Refco bonds, bank paper collapse after it freezes accounts; Delphi steadies, still pressures GM paper

By Ronda Fears

Nashville, Oct. 13 - Refco Inc. on Thursday said it would freeze customer accounts for 15 days at its Refco Capital Markets Ltd. unit, which is at the heart of its unfolding demise, in order to maintain liquidity that was strained to the snapping point by a mass exodus of clients.

The liquidity scare, in turn, caused a mass exodus in the Refco bonds, but as one trader put it, "I find it hard to believe that this firm is going away." He noted that although there were speculators - funds focused on special situation and distressed debt - stepping up for Refco, there still were a slew of "real money accounts" involved.

"The list of holders [in Refco bonds] is the who's who of money managers," the trader said.

Refco the largest independent futures broker in the U.S., said it was trying to protect the value of the capital markets enterprise - its biggest unit - amid a scandal that brought about the dismissal of its CEO Phillip Bennett, who now faces federal charges that he helped hide bad debts and caused Refco to file fraudulent statements to securities regulators, some related to its initial public offering just roughly six weeks ago.

Delphi Corp., meanwhile, took a backseat to Refco. Delphi paper remained fairly active, traders said, though nothing like the volume in Refco. The Delphi bonds ended largely unchanged in the 57/58 area, and traders said the Refco situation served to stem the bleeding in Delphi bonds following its bankruptcy filing over the weekend.

Still, even without considering the ramifications of the Refco ordeal on the credit markets, analysts were anticipating a huge fallout from Delphi's bankruptcy as Delphi is the world's largest auto parts supplier. General Motors Corp. and Ford Motor Co. bonds have fallen to new lows on the Delphi filing, with GM taking the brunt of the sell-off.

Refco freezes accounts

Reports of an exodus at Refco following the arrest of suspended CEO Phillip Bennett on fraud charges sent its finance units bonds crashing by more than 50% and the stock, which debuted on the Big Board just in August, fell 27% before trading was halted mid-morning and never resumed.

In reaction, Refco said it would freeze customers' accounts in one of its subsidiaries for 15 days because it may not have enough cash on hand to operate normally.

Refco Capital Markets Ltd., an offshore broker for stocks, bonds and currencies, is the subsidiary that former CEO Bennett, who was dismissed earlier in the week, allegedly used to help hide up to $545 million in bad debts. Bennett was indicted on federal charges Wednesday.

Parent Refco said receivables from the entity controlled by Bennett was reflected in financial statements for the years 2002-2004, as well as the first two quarters of 2005. In light of the audit investigation, the parent said units Refco Group Ltd. and Refco Finance Inc. will likely delay filing their quarterly reports.

The company also has retained former Securities and Exchange Commission chairman Arthur Levitt and Eugene Ludwig, CEO of Promontory Financial Group LLC, as special advisers to the board of directors. Too, Goldman Sachs & Co. has been tapped as financial advisor.

Refco bonds plunge to 40.5

Refco Finance's 9% notes due 2012 collapsed Thursday on the news, ending the day at 39 bid, 40 offered by one account. But another trader saw what he said appeared to be the last trade of the day at 40.5. The bonds opened at 68 and traded as low as 29-7/8.

The notes again were easily the most actively traded high-yield bond, one sellside trader said. He said some $624 million of the bonds traded Thursday and it is just a $310 million issue.

Just last week, the bonds were in the 108 bid, 109 offered neighborhood. That was before any of the trouble had surfaced, and accounts involved in the paper were some of the most respected institutional funds around - Pimco, Eaton Vance and Vanguard, who own, respectively, 10%, 9% and 5% of the issue.

At their loss, special situation and distressed debt players stepped in Wednesday to pick up the Refco paper. But many were still holding on, thinking that Refco ultimately will pull out of the dive.

The bonds started Thursday at 68 but traders said the plunge began within the first hour of the session amid chatter about the company shutting its doors, which turned out to be the accounts freeze at the capital markets unit.

Before noon the plunge was in full force on word the company was about to make some sort of announcement. One trader said he saw the bonds plunge as low as 29 7/8 right after the company's announcement hit the wires at around 11:30 a.m. ET.

Refco bank paper, stock fall

It was a domino effect on Refco's securities, with the bank paper and stock cratering in tandem with the bonds. The Refco term loan B traded of all day, and was last heard at 57 bid, 60 offered, down from a late-day quote Wednesday around 93 bid, with offerings in the 95 to 96 area.

"These guys are toast," another trader said late Thursday morning, and added that paper which had been trading in a 101 context before the news on Bennett and had hovered in the low 90s late Wednesday, had descended to 86.00 bid, 88.00 offered by lunch time.

Another trader, mid-afternoon, remarked that the company's term loan was trading off the distressed desk, and spotted the company's term loan B at 57 bid, 60 offered.

"People are pulling business," the trader said.

"The same people who are financing these guys are also giving them the business."

Meanwhile a leveraged loan investor remarked that regulators "can more or less take the business away, and then you don't have any collateral as a lender.

"I was surprised yesterday when the loan was falling through the 90s," the source added,

"Lenders clearly wanted to get out, which is something you have not seen in the bank loan market in the past few years."

The buy-sider said that the price plunge in Refco paper at first seemed to be an over-reaction.

"The guy [Bennett] paid back the money. They have real customers and do real business.

"You had to wonder 'Why is everybody acting like this could just disappear?'

"I guess we found out today, with the unregulated business having insufficient capital to continue."

The investor summarized that in circumstances of "systematic fraud," the company "becomes a black box, so that nobody has a justification to hold it."

A market source, meanwhile, said that at the lows the Refco term loan had traded down by as much as 30 points on the day.

Refco shares - a high-flyer since debuting on the Big Board in August - were rocked by the news, plunging for the fourth straight session. The stock dropped to $2.95, or 27%, to $7.90 during the morning before the stock was halted ahead of the company's announcement. The stock never resumed trading Thursday.

Refco, which went public at $22 a share in early August, had garnered keen investor interest, according to media reports at the time. The IPO fetched $583 million for Refco.

Federal prosecutors said Bennett's alleged transactions hid the true value of the company from investors, who have seen their shares tumble from a high of $30.55 since the stock debuted.

Besides the Justice Department, the SEC is also investigating Bennett's alleged secret dealings with Refco.

Delphi bonds active but steady

Delphi bonds remained active Thursday but the Refco story overshadowed the market's preoccupation with its bankruptcy. Bond traders said the bankrupt Troy, Mich.-based auto parts supplier's bonds - now all trading at the same level and trading flat, or without their accrued interest - were basically unchanged in the 57 to 58 area.

Delphi filed for Chapter 11 bankruptcy Saturday and said it hopes to emerge from the reorganization in 2007. Its bank paper has been seen as late as Wednesday still around 103, with bank debt traders saying the revolver and term loan are in the process of shifting into a new investor base.

The company has $17.1 billion in assets and $22.17 billion in total debt. The plan is to finance global operations going forward with $4.5 billion in debt facilities plus additional financing lines, including $2.5 billion borrowed from pre-bankruptcy revolver and term loan facilities and a commitment for up to $2 billion in senior secured 24-month debtor-in-possession financing - comprised of a $1.75 billion revolver and a $250 million term loan that will be led by JPMorgan Chase Bank and Citigroup Global Markets Inc.

Delphi shows hostage strategy

Delphi management on the conference call, rather, revealed what some listeners called a hostage strategy, where Miller aims loaded gun at pension plans and makes an offer to labor, GM and other creditors demanding cooperation.

"Whether this strategy will work or not is the question," said one distressed trader. "Hardball tactics are not always the best way to get unions to acquiesce."

GM and Ford bonds have fallen to new lows for the year amid mounting worries about the health of the U.S. auto sector since Delphi filed bankruptcy on Saturday, with GM taking the brunt of the blow since Delphi's bankruptcy could cost it as much as $11 billion in retiree benefit guarantees.

"The ramifications of Delphi's actions extend well beyond GM itself as the stage is now set for a Big Labor/Big Business showdown of historic proportions that will play out across the automotive spectrum," said CreditSights analyst Louise Purtle.

As for the impact of the filing in the credit markets and distressed automotive names, she said there is huge potential for some corrections to high yield spreads but whether the market will heed the "warning shot" fired by Delphi has yet to be seen.

Moody's Investors Service earlier this week reported that the global high yield default rate increased to 2% from 1.8% in third quarter and actual defaults jumped to $14 billion, so the high yield market is nervous but how that will play out against spreads, what with derivatives so prevalent, is uncertain.

Moody's sees big CDO impact

Moody's said Thursday that it expects there to be some ratings impact on collateralized debt obligations due to the bankruptcy filing of Delphi.

Although Moody's said that it is too soon to determine which specific deals would be affected or the extent of any rating changes, it said that the impact will depend upon the actual exposures to Delphi and the ultimate recovery values. Moody's also said that synthetic structures were more likely to be affected than cash transactions.

Moody's said it has identified 324 -rated CDO transactions with Delphi exposure, of which 177 are U.S. transactions and 147 are EMEA - Europe, Middle East, and Africa transactions. Of the U.S. CDOs, 71 are cash and 106 are synthetic. All of the EMEA transactions with Delphi are synthetic.

Across the affected U.S. cash CDOs, Moody's said the proportion of the portfolios comprising Delphi obligations ranges from 0.1 to 3.7%. For the synthetic CDOs the Delphi exposure ranges from less than 0.1 to 1.6% for U.S. deals, Moody's said, and from less than 0.1 to 2.0% for EMEA deals.

Calpine feeling the squeeze?

Another name that appeared to shudder a bit in Thursday's negative light was that of San Jose, Calif., power generator Calpine Corp.

One source said that Calpine's court battle with Bank of New York and Wilmington Trust, the trustees for Calpine's first-lien and second-lien debt, should it drag out, could limit the company's ability to buy increasingly expensive natural gas. The source added that the $300 million preferred deal that Calpine recently priced gave the company's debt a little bit of a bounce, but it has since fallen.

A trader, meanwhile, saw Calpine's 8½% bond due 2008 at 60 bid, 61 offered late Thursday, down from the 65 context earlier in the week.

The trader noted that on the heels of completing the preferred deal the paper had been as good as 65.0 bid, 66.0 offered.

Solo questions

Also attracting worries was Chicago-based Solo Cup Co., noting that its 8½% notes due 2014 were now trading in the 70s, and that investors seem to be focused on the company's ability to survive.

"Solo Cup was down three points on the day," said a trader late in the afternoon.

The trader saw the paper at 75.50 bid and added that it had been at 82.75 offered "a day or two ago.

"People are starting to discover that this company is 8.5 times to 9 times leveraged," the trader commented. "It's a low-margin business to begin with. Higher energy costs and competition will pose trouble for these guys."

Another trader saw the Solo Cup 81/2s due 2014 at 75.0 bid, 77.0 offered, down more than three points on the day, but wondered to what extent an overall weak market factored in.

However Thursday's sell-off did not take too big a toll on airline paper, with the exception of Northwest Airlines, which was a little weaker, a trader said, spotting it 27 bid, 28 offered, down half a point.

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