E*Trade e*viscerated, again; GM tows autos down on sales drop; Unisys new deal pressures existing bonds

By Paul Deckelman and Paul A. Harris

New York, Dec. 3 - E*Trade Financial Corp.'s bonds once again fell, in line with the continuing slide in the New York-based on-line financial services company's shares, which were driven further downward Monday on a downgrade from Banc of America Securities.

Accelerating talk that some sort of plan to rescue subprime residential borrowers from the current mortgage crunch could be announced this week - including statements from Treasury Secretary Henry Paulson - helped major mortgage writer Countrywide Financial Corp.'s bonds, at least modestly, although competitor Residential Capital LLC's bonds, and those of corporate parent GMAC LLC, didn't seem to get much of a boost.

General Motors Corp.'s bonds were seen down about a point across the board as the Detroit giant reported a big slide in its November sales from a year ago, bringing to a sudden stop its three-month run of monthly sales gains. Arch-rival Ford Motor Co.'s bonds were also lower, despite an unexpected - albeit modest - rise in year-over-year sales, its first in a year.

The new Texas Competitive Electric Holdings Co. LLC bonds which priced last week were a little higher, perhaps helped by news that legendary investor Warren Buffett had snapped up most of the $3.75 billion deal.

Sources were marking the broad market lower on Monday, with one source, a high yield syndicate official, remarking that junk traded lower in line with equities.

A buy-side source commented that the junk market was a little softer on the day - perhaps down as much as a quarter of a point - but "nothing major."

In the primary market, NewPage Corp. was heard by high yield syndicate sources to be preparing to bring a $456 million add-on tranche to its existing 10% second-lien notes due 2012, while Unisys Corp. will be marketing an issue of eight-year notes, with pricing expected later in the week. The latter company's existing bonds were lower on the prospect of more Unisys debt hitting the market.

Conference seen stilling market

A trader characterized the session as "very quiet," and while he mentioned the fact that it was Monday, and the first day of a new month as possible factors, he also noted that many portfolio managers or other decision makers might be off at this week's Banc of America Securities Credit Conference being held in warm, sunny Orlando, Fla.

Overall market volume nosedived about 55% from Friday's levels, while advancing issues narrowly led decliners.

Another trader said that the widely followed CDX index of junk bond performance was off about ¼ point at 95 3/8 bid, 95 5/8 offered. Among other market barometers, the KDP High Yield Daily Index - which on Friday had pushed up by 0.44 - retreated 0.07 on Monday to end at 77.91, while its yield widened by 2 basis points to 8.54%.

Another tumble for E*Trade

E*Trade Financial's bonds and shares were seen down for a third straight session amid continued negative reaction by investors to its announcement Thursday of a $2.55 billion cash-infusion deal with Citadel Investors Group - a deal with significant strings attached.

A trader saw E*Trade's most active issue, its 8% notes due 2011 down 2 points to 74 bid, 76 offered, but saw its 7 3/8% notes due 2013 "getting crushed" and ending at 67.25 bid, 68.25 offered from prior levels in the low-to-mid 70s, although on somewhat less volume than the 8s.

"E*Trade continues to be pretty heavy," said another trader, who pegged the 7 3/8s at 67, which he said was down "4 or 5 points" from the end of trading last week.

A market source saw the 8s fall as low as 74 from opening levels around 77.5, which was a point above where the bonds had gone home Friday at 76.5. However, the source said the bonds came off their lows to return to the 76 level, leaving them down about ½ point.

But the company's 7 3/8% notes due 2013, which had also ended Friday around 76.5, plunged into the upper 60s, finally stabilizing at 67, down some 9 points on the session, according to the source, on several big-block trades. Its 7 7/8% notes due 2015 also declined into the high 60s, before coming off those lows to steady around 71, down 2 points.

Yet another trader saw the 8s plunge 3½ points on the day to 73 bid, 75 offered.

E*Trade's New York Stock Exchange-traded shares, meantime, plunged as much as 15% at one point in the day before regaining some of their early losses to end at $4.11, down 49 cents or 10.65%. Volume of 87 million shares was more than twice the norm.

The bonds and shares have been reeling the past three days over the terms of E*Trade's $2.55 billion buyout by a Citadel-led investment syndicate. While the money will certainly come in handy, analysts have pointed out that it comes at a very high cost - E*Trade will surrender its $3 billion portfolio of asset-backed securities for $800 million, or 27 cents on the dollar, and will issue new stock equal to 19% of its current float and 12½% bonds to the Citadel group in return for another $1.75 billion of cash.

The latest analyst weighing in with a negative assessment was Michael Hecht of Banc of America, who cut his recommendation on the company's shares to "sell" from "neutral" previously. He also slashed his stock price target by more than 75%, to $2 from $9.

Hecht noted that while E*Trade's banking unit managed to unload its most problem-plagued asset, the $3 billion ABS book, it is still stuck with a weakening $12 billion portfolio of home equity loans. He estimated that E*Trade will have to set aside at least $1 billion of additional loan-loss reserves for the portfolio, which will essentially "wipe out" another year of earnings per share - and that's his best-case scenario. If things deteriorate further, Hecht warned, the company might have to unload the home equity portfolio at a "fire sale" price of around 70 cents on the dollar, saddling the company with as much as a $3.7 billion loss.

Even though E*Trade's core operation is its on-line brokerage business, Hecht called this "a dwindling asset," and said it no longer had sufficient value to offset the red ink the banking end of the operation has been rolling up.

The analyst further remonstrated that the executive changes announced last week at the same time the Citadel deal was unveiled - among them, the departure of chief executive officer Mitchell Caplan and his replacement, at least temporarily, by company president R. Jarrett Lilien, who assumes the CEO duties on an acting basis - don't really amount to a fundamental shift in the company's direction, since Lilien has been, in Hecht's view, the departed CEO's "right-hand man" - and Caplan, in any event will remain on the board of directors.

Mortgage names mixed as plan takes shape

E*Trade, caught up in its own troubles, has been largely unaffected by the speculation which has gripped the financial markets over the past several sessions that the mortgage industry and banking regulators will come to a meeting of the minds and craft a plan to stop the rising wave of subprime mortgage foreclosures which threatens to swamp the industry. That has given financial issues a boost in general - and in particular, names like Countywide Financial, which depend heavily on being able to re-sell pools of mortgages to raise capital, a funding source which has all but dried up in the current wave of defaults and foreclosures.

On Monday, further details of the prospective plan were taking shape, with Treasury chief Paulson predicting in a speech that a full-blown plan could possibly emerge by the end of the week. He also called upon Congress to give local governments more borrowing power to ward off foreclosures. The cornerstone of the plan would be a mechanism that would allow borrowers to freeze interest rates on their subprime loans whose rates are about to reset sharply higher, in the hope that many of these borrowers could stay in their homes. As many as 1.5 million adjustable-rate mortgages are scheduled to reset in 2008, on top of the thousands of homeowners - already a record - who have been forced into foreclosure so far this year by rising rates.

But how such a "teaser freezer" might work, for how long, and exactly who would be eligible, and for how long the rates would be frozen remain to be worked out. Also to be taken into consideration is the fact that many banks or mortgage companies which write home loans then turn around and sell the mortgages to other companies which will act as servicers - and who purchase the mortgages on the assumption that the rates will rise.

The uncertainty over how this will all be worked out has tempered some of the earlier market optimism that had been lifting mortgage and housing names pretty much across the board in previous sessions.

Countrywide mixed

For instance, a trader said that while Countrywide's longer paper, such as its 6¼% notes due 2016, was up 1½ points at 62.5 bid, 63.5 offered, the 3¼% notes coming due next May were unchanged at 88.5 bid, 89.5 offered.

"Most of the shorter paper was up half a point, down half a point, unchanged," he said.

Another trader said he saw "no real action" in the Calabasas, Calif.-based mortgage giant's issues, quoting the 61/4s at 62 bid, 63 offered, the 4% notes due 2011 offered at 82 and the 4 1/8% notes due 2009 offered at 75.5, all of them "very quiet."

While trading was seen fairly active in Countrywide's 5.8% notes due 2012, at the end of the day, they had gone nowhere pricewise, remaining at 74 bid. Another market source quoted the 61/4s actually down nearly 3 points, at just below 61.

Another trader was profoundly skeptical of the whole concept, saying that the parties involved would "have a hard time getting a handle on how it works. They may talk about this, and talk about that - but at the end of the day, what's got to happen is the Fed [which meets for the last time this year on Dec. 11] has got to lower interest rates, or all of this stuff doesn't really matter.

"I really don't see how they're going to come up with this master plan where they don't use any taxpayer money and they all of a sudden make all of these things appear -it's just stupid top think that they can do that."

He said that further complicating the situation was the fact that "most of these loans have already been put into bonds and sold, and the mortgage bankers or the servicers are not in a position to do anything, and do what they're supposed to do."

Other mortgage names which previously had been well bid for on the assumption a plan to end the foreclosure crisis would soon be forthcoming, but which were going nowhere Monday included Thornburg Mortgage Inc., whose 8% notes due 2013 were seen unchanged at 84 bid, 86 offered, and ResCap, whose 7½% notes due 2013 were seen unchanged at 64 bid, 66 offered. Its 8 3/8% notes due 2015 were quoted ½ point lower at 64.5

Bonds of ResCap's corporate parent, GMAC, were meanwhile mixed, with its widely traded 8% bonds due 2031 seen by a trader unchanged at 85 bid, 87 offered, although a source at another desk saw the bonds get as good as 88.5, up ½ point, while its 6% notes due 2011 were down ½ point to the 85.5 level. Another market source meantime saw its 6 7/8% notes due 2012 go home down a point at 85.5

GM off as sales slide

GMAC's 49% owner, GM, reported an 11% year-over-year drop in its domestic vehicle sales during November - the first such loss after three straight months of rising sales. That cast a pall over the auto sector, and pushed GM's benchmark 8 3/8% bonds due 2033 down 1 point, a trader said, to 82 bid, 84 offered, while another saw those bonds down ¾ point at 8.75 bid, 82.25 offered. GM's 7 1/8% notes due 2013 were seen off ½ point to 87.5.

Sales figures no help to Ford

A trader meanwhile saw Ford Motor Co.'s 7.45% bonds due 2031 down 1 point at 74.25 bid, 74.75 offered, apparently not given much of a boost by the surprise news that the Number-Two domestic carmaker's U.S. vehicle sales were up 0.4% in November from year-ago levels, the first gain seen in the last 12 months, although it should be noted that the figures got a boost by year-end fleet sales to commercial customers like rental-car and taxicab companies and to police departments and other government agencies; the Ford Crown Victoria full-size sedan is widely used as both police cars and taxicabs. Analysts had been looking for as much as a 3% year-to-year drop.

Texas Competitive gets Buffett boost

Elsewhere, the new Texas Competitive Electric Holdings bonds which priced last week were seen having pushed up a little, perhaps having been given some impetus on the news that billionaire investor Warren Buffett had snapped up most of the $3.75 billion deal.

A trader saw the new 10¼% cash-pay bonds due 2015 having improved Monday to 96.25 bid, 97.25 offered from Friday's level at 95.25 bid, 96.25 offered, while the 10½% PIK toggle notes due 2016 firmed to 95.5 bid, 96.5 offered from 94.5 bid, 95 on Friday.

Another trader, though said that the bonds were just "slightly higher and that's about it."

Yet another trader thought it unlikely the Buffett news had much impact, noting that while the $2.1 billion of bonds Buffett bought is "a lot of bonds" - it's still just barely more than half of the issue. The $3.75 billion of new bonds priced last week by Texas Competitive Electric Holdings are part of the financing for the $45 billion leveraged buyout of the former TXU Corp.

CNBC reported that the Buffett-controlled Berkshire Hathaway Inc. had bought $1.1 billion of the $2 billion 10¼% cash-pay bonds, which priced at 95, and $1 billion of the 10½% pay-in-kind toggle bonds that had priced at 93.25 billion. The bonds were bought from Goldman Sachs, which led an underwriting syndicate that also included Morgan Stanley and Citigroup.

The billionaire tycoon nicknamed "the Oracle of Omaha," famed for his cautious, long-term approach to the market and his savvy stock picks, told CNBC that the bonds are the only junk bonds he is interested in at the moment, adding that some recent issues give new meaning to the word "junk."

Buffett also reportedly called the move a bet on the utility business - although there was some speculation in the market whether it might also be interpreted as a positive sign for LBOs in general, which were setting the financial markets on fire earlier in the year but whose bonds and loans went ice-cold after the mid-summer onset of the current credit crunch.

Unisys outstanding bonds seen lower

A trader saw Unisys's 8% notes due 2012 down 2 points at 89.5 bid, 90.5 offered, opining that the slide might be linked to the fact that the company is bringing a new issue of bonds to market this week. Another source also saw those bonds down 2 points, to just below the 88 level. Its 6 7/8% notes due 2010 were down half a point at 94.5 bid.

NewPage $456 million add-on

The high yield forward calendar grew by more than $700 million, with two issuers rolling out single-tranche offerings.

However no deals were priced during the Monday session.

NewPage Corp. is expected to price a $456 million add-on to its 10% senior secured second-lien notes due May 1, 2012 late this week or early next week, via Goldman Sachs.

The original $350 million issue priced at 98.773 to yield 10¼% on April 22, 2005, as part of a $775 million three-tranche transaction which included $225 million of Libor plus 625 basis points senior secured second-lien floating-rate notes, also due May 1, 2012, which priced at par, and $200 million 12% senior subordinated notes due 2013 which priced at 98.749 to yield 12%.

Proceeds from the add-on to the 10% notes will be used to help fund the acquisition of Stora Enso North America, as well as to refinance debt and for general corporate purposes.

Unisys plans $250 million

Elsewhere Unisys will hold an investor call on Tuesday for its $250 million offering of eight-year senior notes (existing ratings Ba3/BB-), which are expected to price on Wednesday or Thursday.

Bear Stearns & Co., Banc of America Securities, LLC and Citigroup are joint bookrunners for the debt refinancing and general corporate purposes deal.

Apart from NewPage and Unisys there was no other news in the primary market on Monday.

Two other deals are believed to be in the market.

Legends Gaming, LLC, along with Legend Finance Corp., is in the market with a $220 million offering of five-year senior secured notes - a debt refinancing deal via Jefferies & Co., which is expected to price during the Dec. 10 week.

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

The company priced its $1.2 billion term loan last Wednesday at 95.00, with a Libor plus 325 basis points coupon.

A source close to the Sequa financing has told Prospect News that the underwriters are proceeding with the Sequa bonds in "the traditional mode" of pricing the bank deal and letting it trade before they holding conversations with the buy-side about the relative value of the bonds.

A buy-side source saw the Sequa term loan trading late Monday at 96¾ bid, 97¼ offered, firmer on the session.

2007 issuance

According to Prospect News data year-to-date dollar-denominated high yield issuance at Monday's close - with no deals pricing during the session - stood just below $154 billion, less than $3 billion away from surpassing the approximately $157 billion issuance record set last year.

A high yield syndicate official who tracks dollar-adjusted global issuance noted that the euro-denominated primary market, which was active in 2006, has been shut down for weeks.

Specifying that 2006 global issuance was $174 billion, this source marks 2007 year-to-date issuance presently at $163 billion.

In round numbers, even if all or most of the business presently in the market is priced, 2007 global issuance will still be $10 billion short of the 2006 total, the source reckoned.

This syndicate official seemed skeptical that 2007 will see a new record for global issuance.

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