American Axle gains on GM news; CIT Canada bonds improve; Reader's loan reacts to bankruptcy

By Stephanie N. Rotondo and Sara Rosenberg

Portland, Ore., Aug. 18 - While the distressed debt market was "a tad off the bottom," in the words of one trader, there was still some frustration about the lack of real movement on Tuesday.

"It's not following through on the upside," the trader added. "It's pretty spread out."

"Volume was better," said another trader. "But it's still down from where we should be."

American Axle & Manufacturing Inc., however, saw major movement - both price- and trading-wise - on news of a financing agreement with General Motors Corp. The company's bonds gained as much as 14 points on the day, while its bank debt improved by about 6 points.

"The only thing that is going on is back to CIT [Group Inc.]," a trader said, as CIT said certain bondholders might have an extra claim in a bankruptcy case. The news helped massive amounts of the company's notes liked to its Canadian subsidiary move up anywhere from 2 to 4 points.

The Reader's Digest Association Inc.'s term loan showed some reaction - albeit delayed - to the company's announcement Monday that it would file a pre-packaged bankruptcy plan. The loan was seen having gained as much as 3 points by end of trading.

Bankruptcy concerns were blamed for losses in YRC Worldwide Inc.'s debt. A new survey showed that if the carrier were to go bust, it could mean as much as a 5% increase in freight prices.

American Axle boosted by GM news

American Axle & Manufacturing bonds jumped hugely on news that the company had inked a deal with General Motors Corp. for as much as $210 million in financing.

"They were quite active," said one trader. He said the 7 7/8% notes due 2017 traded "a bunch" in a 66 to 68 context.

"Wow," he remarked, noting the move was 14 points above last week's levels.

Another trader placed the 7 7/8% notes at 66.25 on $20 million traded. The 5¼% notes due 2014 meanwhile hit 66.5, with $15 million changing hands.

Also on the news, American Axle's existing term loan was quoted by one trader at 85½ bid, 87½ offered, up about 6 points on the day, and by a second trader at 84 bid, 86 offered, up from around 80½ bid, 82½ offered on Monday.

"Getting loan from GM and getting [amendment] to allow the company to receive cash from GM. Boosting pricing [on the existing loan] to Libor plus 600 basis points with a 2% floor," the first trader added.

In a regulatory filing, American Axle said it had reached an "agreement in principle" with GM for a $110 million payment to cover costs and contracts associated with the Detroit automaker's bankruptcy case. In addition, GM agreed to provide a $100 million second-lien term loan due Sept. 20, 2013.

The proposed second-lien term loan with General Motors will be available in multiple draws, with a minimum draw size of $25 million, through Sept. 30, 2013,

The loan will be repayable at par at any time prior to maturity on Dec. 31, 2013.

Pricing on the loan will be based on Libor and there will be a 2% Libor floor.

Based upon the amount of the second-lien term loan drawn, the company will issue to General Motors five-year warrants to purchase a pro rata portion of up to 12.5% of its outstanding common stock.

In addition, the company has agreed to also issue five-year warrants to General Motors at the time the parties enter into definitive agreements to purchase up to 7.4% of its outstanding common stock.

However, in order for the deal to be enacted, American Axle must first renegotiate terms on its outstanding bank debt by Aug. 31. Still, the news seemed to lessen concerns that the company might be forced to file for Chapter 11 protections.

"Just like the federal government couldn't afford for GM to fail, apparently GM can't afford for Axle to fail," wrote Gimme Credit analyst Shelly Lombard in an afternoon comment. "We thought an out-of-court restructuring might involve some type of bond exchange or equitization. But given the lack of success of some recent exchanges, it appears that Axle will plow ahead with the current $1.2 billion of debt plus the new $100 million term loan from GM."

And even though Lombard said she was not convinced that the company's projected EBITDA of $360 million to $400 million by 2013 was "achievable," the GM deal does address the looming liquidity concerns.

"Liquidity was a big issue and this deal with GM certainly addresses that and has significantly lowered the risk of bankruptcy," Lombard said.

CIT Canada bonds improve

CIT Group was back in the news on Tuesday, giving its Canadian unit's bonds a 2- to 4-point lift.

A trader said the 5.20% notes due 2015 were the "most active" of the notes under the CIT umbrella. He called the debt up 2 to 3 points at 73 bid, 74 offered.

Another trader saw about $65 million of the 5.20% notes trade around 73.5, a gain of 3 to 4 points, he said. He also saw the 5.60% notes due 2011 moving up to around 79, on $40 million traded.

CIT said in a filing with the Securities and Exchange Commission late Monday that holders of bonds linked to the Canadian unit might have an extra claim should the company enter bankruptcy. The claim is in regards to a $2.2 billion loan to an affiliate made by CIT Canada, the filing said. The loan could give bondholders an opportunity to place a claim not only against CIT Canada, but also against the affiliate that received the intercompany funds.

CIT recently completed a tender offer for $1 billion of its floating-rate notes that were to have matured on Monday. Nearly 60% of the bonds were tendered and the remaining notes were paid out.

Reader's loan reacts to filing

In what seemed to be a delayed reaction to some, the Reader's Digest Association's term loan B moved higher by a couple of points in trading on the back of its Monday announcement that it expects to file for Chapter 11 as part of a restructuring agreement that it is working on with lenders, according to traders.

The term loan B was quoted by both traders on Tuesday at 40½ bid, 41½ offered. One of the traders had the loan quoted at 35 bid, 37 offered on Monday and at 37 bid, 37½ offered on Friday. The other trader had the loan quoted at 36½ bid, 38½ offered on Monday and at 33½ bid, 35½ offered on Friday.

Under the planned restructuring, which was announced Monday morning and detailed in an 8-K filing after the close, lenders will exchange a substantial portion of Reader's Digest's $1.6 billion in senior secured debt for equity. Ownership of the company will be transferred to the lender group.

The arrangement also establishes the substantive terms of the $550 million in debt that will remain on the company's balance sheet upon emergence, a 75% reduction from the current $2.2 billion in debt.

Reader's Digest's agreement in principle includes a commitment from certain members of the senior lender group to provide a $150 million new money debtor-in-possession term loan that is being led by JPMorgan.

The DIP has a term of nine months with one three-month extension and is priced at Libor plus 1,000 bps with a 3.5% Libor floor. If the extension option is exercised, pricing will move to Libor plus 1,100 bps. There is also a 200 bps unused commitment fee.

The DIP will be convertible into a three-year exit facility upon the company's emergence from bankruptcy.

The company will also get as part of its exit financing a $300 million second-lien term loan priced at Libor plus 550 bps cash plus 650 bps PIK with a 3.5% Libor floor, or Libor plus 1,200 bps cash if LTM EBITDA is greater than $180 million, and a $100 million euro term loan priced at Libor plus 550 bps cash plus 450 bps PIK, with a 3.5% Libor floor, or Libor plus 1,000 bps cash if LTM EBITDA is greater than $160 million.

Reader's Digest is a Pleasantville, N.Y.-based media and marketing company.

Bankruptcy concerns hurt YRC

YRC Worldwide's debt was seen slipping during the session and one market source attributed the declines to bankruptcy fears.

The source quoted the 5% notes due 2023 at 37 bid, 37¼ offered.

"There are better sellers," he said. "I think people are worried they might file."

Another source pegged the notes at 33 bid, 34 offered, down nearly 2 points on the day.

The trucking and transportation industry was hit hard by the economic downturn and especially by last summer's hefty spike in gas prices. Retailers tried to avert disaster by lowering inventories, meaning there was less to move around.

And, if YRC were to file for bankruptcy, it could mean an increase in small freight parcels, according to a survey conducted by Wolfe Research LLC.

The survey showed that shippers believe prices for shipping with less-than-truckload carriers would increase by 2.5% in the first month after YRC's filing and by another 4.9% in the first year.

"We were somewhat surprised that shippers do not expect, on average, a larger rise in LTL rates immediately following a potential YRC Worldwide shutdown," the report summary said. "However, respondents indicated that longer term, a YRC Worldwide shutdown ultimately would be favorable for the surviving LTL providers and allow for more substantial rate increases from current levels as demand eventually firms and the LTL providers regain pricing confidence."

Idearc busy, better

A trader saw Idearc Inc.'s 8% notes due 2016 move up to 7¼ bid from 6¾%, noting that it was "a big percentage move." He said volume was a fairly busy $19 million.

Another trader also saw the notes trading up, ending "up in the 7 range."

"So they have quietly creeped up in the last few days," he said.

There was no news to explain the move.

Paul Deckelman contributed to this article.

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