Lehman, WaMu decline amid turmoil; Neiman paper slips on earnings; GM, Ford term loans lose ground

By Stephanie N. Rotondo

Portland, Ore., Sept. 24 - Trading in Lehman Brothers Holdings Inc. and Washington Mutual Inc. heated up the distressed market yet again Wednesday, traders reported.

Recovery models on Lehman's bankruptcy have begun to circulate, with a range of 5 cents to 30 cents on the dollar being predicted. Current trading levels are right in the middle of that range, though a trader said the bonds slipped a bit from the previous level where "they had been holding nicely." Another trader called the decline "no big deal."

WaMu's debt also continued to deteriorate as the company was faced with yet another downgrade and increased chatter of an asset sale.

Meanwhile, Neiman Marcus Inc. released its fourth-quarter results during the session. The wider loss - largely due to a pretax impairment charge - put pressure on the company's debt structure. In other retail related news, Linens n'Things' chief financial officer reportedly resigned his position. As a result, a trader said the bonds actually traded in size.

With the market at large in turmoil, the intensity is proving too much for some names. For instance, General Motors Corp. and Ford Motor Co. both saw their term loan weaken. Market sources opined that more liquid names such as GM and Ford are getting beaten down as investors try to sell whatever they can.

Lehman, WaMu decline

Lehman Brothers' Chapter 11 filing is easily the largest and most complex bankruptcy in history. As investment-grade players rid their portfolios of the now distressed debt, it is no surprise that trading in Lehman paper has made up the bulk of the volume of late.

With recovery models ranging from 5 cents to 30 cents on the dollar, traders say they are not surprised that the company's senior paper is now trading around 18, down a bit from around 20 on Tuesday. According to one trader, there were rumors of a bid list "with a bunch of Lehman paper on it" circulating through the market.

One analyst said he believes the onslaught of Lehman debt will continue to play a role in the marketplace, as "a lot of guys, including some money market guys, had to lose it.

"Nobody wants to go into year-end with that on their books, or even quarter-end," he said.

Lehman also had a fair amount of credit default swaps on their books, he added, so "I think it will be awhile [of Lehman at the forefront], at least until the CDS clears up."

"Volume is so large because there is so much to trade," said a trader. "Lehman is the largest bankruptcy in history. Billions in bonds out there and most bonds were held in investment-grade funds that have to sell now before end of the quarter."

"I don't know that folks are real happy about it," said another analyst about the various recovery models floating around. "But I think folks understand how we get our models."

Originally, recovery was predicted around 35, a trader said. Now, consensus is more like 20.

Still, "I don't know how anyone can model a recovery for Lehman," the trader said. Even at 20 cents, "I don't think it is real. If people really could put a number on it, they would have been able to save the company."

Meanwhile, during the financials-dominated day, Washington Mutual's paper continued to fall after getting downgraded yet again.

A trader quoted the 5¼% notes due 2017 at 26 bid, 27 offered and the 8¼% notes due 2010 at 19 offered.

Another trader said the 5% notes due 2012 closed at 24 bid, 27 offered and placed the operating company bonds - the bonds backed by the actual bank - at 27 bid, 32 offered generically.

"There was lots of bailing on WaMu Inc. paper today," he said. "Nobody wants the holding company paper...It's toast."

Standard & Poor's slashed its counterparty credit rating on the bank holding company, while affirming the rating on the bank subsidiary. The rating agency attributed the downgrade to the possibility that the company could be broken off and the pieces sold. Citigroup, JP Morgan and Toronto Dominion are among those reportedly interested in the company's assets.

"Given the stresses facing the broader U.S.-based financial institutions sector," analyst Victoria Wagner wrote in the report, "the available pool of large bank acquirers that are not capital constrained or devoid of their own mortgage credit stress is quite small, raising the possibility that the purchase may be only partial."

Wagner goes on to say that in the event of a piece-by-piece sale, those with holding company paper are likely to be left cold, "because the assets at the holding company are not sufficient to cover the full repayment of the $14.4 billion of rated unsecured debt outstanding."

Neiman slips on earnings

Neiman Marcus' paper slipped during the session after posting disappointing numbers, while Linens n' Things' debt traded on news of another management resignation.

A trader pegged Neiman's 9% notes due 2015 at 92 bid, 93 offered and the 10 3/8% notes due 2015 at 93.5. Another source called the 9% notes down 2.5 points at 92 bid.

Neiman's term loan was also softer in trading on the back of the release of fourth quarter numbers, but traders said that the slide may have been more a function of the overall market being down and less a function of the earnings results.

The term loan was quoted at 89 bid, 90 offered, down from 90.5 bid, 91.5 offered, traders said.

The first trader also saw Linens' floating-rate notes due 2014 trade at 28.

"They haven't traded in round lots for awhile," he said. As yet another top executive bids the company adieu, "it seems like they are headed for liquidation," he opined.

Neiman reported a fourth-quarter loss of $36 million, compared with a loss of $15 million the year before. The wider loss was largely due to a pretax impairment charge.

Revenue increased 5% to $1.03 billion from $982 million.

Over at Linens, Frank Rowan, the company's chief financial officer, left the office he has called home for the last 20 years. His resignation comes less than a month after Barbara Smith, the company's treasurer, exited her post.

Last week, a Reuters news article indicated the Linens' owner, Cerberus Capital Management, might be looking to sell, lending credence to the trader's comments regarding liquidation. The article said that the private equity firm had elected to not sell just a week earlier, but were now considering taking bids as early as mid-October.

In a related sector, Sbarro Inc.'s 10 3/8% notes due 2015 gained nearly 5 points to close at 72.5 bid, 73.5 offered.

GM, Ford lose ground

The more liquid names, like General Motors and Ford Motor, just to name a few, continued to grind lower on Wednesday as people seem interested in selling their paper and getting cash, according to traders.

General Motors, a Detroit-based automotive company, saw its term loan quoted at 68.5 bid, 70.5 offered, down from 70 bid, 71 offered, traders said.

And, Ford, a Dearborn, Mich.-based automotive company, saw its term loan quoted at 68.5 bid, 70.5 offered, down from 69.75 bid, 71.75 offered, traders continued.

"People are just selling anything they can sell today. People are selling more liquid names because you can get bids for that and raise cash," one trader explained.

"People are worried to see what's going on with this bailout and people are just nervous. Seems like people are definitely trying to get in cash right now so that when things start getting better they can buy stuff," the trader added.

"Quieter, heavier days I've seen in a long time," a second trader said. "There's a ton of liquidity that's going to be taken out of the market soon because hedge funds keep blowing up. Not enough money to bail out the banks so who's going to bail out the hedge funds?"

Overall, the par cash market was down 1 to 2 points on the day, while the distressed loan market was down by about 2 to 4 points.

Broad market mostly weaker

Moody's Investors Service downgraded Six Flags Inc. Wednesday, but a trader said the news "didn't affect the bonds too much."

He said the 9¾% notes due 2013 opened around 63, slipped a bit, then came back to close at its original level.

Trump Entertainment Resorts Inc.'s 8½% notes due 2015 fell 1.5 to 2 points to finish at 41.5 bid, 42 offered. Meanwhile, Station Casinos Inc.'s 7¾% notes due 2016 dropped 5 points to 60, a trader said. Another source called the 6% notes due 2012 down 4 points to 64 bid.

MGM Mirage's 6 5/8% notes due 2015 were 3 points weaker at 76 bid.

Idearc Inc.'s 8% notes due 2016 continued to decline, losing 1.5 points to 34.

Sara Rosenberg contributed to this article.

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