WCI added to casualty list; No good news for Countrywide; Retail, restaurant sector hurting

By Stephanie N. Rotondo

Portland, Ore., Jan. 9 - The distressed bond sector took another hit Wednesday as more recession talk placed more pressure on an already heavy market.

According to news reports, U.S. economists are no longer looking at a recession as a possibility - in fact, some say it is the reality. Economists from Merrill Lynch and Goldman Sachs are opining that it is likely the recession has already begun.

A recession, combined with continued troubles in the struggling housing and mortgage sectors, did little to encourage investors to get involved in riskier credits - and the list of potential bankruptcies continued to grow.

"Weak credits are really getting hammered," a trader said.

Homebuilder WCI Communities Inc. saw its equity lose over half its value during the trading day, and its bonds fell as much as 5 points as well. While there was no fresh news, it was speculated that negotiations with the company's lenders were not going so well - which could ultimately force the company into Chapter 11.

It seems that there has been nothing positive coming out of Countrywide Financial Corp. Bankruptcy buzz in the previous session propelled the mortgage lender's bonds downward in Tuesday's session, and more bad news equaled the same in Wednesday's session.

According to the company, foreclosures and delinquencies hit a record high in December. Following that, Countrywide's bonds slipped another 7 points on the day.

With a recession comes a tightening of discretionary spending, something restaurants and retailers are learning all too well. Bon-Ton Stores Inc.'s debt fell 5 points, and restaurant names such as Uno Restaurant Holdings Inc. and Buffets Inc. lost 4 points each.

WCI added to casualty list

WCI Communities is quickly becoming yet another casualty of the housing and mortgage meltdown.

There was no specific news to send the homebuilder's bonds down 5 points - as well as its stock down 50% - but one trader speculated that talks with its bank lenders might not be going so well.

The trader said that "everybody was watching" the company's stock "going toes up," falling $1.69, or 52.98%, to $1.50 by the end of the day. He added that there was not much activity in the corporate debt, which he noted was trading at 50 cents on the dollar.

Another trader said the buzz was the company would likely have to file for bankruptcy, as its bonds fell 5 points to the high-40s. He quoted the 9 1/8% notes due 2012 at 52.

"The shares are smoked," he added.

Another trader placed the 9 1/8% notes down 3 points at 52 bid, 54 offered, while another saw them down 2 points at 50 bid, 52 offered and cited market fears that the company could be forced into a Chapter 11 filing "because they're having trouble negotiating their bank debt amendments."

On Monday, the Bonita Springs, Fla.-based company said it received an extension on a waiver with its banks. WCI, currently in discussions with banks to amend its credit agreement, originally received the waiver in November. It was extended in December to Jan. 7. The newest schedule gives the company until Jan. 16 to come up with an arrangement with its lenders.

In a press release Monday, the company did not try to sugarcoat its situation, stating plainly that there was no guarantee an agreement could be worked out.

"Until finalized it is not certain that we will reach agreement or obtain approval of the anticipated longer-term amendment," the release said. "This amendment will be expensive and there can be no assurance that we will be able to comply with the amended covenants and other requirements."

Further, failure to come to terms with its lenders could result in acceleration of virtually all of its debt. Given the current credit market, the company said it would be difficult to find alternative financing, which would in turn put the company's future in question.

Elsewhere in the sector, a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 down 2 points at 71.5 bid, 73.5 offered, while Standard Pacific Corp.'s 7% notes due 2014 lost 1 point to end at 64 bid, 66 offered. Tousa Inc.'s issues were "down a couple of points," with the 8¼% notes due 2011 at 44 bid, 46 offered, down 2 points on the session.

Another trader pegged Tousa's 10 3/8% notes due 2012 at 9 bid, 11 offered, down 1.5 points on the day.

No good news for Countrywide

Market players continue to be weary of Countrywide Financial's situation, despite the company's continued reassurance that a bankruptcy is not forthcoming.

The mortgage lender's bonds fell Tuesday as the rumor mill swirled with talk of a potential Chapter 11 in the company's future. Come Wednesday, the bonds continued their descent as more bad news surfaced.

One trader said the 6¼% notes due 2016 fell 7 points to 39. Another deemed the debt down 6 to 7 points at around 39.5, down from 46. The trader added that shorter dated paper, such as the 5.2% notes due 2008, was trading at 80 cents on the dollar with a 75% yield.

At another desk, the 6¼% notes were seen falling 4 points to 40 bid, 42 offered, and the 3¼% notes coming due in May of this year at 80 bid, 82 offered, off more than 3 points.

Another trader saw the Countrywide 3¼% notes down 1.5 points at 80 bid, 81.5 offered, the 5 5/8% notes due 2009 down a point at 61.5 bid, 63.5 offered "and the big mover to end it off," the 6¼% down 6 points at 39 bid, 41 offered.

A market source at another desk said that it was more of the same for Countrywide on Wednesday, with the subordinated bonds down 4 to 5 points and "the short notes [coming due later this year] trading at about a 75% yield, on a four-month piece of paper. That's a little crazy," he said - and is "very telling" in what it says about the weakness in the company's bonds.

"The whole complex continues to weaken," he said.

Ratings questioned

He noted the latest obstacle that must be overcome - the warning from Egan-Jones ratings agency that Countrywide must raise $3 billion or $4 billion over the next couple of weeks.

But "the really interesting thing," he said, is that the larger agencies - Moody's Investors Service, Standard & Poor's and Fitch Ratings - "which got raked over the coals for all of this asset-backed stuff" as they continued to give high ratings to ABS paper partly collateralized by subprime mortgages, "still rate this [Countrywide] paper investment grade." Moody's rates Countrywide's bonds at Baa3, while S&P and Fitch rate most of its debt at either A or at BBB+.

"The four-month paper is trading at 75% [yield] - how can they not address it?" He answered his own question a breath later. "They can't address it because if they downgrade them, Countrywide is put out of business.

"It seems like a major conflict to me." He agreed with the notion that the situation was like that in the fable about the emperor's "new clothes" - with no one wanting to step forward and state the truth.

"That's exactly it. You can't pretend that a piece of paper trading at 75% is investment grade, right? But yet - we are."

Countrywide's revolver also headed lower in an overall weaker secondary loan market, and Residential Capital LLC's revolver followed suit, a trader said.

Countrywide's May 2008 revolver was quoted at 68 bid, 70 offered, down from 73 bid, 75 offered, the trader said.

"There are some serious maturities they got to deal with in the near term. Probably won't be able to make it through May/June maturities. And, then there are the write-downs. It's a snowball effect," the trader explained.

Meanwhile, Residential Capital's revolver was quoted at 78 bid, 80 offered, down from 81 bid, 83 offered, the trader continued.

According to the trader, Residential Capital was down in sympathy with Countrywide and the rest of the market.

On Wednesday, the company reported that foreclosures and late payments rose to record highs in December. Of the 9.03 million mortgages on its books, 1.44% had gone into foreclosure - double the 0.70% level from a year earlier. The delinquency rate increased to 7.2%, compared to 4.6% the previous year.

But even as the stream of negative information continues, many still believe that a bankruptcy is unlikely.

"I don't," said one trader when asked if he thought the company would file. However, "I think the CEO will be forced out and company sold for a nominal price to Bank of America," he opined.

Late last summer, Bank of America injected the struggling lender with $2 billion. In return, the financial institution received the right to buy convertible preferred stock at $18 per share, a 21% discount over the market value at that time.

But as Countrywide's stock continues to tumble - the stock is currently trading around $5 - Bank of America's options are not great.

If Bank of America believes that Countrywide could turn things around, even amid a housing slump, it could inject more cash into the lender's system, or it could buy the company outright. Otherwise, it could wait and see what happens - and hope for the best.

Retailers, restaurants under the gun

Restaurants and retailers continued to suffer in the weaker marketplace - and were likely not encouraged by recession talk.

A trader said Bon-Ton Stores' bonds fell 5 points in "big volume." He quoted the 10¼% notes due 2014 at around 56.

The trader said there was nothing specific to prompt the move, attributing the decline to a struggling sector.

"I've got to imagine that some of these guys didn't have a good Christmas," he said.

Meanwhile, the trader said Claire's Stores Inc.'s 10½% notes were also lower, falling below 40.

Another trader agreed that Bon-Ton's bonds were down 5 points, quoting the notes at 65.5 bid, 66.5 offered.

However, Claire's Stores' 9¼% notes due 2015 were unchanged at 61 bid, 63 offered.

At another desk, a trader said restaurant names fell 4 points across the board. He pegged Uno Restaurant's 10% notes due 2011 at 71, Buffets' 11 1/8% notes due 2014 at 22 bid, 25 offered and OSI Restaurant Partners Inc., also known as Outback Steakhouse, at 65 bid, 66 offered on its 10% notes due 2015.

Another trader said Buffets' notes eroded to 22 bid, 25 offered from prior levels at 28 bid, 30 offered.

With a possible recession in the future - or, according to some economists, just beginning - consumer-driven sectors such as retailers and eateries will be among the hardest hit as discretionary spending tightens. The sector is already feeling the pinch due to weaker consumer spending prompted by rising housing and oil prices. Though official figures have yet to be released, numbers from the holiday shopping season - typically considered the best - are not expected to show any holiday miracles.

Delphi, Calpine slide

Delphi Corp.'s bonds were once again weaker, even as the company announced a better cash position for 2007 and launched its exit credit facility.

A trader placed the 6½% notes due 2009 at 44. The debt hit a low of 42 during trading before making the 2-point comeback by the close of business.

For 2007, Delphi said its cash position was $850 million better than expected, attributed to improved operating performance and lower capital expenditures.

The Troy, Mich.-based company also launched its exit facility, which was downsized to $6.1 billion from $6.8 billion.

Upon Delphi's exit from Chapter 11 protection, S&P said it expects to assign a B corporate rating to the automotive parts supplier.

Considered one of the stronger credits in the distressed arena, Calpine Corp. still fared as well as its weaker counterparts: That is, the company's bonds were lower.

A trader said the 8½% notes due 2011 slipped 3 points to 108. Another placed the 8½% notes due 2008 at 111 bid, 113 offered from prior levels at 115 bid, 117 offered.

Both Moody's and S&P issued expected post-bankruptcy ratings on the power producer. Moody's gave a B2 corporate family and probability-of-default ratings, while S&P rated the company B.

Sara Rosenberg and Paul Deckelman contributed to this article.

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