Harrah's slides on downgrade; GM, Ford decline as companies beg for cash; Masonite quiet after call

By Stephanie N. Rotondo

Portland, Ore., Nov. 18 - The distressed bond market remained weak Tuesday, traders reported, as bid lists and technicals ruled the roost.

"I think there are still bid lists out there," a trader said. "Technicals continue to be horrible. It seems like pretty much everything is for sale."

Harrah's Entertainment Inc.'s debt structure remained under pressure following Monday's announcement that the company was planning a debt-for-debt swap. The bonds, as well as the bank debt, were further weighed down by a downgrade from Standard & Poor's.

Meanwhile, the drama that is the auto industry continued to unfold. Executives from the Big Three - General Motors Corp., Ford Motor Co. and Chrysler LLC - met with the Senate Banking Committee Tuesday to try to convince lawmakers to hand over $25 billion as part of the $700 billion bailout plan. But as government officials seemed unlikely to put out the funds, both GM and Ford saw their debt decline.

Masonite International Inc. held a lender call Tuesday in an effort to keep the bankruptcy vultures at bay. The company, which has already secured forbearance from its bondholders, is looking to ease the terms of its loans as well. Still, traders said the door maker's debt was on the quiet side.

Harrah's debt slides

Harrah's Entertainment's term loan B debt traded lower during market hours as S&P downgraded the company's ratings on the heels of its offer to exchange existing notes for new notes.

The term loan B-2 was quoted by one trader at 64 bid, 66 offered, down from Monday's closing levels of 67 bid, 68 offered.

A second trader said that all of the company's term loan B tranches were quoted at 65 bid, 67 offered, down about 1.25 points on the day.

Some of the company's bonds also continued their downward descent. A trader called the 10¾% notes due 2016 down 5 to 6 points on the day at 21 bid, 22 offered. The trader added that the losses in some of the bonds, like the 2016 and 2018 paper, were because the proposed new debt would subordinate those issues.

S&P announced Tuesday that it lowered its corporate credit rating on Harrah's to CC from B and the secured loan to B+ from BB-, with all ratings remaining on CreditWatch with negative implications.

The agency said that it lowered Harrah's ratings because of the company's offer to exchange up to $2.1 billion of proposed new second-lien senior secured notes for some or all of its outstanding senior unsecured and subordinated notes.

In some cases, an exchange for the new notes would represent a substantial discount to the par amount of the outstanding issue. Harrah's priced the deal on Tuesday, as well.

The exchange offer also allows holders of notes maturing in 2010 and 2011 to participate in a modified Dutch auction process for total cash payment by the company of up to $325 million.

The rating agency explained that the exchanges are being viewed as being tantamount to default given the distressed financial condition of the company and concerns around its ability to service its current capital structure over the intermediate term absent this exchange offer.

"Upon consummation of the transaction, we would lower the notes ratings to D and the corporate credit rating to SD [for selective default]," Ben Bubeck, S&P's credit analyst, said in the rating release. "As soon as is practical thereafter, we will reassess Harrah's capital structure and assign new ratings based on the amount of notes successfully tendered."

S&P also said that the preliminary expectation, if the exchange offer succeeds, is that Harrah's corporate credit rating will end up at B-, still one notch lower than it was prior to the Tuesday downgrade.

The B- rating would acknowledge that the post-exchange capital structure, combined with management's efforts to cut costs and pull back on capital spending, allows the company greater capacity to weather the current downturn over at least the next several quarters, the rating agency explained.

It is currently expected that the rating on Harrah's credit facility will remain at B+, where it was lowered to on Tuesday, following completion of the exchange.

Other analysts also expressed their opinion on the company's refinancing plans.

"While we view the exchange as a positive overall for the credit and bonds have traded up in response, we wonder why bondholders have not been offered HET equity as well in return for the reduction in principal," Gimme Credit LLC analyst Kim Noland wrote in an afternoon comment. "We view the exchange as a limited default and think that shareholders should also have to give up value."

Among other casinos, Wynn Las Vegas was deemed one of the more active issues of the day, though there was no news to cause the activity.

One trader pegged the 6 5/8% notes due 2014 at 70.25 bid, 71 offered, while another saw the paper at 71 bid, 72 offered. Both called the issue weaker.

GM, Ford decline

General Motors and Ford Motor both saw their term loans take a noticeable downturn during the trading session, more so than the overall cash market, which was only down about 1 to 2 points on the day, according to a trader.

General Motors, a Detroit-based automaker, saw its term loan fall three points to 39.5 bid, 42.5 offered, the trader said.

Ford, a Dearborn, Mich.-based automaker, saw its term loan fall 2.75 points to 38 bid, 41 offered, the trader continued.

"A lot of technicals. People unwinding trades. Autos were the big underperforming sector of the day but that doesn't come as a big surprise," the trader remarked.

In the bonds, a trader placed Ford's benchmark 7.45% notes due 2031 at 26 bid, 27 offered. Another saw GM's 7.20% notes due 2011 at 24 bid, 26 offered. He said most of Ford's issues were trading in the low-20s.

"You name the Ford issue and it's in the 20s," he said.

"People are just throwing these auto names in the fire," he continued. "Most people think the game is over."

The automotive sector's troubles have mounted over the last year, as the economy has tanked and consumers have shied away from big-ticket spending. In the wake of the downturn, both Ford and GM have cut production, as well as jobs.

Furthermore, the Big Three, which includes Chrysler LLC, have persisted in their attempts to get the Bush Administration to lend a hand by giving them $25 billion from the Wall Street bailout plan.

But the government has gone back and forth on whether to support the companies, with some blaming management for their lack of fiscal responsibility.

At a Senate Banking Committee meeting Tuesday GM's top executive, Rick Wagoner, refuted those claims, stating that the downfall was simply a matter of the economic environment. As such, he told committee members that the industry "needs a bridge to span the financial chasm that has opened before us."

Separately, White House press secretary Dana Perino told reporters that funds should not come out of the financial bailout plan, although Bush has said he would compromise by giving the companies $25 billion to retool their plants.

Masonite quiet after call

Masonite International's bonds were relatively quiet after the company held an investor call to discuss its covenant issues, traders reported.

A trader quoted the 11% notes due 2015 at 10 bid, 13 offered, though he added that there were no trades.

On Monday, Masonite announced that it reached an agreement with its bondholders after failing to pay a coupon payment last month. The forbearance gives the company more time to restructure.

"Masonite expects that this forbearance agreement will provide the company additional time and flexibility as it continues to pursue opportunities to develop an appropriate capital structure to support its long-term strategic plan and business objectives," the company said in a press release.

On Tuesday, the company held a call with its bank lenders. Masonite was reportedly trying to get lenders to ease loan terms in exchange for higher interest payments and fees.

Masonite is a Canadian manufacturer of doors.

Broad market sees continued weakness

"Retailer pain continues," a trader said, as the broad market fell about 2 points in general.

Michael's Stores Inc.'s 10% notes due 2014 were seen at 34 bid, 35 offered, while Rite Aid Corp.'s 8 5/8% notes due 2015 fell 6 points to 28.5 bid.

Yankee Acquisition Corp., the maker of Yankee candles, saw its 8½% notes due 2015 trade around 50, while OSI Restaurant Partners LLC's 10% notes due 2015 ended the day at 16 bid, 17 offered.

Idearc Inc.'s 8% notes due 2016 continued to fall, losing about 2 points to close around 10.

"That's a pretty big percentage move given where they are," a trader said.

GMAC LLC's paper was deemed cheaper, as well. The trader pegged the 7¾% notes due 2010 at 59 versus 62 bid, 63 offered previously.

Another trader quoted the 6 7/8% notes due 2011 at 32 bid, 36 offered.

Charter Communications Inc.'s 11% notes due 2015 fell to 29 bid, 30 offered from 33 bid, 35 offered previously. The 8% notes due 2012 dropped a deuce to 75 bid.

Sara Rosenberg contributed to this article.

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