Lehman, AIG dominate trading, spooking investors; Delphi up; Claire's, Burlington among top movers

By Stephanie N. Rotondo

Portland, Ore., Sept. 15 - Almost overnight, Lehman Brothers Holdings Inc. entered into distressed territory and bond traders reported that the debt fell at least 30 points Monday.

The declines came after the fourth-largest investment bank announced that it was forced to file for bankruptcy. A search for a rescuer proved unfruitful. The news sent shockwaves through the market, sending the Dow Jones Industrial Average down 504 points and putting significant pressure on corporate bonds.

News of troubles at American International Group, Inc. also weighed on the market.

"Everything in general was quoted down," one trader said. While there was some buying at the lower levels, the trader said "paralysis" took hold as investors were trying to figure out their counter party risk.

Also stopping market players in their tracks was Tuesday's Federal Reserve meeting. According to one trader, "there are two divergent schools of thought" regarding the outcome of the central bank's meeting. One is that the Fed will adjust interest rates 50 to 75 basis points "just to pump money into the system." The second - and seemingly more pervasive thought - is that the government will say "enough is enough." The trader, along with several of his peers, opined that the second option is the better way to go.

"The sooner we make that clear, the sooner we can go on with business," he said.

Lehman and AIG aside, Delphi Corp. got a boost after reaching an agreement with former parent General Motors Corp. regarding a capital infusion. The Detroit automaker agreed to provide Delphi with more than $10 billion to help the company exit bankruptcy. As a result, the automotive parts supplier's term loan gained a good 3 points on the day.

Meanwhile, Claire's Stores Inc. and Burlington Coat Factory Warehouse Corp.'s bonds remained on the top movers list, trading actively though finishing the day unchanged. Idearc Inc.'s bonds were also among the more active issues, trading down 4 points.

Lehman, AIG slide

Trading in Lehman bonds dominated the distressed realm after the company formally filed for Chapter 11 protections. The bankruptcy filing wrecked havoc, causing what one trader called "paralysis" in the market.

Traders pegged Lehman's senior debt in the 34 to 36 range, while its subordinated debt moved to the 4 to 6 context. Sources called the bonds down at least 30 points on the day.

"Any senior bond and any sub bond are, for the most part, interchangeable," one trader explained.

While Lehman's bankruptcy came as little surprise - rumors have been circulating for months that the investment firm would collapse - the market was nonetheless deeply affected. The Dow industrials lost more than 500 points, while the distressed and high-yield markets were seen lower by at least 1 to 3 points across the board. According to the KDP High Yield Index, there were no "key gainers" among the 100 speculative grade issues.

Lehman's bankruptcy came after many attempts to secure a white knight. The company was thereby forced to file when no rescuer came. On top of that, Merrill Lynch & Co., Inc. agreed to a Bank of America takeover and insurer AIG's future hung in the balance.

Bond traders also deemed AIG's debt down 30 points. One trader placed the 5.85% notes due 2018 in the mid-50s. That was down from the mid- to high-70s last week and around 80 just 10 days ago.

News reports stated that Treasury Secretary Henry Paulson at no time considered bailing out Lehman and that at the current time, loans to AIG were not in the cards. AIG was allowed to borrow $20 billion from its subsidiaries, an effort to save the top insurer's existence. However, the company still needs to raise more capital and if it is unsuccessful, it could go the way of Lehman.

But market sources believe that the government should stay away from the situation and allow the system to break so it can correct itself. Should that happen, "the pain is going to be horrific," one trader said. "But that is just the way it is."

Lehman has already begun to delever itself by putting $852 million of its leveraged loans up for sale. According to one source, Lehman will now have to put all of its assets up for sale, putting more pressure on the market.

"It should be reasonably quickly," the source said of the liquidation. "It will easily take until the end of the year." However, he added that there will likely be an "impetus to push that so people can start the new year" fresh.

In a research report, Kathleen Shanley of Gimme Credit LLC opined that Lehman's liquidation will instead be "messy and prolonged," despite the company's assertions that it would handle the problems in an orderly fashion.

"Barring a rebound in asset prices (which seems unlikely in this environment), the odds look poor for any recoveries by common and preferred shareholders and subordinated bondholders," she wrote. "The prospects for recovery by senior noteholders are more uncertain."

Also adding to the hubbub is the hefty loss of jobs that the Lehman, et al, debacle will cause, not to mention deflation.

"It's really a difficult situation," said an unnamed analyst. "People lost their jobs and their savings."

Delphi up on GM infusion

Delphi's second-lien DIP term loan was better on a day-over-day basis on Monday on the back of news that the company will be getting more capital from General Motors, according to a trader.

The second-lien loan was quoted at 88.25 bid, 89.25 offered, up from Friday's closing levels of 85 bid, 86 offered, the trader said. On Monday morning, the loan had opened at 89 bid, 90 offered but it slid lower over the course of the day with the rest of the cash market.

In the bonds, trader called Delphi's 6½% notes due 2009 weaker at 10 bid, 15 offered from 15 bid, 17 offered previously. GM's benchmark 8 3/8% bonds due 2033 fell to 50 bid from 57.5 on Friday, while its GMAC LLC's 8% bonds due 2031 were more than 3 points down at 54.

Another trader said that the 2033 paper fell to a round-lot level of 51.5 from 58.5 on Friday on active volume of $18 million. GM "got hammered," he said, seeing the 7.2% notes due 2011 drop some 3 points on the day to 71.75.

Late Friday, Delphi announced that it entered into modified settlement and restructuring agreements, under which General Motors will provide Delphi with support of approximately $10.6 billion for its emergence from Chapter 11, increased from roughly $6 billion in the January settlement.

In addition, the agreement will modify the mechanics and expand the amount of Delphi's net hourly pension liability transfer to GM to approximately $3.4 billion from $1.5 billion.

In exchange for GM's willingness to undertake these obligations, Delphi has agreed to treatment of GM claims in the Chapter 11 cases, and to release GM from certain claims and causes of action upon the effectiveness of the amended agreements.

Delphi also said on Friday that it is taking action to preserve and fund its hourly and salaried pension plans, complete the reaffirmation process for its 2008 to 2011 business plan and establish its intent to enter the capital markets with its reaffirmed business plan.

A hearing in the bankruptcy court will take place on Sept. 23 to consider Delphi's motions on pension plans, amended global settlement agreement and amended master restructuring agreement.

Through the implementation of the amended global settlement agreement and amended master restructuring agreement, GM's financial support of Delphi, which previously was to be received upon Delphi's emergence from bankruptcy, is being pulled forward to the effectiveness of the amendments.

As a result, General Motors will make payments to Delphi of approximately $1.2 billion in connection with the effectiveness of the amended agreements and through the remainder of 2008.

The payments by General Motors combined with Delphi's existing cash on hand and amounts available under its revolving credit facility will provide the company with ample liquidity over the course of the year.

Furthermore, Delphi said that by immediately implementing the amended master restructuring agreement, it will be in a position to pursue exit financing in the capital markets, including through an equity-based rights offering.

Delphi is a Troy, Mich.-based automotive electronics manufacturer.

Although Delphi saw a boost from the GM news, General Motors' term loan saw the opposite reaction, with the move attributed to the general market tone on Monday, according to a trader, who remarked that Ford Motor Co.'s term loan was down as well.

General Motors, a Detroit-based automotive company, saw its term loan quoted at 76 bid, 77 offered, down from 78 bid, 79 offered on Friday, the trader said.

And, Ford, a Dearborn, Mich.-based automotive company, saw its term loan quoted at 77.25 bid, 78.25 offered, down from 80 bid, 81 offered.

The trader explained that these names were down with the rest of the cash market, which was probably off about a half a point across the board on the news that Bank of America is buying Merrill Lynch and that Lehman Brothers filed for bankruptcy.

Another trader said that Ford's benchmark 7.45% bonds due 2031 were lower at 51 bid, 52 offered, while another said the debt was "active - and crushed," losing some 5.25 points to 52.5.

Claire's, Burlington still heavy

Aside from Lehman and AIG, distressed traders reported very little else was taking place in the market.

"Considering what the day was, there were incredibly light volumes," one trader said. "It's all a little softer across many fronts."

Claire's Stores' bonds remained on the active side, however. The trader called the 9¼% notes due 2015 45.5 bid, 46.5 offered, unchanged. Another trader pegged the 9 5/8% notes due 2015 around 28, while another saw the 10½% notes due 2017 at 40 and the 9½% notes at 46.

"They initially traded off, then came back up," he said, though the debt ended the session down 1 to 1.5 points on the day.

Burlington Coat Factory's 11 1/8% notes due 2015 were also considered one of the more active issues. A trader placed the bonds at 69, unchanged.

"There is going to be a little jockeying around," one trader said.

Meanwhile, Idearc's 8% notes due 2016 fell 4 points to 39 bid, 40 offered, according to a trader. Another also deemed the debt down 4 points to 41 from 43 bid, 44 offered on Friday. Another source called Dex Media Inc.'s 8% notes due 2013 down more than 2 points to 57.5 bid.

Charter Communications Inc.'s 11% notes due 2015 fell a deuce to end at 72.

In the gaming sector, a trader said Harrah's Entertainment LLC's bonds "traded a lot," its 10¾% notes due 2016 lower at 59.5 bid, 61 offered. The 10¾% notes due 2018 were also lower around 51.

In somewhat more positive news, Uno's Restaurant said that it called of recapitalization talks and made the coupon payment on its corporate debt. However, traders said they noticed little to no action in that name.

"Nobody knows where that is," said one trader, speculating the bonds were somewhere between 40 and 50.

Another trader said the bonds trade at 35 bid, flat, on Friday.

"If they made the payment, it probably gave them a jump," he said.

Quebecor World Inc.'s 4 7/8% notes due 2008, as well as its 6 1/8% notes due 2013, were unchanged at 35 bid, 36 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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