Refco continues dive as scandal deepens; automotives continue post-Delphi Chapter 11 skid

By Paul Deckelman and Paul A. Harris

New York, Oct. 12- Refco Inc.'s bonds were being pounded down in heavy trading for a second consecutive session as the securities fraud scandal at the New York-based commodities brokerage company deepened with the indictment of its ousted chief executive officer.

Elsewhere, the bonds of bankrupt Delphi Corp. were heard to have hung in right around the levels to which they fell on Tuesday, when traders returned to the market after the 31/2-day Columbus Day holiday weekend break and took those bonds lower in response to its weekend Chapter 11 filing. Other automotive names were in decline for a second consecutive session.

Little was seen in the way of primary sector activity, market participants said, although Ntelos Holdings Corp. brought a drive-by $135 million sale of floating-rate PIK notes.

"Everybody was in a bad mood," a trader said. "Everything was weak across the board. If you weren't in the auto parts sector, your bonds didn't trade - unless they were a name in the paper, like Refco."

Overall the high-yield market was once again weaker on Wednesday, although sources differed as to how weak.

A buy-side source marked it "just a little weaker," and added "there is just not a lot of liquidity out there."

Another source claimed there were some bids out there, but specified that they certainly were not huge ones.

However, late in the session when Prospect News pressed sell-side sources for a spot on the broad market, they responded by saying that some benchmark high-yield bonds were down half a point to a point on the day.

Refco's 9% notes due 2012 were easily the most actively traded bond, a trader said. He saw those notes opening at 84 bid, 87 offered - well down from Tuesday's closing levels around 90 bid, 94 offered - and then getting taken down as low as 75.75 bid, before firming slightly off that nadir to close out the day at 78 bid, 79 offered, down 12 points on the session and some 30 points below their 108 bid, 109 offered levels at the end of last week.

Another trader saw those bonds finishing at 75 bid, 77 offered, down from prior levels in the high 80s Tuesday and above par before that.

Yet a third trader pegged the bonds going out at 75 bid, 77 offered, down 14 points from its Tuesday levels at 89 bid, 91 offered, and over 32 below its recent peak at 108. The trader quipped that Refco was "pretty active," with "a ton of the bonds traded. Call it a bajillion."

A trader said that with the bonds getting pummeled the way they were, among the big losers from the debacle would be institutional holders like Pimco, Eaton Vance and Vanguard, who own, respectively, 10%, 9% and 5% of the company's $390 million of currently outstanding notes.

Refco's bank debt meantime was quoted trading late in the day around 93 bid, with offerings in the 95-96 area, a bit firmer than it was at the open.

Refco's New York Stock Exchange-traded shares were equally widely traded and just as volatile on the downside for a third straight session. They plunged $3 (21.66%), to close at $10.85, on volume of 35 million - almost 18 times the norm. Wednesday's finish was well down from the $28.56 closing price last Friday, before the news emerged about a burgeoning securities fraud scandal. That news led to the company abruptly removing then-CEO Phillip Bennett and putting him on leave.

On Wednesday, the U.S. Attorney's office for the Southern District of New York charged the ousted executive with securities fraud over hundreds of millions of dollars in transactions owed to the company by an entity he controlled. Bennett was arraigned before a federal magistrate, who set his bond at $50 million.

Besides the Justice Department, the Securities and Exchange Commission is also investigating Bennett's alleged secret dealings with Refco.

Prosecutors said that when Refco went public two months ago and raised $583 million, Bennett and "others known and unknown" concealed related-party transactions between Refco and the mystery company - which they said made Refco look stronger than it was during its initial public offering.

U.S. Attorney Michael Garcia said Wednesday that Bennett and these other as yet unidentified individuals had misled investors and regulators - a charge that the embattled exec, through his lawyers, denied.

On Monday, the company had disclosed that a $430 million receivable held by an entity controlled by Bennett was buried deep beneath its quarterly and annual reports, with the debts mostly uncollectable and stretching back as far as 1998. Refco warned investors that its financial statements for the periods ending Feb. 28, 2002, Feb. 28, 2003, Feb. 29, 2004, Feb. 28 and May 31 of this year, "taken as a whole, for each of Refco Inc., Refco Group Ltd., LLC and Refco Finance Inc. should no longer be relied upon."

When Refco suddenly removed Bennett on Monday and put him on leave, it did likewise for another executive, Santo Maggio, the head of Refco Securities. Maggio has not been charged in connection with the alleged securities fraud.

Delphi volatile but ends unchanged

Elsewhere, there was some price volatility during the session in Delphi's bonds - though little real movement day over day, a trader said.

He saw the bankrupt Troy, Mich.-based automotive electronics manufacturers bonds - now all trading at the same level and trading flat, or without their accrued interest - as being "ups and downs, they had mixed emotions," hitting a high of 58 bid, 59 offered and a low of 56.5 bid, 57.5 offered, before ending the session quoted at 57.25 bid, 58.25 offered.

"They just bounced around," he continued. "I think a lot of it was technical, just unwinding all of the CDS [credit default swap] stuff." He said that he didn't think it had much to do with real fundamental news out about the credit.

Auto sector soft again

Other automotive names continued to weaken in the wake of the Delphi bankruptcy filing.

The company's former corporate parent, General Motors Corp., was seen a little lower, with the world's largest carmaker's benchmark 8 3/8% notes due 2033 quoted at 71.5 bid, 72.5 offered, down half a point on the session on top of the three-point loss those bonds were seen to have suffered on Tuesday, after the market reopened following the holiday and had its first reaction to the bankruptcy news.

At another desk, GM's 7¼% notes due 2033, which on Tuesday likewise fell about three points to the 82.5 area, were seen continuing to skid lower Wednesday, dropping another two points to 80.5

GM is being watched especially closely in the wake of Delphi's filing, since it is believed to be on the hook for several billion dollars of its former unit's employee costs as a result of the filing.

GM rival Ford Motor Co.'s 7.45% notes due 2031 were seen half a point lower at 72 bid, 73 offered.

A trader saw Dana Corp.'s bonds down half a point on "that accounting issue," with its 7% notes due 2029 dipping to 66 bid, 68 offered and its 6½% notes due 2009 at 78 bid, 80 offered. The Southfield, Mich.-based automotive systems maker on Monday had announced that it would have to restate its earnings for 2004 and the first half of this year, and would also delay releasing its third-quarter results, due to its previously announced accounting problems. Dana said it will have to write off its U.S. deferred tax assets totaling $740 million, which will cut into net income. Dana also withdrew earnings forecasts for the rest of this year

Dura Operating Corp.'s 9% notes due 2009 were meantime seen by another trader two points lower at 63 bid, 64 offered.

Jean Coutu slips further

Apart from the automotive issues, the trader saw Canadian retailer Jean Coutu Group Inc.'s bonds "status quo, maybe down another quarter [point]," following the retreat the company's bonds had shown Tuesday on lackluster earnings results. "Most of the movement was on Tuesday." Coutu's 8½% notes due 2014 were quoted at 94.5 bid, 95.5 offered.

Another trader saw those bonds at 94 bid, 95 offered, which he estimated was down a point on the day, noting that the bonds had traded as high as 98 bid, 99 offered before the earnings results were released.

He also saw the company's 7 5/8% notes due 2012 "down again, in heavy market conditions," sinking to 98.75 bid, 99.75 offered, versus 102 bid before the earnings figures.

Coutu - which bought the northern half of J.C. Penney & Co.'s Eckerd drugstore operation to become the fourth-largest pharmacy chain operator in the U.S., saw its fiscal first-quarter earnings halved to $11.1 million (four cents a share) from $22.3 million (nine cents a share) in the year-ago quarter. Earnings were way down from the $46.2 million earned the previous (fiscal fourth) quarter.

Mother's Work down on guidance

The trader also saw maternity clothing retailer Mother's Work's 11¼% notes due 2010 two points lower, at 87.5 bid, 88.5 offered. He cited the Philadelphia-based company's recent negative quarterly guidance.

"The market is definitely re-pricing," he said, "re-pricing out there. You have a confluence of a lot of negative news out there - Delphi, energy, [interest] rates going up.

"Everyone's concerned."

Ntelos drives through

Having not seen an issue price since Activant Solutions completed its deal last Thursday, the primary market exhibited a pulse on Wednesday as Waynesboro, Va.-based telecom Ntelos Holdings Corp. priced a $135 million quick-to-market issue of eight-year senior floating-rate PIK notes (Caa1/CCC+).

The notes priced at 99.00 with a coupon that will float at a rate of Libor plus 875 basis points.

Bear Stearns & Co. and Lehman Brothers were joint bookrunners for the deal. Proceeds, along with the proceeds from a $175 million initial public offering of stock, will be used to terminate the company's advisory agreements with Quadrangle Capital Partners LP and Citigroup Venture Capital, as well as for general corporate purposes, debt repayment and capital expenditures.

Downsized Fosun talked at 9%

The rest of the primary market news had negative tones Wednesday.

Chinese conglomerate Fosun International Ltd. downsized its offering of seven-year senior notes (Ba3/BB-) to a range of $325 million to $350 million from the original $500 million offering size, and talked the deal at a yield in the 9% area. Last week the market heard preliminary guidance of 8½% to 9%.

Morgan Stanley and Citigroup are joint bookrunners.

Targa bank deal doing well

Meanwhile another pending deal, Targa Resources Inc.'s $350 million offering of eight-year fixed- and floating-rate senior notes (B2) is possibly not long for the high-yield bond market, a buy-side source said Wednesday.

The source said that pro forma on the fixed-rate notes is 8½%-9%.

"There is talk that they might do the whole thing in the loan market because that bank deal is going very well," the source added, saying that there had already been $1 billion of orders in place last week for the bank deal.

"The term loan is $1.15 billion, so they could easily increase that," the source added.

Credit Suisse First Boston, Merrill Lynch & Co. and Goldman Sachs & Co. are joint bookrunners for the deal, which is pegged to help fund Targa's acquisition of Dynegy Inc.'s midstream natural gas business for $2.35 billion.

Not the best environment

The buy-side source went on to say that at present the junk market is "pretty dead" and "not exactly the best environment to be bringing new deals."

With the Delphi Corp. bankruptcy, the source continued, there has been an onslaught of negative sentiment concerning the auto sector. In particular investors seem nervous about the debt of General Motors Corp.

"People don't seem to have a grasp on how wide it can go from here," the source said. "It's just very uncomfortable right now."

The buy-sider added that there is even talk concerning the possibility of a GM bankruptcy.

"You have guys from Delphi going out every day and making comments about wanting to take out two-thirds of their legacy costs. And GM guys are basically in the same situation Delphi is, as far as legacy costs.

"They're trading recovery swaps on GM, now," the source added. "That's an interesting dynamic that we haven't seen before.

"Even the fact that there is talk about a bankruptcy on something this large - something that dwarfs everything else in the high-yield market - is disconcerting to a lot of people because everybody owns it.

"Everybody owns a lot of it," the source said. "The question basically is, how do you get away from it?"

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