives. A three-hour long conference call held Tuesday seemed to allay some of the market's concerns.

"Linens n'Things hasn't had anything positive to say for a long time," a trader explained.

The positive comes amid a flurry of negatives in the broader retail space. The retail sector overall felt weaker as Wal-Mart cut its profit outlook for the year and Home Depot posted a 14.8% drop in its second-quarter profit.

Retail sector hurting

Elsewhere in the retail world, Bon-Ton Stores Inc. and Burlington Coat Factory Warehouse Corp. saw their bonds dip during trading.

"I don't know if they are taking their cue from Wal-Mart, or what," a trader said.

The trader pegged Bon-Ton's 10¼% notes due 2014 and Burlington Coat's 11 1/8% notes due 2014 at 87 bid, 88 offered.

Standard & Poor's cut its outlook on Bon-Ton to negative from stable, prompted by weak same-store sales, which fell 7.6% in July.

Thornburg downgraded, bonds lower

A rating cut prompted Thornburg Mortgage's bonds to fall at least 12 points, traders reported.

A trader saw the 8% notes due 2013 fall to the low 60s after Moody's Investors Service downgraded the company's senior unsecured debt and preferred stock. The bonds were dropped to B2 from Ba3, while the preferreds slipped to Caa1 from B2.

Another trader said the bonds were "beaten up," falling as low as the high-50s before closing at around 60.

Elsewhere, a market source saw the Thornburg bonds fall from their Friday levels of 82.5 to 61.5 on Tuesday.

Liquidity concerns prompted the downgrade, Moody's said, given the current nature of the mortgage sector.

The real estate investment trust's stock was also downgraded. Several analysts, including those at Credit Suisse, RBC Capital Markets, Friedman Billings Ramsey, Jefferies & Co. and Piper Jaffray, cut their rating on the stock due to increased liquidity pressure.

The stock "got hammered," a trader said, as margin calls helped the shares fall lower. The equity closed down $6.67, or 46.71%, to $7.61.

Also in the news, the company said it would delay its second-quarter common dividend to Sept. 17.

"By Sept. 17, the company will receive its scheduled monthly mortgage payments for August and will have had more opportunity to manage through this difficult environment," the company said in a press release.

The original release date for the dividend was Aug. 15.

Realogy loses ground

In other real estate related names, Realogy Corp.'s bonds were seen lower amid continued mortgage concerns.

"If you can't get a mortgage, you can't buy or sell a home," a trader said.

The trader said the 12 3/8% notes fell 5 points to 71 bid, 72 offered, while the 10½% notes were "down a couple" at 82 bid, 84 offered.

WCI shines amid poor market

WCI Communities seemed to be a bright spot in a sector that has suffered under the weight of mounting mortgage and housing concerns.

A trader said the homebuilder's bonds were active on the day and "better bid."

"The bonds were up slightly to unchanged," he said, "which can be viewed as a positive in an otherwise dismal market."

The trader pegged the 9 1/8% notes due 2012 at 79 bid, 80 offered, the 4% convertibles due 2023 at 84.5 bid, 85.5 offered, the 7 7/8% notes due 2013 at 70 bid, 72 offered and the 6 5/8% notes due 2015 at 69 bid, 70 offered.

The luxury condominium builder announced Tuesday that it would postpone its second-quarter earnings release to Aug. 22 from Thursday. The delay will give the company more time to complete a review of its real estate inventories and assets for impairment charges.

Broad market mixed

After news of a pending merger sent its bonds flying, MedQuest/MQ Associate Inc.'s bonds were seen unchanged, as a trader quoted the 11 7/8% notes due 2012 as "close to par" and the 12¼% discount notes linked to the MQ Associates name as in the mid-80s.

Movie Gallery Inc.'s 11% notes due 2012 edged lower to 18 bid, 18.5 offered, while Blockbuster Inc.'s 9% notes due 2012 moved higher to 86 bid, 87 offered.

A trader said Blockbuster's gains were due to technicals, not because the company was celebrating its rival's demise.

Meanwhile, Movie Gallery's first-lien term loan was pretty much unchanged at 81 bid, 83 offered.

Generac loan dips

Generac Power Systems Inc. saw its first-lien term loan give up a couple of points in trading on Tuesday after a private lender call was held to discuss quarterly results that came in at weaker-than-expected levels, according to traders.

The first-lien term loan ended the session at 83 bid, 85 offered, down from previous levels of 89 bid, 91 offered, traders said.

"There's probably a little overreaction to the quarter itself," one trader remarked. "Some guys still think there's good money there and things will get better over the next few quarters."

Generac is a Waukesha, Wis., manufacturer of standby power products.

Sara Rosenberg contributed to this article.

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