Countrywide active amid Schumer criticism; homebuilders off; funds see $241 million outflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 26 - Countrywide Financial Corp.'s bonds were among the most actively traded issues in a surprisingly lackluster post-holiday session Monday, seen moving lower at least on the long end - even as its shares tumbled 10% after frequent Countrywide critic Sen. Charles Schumer, D.-N.Y., called on the Federal Home Loan Bank system to investigate the cash advances which one of its branches provided to Countrywide.

With renewed investor concerns about the fragile credit situation, bonds of homebuilders like Hovnanian Enterprises Inc. were seen lower after Citigroup downgraded the stocks or issued lower price expectations on the shares of a slew of builders, including Red Bank, N.J.-based Hovnanian, warning that the whole sector was likely to continue to struggle until at least the middle of next year.

Elsewhere, Burlington Coat Factory Warehouse Corp.'s bonds were solidly higher in active trading - likely on investor response to news that U.S. retailers such as Burlington racked up solid sales gains on "Black Friday" and throughout the Thanksgiving holiday weekend, considered the usual kickoff to the industry's all-important year-end holiday shopping season.

Despite the dearth of primary-market activity last week owing to the Thanksgiving holiday break and the usual expectations that with that interruption now out of the way, any prospective borrowers looking to tap junk investors would rush to get their deals done before the market collectively settles its brains for its long winter's nap, the new-deal sector remained in holiday mode.

Funds deeper in the red

And as trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday $241.2 million more left the weekly-reporting funds than came into them. That data, which usually circulates around the market late in the day on Thursday, was delayed by the long holiday weekend.

It was the third straight weekly outflow, following the massive $632.2 million exodus seen in the previous week, ended Nov. 14 - the biggest drawdown from the funds in two years - and that brings to a crashing halt the previous zigzag trend of alternating inflows and outflows, mostly fairly modest in size, which had been seen over the preceding weeks.

The latest week's outflow was the fourth in the last nine weeks, versus five inflows, several of them fairly sizable - but the $873 million hemorrhage seen in the past two weeks all but wipes out those additions, which at one point had totaled nearly $1 billion. During that nine-week period, net inflows have totaled just $23.4 million, according to a Prospect News analysis of the AMG figures.

That recent stretch - until now inflow-dominated - followed a lengthy string of outflows which had begun around mid-year, which completely wiped out the roughly $1.6 billion cumulative inflow that had built up over the first half of the year and which plunged the year-to-date fund flow numbers deeply into the red, where they remain to this day.

The 2007 cumulative outflow now totals $2.072 billion, up from the prior week's $1.831 billion, according to the analysis.

Meanwhile the funds which report on a monthly basis have seen $6.56 billion of year-to-date inflows.

Hence the aggregate year-to-date flows, which tally both the weekly and monthly reporting funds, remain firmly in the black at $4.49 billion.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Countrywide lower as stock dives

A market source saw Countrywide Financial's 6¼% notes due 2016 fall about 2 points on the session to just over 58 bid on heavy volume, with a number of large block trades seen. Its bonds had gyrated around in a 5 point range during the session, and had appeared to have stabilized around the 60 area, little changed on the day, before being pushed down to their closing level in late-day dealings.

Another market source said she saw "ugliness there - I don't know if bankruptcy is in the wind for them - who knows - but there's a lot of talk."

A trader in distressed high-yield bonds said that his shop was now watching the credit, despite its still nominally investment-grade credit ratings at Baa3/BBB+/BBB+ for most of its bonds.

"It can't really be high-grade when they've got one-year paper trading at [a yield of over] 30% - it's way below high-grade now."

He called the company's 3¼% notes due 2008 "very active," chalking it up to the high current yield the bond is carrying. The $1 billion issue was most recently trading at 88, he said, translating to a 32% yield - while the price, just below the 90 level, was still respectable enough, unlike the company's longer paper, some of which trades at badly distressed levels in the 60s and even the 50s. "I think [the yield] is an indication what people really think of Countrywide," he asserted. "If you have short-term debt with those kind of yields, there's a lot of concern whether or not they make it."

Another trader agreed. He pegged Countrywide's bonds - at least its short-dated paper - "pretty much unchanged," with the 3¼% 2008 notes holding steady at 86 bid, 88 offered, while its 4¼% notes slated to mature on Dec. 19 were stable at 97.5 bid, 98.5 offered.

However, with the latter bonds scheduled to be paid off in less than a month's time, such paper would normally be trading right at the par level - but the trader said that "with as much speculation [as there is] about what's actually going to happen at Countrywide, people are leaving it alone.

"It should be at par," he continued, "but it's a couple of points off because of the uncertainty about what's actually going on with Countrywide. No one's getting a really good handle on it."

Its bonds "are up a bunch, they're down a bunch - they've been down more than up recently - but they're kind of all over," because, he reiterated, "no one has a real good handle on what exactly is going to happen. There's rumors they're not going to be able to make interest payments - so the 61/4s are trading at that 58-59.5 level, and were down 2 points on the day. So those guys were trading way off - and these [short bonds] aren't trading right on top of par, just because people are unsure what's going to happen."

Countrywide's convertible senior debentures due 2037 were meantime seen lower at 77.9205 from Friday's finish at 78.7318.

The company's New York Stock Exchange-traded shares into which the latter notes can be converted meantime nosedived $1.01, or 10.47%, to finish at $8.64 on volume of 54.8 million, nearly 1½ times the usual turnover.

Besides the turmoil affecting the financial sector of the equity and debt markets generally, there was more bad news Monday for Countrywide investors in the person of the company's frequent nemesis, Sen. Charles Schumer, who accused Countrywide of treating the Federal Home Loan Bank system "like its personal ATM," and called for an investigation of the $51.1 billion in advances from the FHLB's Atlanta branch which Countrywide had received during the nine months ended Sept. 30. Almost half of that sum - $22.27 billion - was borrowed in the third quarter, as the credit crunch intensified. Countrywide secured the FHLB loans with $62.4 billion of mortgage loans as collateral, or 78% of its mortgage holdings - but Schumer charged that at a time when Countrywide's loan portfolio "is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."

The advances to Countrywide, the nation's largest independent mortgage lender, accounted for fully 37% of the advances which FHLB Atlanta made to mortgage lenders such as Countrywide - a concentration which the New York Democrat warned "may pose a risk to the safety and soundness" of the FHLB, which is composed of 12 regional government-chartered banks owned by over 8,100 U.S. financial institutions.

E*Trade off on mortgage portfolio concern

Also in the financial sphere, E*Trade Financial Corp.'s bonds and shares were seen lower on news that prospective buyers of the New York-based online brokerage are concerned about the value of its deteriorating mortgage portfolio.

A trader said that the company's 8% notes due 2011 and its 7 7/8% bonds due 2015 were down about half a point to a point, at 77 bid, 79 offered and 75 bid, 77 offered, respectively, although he cautioned that volume both last week and on Monday was "extremely low, so it's tough to tell how much is trading around the same levels."

Another market source called the 8s down about 1¼ points at 78 bid, after having earlier touched highs just below 82. The move up was in apparent investor response to the news - which hit the market Friday, when most bond marketers were home still recovering from their turkey dinners and skeleton-staffed trading was very thin - that TD Ameritrade Holding Corp. and Charles Schwab Corp. were each looking E*Trade over, possibly to make a bid for the company. The 8s had been trading around 75 last Wednesday, before the news hit.

However, after hitting its early peaks, the bonds retreated, perhaps pushed down by a story in The Wall Street Journal that Schwab and TD Ameritrade each have concerns that some parts of E*Trade's business have not been marked down enough to reflect the current subprime mortgage trouble.

E*Trade's NYSE-traded shares meantime fell 73 cents, or 13.70% Monday, to close at $4.60. Volume of 81 million shares was about 2½ times the norm.

ResCap holds gains

Mortgage provider Residential Capital LLC - whose bonds firmed handsomely on Wednesday in response to the announcement of a tender offer for some of its outstanding bonds as well as the news that parent GMAC LLC might also buy other ResCap bonds and may sell part of the troubled Minneapolis-based company or buy a foreign institution and combine it with ResCap - was hanging onto those gains on Monday or even building on them, a trader said. He quoted ResCap's 7½% notes due 2013 up 2 points at 62 bid, 64 offered.

A trader meantime saw GMAC's 8% notes due 2031 firm to 80.25 bid, 81.25 offered, up from 78.25 bid, 79.25 offered last week, although he saw the bonds down from their peak levels earlier in the day of 83.25 bid.

Homebuilders get hammered

The continued uncertainty about the credit crunch, the viability of large mortgage providers - and what impact this may have on prospective homebuyers - was seen hurting homebuilders on Monday, especially after Citigroup cut its outlook on the sector's stocks, discounting the chance of a rebound in the business any time soon.

Among the losers Monday, a trader said, was Hovnanian's 8 5/8% notes due 2017, which he called down 1 point at 73 bid, 74 offered.

A market source saw Hovnanian's 6 3/8% notes due 2014 down a point at 70 bid, and also saw rivals D.R. Horton's 8% notes due 2009 and KB Home's 8 5/8% notes due 2008 each off a point as well, at 97.5 bid, and 90 bid, respectively.

Among the more distressed names, a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 at 74 bid, 76 offered, down ½ point on the day but well down from early peak levels in the session around 76 bid, 77 offered. He saw Tousa Inc.'s 8¼% notes due 2011 and its 9% notes due 2010 each down 1 point, at 37 bid, 39 offered and 36 bid, 38 offered, respectively. Standard Pacific Corp.'s 7% notes due 2005 were down 2 points at 60 bid, 62 offered.

The big loser, he said, was WCI Communities Inc.'s 9 1/8% notes due 2012, which tumbled at least 5 points to 59 bid, 62 offered.

The homebuilders all sagged after Citi equity analyst Stephen Kim - who had just upgraded the sector in early October - now wrote in a research note that "the group has underperformed the market by more than 10%."

He said that it probably won't be until next year's second half that there will be "sufficient data" to allow investors to view the sector optimistically.

He reduced his stock ratings to "hold" from "buy" on a group of homebuilder including Horton and Standard Pacific, and lowered his price targets on several others, including Hovnanian and Beazer that he already rated as a "sell."

Burlington better on weekend sales spree

Burlington Coat Factory's 11 1/8% notes due 2014 were among the most actively traded junk bonds on the session, shooting up to 86.75 bid in active size trading, a market source said - not much higher than where they ended on Friday after several smallish sort of trades, but about 3 points up from where the bonds had gone home in the last previous significant trading, on Wednesday.

A trader at another shop saw the bonds up 1 point at 86 bid, 87 offered.

There was no specific fresh news out about the Burlington, N.J.-based-apparel retailer, although it was believed the bonds were firmer on signs of healthy Thanksgiving weekend sales at the nation's retailers such as Burlington, which operates some 380 stores in 44 states.

Overall, a trader said that the market "hardly traded. The good news is that the market didn't sell off." He saw the widely watched CDX junk bond performance index down 3/8 point at 93 7/8 bid, 94 1/8 offered. The KDP High Yield Daily Index improved 0.04 to 77.17, while its yield tightened 1 bp versus Friday's level, to 8.75%.

With volume slow, declining issues led advancers by a not-quite five-to-four ratio.

At 10 a.m. ET a sell-side source spotted the index at 94 3/8 bid, and said that junk had rallied in the morning.

Another sell-sider said that the index had traded as high as 94¾ bid on Monday, before selling off more or less in line with equities, which were in full-scale retreat from mid-afternoon on.

Sequa: no changes

Sources said that there was no news whatsoever in the high yield primary market.

Although several sell-side sources told Prospect News that they had wiped clean their forward calendars, believing that there are presently no deals in the market, an informed source said that there have been no changes to the single deal carried over from the pre-Thanksgiving week.

According to this source Sequa Corp. remains in the market with a $700 million two-part offering of eight-year senior unsecured notes - cash-pay notes and discount notes - (Caa2/CCC+) via Lehman Brothers.

In the market turbulence of the Nov. 19 week the deal was delayed until the post-Thanksgiving week, affording bond investors a chance to see how the company's bank loan prices and performs.

With respect to the bank deal, the commitment deadline, originally set for last Wednesday, has been extended.

An eye to equities

Another source said on Monday that should the stock market and the high yield secondary market rally IKON Office Solutions, Inc. might launch a $150 million of offering senior unsecured floating-rate notes due 2011, via Wachovia.

The company disclosed the deal last week in an SEC filing.

Sell-siders advise Prospect News that there are a number of deals, most of them not in the known pipeline, which could launch should the stock market and high yield secondary market start to rally, or at least stabilize.

Late Monday a high yield syndicate official alluded to the two classes of potential junk issues: there are "corporate deals," which are expected to surface in sizes less than $250 million from issuers that are well-known to the high yield market, and with all or most of the proceeds earmarked for debt refinancing; and then there are the "LBO deals," also known as the risk overhang - hung bridge loans resulting from unplaced bonds and unsyndicated leveraged loans backing the massive LBO financings.

The most recent news on the LBO front involves Alltel Communications and Alltel Communications Finance, Inc. Late in the Nov. 12 week underwriters priced a $1 billion issue of 10 3/8% senior PIK toggle notes due 2017 (Caa1/B-) at 91.50, resulting in a yield to maturity of 11.84%.

The extent of that discount took some market watchers by surprise.

Two sources, not in the deal, calculated that the Alltel trade cost underwriters $60 million.

On Monday, a high yield syndicate official said that should the stock market and the high yield secondary stabilize the primary market could possibly see some corporate deals during the run-up to 2008.

However, the source added, the LBO deals are unlikely to resurface during the remainder of 2007 unless the stock market and the high yield secondary actually see a sustained rally.

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