Auto names continue to struggle; Tembec gets weaker still

By Paul Deckelman

New York, Jan. 13 - Trading in distressed bonds was described as quiet on Friday, as the junk bond market closed early (2 p.m. ET) ahead of the three-day weekend that includes a full market closure on Monday for the Martin Luther King Jr. Day federal holiday.

And as had been the case for virtually the entire week, the automotive sector - carmakers General Motors and Ford Motor Co. and their respective financing arms, as well as the numerous parts suppliers who depend largely on the troubled Detroit giants - continued to fizzle, where earlier they had sizzled.

Elsewhere, Tembec Industries Inc.'s bonds continued to get ever weaker, with a trader citing market scuttlebutt that the company might decide to not make its upcoming bond coupon interest payments.

GM's bonds, and those of its General Motors Acceptance Corp. financial unit, were seen heading lower, after a presentation by the beleaguered automotive giant's chief executive officer apparently failed to convince the financial community that GM is nearing its goal of selling a majority stake in GMAC. GM announced some weeks ago that it was looking to sell a controlling stake in GMAC, presumably to a large, well-capitalized, solidly investment-grade entity, which would help boost GMAC's credit ratings back into investment-grade territory, greatly lowering its borrowing costs. Such a sale would also bring anywhere from $10 billion to $15 billion into GM's coffers, depleted by $4 billion of red ink in the first nine months of 2005.

However, despite GM's assertions that the sale process seems to be going well, no firm deadline for the sale has yet been served, and all of the news has been negative, with several large financial companies thought of as would-be buyers - Bank of America, Wells Fargo & Co. and Citigroup - publicly stating they are probably not interested in buying control of GMAC.

A trader said that GM's bonds were lower Friday after CEO Rick Wagoner spoke to analysts in Detroit, trying to sell them on the efficacy of the world's largest carmaker's turnaround efforts, including its plans for the GMAC sale.

"People were looking for a little more conviction as to what's going to happen with the selling of the GMAC stake - and I don't think he gave it," the trader said.

"It didn't sound like he had any language in his comments that indicated that a deal would be made - in fact, he used the word 'possible,' which doesn't bode well for people [looking for definitive word on a GMAC stake sale] and even if he didn't say anything, I think we still would have been down on the day because people were looking for a little bit more positive tone."

He saw the GM benchmark 8 3/8% notes due 2033 at 68.5 bid, 69.5 offered, down 1½ points on the session, while the GMAC 8% notes due 2031, which had traded at 101 bid, 102 offered before Wagoner's remarks, headed down to around 99.5 bid, par offered, down 1½ to two points on the day.

In a research note, an analyst said that GM and GMAC combined to pull the overall junk market down a point to 1½ points. With the selling coming mostly from "levered accounts and dealers who were spooked by the comments [from Wagoner and other GM executives who spoke] about 'contingency plans' and being 'prepared to operate with or without a GMAC sale'."

The analyst said the market was probably not expecting the GM boss to use that forum to announce an actual sale of a 51% stake in GMAC, but "it was expecting to hear that the process is farther along then it appeared."

The analyst further said that "the next two weeks should be very choppy with the volatility in the parts space and heading into earnings."

Broad auto sector lower

GM's lackluster showing helped push the automotive names in general down, a trader said, with Ford Motor Co.'s 7.45% notes due 2031 down half a point at 69.5 bid, 70.5 offered, while its Ford Motor Credit Co. financial arm's 7% notes due 2013 also down a half-point, at 87.75 bid, 88.75 offered.

Among the parts makers, the bonds of bankrupt Troy, Mich.-based automotive electronics manufacturer Delphi Corp. - formerly a GM unit - were seen having fallen about half a point to 54.5 bid, 55.5 offered, but there was "nothing crazy there," a trader said.

Another trader saw Dura Operating Corp.'s 9% notes due 2009 actually up a point at 56 bid, 57.5 offered - but said that the struggling Rochester Hills, Mich.-based automotive systems maker's 8 5/8% senior bonds due 2012 were down ¾ point at 83.5 bid, 84.5 offered. He warned that the paucity of real market action made it difficult to gauge which way the bonds were really going,

Among other names in the problem-plagued sector - beset by high raw materials costs and sagging sales and orders from their two main customers, Ford and GM - American Axle & Manufacturing, whose 5¼% bonds due 2014 retreated Thursday after the released softer guidance for 2006, was down another half point to 80 bid, 81 offered.

Metaldyne Corp. - whose bonds had firmed handsomely earlier in the week after the Plymouth, Mich.-based metal stamping company announced plans to sell a division for $126 million in cash and stock - was likewise easier, with its 10% notes due 2013 off ¾ point to 92.25 bid, 93.25 offered. Its 11% notes due 2012, which had seen the bulk of the appreciation initially, and then took the brunt of the fall as the whole auto sector soured during the week, were unchanged at 81.5 bid, 82.5 offered.

Dana Corp.'s 5.85% notes due 2015 were ¾ point lower at 71 bid, 72 offered, while ArvinMeritor Inc.'s 8 ¾% notes were off a point at 95 bid, 96 offered.

Tembec falls further

Outside of the auto names, a trader said, "Tembec keeps moving down - and they're probably a little weaker today" as well.

He quoted the Montreal-based forest products concern's 8½% notes due 2011 at 45.75, while its 7¾% notes hit "a new low" at 44.5 and its 8 5/8% notes were at 48.5 bid, 49 offered, "all below where they had been" earlier in the week.

Tembec's erosion "has been constant - every day."

He said that "there was a rumor that the company might decide not to make coupon payments on its bonds that come due next month and in March.

"The reality is that if you think you're not going to make the March payment, why make the February [payment]?"

He also noted the fact that the company's earnings are due out "in about two weeks or so," with those earnings likely to demonstrate the negative impact of the recently strong Canadian dollar, which depresses Tembec's sales within the United States.

Airlines quiet

Traders said that activity in the airline issues was quiet, with bankrupt Delta Air Lines Inc.'s bonds hovering around 25 and the equally bankrupt Northwest Airlines Corp.'s notes hanging in around 40ish levels.

The trader noted that one of the few features in the sector was a big sale Thursday of unsecured claims against UAL Corp. by the pilots union.

"That was a $700 million piece, a big piece, and it traded much better than people thought it would."

He said that his shop heard that the debt had traded around 24, up from earlier levels around 22.

The claims were unsecured debt that the pilots' union got out of its settlement with the Elk Grove Village Ill.-based operator of United Air Lines. UAL - the subject of a lengthy front-page article about its turnaround efforts in Friday's Wall Street Journal - anticipates emerging from bankruptcy some time next month.

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