CIT bonds end softer; Freescale numbers help lift debt; Hawker Beechcraft notes get some air

By Stephanie N. Rotondo

Portland, Ore., Oct. 23 - The distressed debt market ended the week mixed Friday, as a declining equity market and not altogether positive news - but some good earnings - caused gyrations.

CIT Group Inc. was again grabbing headlines throughout the day. First there were reports that the company was close to reaching an agreement with lender Goldman Sachs & Co. regarding its $3 billion loan. Then it was that the company was releasing a web cast discussing its restructuring plans and the calamities that would follow if bondholders did not approve said plans. And last, but certainly not least, there was Carl Icahn's letter to bondholders.

The result of this mish-mash of news was that the company's debt traded largely unchanged - at least most of the day. But just before the market closed, traders started to see some weakness in the credit, leaving the notes as much as a point lower.

Freescale Semiconductor Holdings I, Ltd. meanwhile had some - relatively - good news for the market. Third-quarter earnings showed a slightly lower decline in revenue compared with the previous quarters. In response, the company's bonds finished unchanged to a little better and its bank loan also improved.

Elsewhere, in the land of no fresh news, Hawker Beechcraft Acquisition Co. LLC's bonds headed higher on the day.

CIT bonds end softer

CIT Group's bonds showed some weakness late in the day, traders reported, after the company posted a pre-recorded web cast regarding its restructuring efforts.

A trader said there was "some action" in the 5% notes due 2014 at 63 bid, 64 offered. He called that "kind of unchanged," but another trader disagreed.

The second trader said the 5% notes - which he deemed to be a "good indicator" of where the overall debt stood - traded at 63 shortly before the close, which was not long after the web cast premiered.

"This stuff is starting to weaken," he said, estimating that the bonds would likely drop a point on the day.

The trader also saw the 12% notes due 2018 at 18.5 bid, 19.5 offered, down from 20.5 bid 21.5 offered. The 5.4% notes due 2013 finished about half a point softer around 64.

Still, the trader noted, "There was not a lot of action in size. There are a lot of smaller trades."

Another trader saw considerable activity in CIT Group's bonds, especially its 4 1/8% notes coming due on Nov. 3. He saw $17 million of the bonds trading, mostly in a 69 to 71.25 range.

He saw some $13 million of the 5% notes due 2014, trading in a range of 61.5 bid, 63.5 offered, "where the majority of trades were."

He saw CIT's 5.8% notes due 2011 at 64 to 64.5 and its 5% notes due 2015 at 64 bid, 65 offered, both on $5 million traded.

Another trader said that at his shop, "this week, we were very active" in CIT bonds and the legacy debt left over from the former Lehman Brothers.

He said that there was considerable market activity in CIT as the company approaches "the final deadline" on its exchange offer for its current bonds, which is scheduled to expire for most categories of notes at 11:59 p.m. ET next Thursday, Oct. 29.

He said that "regardless of what is done with this company" - whether the debt exchange is successful, or whether it is unsuccessful and the company is forced into some kind of Chapter 11 restructuring, as management has warned, or, alternatively, whether billionaire investor Carl Icahn's proposed rescue plan is somehow adopted - "the reality of the situation is that they will have to figure out a way to get financing going forward," since CIT's old financing model, making great use of cheap short-term commercial paper financing, is no longer viable.

He continued that he did not know "how completely people have stepped into the gap to fill in for them in providing funding for small businesses and retail. We've heard anecdotally that other banks have stepped into the gap to try and pilfer a lot of CIT's customers. Well, if that's happened, and the economy is functioning without any difficulty and CIT really isn't doing any lending, it begs the question of do they [CIT] really need to exist?"

He said some answers may be clearer this week once we know whether the note exchange carries or not.

In its restructuring presentation - which was also filed with the Securities and Exchange Commission - CIT's management urged bondholders to accept its restructuring plan, or else face recoveries as low as 6 cents on the dollar in a bankruptcy process.

"Without an approved restructuring plan, the company will likely file for bankruptcy without the benefit of a plan of reorganization and stakeholders will lose significant value," CIT said in the presentation. "Impacts include: substantial damage to the franchise; inability to insulate valuable operating businesses from the proceedings; increased risk of seizure of CIT Bank; uncertainty and constraints with respect to liquidity; significant bankruptcy related expenses."

CIT is currently undergoing a debt exchange for certain unsecured notes. Those that participate in the swap will receive new notes and some will also get preferred stock. The goal of the exchange is to cut CIT's overall debt by at least $5.7 billion.

CIT is also reportedly asking some bondholders to participate in a $6 billion loan. But that part of the deal has come under fire from some - specifically, billionaire investor Carl Icahn - as those who agree to provide the funds must then vote for the restructuring plan.

In a letter to the company's board earlier this week, Icahn blasted the company for its "Tammany"-like practices and instead offered another solution: Icahn would provide the $6 billion loan and CIT can slowly wind itself down.

Icahn claims he is the largest holder of CIT notes and stepped up his campaign on Friday in a letter to bondholders.

"I have learned over the years that the best investments are based on simple concepts; I call these 'no brainers,'" Icahn wrote in the letter. "I believe that the CIT bonds would qualify as just such an investment with one caveat; we, the bondholders, must not endanger the value of our investment by voting for the exchange offer/pre-packaged bankruptcy plan currently proposed by the company.

"CIT's balance sheet is comprised of a diversified pool of loans and assets which will generate huge cash inflows over the next few years," he continued. "If these assets are 'run off' in a controlled way, we believe our bonds are worth par and in no event less than 80-85% of par value. However in the company's plan, the assets will not be wound down; rather, they will be reinvested in an operating business controlled by the company's current board of directors. This is the same board and senior management team that has presided over the demise of our company by making Titanic-sized errors, some of which we believe were the result of gross negligence."

But along with its bondholder trouble, CIT is also trying to amend a $3 billion loan it received from Goldman Sachs in June 2008. Under the terms of the current loan, New York-based lender CIT would have to pay Goldman $1 billion if the facility were canceled - a scenario that would likely occur should the company file for Chapter 11 protections.

However, news reports indicate that the parties are close to coming to terms on the deal.

Elsewhere in the financial realm, First Data Corp.'s 10.55% notes due 2015 traded "up a little" at 92 bid, 93 offered.

"That one always trades a lot," a trader said. However, he noted that the 10.55% notes were "not the one that usually trades."

Freescale numbers help debt

Freescale Semiconductor Holdings' debt ended unchanged to better following the release of the company's third-quarter results.

A trader said the 8 7/8% notes due 2014 were "pretty active" at 85 bid, 86 offered. He called that "up from 84.5 bid, 85.5 offered earlier in the week."

Another trader also said the credit's notes were active on the back of what deemed "pretty good" numbers. However, he saw the 8 7/8% notes unchanged at 85 bid, 86 offered and added that the 9 1/8% notes due 2014 were "probably sideways as well" at 77.5 bid, 78.5 offered. The 10 1/8% notes were also steady at 76 bid, 76.5 offered.

Freescale's term loan was meanwhile stronger following the earnings report.

The term loan was quoted at 82 bid, 82.5 offered, a trader said. On Thursday, prior to the release of numbers, the loan was quoted at 81 bid, 82 offered and immediately after earnings came out the loan moved to 81.75 bid, 82.5 offered, the trader continued.

Late in the day on Thursday, Freescale announced that for the third quarter ended Oct. 2, it had a net loss of $410 million, compared with a net loss of $484 million in the second quarter of 2009 and a net loss of $3.48 billion in the third quarter of 2008.

Net sales for the quarter were $893 million, compared with $824 million in the second quarter of 2009 and $1.41 billion in the third quarter last year.

EBITDA for the quarter was $119 million, compared with $38 million in the second quarter of 2009 and $322 million for the third quarter in 2008.

And, cash and cash equivalents were $1.33 billion on Oct. 2, compared with $1.31 billion on July 3.

"Third-quarter results represent very strong execution on the part of the Freescale team," said Rich Beyer, chairman and chief executive officer, in the earnings release. "Revenues in our core businesses grew sequentially, operating profitability improved significantly and we ended the quarter with more than $1.3 billion in cash."

"I guess we could say things were slightly better for Freescale in the third quarter," wrote Gimme Credit analyst Dave Novosel in an afternoon comment. He noted that while revenues fell 37% during the period, they had fallen 44% and 40% in the two previous quarters. And, based on management's fourth-quarter projections, revenue "would be roughly flat year-over-year."

Novosel also noted that while free cash flow is still negative for the year, with $1.3 billion in cash "liquidity is not a major concern at this point."

Freescale is an Austin, Texas-based designer and manufacturer of embedded semiconductors for the automotive, consumer, industrial and networking markets.

Hawker notes get some air

Hawker Beechcraft Acquisition's bonds were up on the day, though there was no fresh news out on the company.

A market source saw the 8½% notes due 2015 gaining more than 3 points to end at 76.75 bid. Another source pegged the issue at 76 bid, 77 offered, up from 73 bid, 74 offered earlier in the week.

Hawker Beechcraft is a Wichita, Kan.-based manufacturer of business, special mission and trainer aircraft.

Tronox moves back up

A trader saw Tronox Worldwide LLC'S 9½% notes due 2013 - which have been on a wild ride over the past two weeks - turn back upward on Friday to trade in a 61.5 to 63 context.

The bonds - trading in the upper-30s before the company released optimistic financial projections for the next several years on Oct. 7 - immediately jumped 10 points the following day, into the upper-40s, and from there, pushed as high as the mid-60s over the next week, a nearly 30-point gain in that time.

They began to come off those highs, however, and by the middle of this week were being quoted as low as 54.5. Steadying as the week wore on, they moved back up to the upper-50s by Thursday, and into the lower-60s on Friday. The trader said he saw "a couple million bonds today [Friday] between 62.5 and 63."

He said he had seen no fresh news about the troubled Oklahoma City-based chemical pigments producer, which is now restructuring under Chapter 11. Tronox recently entered into an agreement to sell much of its business to Huntsman Corp. after the latter made a stalking-horse bid of $415 million for those assets.

Sara Rosenberg and Paul Deckelman contributed to this article.

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