Countrywide climb continues on official B of A deal news; Southwestern Energy prices first deal of '08

By Paul Deckelman and Paul A. Harris

New York, Jan. 11 - Countrywide Financial Corp.'s bonds - after an amazing rebound on Thursday on the news that it was in talks to be acquired by Bank of America - kept right on climbing on Friday after the official announcement that the troubled mortgage lender will indeed be acquired by the Charlotte, N.C.-based banking giant. They ended higher on the day, although the issues did back off from the early highs they hit in the immediate aftermath of the announcement.

That capped a wild week which first saw those same bonds plunge to deeply distressed levels - one widely traded issue touching lows under 40 - as bankruptcy rumors swirled around Calabasas, Calif.-based Countrywide, the nation's biggest mortgage originator, but then finish the week by roaring northward to around par levels, in heavy size trading.

Junk's been in a funk ever since the dog days of last summer by what came to be called the subprime mortgage crisis, initially centered around the woes of Countrywide and other companies writing mortgages for less-than-credit worthy borrowers who fell into default at alarming rates - a situation which spread throughout the lending system, developing into a full-blown credit crunch that killed off what was up until that time a respectable if not necessarily spectacular junk market advance.

But the prospect that one of the main companies involved might be rescued from insolvency sparked a powerful rally pretty much throughout high yield on Thursday.

However, while Countrywide's own rally continued Friday, along with those of sector peer Residential Capital LLC and, to a lesser degree, Thornburg Mortgage Inc., the overall junk market rally pretty much fizzled out, with market gauges pointing lower.

Housing bonds fell pretty much across the board, led by Standard Pacific Corp., the subject of market liquidity worries, especially on its apparent hiring of a well-known restructuring firm as an advisor. In turn, other sector names like Hovnanian Enterprises Inc. and WCI Communities Inc. followed suit. The closely linked construction equipment rental sector was mixed, with United Rentals Inc.'s bonds on the downside and other names like Rental Service Corp. higher.

Also heading lower, giving up whatever gains were notched Thursday, was Quebecor World Inc. - even amid news reports that the troubled printing concern was close to inking an agreement with several lenders to borrow the new financing it has to have by Tuesday, and the late-day announcement that corporate parent Quebecor Inc. and another investor had proposed their own rescue plan.

On the upside, Georgia Gulf Corp.'s bonds rose, in line with a surge in the Atlanta-based chemical manufacturer's shares, after it reported solid debt-reduction progress.

Overall, sources were marking the broad high yield market somewhat weaker on Friday against the backdrop of a sharp fall in stock prices.

One high yield syndicate official remarked that the high yield index was 12 to 13 basis points wider on the day, and cash prices were moderately weaker, but added that it was no surprise given that the Dow Jones Industrial Average fell nearly 250 points during the session.

In the primary sphere, Southwestern Energy Co. successfully came to market with an upsized issue of 10-year notes, which priced at par, breaking the nearly month-long junk bond new-issue drought - the last previous deal to price came from Helix Energy Solutions Group Inc., all the way back on Dec. 18. Secondary players showed their appreciation by taking the new bonds up in aftermarket dealings.

2008's first deal

Meanwhile the primary market saw its first issuance of the year.

Southwestern Energy priced an upsized $600 million issue of 10-year senior notes (Ba2/BB+) at par to yield 7½%, on top of the price talk.

JP Morgan, Banc of America Securities LLC and RBS Greenwich Capital were joint bookrunners for the debt refinancing deal from the Houston-based oil and gas exploration and production company. The offering was upsized from $400 million.

One informed source told Prospect News that the Southwestern Energy deal was oversubscribed and added that the company's new 7½% notes due 2018 traded well in the secondary.

The source added that accounts were relatively happy with pricing, and mentioned that the notes came with a high-grade covenant package.

Another banker, not in the deal, noted that the 7½% interest rate is nothing short of impressive, given the present volatility in the high-yield market.

However, this banker continued, the 368 basis points spread to Treasuries is notable, given that a year ago four-B deals were coming with spreads of between 170 and 230 basis points.

The official who was in the deal conceded this point, but added that the yield on 10-year government paper has lately dropped dramatically.

"You have to put it into the context of where Treasuries were and where they are now," the informed source insisted.

"This deal went well.

"Aside from these notes the company doesn't have a lot of additional debt. They have a huge market cap. The management team did a good job on the road.

"It was a no-brainer in a market where nobody wanted to do anything else.

"The fact that it traded up is a good thing for the market in general.

"It's a good way to start 2008. Finally!"

When the new Southwestern Energy 7½% notes were freed for secondary dealings, a trader saw them push up to 100.75 bid, 101.75 offered, versus their par issue price earlier in the session.

MBIA yields 14%

The bond market turned out paper yielding much higher that Southwestern Energy's new 7 ½% notes, on Friday.

However the notes in question emerged from the investment-grade space, not high yield.

MBIA Insurance Corp. priced $1 billion surplus notes due 2033 (Aa3/AA/AA) at par to yield 14%.

The MBIA notes pay a coupon of 14% for five years, after which the coupon will float at a rate of three-month Libor plus 1,126 basis points, if they aren't called.

One market source called MBIA's 14% interest rate "a distressed yield," and added that on Thursday the company had been attempting to place the notes with a yield of between 9% and 12%.

Elsewhere in the high grade universe, Jabil Circuit, Inc. priced a downsized $250 million issue of split-rated 8¼% 10-year notes (Ba1/BBB-/BB+) at 99.965.

The notes were launched earlier in the day at 8¼%.

Petroleum Development launches $250 million

News of one roadshow start was heard on Friday.

Perhaps not surprisingly, the prospective issuer emerged from the energy/natural resources sector, from which three of 2008's first four announced junk deals have come.

Petroleum Development Corp. will begin a roadshow on Tuesday for its $250 million offering of 10-year senior notes.

Morgan Stanley is the left bookrunner for the debt refinancing and general corporate purposes deal from the Bridgeport, W.Va., energy company. JPMorgan is the joint bookrunner.

Petroleum Development is one of only three deals that were in the market at Friday's close.

The other two are Atlas Energy Operating Co./Atlas Energy Finance with $400 million of 10-year senior notes (B3/B), a debt refinancing deal via JP Morgan and Wachovia Securities, and Solutia Inc., with $400 million of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities.

Both are expected to price next week.

One senior high yield syndicate official who spoke to Prospect News late Friday cautioned that the Southwestern Energy deal notwithstanding, it might be a while before the new issue market gathers any momentum.

"There is cash out there," the official asserted, adding that for over three months issuance has been extremely low.

"You have had several years of tremendous issuance," the banker added, noting that the phenomenal issuance seen in 2006 and 2007 is generating a hefty amount cash in the form of coupon payments, which the buy-side will sooner or later have to put to work.

"Outflows have not been that egregious, given market conditions," the banker added (on Thursday AMG Data Services reported a $285 million outflow from high yield mutual funds for the first full week of 2008).

"We know of accounts that are sitting on a lot of cash right now," the banker said.

"And they really don't have any place to put it to work."

Market gauges point lower

Back among the established issues, a trader saw the widely followed CDX index of junk bond performance down 3/8 point at 92¾ bid, 93¼ offered. The KDP High Yield Daily Index lost 0.07 to finish at 75.91, while its yield tightened by 1 basis point to 9.11%.

In the broader market, declining issues narrowly shaded advancers. Overall activity, reflected in dollar volume, was off by about 19% from Thursday's levels.

A trader observed that Friday's session - like Thursday's was "a weird day - again." As had been the case the day before, he said, the session was fairly slow throughout - other than the brisk trading in Countrywide Financial paper - but then picked up late in the day.

"Half of our trades took place in the last two hours of the day," he observed. But then again, "we've had a late-day surge every day this week."

Countrywide shoots up, gives back some gains

The big exception to what was otherwise a pattern of market lassitude for much of the day was Countrywide, whose bonds were moving upward from the get-go, fueled by the 7 a.m. ET announcement that Bank of America will indeed buy the 84% of Countrywide that it does not already own, in an all-stock transaction worth about $4 billion, an estimated 70% discount to Countrywide's book value - confirming what had pretty much been expected by junk players the day before, when the mortgage company's bonds shot up dramatically.

With most of the upside having been notched on Thursday - its widely traded 6¼% notes due 2016, for instance, had zoomed nearly 40 points on the session, from about 40 bid at Wednesday's finish to just under 80 - Friday's gains were less dramatic, though still substantial.

A trader saw Countrywide's 3¼% notes coming due this May at 96 bid, 97 offered, which he called up only slightly from 95 bid, 96 on Thursday, and saw the 6¼% notes at 85.5 bid, 86.5 offered, up from 76 bid, 78 offered on Thursday, and he noted, well up from the 40-42 level where they were trading "just the other day."

Another trader saw the '08s at 95 bid, 96 offered, which he called up 3 points on the day, although he said they finished below their day's highs at 97.5 bid, 98.5 offered. He saw the '16s up 8 points on the session at 84 bid, 86 offered, after having been as high as 89 bid, 91 offered.

Another market source saw Countrywide's bonds among the most actively traded on the day, with the 61/4s advancing almost 7 points to 85.5 level, although at one point earlier in the session, those bonds had gotten as good as 94, before coming down from that peak. The 31/4s were meantime just below 95 - actually off slightly on the session, and well down from their early peak level just a shade below par. Countrywide's 5.80% notes due 2012 were seen going home at about 90.5, up more than 5 points on the day, though they finished well below their early zenith around 97.

While Countrywide's bonds continued to rise, defying the old financial market maxim of "buy the rumor, sell the news" its New York Stock Exchange-traded shares - which had jumped 51.4% in Thursday's hectic, rumor- and news report-driven trading - did exactly that, nosediving $1.42, or 18.32%, on Friday to end at $6.33, on volume of 234 million shares, nearly five times the usual turnover.

News that Countrywide, the subject of bankruptcy rumors earlier in the week, will be rescued from disaster by the deep-pocketed B of A - either the largest or the second-largest U.S. bank, along with Citigroup, depending on what criteria you use - caused the major ratings agencies to express cautious approval of the idea, with Moody's Investors Service saying that its ratings - the bonds are now at Baa3 - could be upgraded, while Standard & Poor's took it off CreditWatch with negative implications and moved its BBB+ and A ratings to CreditWatch positive, a move which S&P said reflects the higher rating on Bank of America and the benefits Countrywide will receive because of being wholly owned by a larger and more diversified company. Fitch Ratings also put Countrywide's BBB+ ratings under review for a likely upgrade. The agencies are expected to equalize Countrywide's ratings with the better-rated B of A when the transaction closes. They will also be scrutinizing B of A's ratings, to see whether the added pressure of working through Countrywide's still-considerable problems will be balanced out by Bank of America's enhanced status as the leading U.S. mortgage servicer and originator, complementing its already market-leading positions in credit cards and retail deposits.

Other mortgage names also up

As was the case on Thursday, other mortgage companies in the high yield universe were higher along with Countrywide, the latter's pending acquisition by the giant banking concern seen by investors as a positive move bringing some stability and strength to the battered business, and possibly spurring industry consolidation.

A trader saw Residential Capital's 6½% notes due 2012 at 66 bid, 69 offered, up 10 points, although he noted that the bonds were "pretty wide all day," and were "kind of all over," with some people quoting them as wide as 60 bid, 70 offered.

He saw the Minneapolis-based mortgage originator's 6 3/8% notes due 2010 up 6 points at 62 bid, 65 offered.

Another trader saw its 6½% notes due 2013 down 2 points on the day at 60 bid, 62 offered, while its 8 3/8% notes due 2015 were down 1 point at 60. Meanwhile, the 7% notes due 2012 of ResCap's corporate parent, GMAC LLC, were seen up nearly 3 points at just below the 84 level.

Among other mortgage names, Thornburg Mortgage's 8% notes due 2013 pushed up to 82.5 bid, 84.5 offered from prior levels at 81 bid, 873 offered. E*Trade Financial Corp.'s 8% notes due 2011, after having risen solidly on Thursday, were unchanged at 82 bid, 84 offered.

Housing bonds head lower

Despite the prospect that the Countrywide deal will bring some strength and stability to the badly weakened mortgage business, possibly facilitating a restoration of less restrictive credit to would-be homebuyers, housing sector names were seen mostly lower Friday with the big loser being Irvine-Calif.-based Standard Pacific.

A trader saw its 9½% notes due 2012 down 6 points at 36 bid, 38 offered, while another trader saw its 7% notes due 2014 down 3 points at 62 bid, 64 offered. At another desk, a market source saw its 9¼% notes due 2012 swoon more than 10 points on the day to 34.

The company's NYSE-traded shares tumbled 47 cents, or 17.60%, to $2.20, on volume of 22.5 million, more than four times the norm.

Bond and stock investors were spooked by news reports that the company had hired the well-known turnaround specialist firm of Miller Buckfire as an advisor to help it evaluate its financial options (see related story elsewhere in this issue). That sent up red flags among those fearing a possible slide into bankruptcy, since Miller Buckfire has advised a number of companies which subsequently filed for Chapter 11, including current bankrupts Calpine Corp. and Dana Corp.

At one point Friday, the NYSE asked Standard Pacific to comment due to "the unusual market activity in the company's stock," and asked the company to indicate whether there were any developments to explain the movement. The homebuilder declined, telling the exchange that its policy "is not to comment on unusual market activity or rumors."

Bad move, said Gimme Credit analyst Vicki Bryan, suggesting that such stonewalling is " not going to appease investors. Standard Pacific's financial position is in critical condition, so it should expect this news to derail already nervous markets."

Bryan noted that Standard Pacific's liquidity situation is already "precarious," and is being "exacerbated by significant capital contributions required to shore up its struggling joint ventures."

The analyst suggested that "with most of the high yield homebuilding group deteriorating more rapidly than expected, it might be wise for companies like Standard Pacific to get in ahead of the rush to 'pursue alternate strategies' before asset values fall for yet another year."

With Standard Pacific greasing the skids, most of its sector peers slid. Among other builders, a trader saw Hovnanian's 6½% notes due 2014 down 1½ points at 64 bid, 65 offered and its 6 3/8% notes due 2014 down 2 points at 64. The Red Bank, N.J.-based builder's 8 5/8% notes due 2017 were 3 point losers at 67.

WCI Communities' bonds were seen down 2 points across the board, the 9 1/8% notes due 2012 at 49 bid, 51 offered, the 7 7/8% notes due 2013 at 47 bid, 49 offered, and the 6 5/8% notes due 2015 at 46 bid, 48 offered.

Tousa Inc.'s 8¼% notes due 2011 dropped 1½ points to 42.5 bid, 44.5 offered, while Beazer Homes USA Inc.'s 8 5/8% notes due 2011 were ½ point lower at 71 bid, 73 offered. Industry powerhouse Lennar Corp. - recently dumped back to junk from investment grade - was also on the downside, its 7 5/8% notes due 2009 down 2 points at 94.5.

Rental companies a mixed bag

Among the construction equipment rental concerns, whose fortunes and fate are closely linked to that of the builders to whom they rent their bulldozers and other heavy equipment, United Rentals' debt fluctuated during the session after the company presented an upbeat forecast for 2008. But one trader said that while the numbers were good, buried underneath it all was continued concerns about the Greenwich, Conn.-based company's ability to go forward.

The trader quoted the 6½% notes due 2012 around 90.5, noting that the debt moved higher in the previous session to around 92, only to open at 88.5. The 7¾% notes due 2013, which ended Thursday around 84, closed at 79 bid, 81 offered after hitting a low of 77.

Another market source saw the 61/2s down more than 1½ points to around the 90 level, while the 73/4s lost 4.5 points to close below 80.

On the other hand, Rental Service Corp.'s 9½% notes due 2014 were seen around 88, up nearly a point, while Neff Corp.'s 10% notes due 2015 were up ½ at 47 bid, 49 offered.

Quebecor slides despite financing progress

Outside of the mortgage/homebuilding/construction equipment sphere, a notable mover was Quebecor World, whose bonds had risen solidly on Thursday. But on Friday, the Montreal-based commercial printer's 4 7/8% notes due 2008 "got hit pretty hard," said a trader, quoting them down 10 points at 69 bid, 71 offered, while its 6 1/8% notes due 2013 were also down about 10 points, at just below 65. Its NYSE shares fell more than 25%.

That slide came despite news reports that the company - which is under the gun to raise $125 million of new financing by Tuesday or be in default of its senior lending facilities - had received a rescue plan which could provided it with up to C$400 million. The money would come from its corporate parent, media conglomerate Quebecor Inc., along with another investor, Tricap Partners, a private equity fund managed by Brookfield Asset Management Inc. Quebecor World's management acknowledged receipt of the rescue proposal, calling it "meaningful and serious in light of the circumstances and the company's current financial situation."

Earlier in the session, even before the announcement of the rescue plan, Quebecor World was reported by the Globe and Mail newspaper to be close to signing a financing agreement with two large Canadian banks, the Royal Bank of Canada and Toronto Dominion.

Georgia Gulf firmer on debt progress

On the upside, Georgia Gulf Corp. paper was seen firming in Friday trading, though a trader was unable to put his finger on why. According to the trader, the only news out on the company were reports that the company had reduced its term debt. While that helped out the equity, the trader felt short-covering could have been responsible for the bonds' gain.

The trader pegged the 9½% notes due 2014 up at 77 bid, 78 offered, from 68 bid, 69 offered just a few days previous, while its 10¾% notes due 2016 were also better around 61, up from the mid-50s.

Another market source saw the 91/2s up nearly 6 points to 77.5. The stock meantime leapt up 25% to $5.12.

Those gains followed an announcement Thursday that the chemical maker had reduced its term debt by $71.5 million during the 2007 fourth quarter. The balance-sheet cleanup was fueled by a sale-leaseback transaction, working capital reduction initiatives and an income tax refund.

Stephanie N. Rotondo contributed to this report.

© 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.