WaMu hurt by credit default swap settlement; Donnelley gains, Idearc slips; US Airways pressured

By Stephanie N. Rotondo

Portland, Ore., Oct. 23 - Distressed debt traders reported a weaker trading session Thursday, with one trader noting that "the Street went dead in the afternoon."

"It seems like everybody was saying, 'No, I don't want to sell those' and 'No, I don't want to buy that," another trader said.

The second trader added that "the market is still biased toward sellers and buyers are hoarding cash."

Washington Mutual Inc.'s senior holding company led the way, losing as much as 8 points on the day. The declines came after the company's credit-default swaps settlement came in lower than expected.

Meanwhile, R.H. Donnelley Corp. reported third-quarter results before the market opened. The numbers beat expectations and gave the phonebook publisher's bonds a 2-point boost. However, Idearc Inc.'s debt did not perform as well.

In other earnings news, US Airways Group Inc. posted its results as well Thursday. But unlike Donnelley, the numbers put more pressure on the airline's term loan, knocking it down 4 to 6 points.

WaMu takes a hit

Washington Mutual's senior holding company debt took a hit after the company's credit-default swaps were settled.

At an auction held Thursday with 14 lenders, the senior paper's value was set at 57 cents on the dollar, meaning sellers of protection against default will have to pay 43 cents on the dollar. The price was lower than expectations placing the bonds at just over 60 cents.

As a result of the settlement, a trader saw the bonds, such as the 4.20% notes due 2010, down "8 or so points" at 58 bid, 59 offered.

Another trader said the debt fell to 57 bid, 58 offered, ran up to 59 bid, 60 offered and then settled back into 57.5 bid, 58.5 offered on "big volume."

Elsewhere in the financial sector, Lehman Brothers Holdings Inc.'s senior bonds, like the 6 7/8% notes due 2018, were called active and "for the most part" unchanged at 11 bid, 11.25 offered.

Donnelley gains, Idearc slips

R.H. Donnelley's bonds got a 2-point boost on the back of the company's earnings release. But sector rival Idearc did not fare as well.

A trader said there were "lots of markets" in the Donnelley paper around mid-day, but then things quieted down. He saw the 11¾% notes due 2015 at 33 bid, 35 offered, up from 31 bid.

The trader also saw the 8½% notes due 2010 at 73 bid, the 9 7/8% notes due 2013 at 30 bid, the 8% notes due 2013 at 22 bid, 24 offered, the 6 7/8% notes due 2016 at 24 bid, and the 8 7/8% notes due 2016 and 2017, respectively, at 21 bid, 23 offered.

But Idearc's bonds came "off recent highs," another trader said, the 8% notes due 2016 ending at 19 bid, 20 offered in active trading. Another trader said there was a possibility that investors did not see Idearc posting numbers as good as Donnelley's, accounting for the decline.

Donnelley's third-quarter net profit increased to $26.1 million from $18.1 million a year ago, attributed to the company's efforts to control costs.

Still, revenue fell 3% to $648 million, just over analysts' expectations of $640 million. Advertising sales declines 8.3% to $504 million. Donnelley also noted that full-year results are expected to be at the low end of its previous forecast.

"The decline in third-quarter ad sales was as expected due to weak consumer sentiment and the impact it is having on advertisers' ability to make new growth investments, pay existing bills and, for some, stay in business," David Swanson, chief executive, said in a press release.

And while Gimme Credit analyst Dave Novosel noted that the quarterly figures were "not very impressive" at first glance, the company showed it was still able to "generate excellent free cash flow, producing $94 million in the quarter," he wrote in an afternoon comment.

US Airways pressured

US Airways Group's term loan tumbled in trading after the company came out with third quarter numbers, and there was also some selling pressure because investors are less inclined to hold on to the paper since they already received the benefits from consenting to a recent amendment, according to a trader.

The term loan was quoted at 46 bid, 51 offered, down from Wednesday's levels of 52 bid, 55 offered, the trader said.

On Thursday morning, US Airways reported a net loss for its third quarter of $242 million, or $2.35 per share, excluding special charges that totaled $623 million. On a GAAP basis, the net loss was $865 million, or $8.45 per share, compared with a net profit of $177 million, or $1.87 per diluted share, for the same period last year.

"Our third quarter loss reflects the crippling fuel price environment that US Airways and other airlines faced this summer. Fortunately, oil prices have recently fallen to levels well below those experienced in the third quarter, but at the same time concerns have increased about the impact the global economic crisis may place on demand for air travel," Doug Parker, chairman and chief executive officer, said in a news release.

Also pressuring US Airways' term loan on Thursday was that some people are looking to sell the paper now that they received a par paydown at the start of the week and fees for passing an amendment, the trader explained.

The company prepaid $400 million of its credit facility on Monday, reducing the principal amount outstanding to approximately $1.184 billion, and in exchange, the unrestricted cash covenant contained in the loan agreement was reduced to $850 million from $1.25 billion.

The unrestricted cash requirement can further be reduced to $750 million before Sept. 30, 2009 if another $100 million of bank debt is prepaid.

The amendment also provides that the company may sell, finance or otherwise pledge assets that were pledged as collateral under the credit facility, so long as it prepays the debt in an amount equal to 75% of the appraised value of the collateral sold or assigned or 75% of the collateral value of eligible accounts sold or financed in such transaction.

In addition, the amendment provides that the company may issue debt in the future with a silent second-lien on the assets pledged as collateral under the credit facility.

Funds for the paydown came from the company raising approximately $950 million of financing and near-term liquidity commitments. Of this financing, $800 million closed on Monday and the remaining $150 million of liquidity commitments are expected to close during the fourth quarter.

US Airways is a Tempe, Ariz.-based commercial airline.

Broad market mixed

Blockbuster Inc.'s 9% notes due 2012 moved up to 56 bid, 58 offered from 54 bid, 55 offered previously, a trader said. The trader added that there was no news, aside from Wednesday's reports that the company reiterated its positive outlook.

Among other retailers, Bon-Ton Stores Inc.'s 10¼% notes due 2014 fell to around 17.

Traders reported that there was little to no activity in Tropicana Entertainment LLC's 9 5/8% notes due 2014 despite the company's former owners waging a campaign to regain control of the casino. Traders placed the debt at 4 bid, 5 offered.

Sealy Mattress Corp.'s 8¼% notes due 2014 slipped to around 61, a trader said, as Moody's Investors Service downgraded the company.

"The price of the bond was way ahead of the downgrade," the trader said. As for the agency's negative expectations, the trader said "that only makes sense given that it is a consumer item and it has been impacted by housing. I think the next few quarters will remain negative."

Meanwhile, Level 3 Communications Inc.'s paper was mixed after the company reported a narrower loss on flat sales.

One trader said the "somewhat disappointing" numbers pushed the debt lower a few points. He saw the 8¾% notes due 2017 offered at 50.

But another market source called the 5 7/8% notes due 2015 nearly a point higher at 80 bid.

Sara Rosenberg contributed to this article.

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