Rock-Tenn prices eight-year deal; Thornburg mauled by margin calls; funds see $35 million inflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 28 - Rock-Tenn Co. priced a downsized issue of eight-year notes Thursday - the first new deal to come to market in two weeks.

Back on the secondary side of the fence, Thornburg Mortgage Inc.'s bonds fell sharply after the company's disclosure in a regulatory filing that it has been the subject of several hundred million dollars of margin calls on securities backed by less-than-prime mortgages - and that it may be forced to sell assets in order to meet future collateral requirements by its lenders.

AbitibiBowater Inc.'s bonds retreated after the Montreal-based forest products company announced a sizable loss for the fourth quarter, its first period as a combined entity following the completion last fall of the merger of then-rivals Abitibi-Consolidated Inc. and Bowater Inc. - and acknowledged that it has not yet managed to refinance issues of its bonds slated to come due in April and in June.

Sprint Nextel Corp. - nominally an investment-grade credit, for the moment - suffered the indignity of being dropped to junk bond status by Fitch Ratings, after posting a nearly $30 billion quarterly loss as a result of last year's merger of the then-Sprint Corp. and Nextel Communications Inc., and disclosing that it has had to draw down most of its $3 billion credit facility. One of the other major ratings agencies meantime was eying Sprint for a possible downgrade out of high-grade and into junk bond territory, and the third moved a step in that direction by downgrading its outlook. The company's bonds and shares slid accordingly.

A senior high yield syndicate official said that the market was softer and "going out down" on Thursday.

Fund flows up $35 million on the week

And as trading wound down for the session, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday, $34.7 million more came into funds that report on a weekly basis than left them, in contrast with the previous week ended Feb. 20, which saw a cash exodus of $75.9 million.

The latest results were a departure from the negative fund-flow trend which has dominated for most of this year. With nine weeks now in the books, outflows have been seen in six of them, versus three inflows, according to a Prospect News analysis of the AMG figures. Net outflows since the start of the year have totaled about $730 million, according to a market source.

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.

Rock-Tenn prices

In the primary, Rock-Tenn priced a $200 million issue of 9¼% eight-year senior unsecured notes (Ba3/BB-) at 99.30 to yield 9 3/8% on Thursday.

The yield came on top of the 9 3/8% area price talk.

Initially the deal was expected to price Friday, however early Thursday it was announced that pricing had been moved up.

An informed source, describing the deal as a blowout, said that the order book was five-times oversubscribed.

Banc of America Securities, Wachovia Securities and SunTrust Robinson Humphrey were joint bookrunners for the corporate-to-corporate acquisition financing deal.

The bond portion of the financing was downsized from $400 million, with $200 million of proceeds shifted to the company's term loan A, which was upsized to $550 million from $350 million.

The overall size of the credit facility was upsized to $1.2 billion from $1 billion.

One astonishing fact about Rock-Tenn: apart from the LBO risk overhang it is the first senior unsecured deal from an issuer outside of the energy/resources space to price thus far in 2008, with only one session left in February.

Away from the LBO backlog the only other senior unsecured notes to price since the beginning of the year were issued by Petroleum Development Corp., Atlas Energy and Southwestern Energy Co.

New Rock-Tenns not seen, yet

Traders said they had not seen the new Rock-Tenn 9¼% notes due 2016 in aftermarket dealings.

A trader said that the company's established 8.20% notes due 2011 were trading around 101.25 bid, 102 offered, which he said was "down around a point from where we had them pegged" previously, and puts the new issue "about 175 [basis points] back, which I think is fair."

He called Rock-Tenn "a nice company" with a BB rating in the paper and packaging sector. The new bonds, he opined, "should trade fine. My guess is they'll have a nice little pop on the break, depending on how the market opens [on Friday]."

Market compass points south

A trader said that the widely-followed CDX index of junk market performance was off by ½ point Thursday to 88 3/8 bid, 88 ¾ offered. Meanwhile, the KDP High Yield Daily Index lost 0.32 to stand at 74.18, while its yield widened by 7 bps to 9.59%.

In the broader market, declining issues led advancers by around a five-to-four margin. Overall activity, reflected in dollar volumes, declined by about 18% from Wednesday's levels.

Slow growth numbers weigh on junk market

A trader said that "the market in general was a little bit softer. Equities kind of never got out of the gate - they opened down 100 [points on the bellwether Dow Jones Industrial Average] and basically closed down 100" - technically, down 112.10 points.

He said that Federal Reserve chairman Ben Bernanke's Senate testimony Thursday combined with the latest economic numbers from Washington "has a lot of people concerned that if GDP in the fourth quarter [of 2007] was just 0.6%, what's it going to be for the [current] first quarter?"

The government's Bureau of Economic Analysis reported that gross domestic product - the key measure of economy's overall growth, or lack thereof, grew just 0.6% at the end of the year - a big loss of momentum when compared with the prior quarter's brisk 4.9% growth rate.

Fed chief Bernanke meantime told the Senate Banking Committee, in effect, that the economy continues to stagger and is actually in a weaker position than it was at the start of the 2001 recession, while high energy prices are creating inflationary stress and complicating efforts to boost the economy - although he said that he did not foresee a return to the bad old days of the late 1970s, when the economy was bedeviled by "stagflation" - both stagnant growth and high inflation, two generally contradictory conditions.

He indicated that the central bank, which has slashed key interest rates several times since last September in an effort to boost the economy, stands ready to do so again perhaps as soon as its next regular meeting on March 18 - although the Fed is also trying to balance such stimulus against the threat of increased inflation.

With all of that going on, the trader said, "it was kind of more of the same - but a lot more active in terms of issues trading out there."

A thorny time for Thornburg Mortgage

The trader saw Thornburg Mortgage's 8% notes due 2013 down around 8 points on the day at 82 bid, 83 offered, although he said they "rebounded off the lows a little bit", but still ended well off prior levels in the 89-91 area which they had held before Thursday's developments.

Another trader saw the bonds go home at 81 bid, 83 offered, which he called a 7 point loss on the day, while yet another said the loss amounted to 6 points, with the bonds finishing at 82 bid, 84 offered.

A market source at another desk saw the bonds tumble to 81 bid from Wednesday's close above 89; an afternoon effort to push the bonds back up to the mid-80s sputtered and died out when they hit an 83-84 context. Trading was described as busy, with some large-bloc transactions seen.

Thornburg's New York Stock Exchange-traded shares swooned by $1.78, or 15.42% to close at $9.76. Volume of some 21 million shares was more than five times the usual turnover.

Thornburg's bonds and shares careened downward after the Santa Fe, N.M.-based mortgage lender disclosed that it had received over $300 million of margin calls in the last two weeks seeking immediate repayment of debt on a portfolio of mortgage securities backed by alt-A mortgages - loans written for customers who have minor credit problems, or who cannot document their income or assets to get a traditional, prime mortgage. The alt-A loans, however, are not considered as risky as subprime mortgages - the epicenter of the problems now shaking mortgage originators and other financial companies, and a lending area in which Thornburg, ironically, has not been involved.

Even so, Thornburg, which mostly concentrates on large-sized adjustable-rate jumbo mortgages of $417,000 or more made to affluent buyers, said in a filing Thursday with the Securities and Exchange Commission that the margin calls were mostly tied to some $2.9 billion of what it described as "super-senior, credit-enhanced mortgage securities" that carry AAA ratings, although they are backed by the below-prime alt-A mortgages.

While Thornburg said that it has not realized any losses on these securities, it got the margin calls because the value of those alt-A mortgage-backed securities has plunged between 10% and 15% since the end of January. It said in its filing that the margin calls came amid "a sudden adverse change in mortgage market conditions in general" that began on Feb. 14.

While Thornburg has been able to meet the margin calls so far, that effort has reduced its available liquidity to meet future margin calls. Thornburg warned that if its available cash cannot cover future margin calls, it may have to begin "selectively" selling assets into a weak market to raise cash, as it did last summer when it sold some $21.9 billion of assets - taking a sizable loss on the deal - to satisfy its lenders by shoring up its capital position.

Late in the session, Thornburg sought to blunt the market perception that it is in trouble. Its chief executive officer, Larry Goldstone, in several interviews with major financial media tried to reassure investors about the company's overall health, declaring that the widely publicized margin calls are not really a credit issue, but rather, just a pricing issue that reflects market psychology.

Goldstone predicted that the company should still see "a very strong year" earnings-wise, and said its common stock dividends "should be safe." That may have been a factor in both the bonds and the shares coming up a little from the lows they had touched earlier in the session when the financial markets first reacted to the margin call disclosure.

And even as the bonds and shares dove, a major-bank analyst had some positive things to say about the company.

Citigroup's Donald Fandetti said in a research note that he feels new confidence in the lender, citing the "positive steps" which Thornburg has been taking to shore up its liquidity position, including selling assets and otherwise raising capital. Such moves have contributed to what the analyst called Thornburg's "stable liquidity position."

He said that other factors, including the "aggressive" interest-rate easing by the Fed and government actions to stabilize the mortgage market, along with Thornburg's own moves, take "a good bit of risk out of the story" and would create "an attractive new investment environment." All of these factors prompted Fandetti to maintain his "hold" rating on the company's shares while upping his target price for them from $11.91 to an even $12.

AbitibiBowater felled by big loss, financing questions

AbitbiBowater's shortest-dated paper - one issue of 6.95% notes coming due on April 1 and another of 5¼% debt maturing on June 20 - fell sharply on news of the company's wider losses.

A market source saw the 6.95s fall as low as 86 bid at one point, down 8 points from Wednesday's close, before bouncing off that low; however, the bonds were still off more than 3 points ending at around the 90.5 level, in busy trading.

The gyrations in the 51/4s were seen even more pronounced in active dealings with many large-block trades. Those bonds plunged by more than 7 points at the opening to around the 84 mark, before clawing their way back up to an 87-88 context, but could not hold those levels and retreated back to around 86, ending off about 5 points on the session.

A trader saw the company's 7 7/8% notes due 2009 down 3 points at 70 bid, 71 offered, while its 9% '09s were down 2 points at 80 bid, 81 offered. Another estimated its 8 3/8% notes due 2015 "down maybe a point or so" on the "less than stellar" numbers the company put up.

From a longer-term perspective, a market source saw Abitibi's 8½% bonds due 2029 fall by 2½ points on the day to just above the 50 mark, while another trader saw its 8.85% bonds due 2030 drop to 49 bid, 51 offered from prior levels around 54 bid, 56 offered.

AbitibiBowater's NYSE-traded shares meantime dropped by $1.90, or 11.49%, to $14.63 in reaction to the news. Volume of 2.4 million shares was about double the norm.

AbitibiBowater - formed by the merger of the former Abitibi-Consolidated and the former Bowater, a deal completed last October - announced that in the fourth quarter it lost $250 million, or $5.09 per share. Excluding one-time special items, the adjusted loss came in at $115 million or $2.34 per share. Year-to-year comparisons are difficult because the year-earlier results provided by the company were only for Bowater - a quarterly net loss of $107 million, or $3.58 per share, and an adjusted loss ex-items of $15 million, or 50 cents per share.

Along with the results, the company discussed its financing plans and liquidity needs, acknowledging that the upcoming maturities of its short-dated bonds originally issued by Abitibi-Consolidated - $200 million for the 6.95s and $150 million for the 51/4s "have not yet been refinanced" and remain "among other liquidity needs that must be addressed."

A trader said that "my guess is it [the refinancing of the '08s] gets done, so those bonds are probably worth taking a look at." Right now, though, he said that "everyone is so risk-averse at this point that we can't even get [customers] to focus on stuff like that."

AbitibiBowater further confirmed that it "has been reviewing multiple financing alternatives to develop additional liquidity for the remainder of 2008 and 2009," but cautioned that "continued negative conditions in the credit and capital markets, as well as the difficult industry operating environment, are challenging its ability to obtain such financing," adding the standard boilerplate language that it could offer no assurances that such financing could be obtained on satisfactory terms.

Also on the financing front, AbitibiBowater said that it had successfully amended its Bowater division's credit facilities to permit, among other things, an intercompany restructuring of the ownership of its mill in Catawba, S.C. in order to permit additional debt financing by Bowater by the combined parent company.

Sprint dives as rating cut to junk

Market participants were watching the first step in the creation of the newest fallen angel, as Fitch Ratings downgraded Sprint Nextel's issuer default measure to BB+ from BBB- previously. For the moment, the Overland Park, Kansas-based wireless telecommunications provider's bonds are still precariously considered investment grade, carrying a Moody's Investors Service rating of Baa3 and a Standard & Poor's rating of BBB-. But S&P put Sprint on CreditWatch with negative implications, while late in the day Moody's lowered its outlook to "negative" from "stable."

The ratings cut, as well as the company's earlier announcement of a massive quarterly loss and its having to tap into its credit line to meet expenses combined to push its bonds sharply lower, with the 7 5/8% notes due 2011 - which on Wednesday were still par bonds - tumbling more than 9 points Thursday to the 91 area in very active size trading. The bonds' spread versus Treasury was seen to have ballooned out to 945 bps Thursday afternoon from 526 bps at Wednesday's close.

Sprint's bonds were among the most actively traded issues of the day. Although they remain nominally investment-grade instruments, several junk traders said they were well familiar with the credit and had already been trading some Sprint paper around. One quoted the company's 7 3/8% notes due 2015 at 81 bid, 82 offered - he noted that those bonds had originally been junk bonds, having been issued by the old Nextel before it was absorbed into Sprint, and "they may once again be junk" if the other ratings services follow Fitch's lead.

Another trader said the bonds were "down pretty substantially, by 5, 6, even 8 points" with the 7 3/8s "fairly actively traded" in an 80.5-81 bid context.

Another market source saw that particular issue drop as low as a 79 bid level before ending at 81 - calling that a 10-point drop on the session in active trading. The company's 8¾% bonds due 2032 were seen as even bigger losers, down as much as 13 points to end around 80.

Sprint's NYSE-traded shares swooned 86 cents, or 9.61%, to end at $8.09. Volume of 126 million shares was about four times the average daily handle.

Sprint got the snowball rolling downhill with its announcement that it had lost $29.45 billion, or $10.36 per share, in the fourth quarter, most of it due to huge writedowns taken in connection with last year's merger between Sprint and Nextel, which produced the third-largest U.S. wireless carrier behind AT&T Inc. and Verizon Communications Inc. - but one which still lagged considerably behind its larger rivals, beset by integration problems, technical troubles and what some critics have called a nebulous marketing strategy. In the year-ago period, the company had turned a $261 million profit, or 9 cents per share.

Sprint reported a net loss of 108,000 subscribers for the quarter; while it saw an increase in the number of customers using its Boost prepaid brand and via wholesale channels, that only partly offset the loss of 683,000 postpaid, i.e. billed, subscribers, who are considered by the telecom industry to be more lucrative than the prepaid customers, since they typically spend more on data services like texting and web surfing. Sprint warned that it expects to lose a further 1.2 million postpaid customers in the current quarter and around the same amount in the second quarter.

Sprint also said that it had drawn $2.5 billion from its revolving credit line in order to improve its financial flexibility, leaving it with $500 million of remaining availability.

In junking Sprint, Fitch said the downgrade reflects its expectations that the company's financial metrics and operating results for 2008 will be much worse than expected.

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