Connacher, Gastar deals price; ResCap slides on default, bankruptcy fears; AMD up on equity infusion

By Paul Deckelman and Paul A. Harris

New York, Nov. 16 - Connacher Oil & Gas priced its $600 million offering of eight-year second-lien senior notes on Friday, while high yield syndicate sources also saw Gastar Exploration USA Inc. coming to market with its $100 million offering of five-year senior secured notes.

In the secondary market, Residential Capital LLC's bonds continued to slide on market fears that the big mortgage lender might be allowed to default on its bank loan covenants - or even fall into bankruptcy - by corporate parent GMAC LLC, whose bonds were also seen on the downside.

Advanced Micro Devices Inc.'s bonds got a boost from the news that an investor had taken a sizable equity stake in the Sunnyvale, Calif.-based semiconductor manufacturer.

A high yield syndicate official said that the CDX High Yield 9 closed Friday at 94½ bid, down 7/16 on the day.

However, the source added, cash bonds did a lot worse.

The primary market saw a pair of issuers from the energy sector price one tranche of junk bonds, apiece, raising $692 million of proceeds.

Connacher completes $600 million

Connacher Oil & Gas priced a $600 million issue of 10¼% eight-year second-lien senior secured notes (B1/BB) at 98.657 to yield 10½% on Friday.

The yield came 37.5 basis points beyond the wide end of the 10% area price talk.

Credit Suisse, BNP Paribas and RBC Capital Markets were joint bookrunners for the debt refinancing and capital expenditures transaction which generated approximately $592 million of proceeds.

The issuer is a Calgary, Alta.-based Canadian oil sands development and production company.

One source who followed the deal marveled that in late June another Canadian oil sands company, OPTI Canada Inc., priced a similarly rated $750 million issue of second-lien senior secured notes due 2014 (B1/BB+) at par to yield 7 7/8%.

Credit Suisse also ran the books for that deal which priced in a June 25 drive-by, with the proceeds going to repay debt, as well as for project financing.

On the surface, the source said, only one credit rating notch from one agency (Standard & Poor's rated the Connacher notes at BB while assigning the OPTI notes BB+; Moody's assigned its B1 rating to both issues) and one year of maturity (the Connacher notes mature in 2015 while the OPTI notes mature in 2014) separate the deals.

Nevertheless, the coupon on the new Connacher 10¼% notes is 237.5 basis points north of OPTI's 7 7/8% coupon.

Gastar cheap to talk

Friday's only other primary market action also emanated from the energy sector.

Gastar Exploration USA priced a $100 million issue of 12¾% five-year senior secured notes (Caa2/CCC) at 99.50 to yield 12.888%.

The notes were priced at the cheap end of price talk which specified a 12 ¾% coupon and an issue price in the range of 99.50 to 99.75.

Jefferies & Co. ran the books for the debt refinancing and general corporate purposes deal.

$1.99 billion week

Factoring in Friday's deals, the high yield primary market saw $1.98 billion of issuance in seven dollar-denominated tranches during the four-session post-Veterans Day week.

At Friday's close year-to-date issuance came to $147.6 billion. That is slightly less than 10% more, on a year-over-year basis, than the $134.4 billion which had priced by the Nov. 16 close in the record-setting year of 2006.

Entering the pre-Thanksgiving week the 2007 primary market is just $9 billion shy of topping the $156.6 billion issuance record set last year.

However sources say that last $9 billion, given current market conditions, could prove to be a tough row to hoe.

December scenarios

On Thursday and Friday a preponderance of sources from both the buy-side and the sell-side maintained that given the current negative sentiment in the capital markets it could be a cold December, indeed, in the high yield primary.

Only two deals are believed to presently be in the market - both of which are expected to price early in the coming week.

Sequa Corp. is in the market with a $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+), in tranches of cash-pay notes and discount notes - an LBO financing via Lehman Brothers.

The second of the pre-Thanksgiving week's two expected deals is Quebecor World Inc.'s $400 million offering of seven-year senior unsecured notes (Caa1), a refinancing deal via Citigroup.

Roadshows for both of those deals are expected to end on Monday.

One other deal that various sources mentioned during the post-Veterans Day week was Basell's $7 billion of senior secured second-lien notes and/or senior unsecured notes via Citigroup, Goldman Sachs, Merrill Lynch, ABN Amro and UBS Investment Bank, to finance acquisition of Houston-based Lyondell Chemical Co.

Late Friday, however, one sell-sider said that it is extremely unlikely that Basell could succeed in placing anything close to the entire $7 billion, given present conditions.

The last market source to speak to Prospect News on Friday night, just before press time, had a more or less even-handed read on the remainder of 2007.

The source, a high yield syndicate official, said that between Monday and the end of 2007 there will be a lot of financial news.

"You can't rule out another Fed rate cut," the source added, but at the same time he conceded that such a move on the part of the Federal Reserve's Federal Open Market Committee, to make a third reduction in the Fed Funds rate, seems unlikely.

Nevertheless, the official asserted, it does not take too much good news to rekindle activity in the primary market.

Autumn chill

The four-session post-Veterans Day week featured a sizable portion of negative news.

On Wednesday Cerberus Capital Management backed out of the United Rentals Inc. LBO. Sources say the move virtually eliminates $5.15 billion of bond and bank financing.

Then on Thursday Alltel Communications and Alltel Communications Finance, Inc. postponed the sale of a portion of their LBO-related cash-pay notes due to market conditions on Thursday, according to market sources.

A portfolio manager from a high yield mutual fund told Prospect News that lead bookrunner Citigroup had built an order book sufficient to place $1 billion of the notes, but elected not to do so because of apprehensions that the deal would not trade well.

On Friday another source from the buy-side conveyed a point of view on the pulled Alltel deal that seems to be widely held throughout the market.

"The dealers can't get people to care about these deals at levels where the dealers want to sell them," the buy-sider said.

"In the case of Alltel, the dealer feels like it's a decent credit, and they'd rather hold on to it until the market is better. They're not comfortable taking a huge loss on it.

"It has become a matter of finding a price in the middle which everyone can agree on, and we haven't gotten there yet."

The buy-sider added that the underwriter could have placed $1 billion of the Alltel cash-pays, but added that it would have traded badly.

This source, who focuses on the bank loan market as well as high yield, added that the Alltel loan priced at 96.00 on Friday.

"Away from the lead everybody in the world is 95¾ bid, right now," the source said of the Alltel loan, early Friday afternoon.

Biggest outflow in two years

Also among the past week's negative headlines, AMG Data Services reported that the high yield mutual funds which report to it on a weekly basis saw $632.2 million of outflows for the week to Wednesday.

Sources say it was the biggest outflow in two years.

A high yield syndicate official tracked the last bigger outflow to the 39th week of 2005, when the weekly reporting funds underwent a negative $1.3 billion flow.

"People are shedding risk," a buy-side source said, and added that primary market activity could thin to a trickle through the remainder of 2007.

"There are some year-ends for the dealers in November, and even more in December," the source said.

"People are in the 'risk-shedding' mode, not the 'risk-acquiring' mode."

Connacher bonds hover around issue price

When the new Connacher Oil 10¼% second lien senior notes due 2015 were freed for secondary dealings, a trader saw the bonds at 98.75 bid, 99.25 offered, up slightly from their issue price at 98.657. Another trader quoted the new bonds at 98.5 bid, 99.5 offered.

The traders saw no aftermarket activity in Gastar Exploration's 12¾% senior secured notes due 2012, which had priced earlier in the session at 99.5, nor in Novamerican Steel Finco Inc.'s new 11½% senior secured notes due 2015, which had priced at par on Thursday.

ResCap rout rolls on

Back among the established issues, Residential Capital's bonds continued to take a drubbing, reflecting a continued loss of investor confidence in the Minneapolis-based mortgage provider - the second-largest independent mortgage company in the United States, behind only Countrywide Financial Corp.

A trader several issues of ResCap's bonds - its 6% notes due 2011, 6½% notes due 2012, 6½% notes due 2013 and 6 7/8% notes due 2015 - all trading 3 points lower at 53 bid, 55 offered.

Another trader saw its 6 1/8% notes due 2008 down 5 points at 63 bid, 65 offered, while its 6 7/8% notes due 2015 "only" down 3 points at 53 bid, 55 offered.

"The short paper was down the most," he said, with all of the issues starting to converge in a mid-50s context.

A market source at another desk saw its 8 3/8% notes due 2015 six points lower at 53, while its 7% notes due 2011 were off 7 points on the day at 52. Its floating-rate notes due 2008 swooned 7 points to around the 68 level. ResCap bonds were seen among the day's most actively traded issues.

The bonds' continued slide, and the continued widening out of the credit-default swap spreads on the contracts investors use to hedge against the possibility of a default on the bonds, come as speculation mounts that Res Cap may be close to breaching its bank-loan covenant requiring the company to maintain a net worth of $5.4 billion. CDS spreads move inversely to investor confidence in a company's ability to continue as a going concern - and ResCap's have ballooned up to bloated levels above 500 bps, plus up-front payment totaling more than one-third of the debt being protected. New fuel was added to the fire on Thursday when The Wall Street Journal's online editions said that ResCap's cash cushion against breaching the net-worth covenant was dwindling, and the unit could default on the covenant unless parent GMAC - or perhaps more properly, GMAC's corporate parents, the investor group led by Cerberus Capital Management LP and General Motors Corp., which own 51% and 49% of GMAC, respectively, step in with an equity infusion.

The convergence of the once-par bonds to levels down in the 60s for the senior notes and in the 50s for more junior paper certainly could be seen as a sign that the market is anticipating a default - or possibly even a slide into bankruptcy - by the beleaguered lender, since in a restructuring scenario, securities occupying the same level in the capital structure are all considered to be pari passu, eligible for the same level of recovery no matter what their coupon value or maturity.

With all of the bad news floating around, said market analyst Eric Rasmussen of Advantage Data in Boston, "obviously we all know when that happens, spreads start to widen and bond prices fall - that's why we've seen the huge fall in Res Cap over the last day and a half."

The market's thinking seems to hinge on the notion, widely bandied about in the financial media, that GMAC's owners may at some future point decide not to plunge any more funds into the money-losing ResCap, letting the beleaguered unit rise and fall on its own. The analyst noted the recent announcement from GMAC that it had hired Bank of America Corp. executive Rob Hull to become its new chief financial officer, succeeding Sanjiv Khattri, who will remain with GMAC as ResCap's chief financial officer and head of corporate strategy.

"It's a strong indication," Rasmussen said. "They had the same management for quite a few years, and now you have this split [in the CFO office], that's a strong indication that they're looking to separate themselves a bit from that crew [at ResCap] - absolutely."

The market seems to buy into the scenario that GMAC will not let itself be dragged under, should ResCap's troubles continue and GMAC's owners decide to stop throwing good money after bad - it is significant that while ResCap's bonds have plummeted down to the 50s or 60s, GMAC's own paper, while certainly down from recent levels, is hanging in around the lower 80s, a good 20 to 30 points above ResCap's. GMAC's widely traded 8% notes due 2031 were seen by a trader Friday at 80.5 bid, 81.5 offered, down a point on the day, although another trader saw those bonds down more than 2 points at 80 bid, 81.5 offered. Its 6 7/8% notes due 2012 were down 2 points at 82. GM's own 8 3/8% notes due 2033 lost some 3 points, a trader said, to 80 bid, 81 offered.

Rasmussen noted that GMAC "has a little bit more of a cushion than ResCap - they have the auto industry." While the auto industry certainly "hasn't been that great over the past few years, we've seen the housing industry's fall as much more significant than what the auto industry took. When you have a company solely based on residential mortgages, like ResCap, you're going to see them take a bigger hit in these kinds of conditions than GMAC, which also has the auto component to it as well."

A ResCap rescue?

However, even though the market seems to be looking for GMAC - really, Cerberus and GM - to at some point abandon ResCap to its own devices, based on how badly the latter's bonds have fallen and their convergence in advance of an expected default or bankruptcy, Rasmussen believes that there also is "definitely a possibility" that things might not work out that way at all.

The analyst expressed agreement with the theory that given ResCap's size and importance in an already staggering mortgage industry which can ill-afford further traumatic shocks, the battered company may be considered by some in high places to be "too big to fail" - and that should it appear to be on the verge of going under, key governmental officials might jawbone one or more large banks to step in and stop such a development, by rescuing ResCap with a big capital infusion, even if its corporate parents won't. It is widely believed that a similar scenario occurred earlier this year, when Bank of America was persuaded to step in, deus ex machina, and make a $2 billion equity infusion into a faltering Countrywide, which probably saved the Calabasas, Calif.-based mortgage giant from going under at that time.

"Absolutely, looking at what Bank of America did with Countrywide, you kind of get the sense that with big names, the government is not going to allow these guys to falter," Rasmussen declared.

"There is going to be some nudging - there is going to be some discussion, and some bank might come in and say 'OK, we'll buy ResCap at a huge discount, and help it out during these tough times.'"

Should that occur, he continued, when it "grows to be a stronger company again, when this whole housing downturn flips itself, that bank will command a huge profit from buying it at a discount.

"Some company will come in and do its best to help it out, [pick] up [ResCap] before it really goes under - because it's too big of a company to let it fail."

Other mortgage names fall

However, reflecting the current investor angst in the market rather than such a hopeful future scenario, mortgage names in general were lower, with Countrywide's own 6¼% notes due 2016 losing 3 points on the session to finish at 67.

Sector peer Thornburg Mortgage Inc.'s 8% notes due 2013 lost a point to end at 84 bid, 86 offered.

AMD gets an infusion

Elsewhere, Advanced Micro Devices' 7¾% notes due 2012 were seen having jumped more than 5 points in busy trading to above the 93 level.

The high-tech company announced that it had sold an 8.1% equity stake in the company to the Abu Dhabi government's investment arm, Mubadala Development Co., which paid $622 million. The investment comes at just the right time for AMD, which has lost more than $1.6 billion so far this year, and has just $1.5 billion in cash on hand as it battles larger rival Intel Corp.'s dominance of the microchip industry and works to pay down its own $5.3 billion in debt.

Indexes point lower

The AMD surge was one of the few positive features in an otherwise largely negative market. Participants said that overall, the market seemed to have a heavy tone to it, with declining issues surpassing advancers by nearly a two-to-one margin, although market activity was relatively quiet, with overall volume off nearly 25% from Thursday's levels.

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