Defaults send Thornburg bonds lower; Delphi notes gain on GM news; Linens n'Things sinking

By Stephanie N. Rotondo

Portland, Ore., March 6 - The distressed bond market was deemed mostly lower Thursday, with Thornburg Mortgage Corp. leading the way.

"It's taken apart the whole market," one trader said of the new troubles facing the mortgage lender. "You name it, it's lower" by about 2 points generally, he added.

"It's just ugly. Nothing really held on," he said.

Thornburg picked up in activity again this week after it was announced that the company received a default notice from its bankers at JPMorgan late last night. Thornburg's debt declined by at least 20 points on the day, though it managed to close up from the day's low. Meanwhile, the company's ever-falling equity lost more than half its value.

In more positive news, Delphi Corp. is once again closer to exiting bankruptcy as former parent General Motors Corp. agreed to loan the automotive parts supplier around $3 billion to finance its emergence. The company's debt, which has been all but radio silent of late, not only gained trading volume but also about 2 points on the news.

As the entire market took a downturn on more worries facing the economy, Linens n'Things Inc. bonds took a hit. The home accessories retailer has fallen victim to a decline in consumer spending, which has led to a balance sheet in the red. Given its financial difficulties, Moody's Investors Service cut its rating on the company, and its bonds, in the words of one trader, "got smoked."

Default sends Thornburg into freefall

Thornburg Mortgage, in an 8-K filed with the Securities and Exchange Commission late Wednesday, said that it had received a notice of default from its bank lender, JPMorgan, on Feb. 28 after failing to meet a $28 million margin call on a $320 million loan. That default triggered several cross-defaults, according to the filing.

The news sent the company's 8% notes due 2013 into freefall, losing at least 20 points during the session - on top of the losses it incurred earlier in the week when the company said it was facing another round of margin calls.

One trader said the bonds' low was near 38, but they managed to regain some ground to end at 41 bid - that is down from around 90 last week, he said. The trader also said that the bonds are trading flat, with due bills to seller.

"The May coupon is very circumspect," he said of the upcoming interest payment.

Another trader said the bonds got into the 30s before coming back to close at 40 bid, 41 offered. Another trader, who also noted that the bonds are now flat with due bills, pegged the bonds at 41 bid, "looking for a new home."

If that was not bad enough, Thornburg's stock fell more than 50% during Thursday trading. The equity closed down $1.75, or 51.47%, to $1.65. The stock was trading near $12 just last week.

The company also suffered yet another rating cut Thursday. Standard & Poor's downgraded the lender for the second time in a week due to the default news. The senior unsecured debt was dropped to CC from CCC+.

With the possibility of bankruptcy looming larger, there are mixed feelings as to whether the company will actually file or not.

One trader noted that while the company has technically defaulted, there has been no mention of bankruptcy.

"They could work it out if they can find buyers for their assets," he said.

Still, "the market is just giving up on the credit."

Earlier in the week, a trader opined that the company would have to file, blaming the top executive for the current situation.

"The idiot CEO could have taken extra capital and sat tight, but [he] blew it," he said.

Thornburg Mortgage is a Santa Fe, N.M.-based mortgage lender specializing in jumbo home loans.

Delphi bonds better on GM news

It was good news for Delphi when GM decided to step in yet again to help its overwhelmed offspring.

Traders reported that the parts supplier's bonds edged higher during the session, and activity in the name was boosted as well.

One trader said the bonds "tried to push higher out of the gate," though they settled back in to the 36 bid, 39 offered range, generically.

"They were sort of all over the place," he said, adding that he did not think "price action was all that noticeable."

Another trader called the bonds - which tend to trade in line with one another - "a little better" at 38.5 bid, 39.5 offered.

GM increased its loan assumption to $2.83 billion from $750 million, according to a regulatory filing. The new financing agreement could help Delphi finally end its stay under Chapter 11 protection.

Still, Appaloosa Management LP and a group of investors that has agreed to put up $2.55 billion toward the exit financing are vehemently opposed to GM's increased participation. The group believes that GM may interfere in asset sales, as well as in gaining business from GM rivals.

With the new changes to the investment plan, Delphi has taken the matter to a court to decide if the amendments fit within the confines of the original plan.

Delphi is a Troy, Mich.-based automotive parts supplier and manufacturer.

Weaker economy hurting Linens

As the economy continues on its path toward recession - or depression, depending on whom you ask - consumer spending is tightening, leaving some retailers at a loss.

Linens n'Things has been one of the more troubled distressed retailers, a problem that many say began when the company went private in a leveraged buyout in 2006. According to bond traders, the company's debt fell in Thursday's session.

A trader pegged the floating-rate notes due 2014 at 35.5 bid, 36.5 offered. He said the bonds fell due to a weaker market and tightened consumer spending.

"With a recession looming, it's only going to get worse," he said.

Another trader said the bonds "got beat up," ending the day at 35 bid, 36.5 offered, while another quoted the debt at 35.5 bid, 36.5 offered, down from 37 bid, 38 offered previously.

Moody's lowered its rating on the bonds to Caa2 from B3. The cut was attributed to higher year-end borrowing levels and lower revolver availability.

Linens n'Things is a Clifton, N.J.-based retailer specializing in home decor.

Among other retail names, Blockbuster Inc.'s bonds were called "not bad" after posting a slight increase on the day.

A trader quoted the 9% notes due 2012 at 83 bid, 83.5 offered, while another market source placed the debt at 84, up nearly 3 points.

The upward move came after the movie rental chain reported better-than-expected numbers for the fourth quarter. The company posted earnings of $38.1 million, compared to $8.3 million the previous year. The better figures were attributed to cost cuts and restructuring.

Blockbuster is a Dallas-based movie rental provider.

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