Sub-prime woes continue to roil lenders, builders; GM, Tech Olympic among losers

By Paul Deckelman and Sara Rosenberg

New York, March 13 - The continuing meltdown of the sub-prime mortgage lending industry was making its impact felt on the junk bond market as well Tuesday, particularly in such already shaky interest-rate-sensitive sectors as homebuilders and autos.

Among the latter, Technical Olympic USA Inc.'s bonds were batted around, particularly as Moody's Investors Service lowered the Hollywood, Fla.-based homebuilder's ratings, citing the challenging environment it will face this year.

Also lower was General Motors Corp., which reports its long-delayed fourth-quarter earnings results on Wednesday, and whose 49% owned GMAC LLC affiliate is a player in the sub-prime industry through its Residential Capital Corp. unit. GM's financially weaker arch-rival Ford Motor Co. was particularly hard-hit, although the latter's credit arm is not involved in sub-prime loans.

Sub-prime lender Freemont General Corp.'s bonds were also driven lower.

Elsewhere, Northwest Airlines Corp.'s bonds were well down on the day, apparently amid new hassles over its bankruptcy restructuring, which shareholders objecting to extending management's exclusivity period. Bankrupt rival Delta Air Lines Inc.'s bonds were also on the downside.

But a trader said that "people were more watching the stock market than anything else," and suggested that "with stocks down," chiefly dragged lower by the sub-prime lending crisis, "everything was down."

Technical Olympic tumbles

Technical Olympic - whose bonds have already been weakening over the past few sessions - continued on that downward path Tuesday. A market source saw its 7½% notes due 2015 at 79.5 bid, down about 2 points from where it had finished on Monday, in fairly active size trading, while its 9% notes due 2010 were down about a point net-net on the day at 99.5, although at one point they were quoted as low as 96.

The company's 10 3/8% notes due 2012 were seen having gyrated between 89.5 bid and 91, before going out at the latter level, the source indicated.

However, a trader said that the bonds finished around 89.25, "about where they where when they closed [Monday] night." Also steady were its 7½% notes due 2011 at 84 bid.

Technical Olympic is seen as vulnerable to the crisis affecting lenders who write mortgages for borrowers whose credit is less than sterling, since the company builds homes in the $200,000-$300,000 range - relatively cheap by today's standards in most market - and, a trader said Monday, "that's where the sub-prime problems are coming."

Sub-prime borrowers constitute a relatively small portion of the people who take out mortgages and buy homes in the United States - but they function as sort of a canary in mineshaft, since problems with this group of borrowers, such as rising foreclosure rates (new data show these surged in last year's fourth quarter), show up at the first signs of economic sluggishness and may be a harbinger of problems for the larger mortgage and housing industries. Those in turn are viewed as key contributors to the overall health of the economy.

Troubles in the sector caused stocks to slide on Tuesday on news that New Century Financial Corp., the most troubled name in the group, and such other lenders as Accredited Home Lenders Holding Co. and GMAC's residential unit are facing financial problems.

Against that backdrop, Moody's lowered Technical Olympic's ratings Tuesday, dropping its corporate family rating to B2 from B1, its senior unsecured notes to B3 from B2, and its senior sub debt to Caa1 from B3, all with a negative outlook.

The agency said that the downgrades were triggered by "the challenging covenant compliance environment that TOA faces in 2007, even absent additional debt from a possible settlement with the lenders of its Transeastern joint venture."

Moody's cited what it called the "increasing likelihood" that TOA will take on additional debt as a result of a possible resolution of the Transeastern issue, as well as a land supply that exceeds seven years; and difficult market conditions exacerbated by the company's heavy Florida concentration.

Moody's expects that the company's earnings will continue to decline in 2007, even after excluding land impairment and option abandonment charges. This will put "continued pressure on related credit metrics, particularly interest coverage, gross margins, and return on assets. In addition, adjusted debt leverage, already somewhat aggressive, is likely to rise as a result of a possible conclusion of the difficulties at Transeastern - a troubling development at this stage of the homebuilding cycle," Moody's concluded.

Fremont General pushed lower

Another name in the troubled sub-prime sector, Fremont General, was seen lower, with a trader quoting its 7 7/8% notes due 2009 down 2 points on the session at 87.375 bid.

At another desk, the Santa Monica, Calif.-based financial services company's bonds were seen down a point at 88 bid on top of a 2 point drop on Monday.

Although Fremont is not as badly off as New Century, which seems to have emerged as the reluctant poster child for the industry's implosion, its shares have lost have their value this year and were down another 8% on Tuesday. A trader noted that the bonds had fallen into the upper 80s from levels late last week around 91, "and in around mid-February they still were at par."

The company said last week that it had received expressions of interest in its troubled sub-prime unit from as many as a half-dozen potential buyers.

Carmakers in breakdown lane

The troubles of the sub-prime business, and of mortgage lenders generally, are also raising red flags for other credit-dependent economic sectors, such as automobiles, since for most people, a car is the second-largest purchase that they make - and finance with borrowed money - after their homes.

And when an automotive financier also is involved in sub-prime mortgage lending it's a double whammy.

That's the case with GMAC, which is not only the largest automotive lender in the nation, but also plays a sizable role in sub-prime, through its Residential Capital Corp.

That relationship has made bondholders nervous - GMAC debt was among the most actively traded on Tuesday, moving to the downside.

A distressed-bond trader saw its bonds "down a couple of points," with its 8% notes due 2031 two points lower at 109 bid, 110 offered, and its 6¾% notes due 2014 and 6 7/8% notes due 2011 each down a point, at 99 bid, par offered and par bid, 101 offered, respectively.

He also saw parent GM's benchmark 8 3/8% notes due 2033 falling 2 points to 91 bid, 92 offered.

Another source saw the GMAC 8s down a point at 110 bid - after dipping as low as 107 during the session - while the 6 7/8s were down 1¼ point at 100.5 bid.

GM - which delayed the scheduled March 1 release of its fourth-quarter numbers - is expected to announce them on Wednesday, and has indicated that it will post its first quarterly profit in two years.

GMAC also said on Tuesday that GM would give it a $1 billion infusion by the end of the first quarter to help the lender shore up its balance sheet under the terms of last year's spin off of 51% of the company to an investment group led by Cerberus Capital Management.

GMAC further cautioned that its results would likely be affected by "continuing pressures in the U.S. mortgage sector."

GM's problems carried over and dragged Ford's bonds lower Tuesday, even though Ford - which has enough problems of its own already - lacks the exposure to the sub-prime mortgage industry that GM at least indirectly has.

Ford's 7.45% notes due 2011 were seen by one market source to have fallen as much as 5 points on the day to 77.75 bid. At another desk, though, a trader saw the Ford bonds starting the day from a lower level and ending down 1½ points at 77 bid, 77.5 offered.

Ford Motor Credit Co.'s 7 3/8% notes due 2011 were down about a point at 98.

Northwest loses altitude

Elsewhere in distressed land, a trader saw Northwest Airlines' 10% notes due 2009 nosedive to 81.5 bid, 83.5 offered from prior levels at 86 bid, 88 offered. He saw the bankrupt Eagan, Minn.-based Number-Five U.S. airline carrier's 8 7/8% notes due 2006 at 81 bid, 83 offered, down 3½ points on the day.

Northwest - in bankruptcy since the fall of 2005 - had originally hoped to be flying out of it next month - but the airline has now asked the federal judge overseeing its restructuring for an extension of its exclusivity period, which is set to expire Friday, until June 29, which would give the company more time to file its reorganization plan.

On Monday, disgruntled shareholders, including hedge fund Owl Creek Management, asked the judge to shoot down that motion, contending that the company has had more than enough time to try to get its act together and it was not time to let someone else have a crack at it.

The shareholders say that the plan Northwest has been touting - which cancels their shares and gives them nothing - is flawed because it fails to explore how much the airline might be worth if it were merged in bankruptcy with another carrier.

The stockholders believe that such a merger might make Northwest worth enough for them to actually receive something as part of the restructuring.

Also on the airline front, Delta's 8.30% notes due 2029 were down about 2 points on Tuesday, at 54 bid, 55 offered.

Stock dive pulls distressed bonds lower

A trader said that with stocks falling like tenpins, "bonds were down, like everything else." He saw Tembec Inc.'s notes lower across the board, with the Montreal-based forest products company's 8 5/8% notes due 2009 off 3 points at 76 bid, 78 offered, its 8½% notes due 2011 two points lower at 68 bid, 70 offered, and its 7¾% notes due 2012 a point behind at 65 bid, 67 offered.

He saw Sea Container Ltd.'s bonds "down 3 points across the board" on no news, with the Bermuda-based maritime and railroad transportation company's 10¾% notes due 2006 sinking to 86 bid, 88 offered."

Calpine, Fedders better

But there were a couple of bright spots. One, the trader said, was Calpine Corp., "up a couple, in some cases," with its 8½% notes due 2008 up 2 points at 108 bid, 109 offered, though on no real news about the bankrupt San Jose, Calif.-based power generator.

A trader at another shop also saw some upside in Fedders Corp., continuing the positive momentum seen Monday in the 9 7/8% notes due 2014 of the Liberty Corner, N.J.-based air quality product company.

He saw those bonds going home at 57.25 bid, 57.75 offered, up more than a point on the day.

Fedders bonds had strengthened Monday on investor hopes that it might close on some new funding it recently announced, ahead of schedule.

In the bank-debt market, Kelson Holdings LLC's second-lien initially PIK pay term loan tumbled on Tuesday as the market in general was softer, according to a trader.

The second-line loan ended the session at 97¾ bid, 98½ offered, down by about a point and a half from previous levels, the trader said.

"Everything is down. The stock market is down so we're down," a second trader added.

Kelson, a company wholly owned by Harbinger Capital Partners, is a holding company established for the management and ownership of certain power plants.

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