ResCap jumps, Countrywide gets dumped as mortgage names dominate; Linens falls after Chapter 11

By Paul Deckelman and Sara Rosenberg

New York, May 2 - Residential Capital LLC's bonds were seen solidly higher on Friday on the news that the Minneapolis-based mortgage provider will tender for $1.2 billion of its outstanding notes and is offering new secured debt to the holders of another $12.8 billion of the bonds in an exchange process. Bank debt market players saw ResCap's term loan meantime up by a couple of points and noted that the company is trying to line up a new multi-billion-dollar credit facility with its corporate parent, GMAC LLC. Bond and bank debt investors shrugged off ratings downgrades by all of the major agencies, some of which routinely regard any company's effort to get bondholders to accept less than the full par value of a security in a tender or exchange offer - ResCap envisions paying off some of the existing notes for as little as 77 cents on the dollar - to be tantamount to a default.

GMAC's bonds were also seen up, even though that credit too was downgraded and despite the large loss with the automotive and residential lender reported this week.

While ResCap was rising, sector peer Countrywide Financial Corp. was heading in the opposite direction, with its widely traded 2016 bonds seen down as much as 5 or 6 points on the session following a double-dose of bad news - prospective buyer Bank of America said in a regulatory filing that it may not support some of Countrywide's debt once it buys the troubled Calabasas, Calif.-based mortgage company, which in turn caused Standard &Poor's to dump Countrywide's ratings to junk status.

Elsewhere, Linens 'N Things Inc. formally entered the Chapter 11 process, causing the troubled retailer's bonds to fall by several points and begin trading flat - without their accrued interest.

Also in the retail sphere, Claire's Stores Inc.'s bank debt was seen surrendering some initial gains following an S&P downgrade of the company's ratings.

ResCap on the rise

ResCap, a trader said, was "the big name of the day," with its bonds seen up several points across the board on the news that it is working on a new multi-billion credit facility and will be attempting to exchange and tender for a sizable chunk of its outstanding notes. Investors were meantime apparently not very impressed by the unanimity shown by S&P, Moody's Investors Service and Fitch Ratings in downgrading the company's ratings in response to the news of the company's efforts to take out some $14 billion of short- and medium-maturity notes.

A trader saw its 6 1/8% notes slated to come due in November at 88 bid, 90 offered, up a full 6 points on the session. A little further out on the curve, he saw its 6 7/8% notes due 2015 at 54 bid, 56 offered, up 3 points on the day.

A market source saw its 8 7/8% notes due 2015 zoom up 4 points to the 55 bid area.

At another desk, a source said ResCap paper was among the most busily traded issues on the day, with several series of bonds having each racked up more than $40 million of transactions by late afternoon.

ResCap's 6 3/8% notes due 2010 had risen to had risen to above 58 from prior levels at 56.5, while its 6½% notes due 2013 had firmed to 54.5 bid from 51 on Thursday. The 6 1/8s were the big gainers on the day, jumping to 90 from prior levels around 84, while its variable-rate notes coming due on June 9 moved up to 97.5 bid from prior levels at 94.

ResCap said that it plans to make a cash tender offer for the roughly $1.199 billion of the latter bonds that are currently outstanding. The notes will be redeemable for $1,000 per $1,000 of principal amount plus an early delivery payment of $30 per $1,000 in principal amount.

Under the exchange offers it will make for the other $12.8 billion of outstanding bonds, ResCap will offer to issue new 8½% senior secured guaranteed notes due 2010 in exchange for existing 2008 and 2009 notes. The new senior secured guaranteed notes will be secured on a second-lien basis by the collateral for the credit facility.

The company will also offer to issue new 9 5/8% junior secured guaranteed notes due 2015 in exchange for existing 2010 through 2015 notes. The new junior secured guaranteed notes will be secured on a third-lien basis by the collateral for the credit facility.

Noteholders participating in the exchange offers will be allowed to elect to receive cash instead of the new notes that they would otherwise receive under a modified Dutch auction process - but ResCap plans to spend no more than $1.2 billion of cash in that regard. The amounts of cash that ResCap expects to have available to pay participating holders in lieu of new notes will be $700 million total for the approximately $3.32 billion of outstanding old 2008 to 2009 notes and $500 million total for the roughly $9.48 billion of outstanding old 2010 to 2015 notes.

In conjunction with the offers, the company will solicit consents to amend the note indentures. The amendments would release the subsidiary guarantees of ResCap's obligations under the old notes and would eliminate some restrictive covenants and events of default.

However, the amendments are not necessary for the issuance of the new notes or for the pledge of collateral for the new notes.

The exchange offers for the various series of notes are conditioned, upon - among other things - the successful completion of the new $3.5 billion first-lien senior secured credit facility that ResCap is trying to line up. It said that it is in talks with parent GMAC on the proposed new credit line. ResCap is asking for the new credit line less than a month after GMAC said it would extend $750 million in new credit to its problem child, which has been hit very hard by the credit crunch that has shook the U.S. mortgage industry for much of the past year. GMAC - which has already pumped an estimated $2 billion of new capital into the formerly profitable ResCap to help it keep going - held out the possibility of further assistance when it reported a $589 million quarterly loss earlier this week, largely due to the $859 million of red ink that ResCap recorded, which grossly outweighed GMAC's profits from its automotive financing activites.

The idea that ResCap might get still more fresh capital proved to be intriguing to bank debt investors on Friday; its term loan rallied by a couple of points; a trader remarked that investors are hoping for some sort of paydown in connection with all the new debt financing. He saw the existing term loan at 94 bid, 96 offered, up from Thursday's levels of 90 bid, 92 offered.

Ratings agencies razz ResCap

The major ratings agencies were nowhere near as enthused as the bondholders and term loan investors; S&P lowered selected ratings on ResCap, including the company's long-term corporate credit rating, to CC from CCC+. The ratings remain on CreditWatch with negative implications.

"The downgrade reflects the probability that, with the successful execution of the exchange offer, which will pay less than face value to certain Residential Capital LLC bondholders, Standard & Poor's, in accordance with our criteria, will lower our corporate credit rating on the company to 'SD' (selective default)," S&P credit analyst John K. Bartko wrote in the downgrade announcement.

S&P also said that the ratings on the affected debt issues would be lowered to D, although the exchange would not constitute a legal default.

"A successful exchange would extend debt maturities, providing needed relief," S&P admitted - but warned that "the action illustrates the gravity of the company's financial position."

"Furthermore, the exchange indicates that ultimate parents General Motors Corp. and Cerberus Capital Management LP" - GM owns 49% of ResCap parent GMAC and a Cerberus-led investment group has the other 51% - "are pursuing these actions rather than directly providing GMAC LLC with additional capital to downstream to Residential Capital LLC. We believe that if the exchange fails, Residential Capital LLC might file for bankruptcy protection," S&P added.

Moody' also downgraded ResCap as well on Friday, cutting the senior debt rating to Ca from Caa1. All ratings remain under review for downgrade.

"Despite the benefits this exchange could have on ResCap's ability to service its debt, the ratings remain under review for downgrade. This is because ResCap has not proven it has a business model that can produce the required operating cash flow to service and ultimately repay these reduced obligations," the Moody's announcement said.

And Fitch Ratings came out with a downgrade for ResCap following the debt exchange news as well, cutting the company's issuer default rating to C from BB- and its senior debt to C from B+. Ratings remain on Watch Negative.

Upon completion of the exchange, ResCap's issuer default rating will be downgraded to D, Fitch warned, indicating a default has occurred in accordance with the agency's criteria on distressed-debt exchanges.

At the completion of the exchange, Fitch would assign a post-default issuer default rating and new issue level ratings solely reflecting a prospective view of ResCap and its new capital structure. Fitch said that it envisions that ResCap's issuer default rating would be in the single B category, with issue level and recovery ratings reflecting relative seniority and recovery within the capital structure.

Despite all of that ominous-sounding language from the ratings agencies, traders said, investors still took the bonds higher - apparently more enthused at the possibility that ResCap will thus avoid possible bankruptcy by pushing off its 2008 and 2009 maturities to 2010 and by likewise pushing its other maturities off to 2015 than they are upset by what the ratings agencies think.

GMAC gains along with unit

GMAC's bonds meantime were seen higher, despite the possibility that it will have to extend further credit to its struggling mortgage subsidiary. A trader called its 8% bonds due 2031 2¾ point gainers Friday to 78.75 bid, 79.75 offered, while another saw those notes up 3 points at 79 bid, 80 offered, "despite ResCap's problems, the downgrade - and losing a truckload of money" in the most recent quarter.

Another source saw its 6% notes due 2011 up more than 3 points in brisk trading to around the 83 level, while its 6 7/8% notes due 2012 were also at 83, up some 4 points on the session.

GMAC rose even as Fitch cut its ratings to BB- from BB, saying the move reflects "the potential for reduced recovery in a default scenario should the company encumber assets." Fitch also noted ResCap's deteriorating situation as a negative factor. The Fitch downgrade follows similar GMAC downgrades in the past week by S&P and Moody's.

Countrywide clobbered after B of A statement, downgrade to junk

But investors' nonchalance about ratings changes proved to be selective on Friday; an S&P downgrade of Countrywide Financial's debt from nominally investment grade to junk proved to be a downer for its bonds, although a trader pointed out that bondholders were likely "much more motivated" by the underlying event which triggered that multiple-notch downgrade from BBB+ to BB+: Bank of America's warning that it may not stand behind some categories of the mortgage-lender's debt after it completes its $4 billion purchase of the company.

A trader said that the most active Countrywide issue that he saw was the 6¼% notes due 2016. "That was the one that really got clobbered" on the B of A news and the resulting S&P move. He saw the '16s down 5 points on the session in heavy trading at 83 bid, 86 offered.

At another desk, a market source saw the bonds end at 85 - but called that a 7 point loss versus Thursday's levels. And another source had the bonds 10 points down at 82.

Even Countrywide's bonds coming due in less than three weeks, on May 21 - widely considered to be money-good, despite whatever longer-term problems the company may have - were seen easing, down ½ point at 99 bid, 99.75 offered, a trader said.

Countrywide, another intoned, "definitely took a hit on the news."

In a regulatory filing Wednesday, the banking giant - which emerged as the troubled mortgage originator's rescuer some months ago and which has maintained several times since then that its acquisition of Countrywide is still on track, despite large losses and other problems Countrywide has shown in the interim months - said it was evaluating possible courses of action to deal with Countrywide's debt, among them "the possibility of redeeming, assuming, or guaranteeing some or all of this debt," However, the bank warned that "there is no assurance that any such debt would be redeemed, assumed or guaranteed," adding that no decision has yet been reached.

That could leave the status of as much as $38.1 billion of Countrwide's approximately $97 billion of obligations in doubt, including approximately $17 billion of medium-term notes, $4 billion of convertible debt, $2.2 billion of junior subordinated debt and $1 billion of subordinated debt currently outstanding.

Linens 'n Things throws in the towel

Apart from the mortgage names, a trader saw Linens 'n Things' zero-coupon bonds due 2014 down 3 points on the session following the Clifton, N.J.-based housewares retailer's Chapter 11 filing. He also said that the bonds are now trading flat, or without their accrued interest.

Linens 'n Things will ask the U.S. Bankruptcy Court in Wilmington for permission to close 120 of its 589 stores, which the company envisions will cut its workforce by about 2,500.

The bankruptcy of the company - which was taken private for $1.3 billion by Apollo Management LP - marks the biggest failure of a leveraged buyout credit since credit-market disruptions began last summer.

Claire's loan gyrates around

In another retailing name, Claire's Stores' term loan was seen having moved up ½ point early in the day with the rest of the cash market - but after an S&P downgrade, some of those gains were lost, according to a trader.

The term loan went out around 80.25 bid, 81.25 offered, up from Thursday's levels of 80 bid, 81 offered, the trader said.

However, pre-downgrade on Friday, the term loan was quoted at 80.5 bid, 81.5 offered, the trader added.

S&P, among other things, lowered Claire's corporate credit rating to B- from B and its senior secured credit facility to B from B+.

S&P attributed the downgrade to the Pembroke Pines, Fla.-based specialty retailer's poor performance over the past year and the modest weakening of its credit protection profile that occurred concurrent with the deterioration of operations.

Charter keeps chugging along

Elsewhere, Charter Communications Inc.'s bonds continued to gain, as they have all pretty much all week - not on any news about the St. Louis-based cable operator, but more on increased investor comfort with the cable industry, particularly in light of sector peer Comcast Corp.'s results, especially its better-than-expected subscriber numbers.

Charter's CCH 1 11% notes due 2015 were seen up better than 2½ points at 85, while the unit's 9 5/8% notes due 2014 were seen 4 points better at 57.

Its Charter Operating 8% notes due 2012 gained 1½ points to the 98 level.

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