Perkins cut to junk, notes slip; Delphi bonds firmer; Tembec debt active, better; ResCap weaker

By Stephanie N. Rotondo

Portland, Ore., Dec. 20 - The distressed market started to wind down Thursday, and many traders were in full-on holiday mode.

"I'm already on vacation," one trader quipped.

Still, new ideas seem to be surfacing just ahead of the New Year.

Moody's Investors Service cut Perkins & Marie Callender's Inc. to junk Thursday. Distressed traders said the name has popped up on occasion and was definitely lower on the day. However, given the light volume in the holiday market, activity in the name has been slight.

Meanwhile, Delphi Corp.'s bonds continue to get better, though traders are not certain what is propelling the debt. As the company won a three-month exclusivity extension, some are speculating that the sellers have stepped away.

Tembec Inc.'s notes remained one of the more active issues in an otherwise quiet atmosphere. The bonds began to move higher in the previous session on news of a recapitalization plan, and momentum continued into Thursday trading. But while the overall market seems pleased with the proposal, not everyone is as gleeful.

Residential Capital LLC saw its bonds caught in a web of bad news Thursday. The debt has been drifting lower all week thanks to a Bloomberg article on expected defaults that featured the company. On Thursday, the debt slipped yet again as a tender offer was completed - but at far less than what the company was expecting.

Perkins cut to junk

Moody's cut Perkins & Marie Callender's to distressed Thursday, something one trader called "anticipated."

"[The bonds] have been trading in the 70s - not the low-70s, but the 70s - for a while now," he noted.

Currently, however, the 10% notes due 2013 have indeed dipped into the low-70s. One trader said the notes traded at 71, down from the previous session when they were seen at 72.5 bid.

"So that's down a couple points," he said, adding that he has "been seeing [the name] here and there."

The downgrade from Moody's was attributed to liquidity concerns and potential problems regarding the company's covenant requirements.

But the retail/restaurant/entertainment sector has been struggling for some time, prompted in part by weaker consumer spending. Several names under that heading have slid into distressed land over the last year.

"You are not going to find a lot of folks that are positive on that sector," a trader said.

Another trader said that, given the current end-of-year trading climate, other names in the sector were quiet.

Delphi firms

Delphi's bonds were "a little better again," a trader said, after a bankruptcy court judge gave the Troy, Mich.-based company exclusive control over its reorganization plan.

The trader quoted the 6.55% notes that were to have matured last year and the 6½% notes due 2009 at 60 bid, 61 offered. Another trader said the notes were trading "with a 60 handle," adding that the automotive parts supplier's debt had been closer to 54 just a week ago.

The second trader said he did not know exactly why the bonds had been gaining over the last few days, but suspected that "somebody stopped selling."

Another trader said Delphi paper "was moving around a little." Its 6.55% notes were seen up 0.75 point to 59.5 bid, 60 .5 offered.

Delphi headed to court Thursday to ask for an extension to win approval on its plan. The deadline was pushed back to March 31 from Dec. 31.

Tembec active, better

There was "more activity" in Tembec's debt, a trader said, as the bonds gained momentum from the previous day's run up.

The trader said the 7¾% notes due 2012 were up 1 to 1.5 points on top of Wednesday's gains, closing at 45.5 bid, 46 offered. He said the 8 5/8% notes due 2009 were likewise better at around 51.

Another trader called Tembec's bonds up again, its 8 5/8% notes 2 points better at 50 bid, 51 offered.

Elsewhere, a trader saw those notes likewise 2 points better at 50.5 bid, 52.5 offered and said the company's other bonds, such as its 8½% notes due 2011 and 7¾% notes due 2012, were each up 1.5 points to 45.5 bid, 46.5 offered and 44.5 bid, 45.5 offered, respectively.

In the rest of the sector, a trader placed Tembec competitor Ainsworth Lumber's 6¾% notes due 2015 down 2 points at 59 bid, 61 offered and saw the Vancouver-based forest products company's 7¼% notes due 2012 at 60 bid, 62 offered, down 5 points. He said he didn't know what was going on with the bonds, while acknowledging the possibility that Ainsworth holders were swapping out of them to get into the suddenly hot bonds of sector peer Tembec.

Tembec's debt began to move higher in the previous session after the company announced a recapitalization plan that would convert just over $1 billion into new equity. Traders deemed the bonds as much as 4 points better on the news.

Still, not everyone is optimistic. Standard & Poor's cut Tembec's long-term corporate credit ratings to CC from CCC- and placed them on CreditWatch with negative implications.

According to S&P, the downgrade was attributed in part to the plan. The conversion of the $1.2 billion in unsecured debt to equity would equal around C$20 million. Concerns on whether the company would make its Dec. 31 coupon payment also played a role in the rating drop.

Frank Dottori, the former chief executive officer of the Canadian company, is also upset about the proposed plan, according to a news report from the Globe and Mail.

In the article, Dottori is quoted as saying, "I'm upset. The shareholders are getting screwed."

Dottori, who retired in 2006, said he plans to seek legal guidance to explore his options.

ResCap slips

ResCap paper was once again lower, as the company completed its previously announced tender offer to buy back $750 million of four short-term issues - though holders tendered far less than that amount and the company did not raise the consideration it was offering.

A trader saw one of those issues, its 6 1/8% notes due 2008, down 1.5 points at 78 bid, 80 offered, while its 6 7/8% notes due 2015 lost 3 points at 60 bid, 62 offered. Its 8% notes due 2013 were "down 3 or 4 points" to around 60 bid, 62 offered, another trader said, adding "but who knows how they've jumped around?"

Another trader said the mortgage lender's debt "continues to get hit," deeming the "longer dated paper" down a couple points.

The trader pegged the 6½% notes due 2012 around 61.5 and the 6 7/8% notes due 2015 at 60 bid, 61 offered.

ResCap was also named as a defendant in a lawsuit filed against a number of leading mortgage companies by the NAACP, alleging institutionalized racism in lending industry practices.

Broad market mixed

Calpine Corp.'s 8½% notes due 2008 were seen unchanged at 114 bid, 116 offered, getting no real boost from Wednesday's news that its reorganization plan had been approved and a Feb. 7 Chapter 11 emergence date set.

One trader said Sea Container Ltd.'s bonds were unchanged on the day - but another saw the bonds continuing to move up on "a net short in the Street." He quoted the 10½% notes due 2012 at 65.5 bid, 66.5 offered from earlier levels in the lower 60s.

Tribune Co.'s bonds got "hammered," even as billionaire Sam Zell completed his going-private buyout of the Chicago-based media company. A trader said many investors "have no confidence in Sam Zell" being able to turn the company's fortunes around. He quoted the 5 1/8% notes due 2015 at 58 offered, but it was "hard to find a bid."

At another desk, a trader said James River Coal Co.'s 9 3/8% notes due 2012 "continues to show signs of stability." He quoted the bonds around 89, adding that there were not many trades of size.

Paul Deckelman contributed to this article.

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