Nortel nosedives on bankruptcy talk; GMAC falls as bank plan imperiled; new El Paso bonds continue climb

By Paul Deckelman and Paul A. Harris

New York, Dec. 10 - Nortel Networks Corp.'s bonds fell sharply Wednesday as The Wall Street Journal reported that the troubled telecommunications equipment maker was exploring the possibility of a bankruptcy filing or asking the Canadian government for help.

GMAC LLC's bonds lost several points after the automotive financing arm of General Motors Corp. announced another extension of its current exchange offer for $38 billion of its own debt and that of subsidiary Residential Capital LLC - amid reports that bondholder participation has fallen far short of the level needed to allow GMAC to pursue its strategy of turning itself into a commercial bank.

GM's bonds and those of domestic arch-rival Ford Motor Co. were meantime seen mixed, as investors hoping for a federal bailout of the troubled auto industry nervously regarded the new political hurdle that bailout supporters must overcome.

Neiman Marcus Group Inc.'s bonds were also better, despite the Dallas-based retailer's report of an 84% drop in its fiscal first-quarter results versus a year ago.

In the primary market, participants, apparently exhausted from their exertions on Tuesday, when El Paso Corp. successfully brought to market the first new deal seen in nearly a month, sat back. The new bonds, which had begun moving up as soon as they were cleared for secondary dealings late in Tuesday's sessions, continued to climb on Wednesday.

Market indicators head south

The widely followed CDX High Yield 11 index of junk bond performance, which lost ½ point on Tuesday, was seen to have declined by 3/8 point on Wednesday, with a trader quoting it at 73 1/8 bid, 73 5/8 offered The KDP High Yield Daily Index meantime fell by 24 basis points to 47.58, although its yield actually tightened by 8 bps to 17.49%.

In the broader market, advancing issues trailed decliners by a narrow margin. Overall market activity, reflected in dollar volumes, was up 23% from the pace seen in Tuesday's session.

A trader said that junk "was almost a two-tier market environment" on Wednesday. "You had the news-related credits trading, with everything else just being stagnant."

There was not much inspiration to be had from the equities market; the bellwether Dow Jones Industrial Average, after spending most of the day comfortably higher, gave it all back and dipped into negative territory during the afternoon, although it did manage to come part of the way back and finish with a modest gain at 8,761.42, up 70.09 points, or 0.81%. Broader market measures were also a moderately higher, with the Standard & Poor's 500 index finishing up 1.19% and the Nasdaq composite ahead by a nearly identical 1.19%.

While those markets were up, he opined, "high yield saw some negative news, so it looked like a majority of the activity was on the downside, with the news on Nortel and GMAC. " That having been said, "the core part of the high yield market was pretty much unchanged and inactive."

Nortel knocked down by bankruptcy buzz

Nortel Networks' bonds tumbled on the news that the troubled Toronto-based telecom equipment maker was exploring bankruptcy as a possible option, or asking Canada's government for assistance.

A trader saw Nortel Networks' bonds "now trading flat," although he noted that "they haven't filed, they said that they have 12 to 14 months of liquidity, based on current market situations, but they are consulting with someone on exploring bankruptcy after that time period." He quoted its 10¾% notes due 2016 down 7 points at 20 bid, 22 offered.

Another trader saw the Nortel bonds as the most active issues of the day. He quoted its floating-rate notes due 2011 at 19.5 bid, down some 10 points in round-lot trading from the levels around 29 seen on Monday, when the bonds had last previously traded, with $55 million changing hands.

He saw $27 million of the 103/4s at 20 bid, well down from 27.5 previously, while its 10 1/8% notes due 2013 dropped to 19.5 bid from 28 previously, with $15 million traded.

A market source at another desk saw the 2011 floating-rate notes actively traded at sharply lower levels, with the bonds having opened around the 22 level, down 7 points from Tuesday's close at 29, and then having slid further down to around 19.5.

Its 10 1/8% notes due 2013 were seen at around the same levels, with trading seen as busy, although not quite as active as that in the floaters. Nortel's 10¾% notes due 2016 dropped from around the 28 level they had held late Tuesday to around 21 at the opening, and then to 20, where they remained the rest of the session, also in busy trading.

Meanwhile, Nortel's New York Stock Exchange-traded shares swooned by as much as 28.8% in intraday trading before finally finishing down 12 cents, or 23.08%, at 40 cents per share. Volume of 8.8 million shares was nearly 45 times the usual turnover of about 200,000.

The bonds and shares plummeted after The Wall Street Journal reported that Nortel, the largest telecom equipment maker in North America, had "sought legal counsel to explore bankruptcy-court protection from creditors in the event that its restructuring plan fails," attributing its information to unidentified "people familiar with the situation.

"The move comes as the Toronto-based company grapples with plummeting sales for its wireless gear and as the credit crunch hobbles the sale of key assets," the paper added.

It quoted a spokesman for the company as saying that "no bankruptcy filing is imminent," but adding that the company has hired several advisers to help it "chart a way forward."

The Journal also said that Nortel has been exploring the possibility of assistance from the Canadian government. However, recent political turmoil in Ottawa, with prime minister Stephen Harper taking the unusual step of shutting down Parliament until late January to prevent opposition legislators from topping his Conservative government, make the chances of such aid less likely.

Nortel - which sells its equipment to major telecommunications companies like AT&T and Verizon Communications, among others - has seen its sales fall, not only because the current worldwide economic slowdown has forced its customers to cut back on their capital spending plans, but also because some customers have abandoned Nortel's operating systems, based on older code division multiple access (CDMA) technology, in favor of newer, faster technology from such Nortel rivals as Cisco Systems Inc.

Accordingly, the company has lost some $7 billion since 2005; for the third quarter, Nortel posted a net loss of $3.41 billion, or $6.85 per share, on $2.32 billion in revenue, with the loss mostly attributable to a $3.21 billion non-cash charge to write down goodwill and deferred tax assets.

Nortel recently unveiled a belt-tightening plan, including 1,300 job cuts, which it hopes will bring down expenses by up to $400 million per year.

It has approximately $6.3 billion of debt and other obligations, including adjustments for operating leases, pension deficits and other items. The long-term debt portion of that is about $4.5 billion, which includes the $1 billion of floaters coming due in 2011, its nearest bond maturity. But the company claims its liquidity is adequate, and points to a recent S&P report that said Nortel should be able to maintain an acceptable level of liquidity in the next 12 to 18 months - although S&P analyst Ari Bensinger also warned that "with our forecast for $1 billion in negative cash flow and $1.5 billion in working capital requirements for '09, NT has little buffer room to fund operations."

RBC Capital Markets analyst Mark Sue said in a recent research note to clients that Nortel is "overwhelmed with debt and burning cash;" he also cautioned that that further planned asset sales - Nortel is currently trying to find a buyer for its Metro Ethernet Networks business - could conflict with restrictions in its debt covenants.

GMAC whacked as bank plan threatened

The day's other big disaster was GMAC, whose bonds skidded lower after the automotive finance company warned that its plans to transform itself into a bank holding company in order to be able to access federal TARP money from the Treasury's $700 billion bailout fund are in deep trouble, thanks to the refusal of most of its bondholders to take part in a previously announced offer to exchange their bonds for new preferred stock, thus increasing its capitalization to the required levels.

A trader saw GMAC's 8% bonds due 2031 ease to 25 bid, 27 offered, and said its 5.85% notes due on Jan. 14 were down 3 points at 86 bid, 88 offered.

Another trader saw major movement among the shorter GMAC bonds with the 5.85s the most active, on $29 million traded. He saw them at 84.5 bid on a round-lot basis, well down from 94.125 on Tuesday.

"Needless to say," he opined, the investment community was not very happy with this debt-for-preferred swap."

He also saw the GMAC 5 5/8% notes maturing on May 15 fall to 65 bid from 72.5, on $13 million traded, while its 7¾% notes due 2010 dropped to 55 bid from 60, on $12 million traded.

Perhaps GMAC's shortest-dated paper - the 4.10% notes slated to come due on Monday - were trading on an odd-lot basis between 97 and 98, the latter price translating to a 240% yield.

He also saw the 8% 2031 bonds down 2 points to 29, on $3 million traded. Its 6 7/8% notes due 2012 were down 4 points at 37.

A market source at another desk saw an even bigger drop, marking the 5.85s down as much as 14 points on the day to 80, while the 5 5/8s were down as much as 10 points at 64. The source also saw the 7% notes due 2012 down about 7 points at 34 bid.

GMAC - which had announced its exchange offer for much of its outstanding bonds and those of mortgage subsidiary ResCap back in November, said that to date, only about $6.3 billion in total face amount of its own bonds, or 22%, have been tendered under the exchange offer, and only about $2 billion of the ResCap bonds, or 21% -- far short of the 75% bondholder participation level that is a condition of the exchange offer.

While GMAC extended the early-tender deadline to Friday to give the bondholders a final chance to tender their bonds, the company admitted that "[a]s a practical matter, GMAC does not believe it has the ability to make further changes to the GMAC and ResCap offers following the new deadline," so that if the requisite participation in the offers has not been received, "GMAC management intends to withdraw its application to become a bank holding company," since it would not meet the capital requirements set down by the Federal Reserve.

Should that happen, GMAC warned, "it would have a near-term material adverse effect on GMAC's business, results of operations, and financial position" - effects that possibly include forcing the company into bankruptcy, according to published reports.

Besides the problems with the exchange offer, "one of the traders also said that it was "obviously" expected that the bonds would be "down a little on uncertainty" about the status of the auto bailout legislation, seen crucial to the fate of GMAC's 49% owner GM; while the White House and leaders of the Democratic-controlled Congress agreed on a bill and sent it to the House and Senate for votes, Republican senators left out of those negotiations are lining up in opposition and could thwart it.

"You had the House Democrats agree on the bailout, but then there was a lot of resistance from the Republican side."

Late Wednesday, the House approved the $14 billion interim bailout package and sent it on to the Senate for a vote, but some of the rank-and-file GOP members there, such as Sen. Richard Shelby of Alabama, believe the bailout is throwing good money after bad and have vowed to oppose it by any means necessary, up to and including a filibuster, which would require 60 votes to stop.

With that uncertainty hanging over the bill, the trader saw GM's benchmark 8 3/8% bonds due 2033 "down just a touch today" at 18 bid, 20 offered, which he called off 1 to 1½ points.

"The bonds definitely got a little bump when the Democrats agreed to a deal [with the White House] but they definitely got a little heavier later in the day and then were down again when the Republicans said they were against it."

Another trader saw the GM benchmarks down a point at 17 bid, 19 offered.

A trader saw Ford Motor Co.'s 7.45% bonds due 2031 up 1½ points at 26 bid, 28 offered.

However, a second trader pegged them at 20 bid, 23 offered, unchanged.

Yet another saw them at 24.5 bid, down 2 points from Tuesday, on $24 million traded. He also saw Ford Motor Credit Co.'s 7¼% notes due 2011 unchanged at 52 bid, with $9 million bonds traded.

Its 7% notes due 2013 lost 1½ points to end at 49.5 bid.

Neiman Marcus rings up gain

On the upside, a trader saw Neiman-Marcus' 9% notes due 2015 "looking like they were moving up," to 45.5 bid, up 3 points on a round-lot basis from Monday's levels, on $3 million traded, while its 10 3/8% notes due 2015 rose to 40.375 bid, versus 37.75 on Tuesday, with $16 million traded. He noted the Dallas-based department store operator's statement on its conference call that that its customers are beginning to respond to its promotions - although the near-term environment remains challenging.

The gain came despite an 84% slide in net earnings to $12.9 million in the fiscal first quarter that ended Nov 1, versus $78.6 million in the year-earlier quarter. Quarterly same-store sales fell 14.5% from a year earlier.

New El Paso bonds move up again, old bonds mostly firm

A trader saw El Paso Corp.'s new 12% notes due 2013 move up to 92.5 bid, continuing to firm smartly from the levels seen on Tuesday following its pricing.

Another trader saw the bonds do even better, quoting them going home at 93 bid, 94 offered, up 2 points on the day. "They opened at 91 bid, 92 offered, and they were up all day after that."

The Houston-based energy exploration, production and transportation company - it operates a vast network of natural gas pipelines - successfully priced the $500 million issue Tuesday via a syndicate led by Morgan Stanley, along with joint book-runners Citigroup, Goldman Sachs and J.P. Morgan Chase, and a roster of co-managers. The bonds had to be priced at 88.909 to yield 15.25% in order for the deal to go through - but they began rising right out of the gate late in the session before going out at around the 91 bid, 92 offered mark.

It was the first new deal seen in Junkbondland since Catalina Marketing Corp. brought a $490 million two-part deal to market back on Nov. 14.

Existing El Paso bonds were also seen better, with a trader quoting its 7% notes due 2017 at 70.5 bid on a round-lot basis, up from 69.5 earlier in the week, on $5 million bonds traded. Its 7¼% notes due 2018 moved up to 70.5 bid from 68.25 earlier, with $3 million traded, although its 6.80% notes due 2015 were actually down on the day, dipping to 80 bid, down a deuce, with $6 million changing hands.

Another market source meantime saw the 7s up more than 2 points on the session at just under 71.

A high-yield mutual fund manager also saw the new El Paso 12% bonds due 2013 going out Wednesday at 92½ bid, 93 offered, versus the 88.909 issue price, according to a.

"It's up 5 points," the investor said of the deal that ended what is said to be the longest drought in the high-yield market since 1991.

"That's not bad," the buy-sider added.

"To me it suggests that the better names, through the balance of the year, are going to make a sneaky upward move in price.

"It shows that something has to be priced to sell. But after it has been priced, if it's good relative value it will still go up."

The investor said that one of the reasons the El Paso bonds were priced so cheaply was to get the deal out the door before year-end.

"Right now, in the final phase of the year, most people have closed their books," the buy-sider said, adding that from this point until the market resumes in 2009 it will be very difficult to get a deal done.

The restructuring front

The market continued to digest recent news relative to the distressed exchange deals now in the market.

Earlier in the week Harrah's Entertainment Inc. announced changes to its $2.1 billion exchange.

Harrah's added $200 million to the cash amount available to holders of its front-end maturities in the exchange, increasing that amount to $525 million from $325 million.

"They probably had that amendment in their back pocket, all along" said a sell-side source tracking the deal.

"For the front-end bonds, [the 7 7/8% senior subordinated notes due 2010 and the 5½% senior notes due 2010] which are trading in the 40s to 60s but are coming due in two years, it's still a good trade for them to get taken out for $0.67."

Should the front-end bondholders be willing to accept the 10% second-priority notes, those two issues will be exchanged at par, the source added.

What must be troubling for the company and the sponsors, the sell-sider added, is that the deal does not appear to have gotten the desired amount of traction among holders of the front-end maturities.

Those bondholders may not be willing to exchange out, and extend out, for haircuts, but the company is still accomplishing something, the source asserted.

"They are still taking out senior bonds, even though they are long-dated ones, at $0.40 on the dollar.

"If the $4 billion that has already come in represents the long-end bonds, it's not great in the context of the front-end debt that they need to be concerned about.

"But it's pretty good in the context of deleveraging, and in terms of marginally reducing interest expense and increasing option value for the sponsor."

GMAC's game of chicken

Elsewhere news surfaced Wednesday on the massive $38 billion GMAC/ResCap exchange deal.

GMAC extended the early delivery time for the exchange to 5 p.m. ET on Dec. 12 from Dec. 9, and announced that roughly $6.3 billion, or 22%, of the outstanding GMAC notes and about $2.0 billion, or 21%, of the outstanding ResCap notes have been tendered to date.

GMAC said that based on the results of the offers so far, it would not obtain a sufficient amount of total regulatory capital in connection with the offers to meet the Federal Reserve's requirements for GMAC to become a bank holding company. The company needs to achieve at least $30 billion of total regulatory capital, and it needs roughly 75% participation in the offers in order to meet this condition.

The company said it does not believe it can make further changes to the offers following the new Dec. 12 deadline, at which time it plans to withdraw its application to become a bank holding company.

"The consensus is that at the end of the day they will get something done," said a sell-side source parsing Wednesday's news on the GMAC exchange.

"They seem to be playing an aggressive, scary game of chicken here, in part by saying that this is our last and final offer" the sell-sider added.

"There is a big bondholder group that has formed, and has gotten most of the concessions they've asked for."

Noting that the GMAC long bonds, the 8% notes due 2031 traded down to 26½ bid on Wednesday, from Tuesday's 29 bid, the sell-sider commented that the company seems to be inviting its bondholders to truly contemplate their fates in a bankruptcy scenario.

"It's possible that they could withdraw their application to become a bank holding company and let the bonds sell off another 10 or 15 points, and then reopen the discussions," the source said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.