Buffets begins restructuring; Tousa bank debt dips; Linens' outlook bleak; Delphi driven lower

By Stephanie N. Rotondo

Portland, Ore., Jan. 4 - Disappointing economic data released Friday may have been just the thing to push already-on-the-fence distressed debt investors over the edge.

As the unemployment rate hit a two-year high of 5% and job growth weakened, recession worries grew. The resulting hesitation in the market not only put more pressure on the junk sector, but also caused the Dow Jones Industrial Average to sink a weighty 256 points.

"There is a lot of confusion as to what is going on," one trader said. "A lot of bonds are hitting new lows."

Another trader said the outlook for the economy is less than rosy, which will "continue to be negative for levered credits.

"It is hard to see any near term positive catalyst," he added.

At this early juncture of 2008, the bond market is already showing signs that confirm many market players' belief that default rates are on the rise. Coming out of 2007, and an all-time low default rate, a recession would likely bring defaults closer to the long-term average.

At the number 2 position for companies that have all ready entered into default territory is Buffets Inc. The restaurant operator confirmed late Thursday that it had missed its coupon payment due Jan. 2. The news was already in the market earlier in the session, propelling its bonds down as much as 10 points. The debt continued to lose ground Friday - though not as much as the previous session - after the company said as part of its announcement that it would begin restructuring talks.

But unlike Buffets, Tousa Inc., which made number 1 on the year's default list, saw its bonds gain, albeit slightly. However, traders reported that activity in the notes fell off Friday, while the bank debt - previously seen edging higher - began to backtrack.

The added recession worries put even more pressure on the retail sector, which has been underperforming anyway.

For example, Linens n' Things' debt hit an all-time low, prompted in part by poor numbers from rival Bed, Bath and Beyond. One trader pointed out that the home accessories seller's debt has only been on the table for about a year - and it has all ready lost over half its value.

But consumer-driven sectors as a whole are taking it on the chin. Delphi Corp.'s bonds fell about 5 points on the day, a move attributed in part to poor sales numbers throughout the industry. Still, one trader said the culprit was the growing concerns related to the economy at large.

Buffets begins restructuring talks

Buffets' has officially entered into its 30-day grace period, after missing its Jan. 2 coupon payment on its 12½% senior notes due 2014.

The buffet restaurant owner confirmed well after trading finished on Thursday that it had missed the payment; the debt had dropped 10 points during that day's session. Come the last day of the trading week, the bonds continued to lose ground.

A trader placed the debt "down a couple more points" at 28 bid, 29 offered, while another quoted the notes at 28.5 bid, 29 offered. At another desk, a trader pegged the bonds around 28.

The company announced that it would use the grace period to begin discussing restructuring options with its creditors. Should the company not make the interest payment by the end of the 30-day period, it would enter default and the bonds could be accelerated. That would in turn constitute a default under its $640 million credit facility, which could also be accelerated.

Both Moody's Investors Service and Standard & Poor's downgraded Buffets, blaming the likelihood of default.

Tousa bank debt dips

Tousa's second-lien term loan reversed course on Friday as it fell by about a point, a result of overall market weakness, a trader said.

The second-lien term loan was quoted at 91½ bid, 92½ offered, down from Thursday's levels of 92½ bid, 93½ offered, the trader said.

The second-lien term loan had started out on Wednesday around the 91 bid context, but had been climbing up over the Wednesday and Thursday sessions after the Hollywood, Fla.-based company revealed that it failed to make its semi-annual interest payments on its 9% senior notes due 2010 and 10 3/8% senior subordinated notes due 2012.

Sources had said that the second-lien was stronger on the missed bond payment because it meant that there was less money going out the door.

The Hollywood, Fla.-based homebuilder's corporate debt quieted down Friday, after the missed payment pushed the subordinated debt higher. A trader deemed the 10 3/8% notes unchanged at 8 bid, 10 offered, adding that he did not see much trading going on.

Standard & Poor's made good on its threat to cut the company's rating if it failed to pay the coupons. The ratings agency downgraded Tousa's corporate credit rating to D from CC, the 9% notes and 10 3/8% notes to D from C and the senior secured first-lien term loan to CC from CCC-.

Linens' outlook bleak

Linens n' Things floating-rate notes hit an all-time low, a trader said, as recession concerns and poor industry results smacked the company's debt.

The trader pegged the bonds due 2014 at 46 bid, 48 offered. Another trader said the bonds ended the day at 46.5 bid, 47.5 offered, while another said the bonds were "whacked" down 5 points in the previous session, closing still lower Friday to 47 bid, 48 offered.

"Everyone's trying to figure out what to do," a trader said.

Bed, Bath and Beyond, Linens' rival and the largest U.S. home furnishings retailer, reported a net income of $138.2 million for the three-month period ending Dec. 1, compared to a profit of $142.4 million a year earlier.

Still, the market is waiting to hear how Linens' fared in the fourth quarter - though no one is expecting miracles.

"This was not the final word," a trader said. "But my guess is the final word will be worse."

An interest payment on the retailer's debt will come due Feb. 8.

Elsewhere in the sector, Michael's Stores Inc.'s bonds fell about a point, its 11 3/8% subordinated notes due 2016 to 87, and its 10% notes due 2014 to 92.

Delphi driven lower

The automotive industry has for several years been considered a high-risk sector. As consumers are paying higher prices for gas and housing, and recession fears increase, anything related to the industry is touch and go.

Delphi's bonds exemplified that, with traders reporting that the automotive parts supplier's debt fell as much as 5 points on the day.

One trader said the 7 1/8% notes due 2029 slipped a couple points to 51.5 bid, 53 offered. He attributed the decrease to poor sales numbers coming out of Detroit.

Another trader said the bonds were "hammered" down 5 points, its 2029 issue around 52 and its 6.55% notes that were to have matured in 2006 around 51.

The second trader tentatively agreed that poor auto sales had something to do with the shakedown, but was quick to add that the sector as a whole was not the best. As one of several consumer-driven industries, "it is not a surprise" that a weaker economy would weigh heavily on companies like Delphi, he said.

On Thursday, major automakers reported their December sales, most of which fell for the month, and most are forecasting a dismal outlook in the months to come.

Quebecor: Is bankruptcy near?

Could Quebecor World Inc. be the next company on the chopping block? That seems to be the common belief as the printing company races to refinance its debt ahead of some fast-approaching deadlines.

But one trader said a news report that stated that the company was working on a new bank loan pushed the company's bonds up 5 to 6 points. He quoted the 6 1/8% notes due 2013, considered the benchmark issue, at 79 bid, 80 offered. He noted that the debt had been at 76 on Wednesday and 73.5 on Thursday.

"People liked [the news]," he said. "It was good for the bonds."

Quebecor has until Jan. 15 to secure $125 million in new financing and Jan. 30 to refinance its credit facility debt, part of a larger requirement from its banks to reduce its credit facility to $500 million by Feb. 29.

"Quebecor World's banks have put the corporate equivalent of a gun to the company's head," Gimme Credit LLC analyst Shelly Lombard wrote in a report released Friday. "The banks recently agreed to waive covenant violations until March 31 but only if Quebecor obtains $125 million of new financing by Jan. 15 and gets commitments for a refinancing that will reduce the bank facility to $500 million by Feb. 29 and repay it in full by June 30. We can't see any other lender stepping in and saving Quebecor for the same reasons the existing bank group is so nervous."

Given that, she added, the printer might have to stop using its presses for commercial projects, and start printing money.

Sara Rosenberg contributed to this article.

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