ResCap bonds jump on tender offer, sale talk; Georgia Gulf off on plant fire news; IKON plans floater

By Paul Deckelman and Paul A. Harris

New York, Nov. 21 - Residential Capital LLC bonds shot up dramatically around midday Wednesday on news that the beleaguered mortgage lender will tender for some of four of its short-dated issues - about the only real feature in an otherwise listless and colorless pre-holiday market in which participants watched the clock, waiting for the official 2 p.m. ET close. The surprise announcement was seen giving a big boost to the company in the eyes of investors, who had fretted about its continued struggles in a worsening credit environment.

Those investors also noted the news that ResCap corporate parent GMAC LLC is exploring the possible sale of some of its problem child, as well as the possible purchase of an international lending institution, which gave GMAC's own bonds a boost. In turn, GMAC's 49% owner, General Motors Corp., also ended higher on the developments, after having begun the session lower on investor ResCap worries.

Apart from developments along that ResCap/GMAC/GM axis - as well as the movements of similar or related companies like ResCap rival Countrywide Financial Corp. - traders said that things were pretty much dead in the market. There was a little bit of downside activity in Georgia Gulf Corp. after the Atlanta-based chemical manufacturer issued a statement confirming that one of its plants had been damaged to an as yet undetermined extent by a fire over the Veterans' Day holiday weekend.

In the primary arena, IKON Office Solutions Inc. said it is preparing to bring a $150 million issue of floating-rate notes to market.

Indexes point lower

On greatly reduced volume ahead of the long Thanksgiving Day holiday break - which saw an early close on Wednesday, to be followed by a full market shutdown Thursday and what was expected to be only an extremely dull, quiet and very lightly attended half-length session on Friday - traders saw the market largely unchanged to lower, despite the big gains in size trading for ResCap and, to a lesser extent, its immediate and ultimate corporate parents. Declining issues led advancers by a better than four-to-three margin, while overall volume was only about half of what it had been on Tuesday.

A trader did see the widely followed CDX index of junk bond performance unchanged on the session at 93¾ bid, 94 offered - although he said that the market barometer had touched bottom earlier in the day as low as 93 1/8 bid, 93¼ offered, "during the worst of it". The KDP High Yield Daily Index lost 0.19 on the session to end at 77.07, while its yield widened by 8 basis points to 8.77%.

However market participants were quick to qualify those results with the caveat that with the unusually light pre-holiday volume, whether such movements were a true indicator of what was going on was anybody's guess.

A high yield syndicate noted that the CDX index is now down as much as five points in the past 10 days.

This source and others noted that market sentiment remained negative on Wednesday, as it had been throughout the three-day pre-Thanksgiving week.

Not an auspicious start

A trader said the ResCap announcement was "the big news" of the day - but before that hit the tape some time after noon ET, the junk market was continuing its recent trend of "incredible illiquidity and apathy."

He opined that "most people were hoping the market would just be calm and quiet, with nothing to do, but equities overseas opened lower, and our equity futures were lower this morning - I guess the Freddie Mac conference call [on Tuesday] did not go well and there were a lot of unanswered questions about how they're going to raise additional funds and that sort of thing. I think it all just weighed on our market."

The trader noted that there had been sellers around at Tuesday's close, and these came in Wednesday morning and picked up right where they had left off. He said that CDX opened up down around ¼ to ½ point and "never really recovered," and said that stocks also opened in a bearish mode.

"Everything [in junk land] was opening lower, by half to a full point or more in some spots." Retailing names in particular, he said, "continued to get just absolutely crushed," with Claire's Stores "down another couple of points today", its 10½% notes down to near 60. Other sector losers he saw included Bon-Ton Stores Inc. and Michaels Stores Inc.

All of this took place against a backdrop of low volume and limited liquidity.

"We had a couple of guys in trying to buy a couple of things, trying to sell a couple of things, but it was very difficult getting anything going. I think there are very few people picking up Bloombergs [messages] at this point."

ResCap to the rescue

Then, some time after noon, things took a radical change, as newswires carried the press release from ResCap, announcing that the big Minneapolis-based mortgage-lender will tender for an aggregate total of $750 million face amount of bonds from four series - its floating-rate notes due June 2008 and November 2008, its 6 1/8% notes due November 2008 and its floaters due April 2009. It set up a priority ranking, in that order, and set discounted prices at which it will purchase tendered notes on a pro-rata basis.

ResCap's bonds - particularly the short-dated issues subject to the tender offer - moved up explosively after that, as volume revved up, with many large-block trades seen. A trader said that "since the news came out, the ResCap '08 [floater] paper is trading up 10 or 11 points." He said that while the bonds were trading at 61 bid, 63 offered in the morning, "then they were at 69-70, then 70.5-71.5, then 80-83, and 81.5-84." He said of the June 2008 floater issue - the bond at the top of the priority ranking and thus most likely to be tendered and bought, that "it's probably the only one that anyone had - they threw them out there and they got lifted."

A trader who saw the ResCap '08 bonds jump at least 10 points after the company's announcement declared that "this is obviously a very strong signal from GMAC and ResCap about the liquidity and future outlook at ResCap.

A market source saw the June 2008 floaters zoom to the 83 takeout price from prior levels around 71.5.

The other bonds named in the tender offer for possible purchase - but lower down the priority ladder - were also up, but not quite as much.

A trader saw the 6 1/8% notes due 2008 up 14 points at 76 bid, 78.5 offered, although another market source quoted the bonds perhaps 8 points higher at 73. The floaters due in November 2008 were seen up about 5 points to 70.5, while the floaters due in April 2009 - lowest in the priority pecking order were essentially unchanged at 61.

Other ResCap bonds not included in the tender offer were also higher, presumably on the idea that, as a trader said, "this is a big positive" for the company. The 8 3/8% notes due 2015 were seen up 6 points at 61.5. Its 9% notes due 2013 were 4 points better, at 60 bid.

Resolving covenant issues

There had been some statements by analysts and discussion in the financial media over the past week speculating whether absent some dramatic step, the company might breach the financial covenants in its credit agreements - market buzz which caused ResCap's bonds to nosedive and its credit-default swap spreads to balloon out sharply in response to investor fears about a possible default. ResCap said that the purchase of the notes via the tender offer at a discount and their subsequent retirement would have the effect of increasing ResCap's fourth-quarter income and year-end consolidated tangible net worth above their levels otherwise, and further said that parent GMAC "currently intends to take steps, to the extent necessary" to keep ResCap in compliance with its covenants.

It said that among the steps that GMAC's management plans to recommend is, to the extent necessary, a capital contribution to ResCap - although the latter company warned that it was by no means certain that GMAC's board would necessarily approve such management initiatives.

The ResCap announcement also said that GMAC might buy ResCap bonds separately from the tender offer via open-market transactions or other means, either during or after the tender offer, and may contribute notes that it purchases to ResCap as part of any capital infusion.

It said that ResCap and GMAC would explore various strategic alternatives, which could include the sale of part of ResCap, or even GMAC's acquisition of an unidentified "large non-U.S. mortgage lending institution." If such an acquisition were successful - GMAC recently submitted a non-binding second-round indication of interest in one such company now up for sale - GMAC's current intention would be to integrate ResCap's local mortgage business with the acquired institution.

GMAC, GM move higher

Initially, both GMAC and GM bonds were trading lower, dragged down by investor fears - outlined in a lengthy article in Wednesday's editions of The Wall Street Journal - that ResCap's deteriorating finances would pull GMAC down, and along with it, the latter's 49% owner, GM. Late in the morning - before the news of the ResCap bond buyback and GMAC's other steps to try to right the ship hit the market - a trader pronounced GMAC's 8% notes due 2031 down nearly a point at 78.25 bid, 79.25 offered, and said that GM's benchmark 8 3/8% notes due 2033 had fallen to 76.5 bid, 77.5 offered from previous levels at 77.5 bid, 78.5 offered.

However, after the announcement, it was a whole different story. A trader said that the ResCap news "kind of bottomed the market out, and things kind of traded up pretty briskly from there."

He saw the GM 8 3/8s hit a low around 75.5 - just about the same low levels they were hitting during the depths of the credit crunch misery in mid-August, before the Federal Reserve stepped in with a surprise interest-rate cut - but said they then "rallied up," touching highs above 80, or 81 even, up from 78.5 bid, 79 on Tuesday. "That was a big move," he said - quickly adding that "of course, you had light volume and it doesn't really mean much. It's anybody's guess where a real market is - but they were certainly all over the place."

He also saw the GMAC 8s come off their earlier lows around 77.5 to trade around 78.75 near the close.

A trader at another desk saw the GM benchmarks ending up a point at 78.5 bid, 80 offered, and pegged the GMAC 8s up 2 points at 80 bid, 82 offered.

Another market source saw the actively traded GMAC 8s gyrate around in a 6 point range between 76 and 82 before ending just below 80, up only slightly on the day - but saw the company's 6 78/8% notes due 2012 up more than 4 points at 81.5 bid.

Countrywide carnage continues

While mortgage provider ResCap ended the session on a high note, helped by the tender offer news and the other assurances of parent GMAC's continued support, sector rival Countrywide Financial - whose bonds had fallen sharply on Tuesday on renewed liquidity concerns - continued to take a pounding.

Countrywide's 6¼% notes due 2016, which had lost 3 or 4 points in heavy trading on Tuesday, picked up right where they had left off and fell another 4 points to 59.5 in Wednesday's dealings on continued investor angst about the Calabasas, Calif.-based mortgage giant's liquidity situation - this despite a pronouncement from the company Tuesday afternoon that everything was fine on that front, despite scary headlines and market buzz otherwise.

The renewed market concern over a possible liquidity crunch at the nation's largest independent mortgage provider stemmed from poor quarterly results from government-sponsored mortgage financier Freddie Mac, which raised the specter that the latter company might have to stop buying pools of securitized mortgages from companies such as Countrywide.

Despite Countrywide management's reassuring words Tuesday - which had allowed it to minimize its stock losses on the day - its New York Stock Exchange-traded shares again headed south on Wednesday, falling 86 cents, or 8.37%, to $9.42. Heavy volume of 120 million shares was three times the average daily turnover.

Georgia Gulf burned on fire news

Elsewhere, Georgia Gulf's 9½% notes due 2014 were seen having fallen to 77 bid from prior levels around 79.5 after the chemical company issued an announcement in which it "confirmed" that one of its plastics plants in Lake Charles, La. had been damaged by a fire on Nov. 10. It said that it was still assessing the amount of damages at the plant, but was several week away from providing an accurate damage estimate. No one was injured in the blaze.

This was apparently the first widespread public news about the fire, the cause of which is still under investigation. A trader noted that the bonds were "down about 20 points" from the levels they had held earlier around mid-year.

In fact, the 91/2s had been in the 90s previously, being quoted around 94 or 95 as recently as Nov. 14, just days after the Lake Charles fire. Since then they had been steadily cascading down, through the 80s, to their current levels in the 70s. The trader projected that things would only get tougher for Georgia Gulf, and indeed, for other petrochemical producers as well, with crude oil prices continuing to hover around the $100 per barrel mark.

Sequa, the lone deal

The primary market, as expected, failed to generate any news on the day before Thanksgiving, although IKON announced it plans to sell a deal and Hilton Hotels Corp. disclosed a $500 million private placement of floaters.

When market activity resumes on Monday it will do so with only one deal on the forward calendar.

Sequa Corp. is in the market with a $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+) via Lehman Brothers.

In the market turbulence of the Nov. 19 week, the deal was delayed until the post-Thanksgiving week, affording bond investors a chance to see how the company's bank loan prices and performs.

The notes offering is comprised of tranches of cash-pay notes and discount notes.

Slow ahead

As the pre-Thanksgiving week wore on optimism among sell-side sources was in scarce supply.

Likewise, syndicate officials who spoke to Prospect News on Wednesday, just ahead of the four-day recess, were looking for the period between Thanksgiving and Christmas to be a slow one in the primary market.

"If conditions remain as they are now it's going to be tough," said one official.

Issuers who have bonds outstanding might be able to get smaller deals done, the source added.

However the bigger deals in the pipeline, most of them part of the hung LBO risk remaining on underwriters' balance sheets as the result of unplaced bonds and unsyndicated leveraged loans - which underwriters have been keen to get off of their books by the end of the year - might not happen, the official added.

Another syndicate official from a different investment bank had a similar outlook on the post-Thanksgiving market.

"With levels where they are right now, and investor sentiment pointing toward caution, it could be quiet for some time," the official said, adding that while it is possible that a window of opportunity for issuers might open during the remainder of 2007, it is not probable.

The banker said that potential issuers would likely face prohibitive new issue premiums, and therefore would be better off waiting until early 2008, "when everyone has a fresh budget and a renewed sense of taking on risk."

When Prospect News objected that even during the dark days of late September and early October a few deals got done seemingly without onerous new issue premiums, the source conceded that that had been true.

In particular the banker recalled that in mid-September R.H. Donnelley Corp. showed up and priced an upsized $1 billion issue of senior notes due 2017 (B/B) at par to yield 8 7/8%, in the middle of the 8¾% to 9% price talk.

Less than two weeks later it priced a $500 million add-on to that issue at par.

Also, the source recounted, on Oct. 9, in a quick-to-market deal that quadrupled in size, AES Corp. placed $2 billion of senior notes (B1/B/BB) in two tranches: a $500 million tranche of notes due 2015, which came at par to yield 7¾%, and a $1.5 billion tranche of notes due 2017, also at par, to yield 8%.

Both tranches priced on top of the price talk.

In spite of a market flooded with hung-up junk bonds and leveraged loans related to LBOs, Donnelley and AES incurred new issue premiums of perhaps only 25 basis points, the official calculated.

"But the sentiment is worse now than it was back in September and October," the banker asserted.

"People are more concerned about the economy.

"And there is no easy solution this time. If the Fed cuts rates again it's really going to spook people.

"There is a lot more negative sentiment now."

The hung supply

The banker also said that irrespective of how familiar high yield names such as AES and R.H. Donnelley might fare, the investment banks still face the massive amount of hung LBO-related debt.

"We didn't work through as much of the supply as people thought we might be able to," the source conceded.

The official said that whereas the total amount of hung risk had been estimated to have been "north of $350 billion," in July, what remains is presently believed to come to approximately $125 billion on the leveraged loan side and about $80 billion on the bond side.

"We have worked off approximately $150 billion," the banker estimated.

When Prospect News followed by asking if the $150 billion that has been "worked off" represents the easiest part to place, the banker answered "Not necessarily.

"A window opened up, and deals literally got done based upon the timing," the source added.

"TXU hit the market at the perfect time to place their two bank tranches and as many of the bonds as they did, whereas Alltel hit the market at just the wrong time."

This banker recalled a scenario back in 2003, when there were periods in both the bond market and the leveraged loan markets where nothing got done.

"I think we're retuning to that scenario, where certain types of issuers - depending upon where they sit on the credit spectrum - just are not going to have access to the high yield market."

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