Court ruling hurts Iridium; Residential Capital edges higher; Tembec bonds boosted

By Stephanie N. Rotondo

Portland, Ore., Sept. 4 - A court ruling filed Friday pushed Iridium LLC's bonds into a downward spiral Tuesday, with the bonds losing 10 to 12 points on the day.

The bankruptcy judge overseeing the lawsuit between Iridium's unsecured creditors and its former parent, Motorola Inc., dismissed four of the counts against Motorola, ruling that Iridium had failed to prove its case.

Before the ruling, many market players expected to see high recovery levels and started to play in the name.

"People started buying the bonds because they felt there was a huge upside," a trader said.

Afterward, the bonds went into freefall and that dream was lost.

"It was a pipe dream anyway," another trader said.

As trading in Iridium took up most of the volume in the distressed bond market, Residential Capital LLC's bonds continued to inch higher. A trader said the gains began last week, as the company announced it had made an asset sale to beef up its liquidity.

Meanwhile, a trader said news was circulating on Tembec Inc., prompting that debt to gain on the day as well. According to the trader, a group of bondholders is organizing and has hired a legal adviser.

Others traders took a different point of view on the gains. One trader attributed the increase to reports that investors are gobbling up asset-backed securities. Another trader, however, dismissed both explanations.

Overall, traders said the market was definitely better than last week, though some market participants are still out.

"The general tone was better," a trader said.

Some were wearily optimistic.

"The market is definitely up today," another trader said, "but the joy won't last. Bloodletting is expected later in the week."

Court ruling hurts Iridium

Satellite provider Iridium saw its bonds dive 12 points on the news that a federal judge dismissed four of the eight claims a group of the company's unsecured creditors brought against former parent Motorola.

A trader said the bonds were in the 3 bid, 4 offered context, down from Friday's levels around 15 bid, 16 offered.

Another trader pegged the 14% notes due 2005 down 11.75 points to 3.75 bid, 4.25 offered.

Bankruptcy court judge James Peck dismissed four of the counts brought against Motorola, contending that the creditors committee failed to meet the burden of proof in showing that Motorola knew the company was insolvent before it was forced into bankruptcy.

Further, the judge stated that the market was not misled in the valuation of Iridium's expected performance.

Since the beginning of the lawsuit, filed shortly after the company filed for Chapter 11 protection, market players started stocking up on Iridium's bonds, believing them to be worth "north of 200," a trader said.

But, as the case is starting to unravel, investors jumped ship.

"It was a pipe dream to begin with," a trader said.

Still, not all have given up hope.

"There is a chance that they will get something," a trader said, though he noted it would be well-below earlier market expectations.

Others, however, are not so optimistic.

"I don't think they will get anything," another trader said, adding that the case was shaky from the start.

The remaining four issues left in the Iridium case will be heard in court on Sept. 12.

ResCap paper moves up

Residential Capital's bonds "continue to be somewhat active," a trader said. He quoted the 7 3/8% notes due 2010 up slightly at 79 bid, 80 offered, adding that the bonds were in the "78 [to] 78.5 zip code" Friday.

The trader also noted that the bonds started to get stronger last week. On Friday, the mortgage lender announced it had sold most of its health care finance assets and operations to GMAC Commercial Finance LLC for $775 million. The sale was aimed at increasing liquidity.

Elsewhere in the distressed mortgage lender world, Thornburg Mortgage Corp.'s bonds were deemed unchanged, as a trader pegged the 8% notes due 2013 at around 88.

Thornburg, like ResCap, has taken several steps to ensure its continuation. First, the company sold a hefty chunk - $20.5 billion, to be exact - of its mortgage-backed securities and then issued $500 million in preferred stock.

On Tuesday, the company announced it had sold bonds backed by $1.44 billion worth of mortgages to pay down credit lines.

The company said funds from the transaction would also be used to accelerate new lending. The Santa Fe, N.M.-based company stopped making new loans in early August but resumed lending last week.

Tembec bonds better

A trader said Tembec's bonds were 2 to 3 points better on the day on reports that a group of bondholders had hired a legal adviser.

The trader saw the 8 5/8% notes due 2009 in the low 50s, while the 7¾% notes due 2012 were around 45.

The trader said the bonds likely firmed in response to the news. He also speculated that the market believed "they are forming to try to have some talks with the company."

Another trader saw the 8 5/8% notes jump to 52 bid, 54 offered from 47 bid, 49 offered previously, while its 8½% notes due 2011 firmed to 46.5 bid, 48.5 offered from 43.5 bid, 45.5 offered, and its 7¾% notes due 2012 moved up to 45 bid, 47 offered from 42 bid, 44 offered.

He said he had seen no news to explain the move.

But another trader who saw the bonds at those same levels thought they were up on the news, reported in the Toronto-based Globe and Mail newspaper, that "debt vultures" such as Toronto-based Cerberus Capital Management LP are buying asset-backed commercial paper issued by Canadian companies, "seeking to snap up securities on the cheap from distressed sellers," the paper said.

"People are talking as though Cerberus is in there buying plain old distressed paper rather than asset-backed stuff," the trader said, disbelievingly. He said that there was "no reason" for the Tembec paper to have gone up 3 to 5 points on the day. "I don't think anything has materially changed with them," he said - the company still has the same problems it has been wrestling with for months.

The bonds "went up on air" - i.e. nothing of any substance - although he noted that a few weeks ago, "they also went down on air also, with the 8 5/8s dropping to levels around 45 from around 60.

He dismissed as old news the notion that the bonds went up because the bondholders had hired an adviser, snorting that "hiring an adviser doesn't mean anything" - the company has already said they are not at the point where they will talk to the bondholders or their advisers, so it is meaningless.

He also said it is crazy that the 8 5/8s are trading higher than the other issues "when they're all pari passu. Why should they be any different? They're trading as though those holders would get something extra in a restructuring - but you can't do that, or else you'll get all kinds of lawsuits. There should be no spread between those issues - yet the spread [between the 8 5/8s and the other bonds] has widened from about 2 points to 5 points."

He chalked the price rise up to "people just pushing bonds around."

Remy debt boosted

A trader saw Delco Remy International Inc.'s bonds "up big time," after the parent issuer, Remy International Inc., announced Friday that it had begun soliciting noteholder consents to its pre-packaged Chapter 11 plan of reorganization.

He saw its 8 5/8% notes slated to come due on Dec. 15 as having moved up to 110 bid from 104 bid, 106 offered previously, while the company's other bonds were up even more - its 9 3/8% notes due 2012 moved up to 115 bid, 120 offered from 92 bid, 94 offered previously, while its 11% notes due 2009 were also at 115 bid, 120 offered, up from 94 bid, 96 offered.

"They were both up 20 points," he said of the latter issues. "Those two issues are getting all of the equity, while the 8 5/8% notes are getting reinstated and apparently not participating in the equity."

Another trader who saw the bonds at similar levels said there was "a big short squeeze" in them - adding "but there shouldn't be." He said that the bonds were trading at "ridiculous" levels.

"They should be trading more like around 20 than 120," he quipped, exclaiming, "thank God I'm not involved" in the name.

Yet another trader said that Remy's 8 5/8% notes "continue to make big jumps," pegging the bonds up 12 points to 108 bid, 110 offered - but he saw a somewhat more conservative move for the other issues than the 20-point gallop the other traders saw, estimating the 11% as being up 10 points at 97 bid, 101 offered.

Another market source meantime had the 8 5/8% at 111 but the other two issues only at par.

In the rest of the autosphere, Dana Corp.'s 6½% notes due 2008 were placed at 83 bid, 85 offered, up from 81.5 bid, 83.5 offered.

Delphi Corp.'s bonds also moved up, with its 6.55% notes due 2006 at 101 bid, 103 offered, up 1 point.

Dura Automotive Systems Inc.'s senior notes gained 2 points during the session, its 8 5/8% notes due 2012 at 52 bid, 54 offered. The 9% subordinated notes due 2009 were up 1.5 points to 3 bid, 4 offered.

Broad market firmer

Power producer Calpine Corp. saw its bonds gain about a point, a trader said. He saw the 8½% notes due 2011 with a "109 handle."

Another trader saw Calpine's 8½% notes due 2008 up 2 points to 108 bid, 110 offered.

A trader said retailers were firming. He pegged Linens n'Things floating-rate notes as "straddling 68," noting that the bonds were around 66.5 bid, 67 offered last week.

Elsewhere, a trader said both of Swift Transportation Co. Inc.'s bond issues were "better at 67."

Sea Containers Ltd.'s 10¾% notes due 2006 moved up 3 points to 75 bid, 77 offered.

Movie Gallery loan steady

Movie Gallery Inc.'s first-lien term loan held steady after the company announced that it defaulted on its second-lien credit facility, according to a trader.

The first-lien term loan closed the day at 84 bid, with no real offers seen, compared to Friday's levels of 84 bid, 86 offered, the trader said.

"It's not really meaningful or new because we already know they're in forbearance, so we have to wait until Sept. 30 to see what happens, and I don't see why the second-lien wouldn't go along with that," the trader remarked.

On Tuesday morning, Movie Gallery said that due to its inability to meet the financial covenants contained in its first-lien credit facility for the fiscal quarter ending July 1, it has sent a notice of default to the agent under its second-lien facility.

As a result of the default under the second-lien loan, the company also sent a notice of default to the agent under its first-lien facility, with the default subject to the forbearance agreement with the first-lien lenders.

The company is in discussions with its second-lien lenders regarding the situation.

Movie Galley's 11% senior notes due 2012 executed a forbearance agreement on Aug. 31 that is effective until Sept. 30. The company's first-lien credit facility lenders extended an existing forbearance agreement to Sept. 30 from Aug. 27.

A trader slated the corporate debt at 23 bid, 25 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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