Abitibi, Thornburg lead generally lower junk market downward; Goodyear off, Chesapeake seen firmer

By Paul Deckelman and Paul A. Harris

New York, March 7- AbitibiBowater Inc.'s bonds fell sharply on Friday on the news the forest products company wants to give holders of its two issues that mature this year a combination of new debt and cash rather than just cash, but those bonds bounced off their scary initial lows to finish only moderately lower.

That was not the case, however, with troubled Thornburg Mortgage, Inc., whose already badly battered bonds - trying to bounce upward after Thursday's 20-point loss - sank like a rock in afternoon dealings after the Santa Fe, N.M.-based mortgage lender said that it had received yet another round of demands for payment of margin calls on its borrowing - and that it was not at all certain that it could continue to operate "as a going concern."

Elsewhere, E*Trade Financial Corp. was unchanged, though in very busy dealings, while Goodyear Tire & Rubber Co.'s bonds were off, and Chesapeake Energy Corp. was seen up, all on no news.

Primary market activity remained muted.

Market indicators continue retreat

A market source saw the widely followed CDX index of junk market performance dip by about ¼ point Friday to about the 86.75 bid level. Meanwhile, the KDP High Yield Daily Index lost 0.20 to end at 73.48, while its yield pushed out by 5 basis points to 9.77%.

In the broader market, declining issues led advancers by a better than five-to-three margin. Overall activity, reflected in dollar volumes, fell by 38% from Thursday's levels.

Fitch Ratings, in a research piece, noted Friday that a lassitude seems to have descended on both poles of the junk market, with primary side falling silent as another week passed with no new issues, while secondary volume was declining by nearly 20%, as "a steady stream of weak economic data, weak corporate earnings and ever-tightening credit market conditions left investors with little to do but watch from the sidelines." Volume for the week ended Thursday totaled $21 billion, for a daily average of $4.2 billion, down from total volume of $25.3 billion and a daily average of $5.06 billion the week before. The analysts noted that the most actives for the week included the bonds of Idearc Inc., Thornburg, AbitibiBowater, Residential Capital LLC and GMAC LLC.

With Thornburg and sector peer Countrywide Financial Corp. leading the way downward, Fitch said, the Merrill Lynch High Yield Master II Index lost a total of 4.242 points for the week to close at 573.597 on Thursday, down from 577.839 the previous week, "giving up all of [the previous week's] gains and more." For the week, the total return for the Master II Index was a loss of 73 bps, bringing the total return to negative 2.91% for the year-to-date. The yield-to-worst on the Master II Index increased by 24 bps to 10.62% from 10.38%, while the option-adjusted spread widened by 42 bps to 779 bps from 737 bps a week ago, Fitch noted.

Abitibi adrift on '08 note plan

Distressed names seemed to dominate secondary activity Friday in junk bond land, among them the short-dated bonds of AbitibiBowater, which were down big all day. Its bondholders, particularly investors holding its 6.95% notes slated to come due on April 1 and its 5¼% notes coming due on June 20, were peeved at the Montreal-based forest products company's proposed $1.4 billion refinancing plan - which would pay those bonds off with a combination of cash and newly issued debt, rather than just giving the holders cash.

That caused the 6.95s, the nearest issue, to fall as much as 12 points during the day, although the bonds came off their lows to end down about 8 points.

A trader said the two 2008 issues "got clobbered," quoting the 6.95s down 10 points around 79 bid, 80 offered, while the 51/4s were down about 8 or 9 points at 77 bid. "They were down pretty big," he observed.

Another trader saw the 6.95s fall 10 points, to 78 bid, 80 offered, while the 51/4s were 8 points lower at 76 bid, 78 offered.

"They're not gonna get away with it," he opined. "They don't have the cash [about $350 million total] to pay them, and when the noteholders say 'no,' [company officials] have a choice - file [for reorganization] or pay."

He also saw the 8.85% bonds due 2030 lower, dipping to 45 bid, 47 offered from 48 bid, 49 offered on Thursday.

Another trader saw the bonds bounce off their earlier lows, quoting the 6.95s at 81 bid, 83 offered, down 6 points on the day, the 51/4s at 78 bid, 80 offered, and the 7¾% notes due 2011 down 2 points at 51 bid, 52.5 offered.

Abitibi, in announcing its $1.4 billion refinancing plan, said that its Abitibi-Consolidated unit intends to "promptly commence" an exchange offer targeting some $500 million of its near term maturities - the two 2008 issues as well as its $150 million of 7 7/8 notes due 2009, offering the holders of those bonds a combination of cash and new senior Abitibi-Consolidated senior unsecured notes due 2010.

Analyst Kim Noland of the Gimme Credit investment research service noted that "it is not clear yet that noteholders will agree to the exchange offer or that the company will find a market for the new senior secured loans [that are a part of the refinancing plan], although we doubt the company would have floated the plan without garnering significant support from current holders."

But, Noland added, "we think the company could face additional refinancing problems if its business doesn't improve."

Additionally, the analyst said, "the plan seems dependent on asset sales which have not yet been accomplished. Therefore . . . we are not ruling out a bankruptcy filing should the plan fail to gel." Noland said that should Abitibi wind up in the bankruptcy courts, its filing might be limited to just the Abitibi-Consolidated subsidiary, since the former Bowater Inc., which merged with Abitibi-Consolidated last year to form AbitibiBowater, is held as a separate subsidiary.

Noland said the plan is "not good news" for the 2008 and 2009 bonds, since they will not be paid in full at maturity but instead get new notes in addition to being partly repaid in cash.

Thornburg plummets on 'going concern' warning

Thornburg Mortgage, coming off of Thursday's debacle, which saw its 8% notes due 2013 get hammered down by about 20 points, started out to the upside, trying to firm off those new lows - but it didn't last.

Thornburg "was the name du jour as far as getting whacked goes," a trader said.

The bonds - which had fallen some 20 points Thursday to end at around 40 bid on news the company had received a notice of default from JP Morgan Chase which in turn triggered cross-defaults on its other obligations - "were busy again today. They started off a little stronger, and traded up to the low 40s. Then it got pounded, and looks like it's going out in the high 20s."

He said that the company's latest bad news - that it can't meet the latest batch of more than $600 million of new margin calls, a development which could affect its very survival - "just crushed them. They were holding in, hanging around the high 30's level, bid here and there and then, BOOM. Just a big crack at the end."

At another desk, a trader - who called Thornburg the most active bond of the day - saw them first blip up to around 43 bid, from Thursday's closing level around 40, but then slide as low as 27 bid, 29 offered before improving oh so slightly at the end to finish at 28 bid, 30 offered.

A market source at another desk who also saw the bonds pretty active, though not necessarily the busiest, pegged the bonds' high point of the day at 44 - but then saw them slide precipitously, bottoming below 26 before coming up from that trough to finish at 29.5 bid, still down more than 10 points on the session.

Thornburg's New York Stock Exchange-traded shares at one point had plunged 34% on the day to a low of $1.08 before actually ending up 14 cents, or 8.48%, at $1.79, pushed back into the black by some last-minute large-block trades, market sources said. Volume of 54 million shares was not quite seven times the average daily handle.

Thornburg's shares, and its bonds, have been on the slide ever since Feb. 28, when the company disclosed that it had received $300 million of margin calls on its reverse repurchase agreements, a form of collateralized short-term borrowing it engaged in with various counterparties. Although it was able to meet those initial margin calls, it disclosed this past Monday that it had received another $270 million of calls and had been unable to meet "a substantial majority" of them. The company announced plans later that session to raise almost $1 billion by the sale of loans in a securitization, but that failed to calm the markets much and the hits just kept on coming - ratings downgrades from the major agencies, and the revelation late Wednesday that it had gotten the JP Morgan default notice, triggering the cross-defaults on its other obligations. Several analysts, including Citigroup's Donald Fandetti, suggested the company might find itself forced to file for bankruptcy.

On Friday, yet another shoe dropped, as Thornburg revealed that it had gotten $610 million of margin calls, on top of the $570 million it had already received. The company said it did not have the money available for those margin calls and was trying to raise it.

Thornburg continues to insist that its mortgage assets are solid; on Friday, the company's chief executive officer, Larry Goldstone, declared that "quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality."

However, the company acknowledged in its statement Friday that falling prices for those assets and the company's shrinking liquidity "have raised substantial doubt" about its ability to keep operating "as a going concern."

It said that its bankers agreed to freeze their demands for payment for a few hours, till midnight Friday, to give Thornburg the chance to raise enough cash to meet its obligations. There was no immediate word at press time whether the company would be able to raise the capital required to satisfy all of those margin call demands.

Thornburg at the same time announced that its auditor, KPMG LLP, has concluded that its 2006 and 2007 audit reports should no longer be relied on. The company will accordingly restate last year's results and take a $427.8 million charge for its adjustable-rate mortgage holdings.

Countrywide moves lower

Thornburg sector peer Countrywide Financial Corp.'s bonds "seemed a little lower again," a trader said, seeing the Calabasas, Calif.-based mortgage lender's 6¼% notes due 2009 down 1 to 1½ points at 87.5, while its more widely traded 6¼% notes due 2016 hardly traded at all, he said. He saw the company's 3¼% notes coming due on May 5 around 96.5, and "pretty active."

By way of contrast, the floating-rate notes coming due this year, last seen around 95.5 bid, 96.5 offered, "hasn't been trading at all - the last round lot was in January."

He said that "the shortest dated paper was down just modestly, maybe around ¼ point. But the longer you get out, the more they were getting hit. So I don't think the short paper is indicative of what it [the credit] was doing."

Another trader saw the '16s down a point at 71.5 bid, 73.5 offered, and the 3¼% notes unchanged at 95 bid, 96 offered.

E*Trade steady, Goodyear off, Chesapeake up

A market source saw New York-based financial operator E*Trade Financial up about ½ point to 86.5 bid, on very active volume but no fresh news seen out about the company

There was also no fresh news seen about Chesapeake Energy; the Oklahoma City-based independent oil and gas exploration and production company's 6¼% notes due 2018 were seen up a point at 97.

And things were also fairly quiet in Akron, Ohio, home of tiremaking giant Goodyear. Its 7.857% notes due 2011 were seen by a market source to have eased to 100.25 in busy dealings, down nearly 2 points on the day.

Primary quiet

No issues were priced during Friday's session in the primary market, bringing to a close a week that saw no new issues clear the market.

The week also came to a close with only one junk deal on the road.

FairPoint Communications Inc./Northern New England Spinco, Inc. will start a roadshow on Monday for its $540 million offering of 10-year senior unsecured notes (B3/B+).

Pricing is set for the week of March 24.

Banc of America Securities, Lehman Brothers and Morgan Stanley are joint bookrunners for the merger deal.

Abitibi's $1.4 billion refinancing

Early in the session AbitibiBowater Inc. announced a $1.4 billion refinancing plan.

It includes new bank and bond debt and is intended to address the upcoming maturities and general liquidity needs of the company's Abitibi-Consolidated Inc. subsidiary.

The refinancing includes approximately $400 million of senior secured notes or term loan due 2011, secured by fixed assets, and a $400 million to $500 million 364-day senior secured term loan, secured by working capital and other assets.

The bank meeting for the 364-day loan is scheduled to take place in New York City during the week of March 10.

The plan also includes $200 million to $300 million of new equity or equity-linked securities to be issued by AbitibiBowater Inc.

In addition the refinancing includes $200 million to $300 million of senior unsecured exchange notes due 2010 which are part of a $500 million exchange offer for near-term maturity notes.

Goldman Sachs & Co. is leading the exchange offer according to market sources.

Abitibi buying time

A money manager who focuses on bank loans and junk bonds said that Friday's news release from Abitibi had "everybody sort of knitting their eyebrows.

"The market reaction was to trade the short-term debt up quickly," the source said, adding that the debt subsequently "started to fade fairly quickly."

The investor said that the buy-side harbors a belief that the refinancing deal requires an equity component in order to work.

"The question is, 'Who has the desire to put equity into the company?'" the source continued.

"Possibly it's the people with positions bought cheaply on the bond side. They might have an incentive; at least they get a pop on their bonds."

The money manager said that the restructuring unveiled on Friday, if it works, gets Abitibi past a couple of bond refinancings, and buys time for the company.

"It's about the best that anybody can hope for," the money manager said.

"Abitibi is a good company with a bad balance sheet. They've been hit by a lot of stuff, including the strong Canadian currency and the decline in newsprint.

"And there is so much debt.

"But if you get off a big exchange offer, and get a little bit more equity, and get a little bit of liquidity from the banks then you have a shot."

Big pressure

The money manager said that presently "the big pressure" in the debt markets centers on the investment grade side.

"Right now it's just cratering, with dislocations all over the place," the source remarked, adding that the situation is causing apprehensions that high yield spreads will come under pressure.

"You would think, with all this incredible fear - with the Fed expected to come in with as much as 75 basis points on the 18th, and 50 more basis points at the next meeting in April - that there would be generic spread widening in credit.

"It isn't there right now."

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