Smithfield gains on beef unit sale; more trouble for Thornburg Mortgage; Idearc continues to move up

By Paul Deckelman and Paul A. Harris

New York, March 5- Smithfield Foods Inc.'s bonds were seen up about a point or so in busy dealings Wednesday on the news that the Smithfield, Va.-based meat processing company will sell its U.S. beef operations to Brazilian-based JBS SA and will use the proceeds from the transaction mostly for debt reduction.

Thornburg Mortgage Inc.'s bonds were again heading lower as the Santa Fe, N.M.-based lender continued to be the focus of market angst about the credit crunch - and the bad feelings are expected to intensify now that it had received a notice of default on some of its margin calls.

Idearc Inc.'s recently oversold bonds were solidly higher, continuing to get a lift, traders said, from a Barron's story over the weekend touting the telephone-directory publisher's equally oversold stock as a potentially good investment for market players not afraid of a little risk. Sector peers R.H. Donnelley Corp. and the latter's Dex Media Inc. subsidiary were also better.

The big automotive benchmark names - General Motors Corp. and domestic arch-rival Ford Motor Co. - were seen higher.

The primary market remained adrift.

Market indicators gain ground

A trader said that the widely-followed CDX index of junk market performance was up by 5/16 point at 88 1/16 bid, 88 5/16 offered. Meanwhile, the KDP High Yield Daily Index rose 0.24 to end at 73.79, while its yield came in by 5 basis points to 9.69%.

In the broader market, advancing issues led decliners by a slight margin. Overall activity, reflected in dollar volumes, rose by about 4% from Tuesday's levels.

No beefs about Smithfield asset deal

Ever since a fast-food company years ago produced a memorable television ad featuring a scowling elderly lady scornfully scrutinizing a competitor's main hamburger product and growling "where's the beef?", that expression has become a cultural catch phrase expressing extreme skepticism. But nobody on Wall Street seemed to be uttering the dreaded demand on Wednesday, as Smithfield Foods's shares and bonds rose - more modestly than flamboyantly, to be sure - on news of its planned beef-unit asset sale, with the bonds higher by around 1 to 1½ points.

A trader saw the company's 7% notes due 2011 up a point at 99 bid, par offered, while its 8% notes due 2009 were at 100.5 bid, 101.5 offered, both up a point.

He also saw Smithfield's 7¾% notes due 2017 up 1½ points at 96 bid, 97.5 offered.

Another market source saw the 73/4s as probably the most busily traded issue, pegging the bonds up slightly more than a point to 97.75. The 7s were hovering just under par, up 1½ points, while the 8s up maybe ½ point to the 102 region, but on very restrained dealings. The company's 7¾% notes due 2013 moved ½ point higher to around the par level.

Smithfield's New York Stock Exchange-traded shares gained $1.07, or 3.84%, on news of the asset sale, ending at $28.95. Volume of 4.7 million shares was not quite four times the norm.

Smithfield - the world's largest pork producer but only the fifth-largest U.S. beef producer - said that it had agreed to sell its Smithfield Beef Group Inc. beef processing and cattle-feeding operation to JBS for $565 million. Its live-cattle inventories and those animals currently owned by a 50-50 joint venture Smithfield owns with Continental Grain Corp. are excluded from the purchase. That livestock will be raised by JBS after the transaction closing for a negotiated fee and will then be sold - most within six months of the closing and virtually all within 12 months, Smithfield estimates - with proceeds from those cattle sales to go to Smithfield or to the joint venture, as the case may be. Smithfield anticipates getting total proceeds from the livestock sale - between its own animals and its share of the proceeds from the joint-venture animals - in excess of $200 million, that in addition to the proceeds of the basic beef unit sale. It anticipates primarily using the proceeds from the two transactions for debt reduction, principally its outstanding revolving credit facility balance.

Moody's Investors Service affirmed Smithfield's Ba2 corporate family and probability-of-default ratings as well as its Ba3 senior unsecured debt rating and its SGL-3 speculative-grade liquidity rating, citing the likely application of the asset-sale proceeds to debt reduction. It is keeping the outlook at negative.

While noting the company's size and market position, its geographic and product diversity, and its "solid brand" in the U.S. pork industry - the company's core operation upon which it intends to focus once it exits the beef business - Moody's also pointed out Smithfield's high leverage, its "somewhat volatile" earnings and cash flow stream and its "aggressive" acquisition strategy as well as "a complex and changing business structure."

Thornburg on the downside, again

A trader saw Thornburg Mortgage's 8% notes due 2013 down another 3 points at 63 bid, 65 offered.

A market source at another desk saw the bonds down more than 3 points to the 64 level.

The first trader noted that after the market had closed "there was a disclosure that they had gotten a default notice [on some of their mortgage-linked securities] from JP Morgan, so that's expected to send them down [Thursday]."

Thornburg admitted in an 8-K report filed with the Securities and Exchange Commission that it had received a letter from JPMorgan Chase Bank, NA after failing to meet a margin call of approximately $28 million. The JPMorgan letter charged that an event of default had taken place and said that the banking giant would exercise its legal rights under its master agreement governing Thornburg's approximately $320 million of reverse repurchase agreements, a form of collateralized short-term borrowing.

Thornburg said in its filing that its receipt of the notice of an event of default has triggered cross-defaults under all of its other reverse repurchase agreements it had entered into with other counterparties, and its secured loan agreements. Thornburg's obligations under those agreements "are material," it said.

Disclosure of JPMorgan's claim of a default and the potential effect that could have on literally hundreds of millions, if not billions of dollars of other borrowings, is the latest in a string of recent setbacks for Thornburg.

The company disclosed a week ago that it had received $300 million of margin calls on a portfolio of $2.9 billion of borrowings collateralized less-than-prime alt-A mortgages, although it said it had met those calls. Then on Monday, Thornburg reported an additional $270 million of margin calls and said it had not met "a majority" of them, although it later said it had reached agreement to sell nearly $1 billion of loans in a securitization to raise cash to meet those calls and other demands. But while its bonds and shares rose off their lows at that news, they continued to show losses, a sign of sustained market skepticism about the company's ability to meet all of its obligations.

Elsewhere among the mortgage names, Countrywide Financial Corp.'s 3¼% notes slated to come due in May were being quoted at 96 bid, 97 offered, up a point, while its 6¼% notes due 2016 were unchanged at 79 bid, 81 offered.

Residential Capital LLC's 8 7/8% notes due 2015 were up a point at 52 bid.

More upside for Idearc

A trader saw Idearc's 8% notes due 2016 up 4 points on the day at 66 bid, 67 offered. He attributed the bounce off recent lows to "an article in Barron's [this past weekend] that continues to push them higher."

A second market source also saw them up 4 points at above the 66 area, in active trading, including some big-block trades.

Yet another market source quoted the bonds as high as 69 bid near the end of the day, a 6 point gain on the session.

The article in question said that Idearc - along with such other debt-laden high-yield peers as Bon-Ton Stores Inc. and FelCor Lodging Trust - could be potentially profitable investments for market players who can look beyond the credits' riskiness.

The Barron's article noted that all of the companies it named - others were Gray Television Inc., Carmike Cinemas Inc., McClatchy Co. and Libbey Inc. have debt that exceeds their equity market value. The article suggested that given their modest market capitalizations, prices could move up quite sharply under the right circumstances. "A little bit of equity and a lot of debt can produce huge returns in a favorable market," the magazine opined.

Among other names in the directory sector, the first trader also noted that R.H. Donnelley's bonds "have been tagging along, up or down" with Idearc, and saw its 8% notes due 2013 up 2 points on the day to 72 bid, 73 offered.

At another desk, a source saw Donnelley's 6 7/8% notes due 2013 up nearly 2 points at 59.5 bid, while the Donnelley-owned Dex Media West 9 7/8% notes due 2013 gained nearly 4 points to the 88.5 mark.

Auto names drive higher

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 up a point at 76 bid, 77 offered, while its 49%-owned financing arm, GMAC LLC's 8% paper due 2031 eased ½ point to 73.5 bid, 75.5 offered. Ford's 7.45% bonds due 2031 were unchanged at 67 bid, 69 offered.

At another desk, a trader said all three issues were up about ¼ point, with GM at 76.25 bid, 77.25 offered, Ford at 67.5 bid, 68.5 offered and GMAC at 74.5 bid, 75.5 offered.

But another market source estimated the Ford bonds up more than 1½ points at 67.5.

No real news was seen out of the sector, other than GM's willingness to front its former parts unit, Delphi Corp., about $3 billion to help the Troy, Mich.-based parts company emerge from Chapter 11.

Trump gets dumped

Trump Entertainment Resorts Inc.'s 8½% notes due 2015 were down 1½ points to 67 bid, 69 offered; a trader cited "weaker numbers" as the reason for the retreat.

Another source pegged those bonds down 1 3/8 points at 68. Yet another called the bonds down 1 point at 67, in very active dealings.

The Atlantic City, N.J.-based casino and hotel concern posted a $183.2 million net loss for the fourth quarter, compared to a loss of $9.7 million the previous year. Revenues also declined to $228.6 million, versus $244.2 million in the last quarter of 2006.

However, the company remained upbeat, stating that it has sufficient liquidity.

"We don't see liquidity as being an issue for all of 2008," said John P. Burke, the interim chief financial officer, during a quarterly conference call.

Trump, along with other Atlantic City rivals like Boyd Gaming Inc., MGM Mirage and Harrah's Entertainment, has been hurt by developments over the last year over which it has no control, including a partial public smoking ban in the city that took effect last April. New gaming centers in New York and Pennsylvania have also put some strain on the Jersey Shore casinos.

'Skittish' market

A buy-side source said that the high yield market felt better towards the end of the Wednesday session, but it remained "very skittish.

"In terms of the cash market there are probably better sellers than buyers," the source commented.

A high yield syndicate official more or less signed off on that color.

"The high yield has been trading with equities, in terms of general sentiment," the official said, noting that afternoon rallies saw the major indexes end the day in positive territory, with the Nasdaq and S&P 500 both up over 0.50%, while the Dow Jones Industrial Average ended the day 0.34% higher.

"There is a general negative bias to everything, although there are some days that feel a little better than others," the sell-sider added.

"Today may have felt a little better."

A four-B industrial

The primary market saw no activity whatsoever on Wednesday.

However a high yield syndicate source reported that discussions are underway between underwriters and a mid-to-high double B rated industrial issuer.

"The question is, which of the broken markets will it choose in order to get its financing?" the official remarked, adding that if the issuer is in for a longer tenor it could opt for high yield.

However, the source noted, tenors have recently been at the shorter end of the traditional high yield range: seven-year and eight-year paper, as opposed to 10-year paper.

"It's been shorter, in part, because issuers are looking to be on the shorter end with respect to the non-call period," the official said.

Should the prospective issuer choose to raise money in the bank loan market it will face more restrictions as well, the official added.

"Right now the bank market is a true bank market, as opposed to an institutional term loan B market.

"So it's covenants and it's banks."

The source, while declining to furnish an issuer name, said that a possible deal is generating some interest among crossover credits.

Prospect News asked the source whether last week's Rock-Tenn Co. deal might serve as a source of encouragement for the prospective four B industrial issuer to take a try at the high yield bond market.

To recap, Rock-Tenn priced $200 million of 9¼% senior unsecured notes due 2016 (Ba3/BB-) at 99.30 to yield 9 3/8%.

"Rock-Tenn went alright, but look at the pricing," the official said, adding that the last dollar-denominated four B deal to come with a "nine-handle" was the dollar-denominated tranche of Intergen NV's senior secured notes due 2017, which came last July with exactly the same ratings as Rock-Tenn: Ba3/BB-.

The Burlington, Mass.-based power generation company priced $1.26 billion of 9% notes at 99.189 to yield 9 1/8%.

The syndicate official suggested that the pricing of the Rock-Tenn deal - its high ratings notwithstanding - could have included a concession to the fact that the company operates in the cyclical paper and packaging space, whereas the unidentified industrial company in question does not.

The source said that a better, although by no means perfect, comparable could be Southwestern Energy Co. which priced a $600 million issue of senior unsecured notes due 2018 (Ba2/BB+) at par to yield 7½% on Jan. 11.

The official did specify, however, that the industrial credit in question does not operate in the energy or resources sectors.

Losing to mezzanine market

The syndicate official also said on Wednesday that the high-yield market is presently losing business to the mezzanine financing market.

"The call terms are shorter in the mezz market," the source said.

"So even if issuers have to pay a bit more coupon they're getting a shorter call."

The official conceded that interest expenses for issuers are traditionally higher in the mezzanine market.

However with respect to where some of high yield is trading, there is lately some convergence with respect to coupons.

"The mezz market makes sense for both sides," the official asserted.

"It's the only way you get a buyer and a seller right now.

"The high yield doesn't make sense for the issuers."

The official also conceded that mezzanine debt is not liquid, whereas traditional high yield bonds most often become free to trade. Hence mezzanine plays customarily play to buy-and-hold types of accounts.

However, the banker asserted, some of the high yield that has gotten done lately hasn't been all the liquid, either.

"Things have traded poorly," the source said.

"So the only way to trade them is to take a hit on them.

"You're sort of in them, anyway, so it's not much of a difference."

Also, the banker said, mezzanine investors have lately been demonstrating slightly more latitude with respect to deal terms.

"Traditional mezzanine financing has warrants and higher coupon than high yield," the source noted.

"And traditional mezzanine is non-callable.

"But that's not where it is currently.

"There is a little more flexibility with regard to what terms people are finding acceptable.

"They are all individually negotiated deals. There is no one-size-fits-all, the way high yield notes are."

Stephanie N. Rotondo contributed to this report.

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