AIG, GM debt gyrates pre-earnings; ResCap notes gain, GMAC ends mixed; broad market remains strong

By Stephanie N. Rotondo

Portland, Ore., May 6 - The distressed debt market continued to feel stronger, traders reported Wednesday, though some commented that "nothing really stood out."

Ahead of Thursday earnings releases, American International Group Inc.'s bonds traded up. The bailed out U.S. insurer was expected to post a loss around the $5 billion mark.

General Motors Corp. will also put out numbers on Thursday. As investors prepare to see just how dire that situation is, the automaker's bonds ended mixed.

Residential Capital LLC's debt was seen moving higher, possibly in response to the company's swing to profit for the quarter. Just one day after posting its results, GMAC LLC's notes continued to be wishy-washy.

AIG, GM gyrate pre-earnings

Both American International Group and General Motors will put out numbers on Thursday and both companies saw their bonds react differently ahead of the reports.

AIG's paper gained anywhere from 1 to 5 points on the day ahead of earnings, despite reports that the insurer could post as much as a $5 billion loss for the quarter.

A trader placed the 6.9% notes due 2017 at 46, calling them up 1.75 points. The 6¼% notes due 2037 inched up slightly to 14, while the 5.9% notes due 2012 jumped more than 5 points to 53.

Another trader saw the 6.9% notes rise to 49 bid from 44 .75 Tuesday, with $21 million traded.

A Wall Street Journal article published early Wednesday cited sources close to the matter who indicated what the quarterly report might look like. Should AIG in fact report a $5 billion loss, it would still be an improvement over its $61.7 billion fourth-quarter results.

Meanwhile, GM is expected to report its eighth consecutive loss Thursday, somewhere in the neighborhood of $6 billion.

A trader said the carmaker's bonds were a mixed bag with "one high, one low and one right in the middle." He deemed the 7 1/8% notes due 2013 up half a point at 7, while the 8¼% notes due 2023 were also at that level, though they had weakened a point on the day.

The trader also saw the 7.4% notes due 2025 unchanged at 8.

At another desk, a trader called the benchmark 8 3/8% notes due 2033 weaker at 7 bid, 8 offered.

Even as GM prepares to report what is already considered to be dire numbers, some market players have said a large loss could work for the company, rather than against it. In a Bloomberg report, Argus Research analyst Kevin Tynan said that "it actually helps their cause to report a big loss, to show how close they are to actually being bankrupt." With a financial statement to back up their case, the company might only increase their chances of obtaining more federal aid. Also, the numbers might encourage bondholders to accept what has been called an unfair debt swap in an attempt to keep the company out of bankruptcy.

"It's at a point where you would think they would want to show the financials as bad as they are and put the screws to the bondholders," Tynan said in the report.

ResCap gains, GMAC mixed

Residential Capital's move to a profit has served to push up the struggling mortgage lender's bonds.

A market source saw the 8 7/8% notes due 205 jump 12 points to the 56 level, while another source called the 6 3/8% notes due 2013 inch up more than a point to 69.5.

On Tuesday, the subsidiary of GMAC said that it would likely post a first-quarter profit of $229,000. That compares with a loss of $859 million in 2008.

However, the swing to profit is more of an accounting move than anything else. GMAC, in its effort to keep its flailing offspring afloat, forgave $1.35 billion in ResCap debt during the quarter. The debt forgiveness gave GMAC a one-time gain of $900 million for its mortgage units, but also resulted in a $900 million loss for its corporate operations.

For the quarter ending March 31, GMAC posted a loss of $675 million, largely due to continued mortgage-related losses. Of that number, $125 million came from GMAC's mortgage operations.

GMAC might also need to conjure up more capital as a result of its "stress test" performance, news reports stated. The company might need as much as $11.5 billion in new capital. The Obama administration has already indicated that it would help GMAC, after the company agreed to merge with Chrysler LLC's financial arm as part of the automaker's reorganization plan.

GMAC's debt ended the day mixed, a trader said. He placed the 7¼% notes due 2011 at 84, a decline of nearly 3 points during the session. But the benchmark 8% notes due 2031 gained a point to close at 64.

Another market player pegged the 6 7/8% notes due 2012 at 77 bid, a loss of 2 pints on the day.

Broad market remains strong

Elsewhere in the wide world of distressed, it was "more of the same," a trader commented.

"The market still seems like there is cash around," he said, adding that volumes remained high.

But he also noted that "nothing really stood out. But generally, stuff got better."

First Data Corp.'s bonds traded actively, though there was no news to explain the movement.

A trader called the 9 7/8% notes due 2015 up more than 2 points at 70.25, with about $40 million traded. Another trader also placed the debt at that level, calling it "up a couple points."

Among other financial related names, CIT Group Inc.'s 5.80% notes due 2011 fell half a point to 71.

A trader saw Capital One's Financial Corp.'s 7.686% hybrid securities due 2036 - a split-rated Baa2/BB+ issue - jump to 55 bid from 44.5 on Tuesday, with $35 million of the bonds trading.

He saw another hybrid preferred issue, Citgroup's 8.3% securities due 2057, likewise jump to 73 bid from 66 on Tuesday, with $36 million traded.

"Those junior tranches are the first ones to get hit," he said, "and accordingly, also the first to move back up."

Freeport-McMoRan Copper & Gold Inc.'s 8¼% notes due 2015 increased some to 99 3/8, with about $38 million changing hands, a trader said.

Paul Deckelman contributed to this article.

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