GM bank debt better on GMAC sale news, but bonds give up gains

By Paul Deckelman and Sara Rosenberg

New York, April 3 - General Motors Corp.'s revolving credit loan paper saw positive momentum on the bid-side, as the giant carmaker announced that after months and months of trying, it has reached a deal - finally - to sell a controlling 51% stake in its General Motors Acceptance Corp. financing arm.

But GM's junk bonds, after initially pushing higher on the news, fell back as market players basically shifted their focus away from the expected news, and began fretting over what the worsening labor situation at GM's major parts supplier, the bankrupt Delphi Corp., might mean to GM's ability to keep churning out new cars and trucks.

GMAC's own bonds, on the other hand, managed to hold onto at least some of their initial gains, although they finished at levels below their day's highs.

Elsewhere, Movie Gallery Inc.'s bonds were seen lower, with traders citing investor angst over a Wall Street Journal story warning that the relaxed covenants that the Dothan, Ala.-based home video sales and rental chain won from its lenders last month, may come back to haunt it down the road.

"Low hurdles aren't always a good thing, as shareholders of Movie Gallery Inc. may learn at their peril," the Journal cautioned.

A trader noted that the story outlined how Movie Gallery managed to get its lenders to go along with easier debt-to earnings leverage ratios, interest coverage requirements and fixed-charge covenants for the whole rest of this year.

However, "all of those covenants get tougher in 2007 - and the story questioned whether that company is going to be able to comply with them," the trader said, explaining how the company's 11% notes due 2012 backtracked to 47 bid, 48 offered from levels around 49 bid, 51 offered at the tail end of last week.

Movie Gallery has already warned in a recent filing with the Securities and Exchange Commission that it likely will need further covenant relief from its bankers come 2007 in order to remain viable.

GM revolver firm

In the bank debt market, GM's revolver was being quoted at 96 bid, 97 offered on Monday, up a point on the bid-side from Friday's levels of 95 bid, 97 offered, one trader said.

However, according to a second trader, levels actually ended the day at 95.5 bid, 96.25 offered - still up on the bid-side when compared to prior quotes, but also lower on the offer-side, creating a tighter market in the bank debt.

The bank debt tightened after GM announced that it has agreed to sell its stake in its financing arm, GMAC, to a consortium of investors led by Cerberus Capital Management LP, and including the buyout unit of Citigroup Inc. and Aozora Bank Ltd., for about $14 billion in cash that will be paid out over three years, with an estimated $10 billion paid by closing.

At the closing, the consortium will pay about $7.4 billion for GMAC. GM will also receive an estimated $2.7 billion cash distribution from GMAC, while retaining about $20 billion of GMAC automotive lease and retail assets and associated funding, with an estimated net book value of $4 billion, that will monetize over three years.

The transaction is subject to a number of U.S. and international regulatory approvals and to GMAC having a minimum rating of BB. The companies expect to close the transaction in the fourth quarter.

"This [GMAC sale] provides GM with $10 to $14 billion of liquidity. So they will have ample liquidity for the near-term. They may not need to do a refinancing [of a $5.6 billion unsecured credit line] right now. It's not as imminent. I haven't heard anything about a refi today. GMAC was the focus," the first trader said.

However, once again, the second trader disagreed. "They need to have a facility they can draw on and it's still questionable as to whether they can draw on this. Refi [buzz] is still very much out there."

Last week, GM's revolver had rallied from a mid-80s context, up to the mid-90s on rumors that a refinancing of that $5.6 billion facility was soon to come, based on remarks in the company's recent 10-K filing.

GM had said in the filing that it is currently exploring the possibility of amending or replacing its existing revolver since it is unsure as to whether lenders would allow any borrowings under the facility due to the recent restatement of prior financial statements.

GM, GMAC bonds better, then fall back

Over in the junk bond market, the that GM reached agreement to sell control of GMAC to the Cerberus-led syndicate for a better-than-expected $14 billion helped boost both GM's bonds and GMAC's issues - at least in the early going. But the gains did not last.

A trader said that "when people got in this morning [Monday], the rumor" that had swept the junk market at the tail end of last week, that GM and Cerberus were nearing a deal, "proved to be true."

Initially, "from like 7:30 a.m. to 8:30 a.m. [ET], that was interpreted positively," with the automaker's benchmark 8 3/8% notes due 2033 moving as high as 76 bid, 77 offered from a 74ish context late Friday, while the GMAC 8% notes due 2031 got as good as 97 bid, 98 offered from around 95 on Friday.

But those advances quickly proved to be illusory. He saw GM give back all of its gains and actually end the day down a point at 73.25 bid, 74.25 offered, while GMAC's 8s ended at 96 bid, 97 offered, up a point on the day but down from its highs.

What happened?

First, he said, "we got some ratings commentary" - and the ratings agencies were by no means enthusiastic about the deal.

Standard & Poor's said that while estimated cash proceeds to GM at closing are expected to be about $10 billion, "which will bolster GM's liquidity significantly . . . GM's claim on GMAC's future cash flow and earnings will be diminished." It also warned that "in the long term, GM could face the risk that GMAC's new owners would seek to reduce funding support for GM's automotive business." S&P further said "the potential for future divisiveness among GMAC's owners for economic or business reasons also poses risks."

Moody's is also keeping the companies under scrutiny, while Fitch Ratings kept GM on its ratings watch for a possible downgrade, although it is looking at GMAC for a possible upgrade.

On top of that, the trader said, "people sort of realized that Delphi [and its labor problem] is still around, and the bonds retracted."

Another trader agreed that "it was a definite case of [buy on the rumor], sell on the news." He saw GM's bonds as having gone home at 74.5 bid, 75.5 offered on Friday, and then having initially moved a little higher on Monday's announcement. But "then the 75 bid got hit this morning, and they started to fade from there." He saw the GM flagship issue drop to a close Monday of 72.5 bid, 73.5 offered, "so they definitely got kicked around a little bit.

"At the end of the day, the most important thing for this company in the short tem is avoiding a Delphi strike, because they'll bleed money if there is one." He said that GM "already bleeds money - but they'll really bleed money if there's a strike. That's going to be ugly."

He opined that the attitude of bondholders seemed to be "well, that's done [the GMAC sale]. We thought it was going to get done, knew it was going to get done. Yes, they raised liquidity, but that was already baked in. So on to the next thing" - which is figuring out what impact Delphi's worsening labor situation might have on GM.

The bankrupt Troy, Mich. - based automotive supplier on Friday petitioned the U.S. Bankruptcy Court for the Southern District of New York for the right to void its labor contracts with 34,000 unionized hourly workers if it cannot reach agreement with the United Auto Workers union and other labor groups on cutting its heavy labor costs.

Delphi said it does not intend to immediately move to junk the contracts should it get the legal power to do so - but the unions have warned that such an action will lead to a strike against the already struggling company. A strike against Delphi could also badly hurt former corporate parent GM by interrupting the steady flow of parts from Delphi, which is GM's single largest supplier. GM bondholders are also worried about Delphi's parallel legal move to get the right to reject supply contracts under which it provides parts to GM. Delphi has said it needs to get more money from GM and its other customers in order to stay in business over the long term.

A trader at another desk saw GM'S 8 3/8s unchanged, at 73.25 bid, 73.75 offered, and saw the GMAC 8s "off their highs [of the day] but still a bit better." He saw those bonds ending at 96 bid, 96.5 offered - down about a point from the early peak levels, but up about a quarter to a half point on the day. GMAC's 6 5/8% notes due 2012 were likewise seen up a point at 93.5 bid, although they had been up as much as 1½ points in morning trading following the announcement from GM.

Auto sector mixed

Elsewhere in the autosphere, a trader saw Delphi's 6 ½% notes due 2013 drop a point to 61 bid, although another trader saw those 2013 notes actually move up, but to the 60 bid, 62 offered level. He saw Visteon Corp.'s 8¼% notes due 2010 half a point better at 82.25 bid, 83.25 offered.

A trader saw bankrupt Toledo, Ohio-based automotive supplier Dana Corp.'s bonds initially firm, probably pulled higher along with other sector names by the GM news, but then give the gains as GM faded and drop back to close little changed.

He saw Dana's 6½% notes due 2008 at 78.5 bid, 79.5 offered, while its 5.85% notes due 2015 ended at 75 bid, 76 offered, and its 7% notes due 2028 were at 76 bid, 77 offered, all down a point from their peak levels of the day, and unchanged versus Friday's levels.

Calpine up again

Apart from the automotive names, traders noted that Calpine Corp.'s bonds "continue to grind higher," as one put it, but with no obvious news out there that could explain the continued strength of the bankrupt San Jose, Calif.-based power generating company.

A trader who saw Calpine's unsecured bonds up a point on the session quoted its 10½% notes due 2006 at 61.5 bid, 62.5 offered, while its 8½% notes due 2011 were at 38.5 bid, 39.5 offered.

"Calpine just keeps moving up," another trader said, "it's incredible." He saw the 2006 bonds at 60 bid, 62 offered, which he called up half a point."

"They just keep chugging up there."

Granite steady despite coupon warning

A trader saw little or no movement in the bonds of Granite Broadcasting Corp. In the wake of the New York-based television station group owner's Friday revelation in its 10-K filing to the SEC that it would not be able to make a scheduled $19.744 million interest payment on its bonds due on June 1, absent changes in its operations or capital structure.

"That was not a major surprise," a trader said Monday. He saw Granite's 9¾% notes due 2010 at 93.25 bid, 94.25 offered, around the same levels they held Friday and in fact held all of last week.

The suspicion that the underperforming company would not be able to make the June coupon payment had been out in the market for some time, he said.

In its SEC filing Granite warned that "we have limited sources of liquidity and no working capital facility or other credit facility and therefore will not be able to service all of our obligations."

The company has hired restructuring specialist Houlihan Lokey Howard & Zukin as its financial advisor to assist in the evaluation of strategic options and to advise Granite on available financing and capital restructuring alternatives.

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