Quality Distribution notes dive; Level 3 hurt by numbers, downgrade; Retailers holding steady

By Stephanie N. Rotondo

Portland, Ore., Feb. 15 - Market players were taking advantage of Friday's early close and the long holiday weekend, resulting in a significant lack of activity in the bond market.

"I think most of the decision makers are taking a long weekend," opined one trader, who was manning the phones.

"It certainly felt like a long holiday weekend on a Friday," said another source.

So with many participants away from their desks, it was not surprising that the distressed sector was deemed "unchanged to maybe a little bit weaker in some names."

One active name in an otherwise quiet day was Quality Distribution Inc. That name fell about 20 points during the last few sessions after the company "previewed" its fourth-quarter results - or "lack thereof," as one trader put it.

Poor numbers have also put pressure on Level 3 Communications Inc.'s debt. The company reported its quarterly results earlier this month, and since then, the bonds have deteriorated - along with its stock.

Consumer confidence remains in the red, according to a report released Friday. But the report did little to hurt struggling retailers, such as Bon-Ton Stores Inc. and Michael's Stores Inc., even though a decline in spending could have a negative impact on that sector.

In honor of the Presidents Day holiday, the U.S. market will be closed for business on Monday.

Quality Distribution notes dive

Trucking company Quality Distribution released preliminary fourth-quarter and full-year results on Tuesday. By Friday, the company's debt had fallen at least 20 points.

"The bonds are getting whacked pretty good," a trader said, though trading in the name was very light.

Still, the 9% notes due 2010 closed the week at 50 after opening Friday morning at 60. Earlier in the week, the bonds had been closer to the high-70s.

The company estimates that revenue for the fourth quarter of 2007 will increase to $159 million, compared to $152.4 million for the same quarter of 2006.

Management acknowledged the "difficult economic climate" had a negative impact on the company but maintained that it was "much better positioned today than it was as we entered 2007."

Quality Distribution is not the first cargo carrier to experience difficulty. Swift Transportation Co. Inc. has seen its relatively new debt decline steeply amid rising gas prices and lowered consumer spending - which thus resulted in less product being shipped. However, with Swift, it is difficult to pinpoint where the cracks are, as it is a private company.

And, transportation companies made the cut for Standard & Poor's recent list of potential fallen angels.

Poor numbers, downgrade hurt Level 3

Level 3 paper "continues to get beat up," a trader said, just one day after the company's stock was downgraded and one week after posting lackluster quarterly numbers.

The trader said the bonds fell in the previous session, along with its equity counterpart, following a downgrade from Morgan Stanley. The declines continued in Friday's session, as the debt fell another 1 to 2 points.

The trader quoted the 12¼% notes due 2014 at 91, adding that the 9¼% notes due 2014 "dipped below 80." According to Finra's Trace system, that issue traded at 79.5.

For the fourth quarter, Level 3 reported revenues of $1.1 billion, with a net loss of $91 million.

Morgan Stanley analyst Simon Flannery, noting the difficulties facing the internet service provider, cut his rating on Level 3's stock to "underweight" from "equal weight" Thursday. With the company forecasting a dip in first-quarter revenue and a high level of debt, it faces many obstacles.

"All this is happening with the backdrop of a deteriorating macroeconomic environment and management turnover, as we await a new chief financial officer," Flannery said in a client note.

The Broomfield, Colo.-based company's stock fell 17 cents, or 6.42%, to $2.48 in Friday trading.

Retailers hold on amid declining confidence

As consumer confidence slipped to the lowest level since 1992, distressed retailers managed to get through the trading session relatively unscathed.

A trader said there was "not a lot going on" in that particular sector. Names like Bon-Ton Stores and Michael's Stores "really weren't trading."

"There was not a lot of price action," the trader said. "[They are] maybe slightly weaker, though fairly thin [trading]."

The trader pegged Bon-Ton's 10¼% notes due 2014 at 67 bid, 67.5 offered and Michael's 11 3/8% notes due 2016 around 80.

The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 the previous month, and manufacturing data showed no change in production - after two months of gains.

A lack of consumer confidence seems to only increase recession worries. Should a recession occur, retailers as a whole will be significantly affected as discretionary spending will likely decline. But for those in the sector that are already struggling, such as Bon-Ton, a recession could produce increasingly negative results.

Housing names unaffected

A trader saw the housing sector mostly unchanged during the session, and trading had already wound down by the time Standard & Poor's cut the ratings on several junk-rated builders.

The trader called Standard Pacific Corp.'s 7% notes due 2015 steady at 70 bid, 71 offered. He said that Beazer Homes USA Inc.'s 6 7/8% notes due 2015 held in at 71 bid, 73 offered and saw only "very light trading" in Hovnanian Enterprises Inc.'s 7½% notes due 2016, which were unchanged at 70 bid, 72.

Another trader said the S&P action was too late to affect Friday's market but opined that the downgrade "will probably show up [in price levels when the market returns from its holiday break] on Tuesday."

He said that Tousa Inc.'s senior bonds still languished around the mid-50s, while its subordinated notes remained mired at 8 bid, 10 offered.

He said that builders' bonds would "probably drop a little more" when trading resumes Tuesday - "but not very much - since [at current levels], some of them don't have very far to go."

Mortgage sector mixed

One trader deemed Residential Capital LLC's 6½% notes due 2013 up 2 points on the day at 63 bid, 65 offered, while another saw the bonds trading in the 60.5 bid, 61.5 offered area, unchanged.

The second trader also called parent GMAC LLC's debt unchanged, still around a 79 bid, 80 offered context and said that he had seen "no cash trading" on the 8% notes, which he called "amazing for a $4 billion issue."

He saw GMAC's debt-protection CDS costs 15 basis points wider at 905 bps bid, 915 bps offered.

The trader noted that "there was" activity in Countrywide Financial Corp.'s 6¼% notes due 2016, which he quoted at 85.5 bid, 86 offered in "good-sized trading." However, the price level was "pretty much where they've been for the last few days."

Another trader saw those bonds down a point at 85.5 bid, 87.5 offered but said its 3¼% notes coming due in May were unchanged at 97 bid, 97.75 offered.

Paul Deckelman contributed to this article.

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