Lehman, AIG keep investors focused; Tribune loan slips in sympathy; broad market remains heavy

By Stephanie N. Rotondo

Portland, Ore., Sept. 16 - Lehman Brothers Holdings Inc. and American International Group Inc. remained the focus of the market Tuesday as players continued to wonder what the fall out might be.

But while Lehman was definitely at the forefront on Monday, it was AIG in the spotlight during Tuesday's session. Lehman's debt fell during trading, though only by a few points as opposed to 30-plus points in the previous session. AIG paper started the day off by losing another 15 points or more on the day, but managed to rebound somewhat by market close on talk of a government bailout.

"It was a crazy day," said one trader. He added that buzz AIG might get some help pushed things higher by the end of the day.

"Towards the end of the day, it felt a little better," said another trader.

Distressed traders were also talking about the situation at Washington Mutual Inc. and whether the bank will ink a takeover deal with JP Morgan.

"If somebody else doesn't come in to take [WaMu] over, it's probably a sinking ship," opined one source. "There are too many vultures attacking them."

Aside from Lehman and AIG, trading in distressed territory seemed to take a break. Traders speculated that while the market was "teetering on the edge," investors were still trying to sort out their exposure to Lehman and what it all means.

Tribune Co.'s bank debt took a hit. With no news out to cause the decline, traders attributed the loss to sympathy for the broader market.

Lehman, AIG still dominate

Lehman bonds dipped slightly during trading, though by far not as much as in the previous session.

One trader said Lehman's senior debt fell to around 31, down from 35 bid, 36 offered on Monday. Before that, the bonds had been in the 70s.

According to a Reuters report, Barclays plc has agreed to purchase Lehman's broker-dealer operations for about $2 billion. The buyout comes just days after the British bank backed away from taking over the investment bank, which drove Lehman into bankruptcy.

No official word has been released on the pending deal, though an announcement was expected late Tuesday or early Wednesday.

The sale also marks Lehman's attempts to liquidate its business. On Monday, the bank put up more than $800 million of its leveraged loans up for auction. However, come Tuesday, Lehman called off the auction, as leveraged buyout loan prices have drastically fallen in the wake of Lehman's collapse.

Meanwhile, talk of a government bailout for AIG helped the company's debt recover somewhat by the end of the day. Traders saw the company's debt, such as the 5.85% notes due 2018, fall to the mid-30s before rebounding to close in the low-40s. Still, that is down from the mid-50s previously.

Although Treasury Secretary Henry Paulson had previously stated that government assistance for the insurer was not in the cards, traders said by the close of business, many were talking about the possibility.

The market chatter came as another round of downgrades on the company's credit rating threatened to destroy moves to raise needed capital to keep the company afloat. According to a Bloomberg article, former chief executive Maurice Greenberg was leading a group of investors to take over the company, whether through a proxy fight or a buyout.

The article also said that the Federal Reserve has told AIG to seek private capital. Goldman Sachs Group, Inc. and JPMorgan Chase & Co. are reportedly working with the company to figure out exactly how much capital is needed.

But that number could multiply quickly if the company receives collateral calls from credit swap investors. The recent downgrades could result in more than $13 billion of calls.

The company is currently working on obtaining a bridge loan to fund operations in the short term. But with no announcements as of Tuesday, that could also leave AIG vulnerable to investor panic.

In the rest of the financial sector, a trader said he saw no activity in Thornburg Mortgage Inc.'s 8% notes due 2013 - despite news out about the new threat to the company's viability posed by a fresh round of margin calls, which hammered its stock down 31% on nearly twice the usual volume. He said the last round-lot activity he had seen was at the end of last week, with the bonds in the mid-60s, and he saw nothing in smaller over-the-counter dealings since then.

Another trader saw the bonds last offered Tuesday around 63-64, "and there was a seller." He said he did not know where the bonds ended up, but stressed that it was "small, no activity."

Tribune loan slips

Tribune's term loan B traded off by a couple of points on Tuesday just in sympathy with the rest of the market, according to a trader.

The Chicago-based media company's term loan B was seen trading in the 60 level, compared with Monday's quotes of 63 bid, 65 offered, the trader said.

"Things definitely finished down. Might have popped off their lows but still down anywhere from a half to 2 points on the day," a second trader remarked about the cash market in general. "People are just selling things today."

"Everything is all over the place. Tone is negative," another trader remarked.

"Cash opened significantly weaker today," a third trader said, explaining that after the open, things started creeping back up a little bit but overall names were still down on the day.

"For example, take First Data [Corp.'s] term loan B2. 89.5 bid early. Then 89.25 bid. Rallied to 90.25 bid late day. Yesterday finished out 91 to 91.5," the third trader added.

Broad market remains heavy

While the talk of a rescue plan for AIG helped to bolster the faltering market, the buzz might have come too late in the day to help the broader marketplace. As a result, many issues remained on the lower side.

A trader said Charter Communications Inc.'s 11% notes due 2015 drifted into the high-60s from 71 previously. He also saw Spectrum Brands Inc.'s 11% toggle notes due 2013 in the high-60s, which he called unchanged.

At another desk, Residential Capital LLC's 8 7/8% notes due 2015 fell a deuce to finish at 23 bid.

Idearc Inc.'s 8% notes due 2016 continued to lose weight, dropping another 3 points to 37 bid. The bonds had lost about 4 points in the previous session.

Six Flags Inc.'s 9 5/8% notes due 2014 slipped 4.5 points to 59.5 bid.

A trader said Tronox International's 9.5% notes due 2012 gained half a point to 41.5 bid. "It's up - which is unusual in our market," he said.

Sara Rosenberg contributed to this article.

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