Thornburg notes continue to rally; R.H. Donnelley bonds better; New Charter loan breaks, slips

By Stephanie N. Rotondo

Portland, Ore., March 12 - Trading in the distressed debt market was a little sporadic during the mid-week session, with some traders preoccupied with the resignation of New York's governor and others away from their desks entirely.

According to news reports, trading all but stopped as market players focused their attention on Gov. Eliot Spitzer's resignation speech. Spitzer, who resigned after becoming embroiled in a sex scandal, had many a foe on Wall Street since his days as a prosecutor focusing on crimes within the financial arena.

"When the news broke, there were cheers on the floor," one trader said.

Meanwhile, other market participants were enjoying some fun in the sun at the Lehman Brothers High-Yield and Leveraged Loan Conference at Disney's Yacht and Beach Club Resort in Florida. The conference began Wednesday and will continue through Friday.

Of the notable names of the day, Thornburg Mortgage Corp. continued its venture to higher ground. The mortgage lender's debt began to climb early in the week and was further propelled upward by the news that the Federal Reserve would pump up to $200 billion into banks and investment houses. After gaining 10 points in Tuesday's session, the bonds were anywhere from 3 to 6 points better Wednesday.

Meanwhile, R.H. Donnelley Corp. gave its 2008 guidance, prompting its bonds to also move up during the session. Sector peer Idearc Inc.'s debt also gained, while its top executives gave a presentation at the Lehman conference.

Charter Communications Operating LLC's new incremental term loan entered the market Wednesday. Post-break the loan dipped, though slightly, from its issue price. The cable provider's other existing loans, however, managed to regain some of their losses from the previous session.

Thornburg continues to rally

After seeing its debt go into freefall during the previous week, Thornburg is breathing a sigh of relief as its debt steadily climbs back from the depths.

Margin calls and the ensuing liquidity crunch resulted in the mortgage lender's bonds falling from around 90 just a week and a half ago to the high-20s on Friday. But as a new week started, the bonds began to reclaim some of their losses. So far, the bonds are about 20 points better.

One trader said the 8% notes due 2013 "bounced around" during the session before closing at 48 bid, 52 offered. He noted that the bonds "got as good" as 50 bid before sliding back slightly. Another trader also saw the paper in the 50s, while a market source pegged the bonds at 52, compared to 45.5 in the previous session.

Another trader acknowledged they were again better, "until it turns around [i.e. lower] again."

At another desk, a trader saw those bonds up 5 points to end at 50 bid, 52 offered, citing the positive impact of an upgrade in the company's stock by a brokerage.

Even restated financials have not hampered the bonds' momentum. On Tuesday, Thornburg increased its write-down for adjustable-rate mortgages for last year to 58%, or $676.6 million. As a result, the previously reported fourth-quarter income became a $605.9 million loss.

The company has also faced several ratings' downgrades from Moody's Investors Service, Fitch Ratings and Standard & Poor's. Last week, the company said it failed to pay some of the margin calls, which meant the company was in default on one of its JPMorgan bank loans. That then triggered a mass of cross-defaults. After that notice, Thornburg said its banks had agreed to freeze their demands for repayment while the company searched for additional cash.

But as that agreement has since run out, Thornburg received another notice of default Wednesday, this time from Morgan Stanley. In an 8-K filing, Thornburg said the default came after failing to pay $9 million in margin calls.

Thornburg Mortgage is a Santa Fe, N.M.-based mortgage lender specializing in jumbo home loans.

Among other mortgage names, Countrywide Financial Corp.'s 6¼% notes due 2016 were at 63 bid, 65 offered versus levels in the 67 area on Tuesday, while its 3¼% notes coming due in May were off a point at 94 bid, 95 offered. Another trader saw the latter bonds down half a point at 94 bid, 95 offered while the 6¼% notes were unchanged at 64 bid, 65 offered.

A traders saw Residential Capital LLC's 6½% notes due 2013 lower by 2 points at 45 bid, 46 offered, while ResCap parent GMAC LLC's 8% bonds due 2031 lost 3 points to 67 bid, 69 offered.

R.H. Donnelley bonds better

Despite a lowered 2008 forecast than what was given late last year, R.H. Donnelley's bonds moved up in trading.

A trader called the paper "better," its benchmark 8 7/8% notes due 2016 at 61 bid, 61.5 offered. However, another trader said the bonds were "still" 70 bid, 72 offered.

In a filing with the Securities and Exchange Commission Tuesday, the phonebook publisher said it expects to generate an operating income of about $845 million for the year. That compares to an operating income of $905 million in 2007.

While the operating income was lower than what the company had forecast in December, the company's revenue expectations of $2.6 billion to $2.7 billion did fall in with analysts' forecasts of $2.63 billion.

The lowered guidance did prompt Moody's to place the company under a negative outlook, though it affirmed its rating at "B1".

Declining advertising sales and a poor performance from sector peer Idearc has hurt R.H. Donnelley's debt of late. With a heavy capital structure, Moody's said the company could face a downgrade if it cannot reduce its debt.

Still, at least one analyst was optimistic on the future of the company.

Gimme Credit analyst Dave Novosel maintained a buy recommendation on the company's debt in a morning report. According to the report, R.H. Donnelley's quarterly performance was "excellent," and liquidity is not yet an issue.

"We view R.H. Donnelley as a solid operating performer that is overleveraged," Novosel wrote. "Most importantly, the company has free cash flow to reduce debt significantly over the next few years."

R.H. Donnelley is a Cary, N.C.-based publisher of phonebooks and online directories.

Meanwhile, Idearc's debt was deemed "much better," its 8% notes due 2016 at 63 bid, 63.5 offered. Another source quoted the bonds down 2 points at 62 bid, 64 offered.

New Charter loan breaks, slips

Charter Communications Operating's incremental term loan (B1/B+) freed for trading early in the session Wednesday after finalizing the size of the loan that was increased during its one-day marketing period because of strong market reception to the deal, according to a trader.

The new term loan was quoted at 96 7/8 bid, 97 7/8 offered on the break, and then it inched down to 96 5/8 bid, 97 5/8 offered where it closed the day, the trader said.

Meanwhile, the company's existing term loan B rebounded a bit from Tuesday's losses, with levels going out at 84½ bid, 85½ offered, up from 84 bid, 85 offered, the trader continued.

On the corporate debt side, the new 10 1/8% notes due 2014 were at 96 bid, 97 offered versus their issue price Tuesday of 96.106.

Charter's drive-by incremental term loan was launched to investors on Tuesday morning with a size of $275 million. Then on Tuesday afternoon, investors were told that the deal would be sized in the area of $400 million to $500 million as a result of good demand.

Pricing on the term loan is Libor plus 500 basis points, with a 3.5% Libor floor, and an original issue discount of 96.

During the short syndication process, the original issue discount on the loan finalized at the wide end of original guidance of 96 to 97.

Amortization is in quarterly principal installments totaling 1% annually beginning on June 30.

JPMorgan and Citigroup are the lead banks on the term loan, with JPMorgan the left lead.

Net proceeds of $471 million from the term loan due March 6, 2014 will be used to repay revolver borrowings and for general corporate purposes.

Charter also sold $520 million of 10.875% second-lien notes due 2014 on Tuesday. The purchase price of the notes is approximately 96.1% of the principal amount.

Proceeds from the notes will also be used to pay down revolver borrowings.

Closing on the debt transactions is expected to occur in about one week.

After giving effect to term loan and the notes, the company expects that cash on hand, cash flows from operating activities and the amounts available under the credit facility will be adequate to fund projected cash needs, including scheduled maturities, through 2009.

However, in an 8-K filing on Tuesday, the company said that it does not expect to have sufficient funds to finance projected cash needs in 2010, primarily as a result of the $2.2 billion of senior notes maturing in September 2010, and thereafter.

Charter warned that an inability to access additional sources of liquidity to fund cash needs in 2010 or thereafter, or to refinance or otherwise fund the repayment of the senior notes, could adversely affect growth, financial condition, results of operations, and the ability to make debt payments.

The company went on to say that a situation in which additional funds are not obtained for 2010 and thereafter could cause a bankruptcy filing to take place.

Charter is a St. Louis-based broadband communications company and cable operator.

Foamex loan higher on debt swap

Foamex International Inc.'s bank debt headed higher during market hours after the company announced plans to offer its second-lien loan lenders stock for debt and plans to pay down first-lien borrowings, according to a trader.

The second-lien term loan was quoted at 78 bid, 82 offered, up from 74 bid, 76 offered, the trader said.

Under the proposed offering, Foamex's second-lien loan lenders will be given the option to purchase common stock at $1.50 per share, using their second-lien loans at par value.

The company is also planning a rights offering to all of its stockholders to purchase its common stock at $1.50 per share as well.

The company anticipates receiving collectively a minimum of $80 million in new equity, which would be through a combination of cash and an exchange of second-lien loans.

Proceeds from the rights offering would be used to prepay the loans under the company's first-lien credit facility.

Any second-lien loans that are used to purchase common stock would be cancelled.

The proposed transactions are subject to the amendment of the second-lien term loan to allow for the assignment of stock, and the consent of the first-lien lenders.

Consents from loan lenders are due at 5 p.m. ET on Thursday.

The consent fee for the first-lien lenders is $862,500, to be shared pro rata by consenting lenders, and the consent fee for the second-lien lenders is 25 basis points.

Bank of America is leading the consent and amendment process.

Some positives of doing the offerings are that Foamex's credit profile would improve, there would be significant deleveraging, there would be a reduction of interest expense, trading levels on the first- and second-lien term loans are expected to improve, and management would be provided with the ability to execute on its operating strategy and continue to reduce leverage, the company said in an 8-K filing.

Foamex is a Linwood, Pa.-based manufacturer of flexible polyurethane and advanced polymer foam products.

Broad market tidbits

A trader said that Delphi Corp.'s 6.55% notes that were to have come due in 2006 were at 36 bid, 38 offered, "all I've ever seen."

Hines Horticulture Inc.'s 10¼% notes due 2011 gained 3 points to 54 bid, 56 offered on "short covering."

Movie Gallery Inc.'s 11% notes due 2012 "did not move today," a trader said, "but they are now quoted lower than where they had been" [recently] at 17 bid, 20 offered, down 4 points.

AbitibiBowater Inc.'s bonds continue to fall, with the 6.95% notes coming due April 1, 2008 at 67 bid, 69 offered, down from 74 bid, 76 offered on Tuesday, and its 5¼% notes maturing on June 20, 2008 dropping 9 points on the day to 63 bid, 65 offered. The 8.85% bonds due 2030 were 3 points lower at 36 bid, 38 offered.

Another trader said the bonds "continued to go down," with the 6.95% notes down 5 points to 67 bid, 69 offered and the 7 7/8% notes due 2009 swooning 15 points to 48 bid, 50 offered.

Solo Cup Co.'s 8½% notes due 2014 were up 3 points to 81 bid, 83 offered.

Quebecor World Inc.'s bonds were "still there" at 42 bid, 43 offered, a trader said.

A source said Rite-Aid Corp.'s 8 1/8% notes due 2010 were "starting to creep up over the last few days." The bonds ended the session at 98.75.

Sara Rosenberg and Paul Deckelman contributed to this article.

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