Thornburg bonds gyrate; ResCap, Countrywide seen lower; court ruling boosts Tropicana

By Paul Deckelman and Paul A. Harris

New York, Mar. 3- Thornburg Mortgage Inc.'s bonds gyrated wildly on Monday after the Santa Fe, N.M.-based mortgage lender disclosed that it had been hit with a new wave of margin calls related to securities backed by less-than-prime alt-A mortgages - and that it had been unable to meet all of those demands for payment. However, the company's bonds - as well as its New York Stock Exchange-traded shares - were able to bounce off their day's lows and recover some of their lost ground on news it had sold nearly $1 billion of new securities.

News was roiling other players in the battered mortgage industry.

Residential Capital LLC's bonds were seen lower amid news that Fitch Ratings had downgraded it by two notches, although some observers were not terribly impressed by that development.

Traders said that E*Trade Financial Corp.'s appointment of a new chief executive officer gave little lift to its bonds, especially since the new boss acknowledged that there are a lot of balance-sheet problems to be cleaned up. Countrywide Financial Corp.'s bonds eased despite the Calabasas, Calif.-based mortgage originator having picked up a little positive press over the weekend in Barron's.

From deep in distressed territory came word that a court ruling favorable to bondholders had given Tropicana Entertainment LLC's paper a lift.

But Finlay Fine Jewelry was seen heading in the opposite direction, hurt by the news that it will soon lose its lucrative niche selling jewelry at the upscale Lord & Taylor department store chain.

The high yield primary, meantime, continued to sleepwalk.

Market indicators pointing downward

A trader said that the widely-followed CDX index of junk market performance was off ¼ point Monday to 87¼ bid, 87¾ offered. Meanwhile, the KDP High Yield Daily Index lost eased by 0.06 to end at 73.69, while its yield widened by 2 basis points to 9.70%. In the broader market, declining issues led advancers by a five-to-four margin. Overall activity, reflected in dollar volumes, fell by about 26% from Friday's levels.

A trader said that things - especially the Thornburg bonds - were "rockin' and rollin," but said that he'd observed "a lot of unhappy campers."

Another market-watcher said that "things are getting ugly again," and not just in high yield, but in other previously shielded areas as well, such as municipals, given the recent troubles of bond insurers who guarantee those bonds as well as the overall jittery state of the financial markets in general. For instance, on Friday, he said, some speculators who'd "got caught on the wrong side of some risk trades, and the basis-spread went against them were selling billions of dollars of high-grade munis. They blew out spreads to the widest they'd ever been versus Treasuries" - a sign, he declared that "the market is broken."

The market, another trader opined, "was dead." Things were "trading pretty heavy. 'Most everything was down."

Thornburg takes another dive

Chief among them was Thornburg Mortgage's 8% notes due 2013, which easily topped the charts as the most heavily traded junk issue of the day. A trader saw those bonds fall as low as 64 bid, 65 offered versus prior levels at 79 bid, 81 offered, before the bonds came off their lows to end at 71 bid, 73 offered. He said that "a lotta guys were pumpin' them around, when they were down by 15 and then back up [from the lows] by 6 [points]."

Another trader saw the 8s finishing down 8 points on the day at 70 bid, 74 offered; he said the bonds "did trade as low as 65 bid, 67 offered for odd lots, but then pretty much bounced back with equity" which he noted had gone from being down around 60% on the day to down around 40% later on, "getting a little [of the lost ground] back." At another desk, a market source saw the bonds nosedive as low as 64 bid - down some 16 points on the day - before coming back from that nadir to end at 74, still off about 6 or 7 points, with many size trades.

Thornburg's NYSE-traded shares meantime ended up swooning $4.58, or 51.46%, to $4.32, on volume of 76.8 million shares, nearly 18 times the usual turnover. At one point in the session, the shares were down over 60% from Friday's close.

The bonds and shares - which had fallen badly enough on Thursday, when Thornburg said it had received over $300 million of margin calls on its mortgage-backed securities but had managed to make the required payments - went into freefall Monday morning when the company disclosed in a Securities and Exchange Commission filing that it had gotten another $270 million of margin calls on its reverse repurchase mortgage agreements - but had not been able to meet all of those, up to that point.

"The company has not met the majority of its most recent margin calls," Thornburg said in the 8-K filing, "but it is working to meet all of its outstanding margin calls within a time frame acceptable to its lenders by either selling portfolio securities or raising additional debt or equity capital."

Thornburg tried to put the best possible spin on the situation, asserting that the new margin calls "are strictly the result of continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions, but are not a reflection of the credit performance or long-term realizable value of Thornburg Mortgage's high quality portfolio, which continues to remain exceptional."

Despite those attempts at reassurance, the bonds and stock slid, especially after Citigroup equity analyst Donald Fandetti warned in a note to investors that "another downturn in the market could lead to significant risk to the company; a more dire turn in the market could lead to bankruptcy," as he cut his rating on the stock to a "sell" from "hold" previously, while slashing his 12-month price target for the shares to just $5 from $12. He said that in order to meet the new margin calls, Thornburg "will have to sell assets in a distressed market or raise equity capital." "Failure to complete either of these two could put Thornburg at risk of bankruptcy."

The analyst's red flag was all the more notable since Fandetti himself just on Thursday had expressed cautious optimism that Thornburg would able to muddle through, between the moves that the company itself had previously made to boost its capital position and the "aggressive" easing by the Federal Reserve and other government actions aimed at improving conditions in the badly shaken mortgage market. Fandetti at that time had raised his target price slightly to the $12 level.

But after wallowing around in the depths for much of the session, Thornburg's bonds, as well as its shares, came off the bottom on the news that it had sold nearly $992 million in adjustable-rate mortgages to investors via a securitization. Thornburg said that it anticipates "an increased use of collateralized mortgage debt financing and reduced reliance on reverse repurchase financing." Another option for shoring up its finances, which was suggested by Fandetti earlier in the day, would be the suspension of its 25-cent per share quarterly dividend, which the company had in fact suspended when it first ran into trouble last summer but then reinstated in December. The analyst estimated that such as step could save the beleaguered company about $160 million that it might need to meet further obligations. There was no immediate word from the company whether that step would be taken, now that it's gotten nearly $1 billion into its till.

ResCap lower as Fitch downgrades

Also among the mortgage lenders, a trader saw Residential Capital's 6½% notes due 2013 down 2 points at 51 bid, 53 offered, while parent company GMAC LLC's 8% bonds due 2031 were down a point at 74 bid, 76 offered. Another trader said the 61/2s were down 4 points at 50 bid, 53 offered, while GMAC's benchmark 8s lost 2 points to 75 bid, 76 offered.

At another desk, a market source characterized ResCap's 8 7/8% notes due 2015 down a point at 52.5 bid, while GMAC's 6 7/8% notes due 2012 were down more than a point at 79 bid. ResCap's 7% notes due 2011 declined 1½ points to 52.5 bid.

The downturn came on the heels of news that Fitch Ratings had downgraded ResCap's long-term issuer default rating by two notches, to BB- from BB+ previously, while also cutting GMAC's long-term rating by one notch to BB and affirming its short-term rating at B, all with a negative outlook.

"This action follows ResCap's extremely difficult 2007 and uncertain prospects for 2008," Fitch declared. While acknowledging that ResCap has "aggressively addressed near-term liquidity issues," the ratings agency warned that the company's return "to even a modicum of sustainable profitability in 2008 would be difficult if mortgage market dislocation continues." Fitch further noted that even after recent debt buybacks, ResCap still has $4.4 billion of debt slated to mature this year, including a $1.7 billion term loan.

But while the Fitch announcement certainly was not good news, some in the market dismissed it. One trader said that the announcement was hardly unexpected and suggested that the ratings agencies are usually behind the curve anyway, with the market having already priced such concerns in, as evidenced by the fact that ResCap bonds are trading at no more than 50 cents on the dollar and GMAC's in the 75 to 80 cents on the dollar range.

Banc of America Securities, in a research piece, said that the Fitch action "was not a surprise, especially since [Standard & Poor's] and Moody's [Investors Service] have already downgraded." The downgrade would have "no impact on the coupon step-ups as these have already been maximized by previous downgrades." B of A said that while it had been hearing "increased concerns" from investors regarding ResCap's liquidity, given what sector peer Thornburg is going through, ResCap had assured its analysts that "it is not seeing increased margin calls due to changes in collateral values over the last several weeks, giving us some comfort that ResCap's liquidity is not under the same sort of pressure at this point in time."

E*Trade CEO doesn't help bonds

The news that E*Trade Financial Corp. has finally selected a chief executive officer was seen having little or no positive impact on the New York-based financial services concern's bonds. A trader saw them "unchanged across the board, even with the news of the new CEO," quoting its 7 3/8% notes due 2013 at 76 bid, 77 offered and its 7 7/8% notes due 2015 at 76.5 bid, also unchanged.

A market source elsewhere in fact saw the bonds somewhat lower - with the 7 7/8s as the main mover, down several points to the 71.5 level in active size trading, while the 7 3/8s hung in around the same 77-78 context they had held. E*Trade's 8% notes due 2011 were seen off slightly at 87 bid, though on restrained trade.

The company said that Donald Layton - who was already serving as chairman - will take on the additional duties as CEO. Layton was named chairman in November when Citadel Investment Group led a group of investors that injected $2.6 billion into E*Trade, which badly needed the cash infusion to cope with its losses on asset-backed securities. Those losses led to the ouster of the company's then-CEO, Mitch Caplan, who was temporarily replaced by E*Trade's president and chief operating officer, Jarret Lilien pending an appointment of a permanent CEO. Lilien will continue holding his previous offices.

In taking command of the problem-plagued company, Layton acknowledged that E*Trade still needs to "work through" the serious trouble on its balance sheet, including the presence of some $12 billion of potentially risky home-equity loans that might give potential buyers of the company serious pause given current market conditions.

"Until we're through that," Layton said in an interview with CNBC on Monday, "there is no realistic sale."

Countrywide falls back

A trader said that Countrywide Financial's bonds "moved a little more," with the 3¼% notes coming due this May off a point at 96 bid, 97 offered, while its 6¼% notes due 2016 were 2 points lower at 82 bid, 84 offered. He noted that the bonds were easier despite favorable mention of Countrywide's shorter-dated bonds in a Barron's article, suggesting that it might be because investors realize that "Countrywide's [mortgage-loan] portfolio is really going downhill," with the percentage of its sub-prime borrowers who are a month or more behind on their loans having increased to about 27% at last count from 19% previously.

In the Barron's piece, an interview with Mary Miller, the director of T. Rowe Price Fixed-Income Group, Miller said that "the big opportunity in 2008 probably will be in the financial sector, which got beaten up for most of last year," adding that T. Rowe Price "just actually bought some very short-term debt issued by Countrywide Financial. It's three-month debt, with an annualized yield of 12%. We will dip our toe in the water when we see reasonable risks."

Despite Countrywide's well-publicized problems, Miller noted that "there's a deal with Bank of America to help shore up Countrywide over the longer term. There are many details to be worked out, but we felt that, over three months, we had enough information to make that call."

Finlay falls on Lord & Taylor move

Apart from the financials, Finlay Fine Jewelry's 8 3/8% notes due 2012 were seen down as much as 5 points during the session to 40 bid on the impending loss of parent Finlay Enterprises Inc.'s lucrative business with the upscale Lord & Taylor store chain.

Finlay said late last week that it had been informed by the prestigious store chain that Lord & Taylor will not renew license agreements for leased Finlay jewelry counters located in 47 Lord & Taylor stores upon the expiration of those agreements neat Jan 31, since Lord &Taylor bought the bankrupt Fortunoff's - itself known as a fine jewelry seller - and will now operate its own jewelry counters under that name.

New York-based Finlay said it will have to evaluate the impact of the development on its operations. The Lord & Taylor business produced $44 million of revenues for Finlay in 2007, the last year for which it has full figures.

Tropicana a winner

One of the few definitive upsiders in Monday's dealings was Tropicana Entertainment's 9 5/8% notes due 2014. A market source pegged those bonds up as much as 7 points at 55 bid, in busy dealings, following a court ruling seen as favorable to the Fort Mitchell, Ky.-based gaming company's bondholders.

A trader said that the news came out late Friday that the casino operator was found to be in default on the bonds after the company was denied a gaming license renewal for its casino in Atlantic City, N.J. and was thus forced to turn the property over to a trustee to be sold.

The trader called the senior subordinated notes "fairly active," gaining about 6 points to end at 54. Another trader quoted the bonds at 55 bid, 56 offered, up from 48 bid, 49 offered previously.

"[The ruling] is viewed as a positive for the bondholders," he said.

Last month, the company received a notice of default and acceleration on its bonds as a result of the New Jersey Casino Control Commission's refusal to renew Tropicana's license to operate the Tropicana Casino and Resort in Atlantic City.

A complaint by bondholders was filed in the Court of Chancery of the State of Delaware against the company, Tropicana Finance Corp., Aztar Corp. and some Tropicana officers alleging that an event of default had occurred as a result of the license refusal and "gross mismanagement."

Tropicana, believing that no default had occurred and the acceleration was therefore invalid, then countersued, accusing the bondholders of interfering with the attempt to sell the property.

The court did not agree with the bondholders that immediate repayment was necessary. It gave the company 60 days to repay the debt. However, as the date of default began about a month ago, Tropicana now has only a month left to pay up - or be forced into bankruptcy.

A forbearance agreement from senior credit facility lenders regarding the Atlantic City license issue was obtained back in December.

The Atlantic City property is up for sale. Proceeds from the sale are expected to be used to repay bank debt.

Ainsworth still only deal in market

The primary market remained quiet, ending the session where it began, with only one deal in the market.

Ainsworth Lumber Co. Ltd. is expected to place $50 million to $75 million of six-year senior secured first-lien notes possibly this week, via Barclays Capital.

The deal is being marketed without an investor roadshow.

Ainsworth brings the new notes to market concurrent with an exchange offer for $153.5 million of senior floating-rate notes due 2010, $275 million of 7¼% senior notes due 2012, $75 million senior floating-rate notes due 2013, $210 million 6¾% senior notes due 2014 and $110 million 6¾% senior notes due 2014.

The new notes offer is backstopped by holders of the existing notes in return for warrants to purchase up to 7,887,998 of the company's common shares, representing approximately 35% of the currently outstanding shares.

On Monday Ainsworth announced that it was extending the early deadline for the exchange offer to 5 p.m. ET on Friday.

Rock-Tenn: the stars aligned

High yield market watchers continued to speak in positive terms about Rock-Tenn Co.'s new issue of 9¼% senior unsecured notes due 2016.

The $200 million issue (Ba3/BB-) was placed late last week via Banc of America Securities, Wachovia Securities and SunTrust.

The notes were priced at 99.30 to yield 9 3/8%.

In addition to pricing on top of talk, the notes came in line with the pro forma interest rate in the red.

On Monday a source close to the deal said that in an otherwise abysmal high yield primary market "the stars aligned" for Rock-Tenn.

"It was a good execution," the sell-side source said.

"It's a well-rated credit and a well-known issuer," the official added, noting that following a bond deal which the company brought during the first half of 2005 to help fund its acquisition of Gulf States Paper Corp. - a deal that came to market with investment grade ratings - Rock-Tenn was able to show some rapid deleveraging, which may have helped the company's cause as it came to market with high-rated junk this time around.

Ahead of the roadshow Rock-Tenn downsized the bonds to $200 million from $400 million, shifting $200 million to the pro rata portion of the credit facility.

Even though the bond deal was oversubscribed the company did not elect to return any of the financing to the junk piece.

"The bank deal did very well, which created positive momentum," the informed source said.

"They didn't upsize the bonds again because they had commitments from the pro rata banks.

"They took what they had lined up with the banks and went ahead with that nice print on the bonds."

Emptiness

Apart from the above-mentioned Ainsworth deal, the forward calendar is empty as far as the eye can see, sources said on Monday.

However sell-siders did say that there are some situations out there that could develop fairly quickly should circumstances in the leverage markets improve.

One such source, noting that the new Rock-Tenn 91/4s held in Monday around 101 3/8 bid, 101 7/8 offered, basically unchanged, commented that "high quality deals, coming a little cheap and trading up, are what the primary market needs in order for investor confidence to build."

Another sell-sider, noting that the new Boise Paper Co. term loan traded up a couple of points in the secondary market on Monday, suggested that debt issues "finally seem to have enough rate on them that people are beginning to show interest."

This official said that high yield deals will start to come when the market allows them to come, and added that one time-honored catalyst, reverse inquiry - in which high yield investors specify willingness (or even eagerness) to buy new debt from a particular issuer, should that issuer wish to raise some cash - could kindle business when market circumstances allow.

Stephanie N. Rotondo contributed to this report.

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