Troubles abound for mortgage lenders; Housing, retail sectors hurt by market woes

By Stephanie N. Rotondo

Portland, Ore., March 13 - The distressed bond sector once again gave a lackluster performance Thursday as market participants continued their focus on the Lehman Brothers 2008 High Yield Bond and Syndicated Loan Conference in Orlando, Fla.

"The market is just indifferent to life itself," said one discouraged trader. "It's just hopeless."

Even a rally on the equity side did not seem to phase the junk arena, although traders differed on the overall tone of the day. Some said the distressed market was perhaps a touch better, while still others claimed it was weaker.

"It was another ugly day in the land of bonds," one trader surmised.

Given the current state of things, and some analysts' beliefs that a recession has indeed come to pass, market players are wondering when the aversion to risk will end.

The fear has perhaps made the biggest impact on the mortgage sector, as news reports of more write-downs and more losses roll in daily. During Thursday's session, names like GMAC LLC, Residential Capital LLC and Thornburg Mortgage Corp. traded lower, though one trader said Countrywide Financial Corp.'s debt bounced slightly.

Furthermore, that sector was probably not at all helped by the latest foreclosure report, which once again showed an increase in repossessed homes.

The report also hurt distressed homebuilders' bonds. Standard Pacific Corp. and Beazer Homes USA Inc. were both seen weaker on the day, though off of the day's lows.

And what hurts homebuilders will also affect retailers. Such was the case for Linens n'Things Inc., whose debt hit a new low, according to one trader.

Still, the domino effect created by the subprime mortgage crisis and housing slump of 2007 could be coming to an end sooner than later - at least according to Standard & Poor's. S&P issued a report Thursday, which claimed that there was in fact an end in sight.

Troubles abound for mortgage lenders

Mortgage lenders just cannot seem to catch a break these days, despite many efforts put forth by the Federal Reserve to help bring balance back to the sector.

Instead, companies like Thornburg Mortgage face continued liquidity concerns as well as potential disintegration.

Thornburg, which has been hit with a significant amount of margin calls in the last month, started the week strong, its bonds regaining some of the 60-plus points it lost over the last two weeks. But come Thursday, the bonds reversed their direction.

According to one trader, the 8% notes due 2013 traded at 43.5, though he said "it looks like a mistake."

"That is significantly below where it was," he noted. He added that the market was "more likely" 47 bid, 49 offered, still down from the previous session.

However, he conceded that the print could in fact be real.

"It could be a distressed seller that needed liquidity," he opined.

Another market source placed the Santa Fe, N.M-based mortgage lender's debt at 50, down 3 points.

At another desk, Thornburg's notes were seen sliding 8 points to 42 bid, 45 offered, a trader said, noting that the company "got another default notice" on its reverse repurchase agreement margin calls.

"The party is over," another trader said, referring to the three-day run-up in the bonds that had taken them all the way up to Wednesday's closing level around 50 bid from 28 bid late Friday.

A trader who saw the Thornburg bonds get down to the 43 bid, 45 offered mark noted that the bonds "gave a little back" from their recent gains. "I didn't see much activity in them, personally." He further opined that with Thursday's relatively thin market liquidity, "a couple of million [dollars of] bonds trading" could translate to a sizable price move.

Thornburg, a trader said, "was definitely lower." He said that the only $1 million round lot traded at 43.5 bid, well down from the 50-area trades seen on Wednesday; odd-lot trading brought the bonds to about 45.5 versus a context of 48-53 seen Wednesday.

Another trader quoted the bonds going home at a wide 44 bid, 48 offered, down from 50 bid, 52 offered on Wednesday.

Meanwhile, Detroit-based GMAC and Minneapolis-based ResCap saw their paper "get killed," a trader said. As ResCap's subordinated issues fell "back to new lows," GMAC's benchmark 8% notes due 2031 slipped about a point to 68 bid, 68.5 offered from 69.25 bid, 70.25 offered previously. The trader said that issue fell as much as 3 points throughout the day.

The trader also noted that the 8% notes are now trading behind parent company General Motors Corp.'s 8 3/8% notes due 2033. He pegged that paper at 70 bid, 70.5 offered.

"There use to be quite a bit of difference the other way," he said. But as credit concerns at GMAC deteriorate and operating numbers improve at GM, the situation has reversed.

At another desk, a trader quoted the 8% notes around 67 and GM's 8 3/8% notes around 70.

Elsewhere, ResCap's 6½% notes due 2013 lost a point to end at 45 bid, 47 offered, although a trader saw ResCap parent GMAC LLC's bonds about unchanged at 67 bid, 68 offered. GMAC "was down a couple earlier, but then they came back," he said.

Another market source saw ResCap's 8 7/8% notes due 2015 down a point at 45 and likewise saw GMAC's 6 7/8% notes due 2012 down a point at 69.

Meanwhile, Countrywide Financial's debt seemed to "bounce," a trader said. The trader pegged the 5.8% notes due 2013 at 77 bid, 77.5 offered, better on the day. Still, the trader noted that the name "was getting demolished" of late, with some issues down as much as 24 points in the last couple of weeks.

At another desk, however, a trader said Countrywide's debt was worse on the day, its 4½% notes due 2010 at around 82.25 and its 6¼% notes due 2009 at 85.

"Some of these names are really in the news right," the trader said, speaking not only of GMAC, ResCap and so forth, but also for better-rated credits such as Washington Mutual, Citigroup and Bear Stearns.

"Those names are all still showing investment-grade ratings," the trader said. "But they certainly are not trading that way."

"There doesn't seem to be any kind of floor," the trader continued. "It just seems like more news every day, more write-downs" and other financial issues. "There is just a lot of fear."

Indeed, as U.S. foreclosures went up another 60%, Calabasas, Calif.-based Countrywide reported foreclosures on its own loans doubled in the last month.

But S&P believes there is an end for subprime write-downs in sight. In a report published Thursday, analyst Scott Bugie increased the estimated valuations for the write-downs to $285 billion from $265 billion. But he expressed some optimism.

"The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime [asset-backed securities]," he wrote.

Woes follow housing, retail sector

The financial sector is not the only one hurting in the current market environment. Homebuilders, and in turn retailers, are continuing to ebb and flow - though perhaps mostly ebb.

The downturn in the market has resulted in an increase in foreclosures. In the last year, foreclosures have increased nearly 60%, according to RealtyTrac, with the biggest problem areas being Nevada, California, Florida and Texas.

Standard Pacific, which is based in Irvine, Calif., and does most of its business there, has historically been thought of as one of the stronger companies among distressed homebuilders, but that has not made it immune. A trader said Standard Pacific's 6¼% notes due 2013 turned lower in Thursday trading, ending at around 69. Beazer Homes' 8 3/8% notes due 2012 slipped about 1 point to around 73. While both names - as well as the general sector - were deemed lower on the day, the trader did note that the levels were up from the lows of the day.

Another trader saw Beazer's 8 5/8% notes due 2011 down a point to 74 bid, 76 offered, while Standard Pacific's 7% notes due 2015 were also down a point at 68 bid, 70 offered.

Elsewhere in the sector, Hovnanian Enterprises Inc.'s 6 3/8% notes due 2014 and 6¼% notes due 2016 were unchanged at 65 bid, 67 offered.

The housing slump and credit crunch have thus made consumers tighten their belts as they prepare for the worst. That has resulted in a weakening retail environment.

In fact, the Commerce Department reported that retail sales fell by 0.6% in February, which demolished analysts' expectations of a 0.2% increase for the month.

That report, combined with the newest housing data, sent Linens n'Things bonds to new "all-time lows," according to one trader. The trader said the Clifton, N.J.-based company's floating-rate notes due 2014 hit a low quote of 28.5 bid, 29.5 offered before coming back to end at 30 bid, 31 offered.

Among other retailers, Bon-Ton Stores Inc.'s 10¼% notes due 2014 closed at 65.5 bid, 66.5 offered, down 2.5 points. Burlington Coat Factory Warehouse's 11 1/8% notes due 2014 were likewise seen down 2 points at 77.25 bid, 78.25 offered, while Claire's Stores Inc.'s 10½% notes due 2017 fell more than 3 points to the 44.5 area. Finlay Fine Jewelry's 8 3/8% notes due 2012 fell for a third straight session, off 1.5 points to end at 35.

Fitch Ratings cut the department store's outlook to negative, though it affirmed the notes' rating at CCC+/RR6. Fitch said the negative outlook is due to the company's continued slide in operating and credit metrics, as well as the challenges it faces in the retail sector.

Foamex loan continues gains

Foamex International Inc.'s second-lien term loan continued to grind higher during the trading session as investors were still reacting to the company's plan to offer its second-lien loan lenders stock for debt and to pay down first-lien borrowings, according to a trader.

The second-lien term loan was quoted at 81 bid, 83 offered, up from 78 bid, 82 offered, the trader said. Earlier this week, prior to the news of the debt exchange, the second lien was being quoted at 74 bid, 76 offered.

Under the proposal, Foamex's second-lien loan lenders will be given the option to purchase common stock at $1.50 per share, using their second-lien loans at par value, and the company is also planning a rights offering to all of its stockholders to purchase common stock at $1.50 per share as well.

Proceeds from the rights offering would be used to prepay the loans under the company's first-lien credit facility, and any second-lien loans that are used to purchase common stock would be cancelled.

Foamex anticipates receiving collectively a minimum of $80 million in new equity, which would be through a combination of cash and an exchange of second-lien loans.

The company is proposing the offerings to, among other things, improve its credit profile, to significantly deleverage, to reduce interest expense, and to improve trading levels on the first- and second-lien term loans.

Foamex is a Linwood, Pa.-based manufacturer of flexible polyurethane and advanced polymer foam products.

Distressed arena weakens

In the autosphere, Metaldyne Corp.'s 10% notes due 2012 lost 3 points to 63 bid, 65 offered, while Delphi Corp.'s 6.55% notes that were to have come due in 2006 were off a point at 35 bid, 37 offered.

A trader saw AbitibiBowater Inc.'s 6.95% notes slated to come due on April 1, 2008 at 63 bid, 65 offered, down from 67 bid, 69 offered, while its 5¼% notes maturing on June 20, 2008 were at 60 bid 62 offered, down from 63 bid, 65 offered. The 8.85% bonds due 2030 were called unchanged at 36 bid, 38 offered.

At another desk, a trader said the 6.95% notes fell below 65 from levels around 67.5 on Wednesday, before ending at 65.375, "so the paper is lower, definitely under pressure." He saw the 5¼% notes at 61 bid, down from 62 bid, 63 offered on Wednesday.

However, yet another trader deemed the Abitibi 7.95% notes due 2011 unchanged in a 63 context.

In one of the few upside moves on the day in distressed, Idearc Inc.'s 8% notes due 2016 gained half a point to 63.5.

Pliant Corp.'s 11 1/8% notes due 2009 ended down 2 points to the 75 bid, 77 offered level. "Poor quarterly numbers" were blamed for the downturn.

Majestic Star Casino LLC's 9¾% notes due 2011 lost 4 points and were quoted offered at 41 with no bids seen, a trader said. Herbst Gaming's 8 1/8% notes due 2012 eroded another 2 points to 17 bid.

Sara Rosenberg and Paul Deckelman contributed to this article.

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