Delphi bonds off as company seeks delay; E*Trade crushed again; mortgage names mixed as plan nears

By Paul Deckelman

New York, Dec. 3 - Delphi Corp.'s bonds were seen down several points Monday as the bankrupt Troy, Mich.-based automotive past maker sought court approval for extending the time it has to submit a plan of reorganization and soliciting creditor acceptances.

Several distressed-debt traders saw E*Trade Financial Corp.'s bonds once again fall, in line with the continuing slide in the New York-based online financial services company's shares, which were driven further downward Monday on a downgrade from Banc of America Securities amid investor skepticism about the $2.5 billion-plus rescue plan for the company announced Thursday.

Accelerating talk that some sort of plan to rescue subprime residential borrowers from the current mortgage crunch could be announced this week - including statements from Treasury secretary Henry Paulson - helped major mortgage writer Countrywide Financial Corp.'s bonds, at least modestly, although competitor Residential Capital LLC's bonds, and those of corporate parent GMAC LLC, didn't seem to get much of a boost.

Distressed housing names such as Beazer Homes USA Inc., Tousa Inc. and Standard Pacific Corp., which had gotten a boost last week on talk of a possible rescue plan for subprime borrowers - which might restore homebuyer confidence and help their sales - were seen mostly unchanged Monday

Delphi drubbed on delay

A trader saw Delphi's bonds "down a couple" of points, its 6.55% notes that were to have come due last year at 66 bid, 67 offered from Friday's levels at 68.5. However, a market source at another desk saw those bonds actually gain ½ point to end at 69. But another market source said the bonds were down 3 points on the day to 66.5 from 69.5 on Friday.

That comes against the backdrop of the company seeking an extension of its exclusivity period from the bankruptcy court overseeing its reorganization - a move which Delphi said was merely precautionary, given the current turmoil in the capital markets and which does not indicate that the company is backing off from its previously announced planned emergence from Chapter 11 during next year's first quarter.

In seeking to extend its right to be the sole party introducing a plan of reorganization from the current deadline of Dec. 31 to the new proposed deadline of March 31 - and extending as well the time in which it has the exclusive right to solicit plan acceptances - Delphi cited the impact of the ongoing credit crunch, which has made it difficult for the company to obtain Chapter 11 exit financing.

That's caused Delphi - in bankruptcy reorganization since October 2005 - to scale back the amount of money it intends to borrow to pay off its creditors, to $6.8 billion from some $8.4 billion originally, which led to changes in the plan - the reduction in cash payments by some $3 billion was a major change; unsecured creditors, who are being paid mainly with new Delphi stock, will instead get the option to buy additional shares at a discount through a rights offering. Former corporate parent General Motors Corp. will get a combination of cash, new debt and new convertible preferred stock, with less cash than originally planned.

Another tumble for E*Trade

E*Trade Financial's bonds and shares were seen down for a third straight session amid continued negative reaction by investors to its announcement Thursday of a $2.55 billion cash-infusion deal with Citadel Investors Group - a deal with significant strings attached.

A trader saw E*Trade's most active issue, its 8% notes due 2011, down 2 points to 74 bid, 76 offered, but saw its 7 3/8% notes due 2013 "getting crushed" and ending at 67.25 bid, 68.25 offered from prior levels in the low-to-mid 70s, although on somewhat less volume than the 8s.

"E*Trade continues to be pretty heavy," said another trader, who pegged the 7 3/8s at 67, which he said was down "4 or 5 points" from the end of trading last week.

A market source saw the 8s fall as low as 74 from opening levels around 77.5, which was a point above where the bonds had gone home Friday at 76.5. However, the source said the bonds came off their lows to return to the 76 level, leaving them down about ½ point.

But the company's 7 3/8% notes due 2013, which had also ended Friday around 76.5, plunged into the upper 60s, finally stabilizing at 67, down some 9 points on the session, according to the source, on several big-block trades. Its 7 7/8% notes due 2015 also declined into the high 60s, before coming off those lows to steady around 71, down 2 points.

Yet another trader saw the 8s plunge 3½ points on the day to 73 bid, 75 offered.

E*Trade's New York Stock Exchange-traded shares, meantime, plunged as much as 15% at one point in the day before regaining some of their early losses to end at $4.11, down 49 cents or 10.65%. Volume of 87 million shares was more than twice the norm.

The bonds and shares have been reeling the past three days over the terms of E*Trade's $2.55 billion buyout by a Citadel-led investment syndicate. While the money will certainly come in handy, analysts have pointed out that it comes at a very high cost - E*Trade will surrender its $3 billion portfolio of asset-backed securities for $800 million, or 27 cents on the dollar, and will issue new stock equal to 19% of its current float and 12½% bonds to the Citadel group in return for another $1.75 billion of cash.

The latest analyst weighing in with a negative assessment was Michael Hecht of Banc of America, who cut his recommendation on the company's shares to "sell" from "neutral" previously. He also slashed his stock price target by more than 75%, to $2 from $9.

Hecht noted that while E*Trade's banking unit managed to unload its most problem-plagued asset, the $3 billion ABS book, it is still stuck with a weakening $12 billion portfolio of home equity loans. He estimated that E*Trade will have to set aside at least $1 billion of additional loan-loss reserves for the portfolio, which will essentially "wipe out" another year of earnings per share - and that's his best-case scenario. If things deteriorate further, Hecht warned, the company might have to unload the home equity portfolio at a "fire sale" price of around 70 cents on the dollar, saddling the company with as much as a $3.7 billion loss.

Even though E*Trade's core operation is its on-line brokerage business, Hecht called this "a dwindling asset," and said it no longer had sufficient value to offset the red ink the banking end of the operation has been rolling up.

The analyst further remonstrated that the executive changes announced last week at the same time the Citadel deal was unveiled - among them, the departure of chief executive officer Mitchell Caplan and his replacement, at least temporarily, by company president R. Jarrett Lilien, who assumes the CEO duties on an acting basis - don't really amount to a fundamental shift in the company's direction, since Lilien has been, in Hecht's view, the departed CEO's "right-hand man" - and Caplan, in any event will remain on the board of directors.

Mortgage names mixed as plan takes shape

E*Trade, caught up in its own troubles, has been largely unaffected by the speculation which has gripped the financial markets over the past several sessions that the mortgage industry and banking regulators will come to a meeting of the minds and craft a plan to stop the rising wave of subprime mortgage foreclosures which threatens to swamp the industry. That has given financial issues a boost in general - and in particular, names like Countywide Financial, which depend heavily on being able to re-sell pools of mortgages to raise capital, a funding source which has all but dried up in the current wave of defaults and foreclosures.

On Monday, further details of the prospective plan were taking shape, with Treasury chief Paulson predicting in a speech that a full-blown plan could possibly emerge by the end of the week. He also called upon Congress to give local governments more borrowing power to ward off foreclosures. The cornerstone of the plan would be a mechanism that would allow borrowers to freeze interest rates on their subprime loans whose rates are about to reset sharply higher, in the hope that many of these borrowers could stay in their homes. As many as 1.5 million adjustable-rate mortgages are scheduled to reset in 2008, on top of the thousands of homeowners - already a record - who have been forced into foreclosure so far this year by rising rates.

But how such a "teaser freezer" might work, for how long, and exactly who would be eligible, and for how long the rates would be frozen remain to be worked out. Also to be taken into consideration is the fact that many banks or mortgage companies which write home loans then turn around and sell the mortgages to other companies which will act as servicers - and who purchase the mortgages on the assumption that the rates will rise.

The uncertainty over how this will all be worked out has tempered some of the earlier market optimism that had been lifting mortgage and housing names pretty much across the board in previous sessions.

Countrywide mixed

For instance, a trader said that while Countrywide's longer paper, such as its 6¼% notes due 2016, was up 1½ points at 62.5 bid, 63.5 offered, the 3¼% notes coming due next May were unchanged at 88.5 bid, 89.5 offered.

"Most of the shorter paper was up half a point, down half a point, unchanged," he said.

Another trader said he saw "no real action" in the Calabasas, Calif.-based mortgage giant's issues, quoting the 61/4s at 62 bid, 63 offered, the 4% notes due 2011 offered at 82 and the 4 1/8% notes due 2009 offered at 75.5, all of them "very quiet."

While trading was seen fairly active in Countrywide's 5.8% notes due 2012, at the end of the day, they had gone nowhere pricewise, remaining at 74 bid. Another market source quoted the 61/4s actually down nearly 3 points, at just below 61.

Another trader was profoundly skeptical of the whole concept, saying that the parties involved would "have a hard time getting a handle on how it works. They may talk about this, and talk about that - but at the end of the day, what's got to happen is the Fed [which meets for the last time this year on Dec. 11] has got to lower interest rates, or all of this stuff doesn't really matter.

"I really don't see how they're going to come up with this master plan where they don't use any taxpayer money and they all of a sudden make all of these things appear -it's just stupid top think that they can do that."

He said that further complicating the situation was the fact that "most of these loans have already been put into bonds and sold, and the mortgage bankers or the servicers are not in a position to do anything, and do what they're supposed to do."

Other mortgage names which previously had been well bid for on the assumption a plan to end the foreclosure crisis would soon be forthcoming, but which were going nowhere Monday included Thornburg Mortgage Inc., whose 8% notes due 2013 were seen unchanged at 84 bid, 86 offered, and ResCap, whose 7½% notes due 2013 were seen unchanged at 64 bid, 66 offered. Its 8 3/8% notes due 2015 were quoted ½ point lower at 64.5

Bonds of ResCap's corporate parent, GMAC, were meanwhile mixed, with its widely traded 8% bonds due 2031 seen by a trader unchanged at 85 bid, 87 offered, although a source at another desk saw the bonds get as good as 88.5, up ½ point, while its 6% notes due 2011 were down ½ point to the 85.5 level. Another market source meantime saw its 6 7/8% notes due 2012 go home down a point at 85.5

Housing names mostly unchanged to lower

Bonds of distressed housing companies - which had firmed last week on the hopes that such a plan might be forthcoming - were seen mostly unchanged or down a bit Monday. A trader saw Beazer Homes' 8 5/8% notes due 2011 down a point to 75.5 bid, 77.5 offered. He saw Standard Pacific's 7% notes due 2014 steady at 64.5 bid, 66.5 offered, while Tousa's 8¼% notes due 2011 were likewise unmoved at 40 bid, 42 offered.

The trader also saw WCI Communities Inc.'s 9 1/8% notes due 2012 down 2 points at 55 bid, 57 offered, although another trader saw its 7 7/8% notes due 2013 up a point at 52 bid, 53 offered.

Sara Rosenberg contributed to this report

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