NXP falls on lower earnings; GM gains; SemGroup slides after Chapter 11; WaMu up despite big loss

By Paul Deckelman and Paul A. Harris

New York, July 22 - NXP BV's bonds were sharply lower Tuesday, after the Dutch computer-chip manufacturer reported lower sales and earnings for its most recent quarter. Those results, which were announced during the European trading day, before markets in the United States opened, cast a pall over the domestic tech sector, notably Freescale Semiconductor Inc., whose bonds were pushed lower in busy trading from the get-go ahead of Freescale's own earnings announcement. But when those numbers actually came out, the Freescale bonds came off their session lows, and several issues actually ended up on the day.

Elsewhere, General Motors Corp. bonds and those of its domestic arch-rival Ford Motor Co. continued to cruise higher, bouncing back for yet another session from their recently oversold condition. GM got a big vote of confidence as a major investment bank said its bonds were a good buy because of the Detroit-based Top U.S. carmaker's access to capital and - at the levels to which its bonds have fallen - its relative value versus the market and sector peers. But a noted financial observer was taking a less sanguine approach, warning of nearly a 50-50 chance that the two troubled carmakers may default within the next five years.

SemGroup LP officially reached that point Tuesday, with the Tulsa, Okla.-based energy trading and transportation company announcing its Chapter 11 filing. Its bonds - which were trading in the mid-to-upper 90s just a week ago but which had been savagely chopped down over the prior three sessions - slid even further, into the single-digits.

Washington Mutual Inc.'s bonds were seen having moved up - even though the troubled Seattle-based thrift reported a $3.3 billion quarterly loss.

In the primary market, AEI was heard by high yield syndicate sources to have postponed its upcoming issue of 10-year notes, a development the company attributed to market conditions.

Market indicators seen mixed

Back among the established issues, a market source pegged the widely followed CDX junk bond performance index up ¼ point on Tuesday, quoting it at around 94 bid, 94¼ offered. But the KDP High Yield Daily Index fell by 17 basis points to end at 71.52, while its yield widened by 5 bps to 10.43%.

"People are starting to get interested in things, and they're moving up pretty well," a hedge fund manager said, adding that there seems to be a lot of money on the sidelines.

In the broader market, advancing issues and decliners were almost evenly matched. Activity, represented by dollar volume, jumped by 48% from the levels seen in Monday's session

A trader said that his impression was that there was "an overall better tone to the market - but nothing was really running." He guessed that on average, issues were up 1/8 to ¼ point.

"There were a few more people on the sidelines who came in." he said.

Despite the higher dollar volume figure, another trader characterized the market as "kinda dead," and said it had been "a very quiet afternoon."

NXP lower on sales, EBITDA slide

The big mover on the day was NXP, whose bonds slid badly after the Eindhoven, Netherlands-based computer chip manufacturer reported sharply lower second-quarter results.

A market source saw its 9½% notes due 2015 slide more than 9 points in active trading, mostly in round-lot trades, pushing the bonds down to around the mid-74 level from Monday's close just below 84. There was also very active large-block trading going on in its 7 7/8% notes due 2014, which were down more than 3 points on the day, trading below 86.

Trading volume was a little more restrained - although the bond price movements weren't - on its floating-rate notes due 2013, which were seen down 6½ points around the 78 level.

NXP - the spun-off former semiconductor manufacturing arm of Dutch industrial powerhouse Royal Philips Electronics Inc. - said adjusted EBITDA for the second quarter was $114 million, which was down sequentially from $183 million in the first quarter and down even further from $190 million a year earlier.

Sales slid to $1.524 billion in the quarter, down 0.6% from first-quarter levels and down $1.9% from a year ago.

The company - touting its successes at cutting costs - was forced to acknowledge that "although costs were significantly reduced this quarter leading to improved gross margins, the strong negative impact of the weaker dollar, which had an EBIT impact of approximately $70 million, offset these gains and led to a decreased EBITA."

It projected that despite strength in some of its business areas, including multi-market semiconductors and its automotive and identification businesses, as well as its sales to manufacturers of digital television equipment, "due to the overall market sentiment we continue to see a relatively flat market. The company expects a year-over-year comparable mid single-digit sales decrease, translating into similar sales levels as in the second quarter."

The slide in NXP's levels also follows recent downturns in such sector peers as Advanced Micro Devices Inc. and Magnachip Semiconductor Ltd. following the release of disappointing numbers or softer guidance.

Freescale gains on not-so-bad numbers

But another chip maker, Austin, Tex.-based Freescale Semiconductor, surprised the financial markets with better-than-anticipated numbers, pushing its bonds - which had been beaten down on expectations of poor results - higher late in the day.

Earlier, a market source had pegged the company's 8 7/8% notes due 2014 down more than 2 points on the day to 79.5, while at another desk, those bonds were seen down nearly 2 points, though at a level of 81 bid, while its 10 1/8% notes due 2016 had retreated several points to 74 bid.

However, after the late-afternoon announcement of the quarterly results changed all of that. Another market source saw the company's 9 1/8% notes due 2014 come back from lows below 76 to finish at 80.5 bid, up 1½ points from Monday's finish, while the 8 7/8s gained more than 2 points on the day to end at around 84. Freescale's 10 1/8s gyrated around before ending at 76, actually down 2 points on the day.

Freescale said that its net sales for the second quarter were $1.47 billion, up sequentially from $1.41 billion in the first quarter up still further from $1.38 billion a year ago.

Including reorganization of business charges and non-cash purchase accounting expenses related to the company's acquisition by a private equity consortium in December 2006, Freescale's operating loss and net loss for the second quarter of 2008 were $137 million and $184 million, respectively, an improvement from $268 million and $288 million, respectively, during the 2007 second quarter.

Excluding those unusual expenses, the latest quarter's operating earnings were $234 million and EBITDA was $368 million, versus $159 million of operating earnings and $311 million of EBITDA in the year-ago period.

GM, Ford continue upside ride

In the autosphere, a trader saw General Motors' 7.20% notes due 2011 up 1 point at 73 bid, 74 offered and pegged its 8 3/8% bonds due 2033 up 1½ points at 58 bid, 59.5 offered, while at GM's 49%-owned automotive finance unit, GMAC LLC, the 8% bonds due 2031 gained 1 point to 63.5 bid, 65 offered.

On the other hand, a market source saw GM's 8.80% bonds due 2021 down 1½ points around the 56 level, while quoting GMAC's 8s off 3 points at 63. GMAC's 6 7/8% notes due 2012 lost ½ point to close at 67.

However, at another desk, the GM benchmark issue was seen up ½ point at 58.5 bid, while its 7 1/8% notes due 2013 were also ½ point better at 63.5. GMAC's 6 7/8% notes due 2011 were a point better around the 73 area.

Ford's 7.45% bonds due 2031 were seen up 1 point at 57 bid, 58.5 offered.

However, another trader said that the GM and ford benchmark bonds just held steady around Monday's levels.

Three views of GM

GM's bonds meantime got a boost on Tuesday from a powerful voice - J.P. Morgan Chase & Co., where analysts Eric Selle and Atiba Edwards wrote in a research report that for all of its recent setbacks, the giant carmaker's paper represents relative value versus its sector peers and the overall market. They noted that since February the benchmark 8 3/8s have dropped by 26 points from their former levels and the 7.20% notes due 2011 by 22 points, making them an attractive buy.

While the 8 3/8s have fallen into the upper 50s and the 7.20s into the lower 70s, clearly in distressed-debt territory, the analysts are not worried about GM's survivability, noting that the world's largest automotive manufacturer still has sufficient access to the capital it needs, via a combination of asset sales, capital market transactions, equity injections and internal cost-cutting.

Last week, GM chief executive officer Rick Wagoner outlined a plan that envisions GM meeting its capital needs for this year and next while it rides out the current car-buying downturn by coming up with about $10 billion of internal cost cuts, buttressed by another $5 billion of asset sales and borrowing, with about $2 billion to $3 billion of borrowing envisioned.

The Morgan analysts projected that successful efforts by the company to bolster its liquidity and cut its heavy level of annual cash burn may mean an average total return over the next 12 months of 32% for GM bonds.

While the chance of GM being forced into a liquidation scenario remains relatively remote - although a Merrill Lynch research report recently said that a bankruptcy could not be completely ruled out - the analysts said the bonds would have an annual total return of negative 39% in the event of a bankruptcy, and estimated the value of GM's bonds in a distressed liquidation at about 34 cents on the dollar.

However, the likelihood of a GM or Ford bankruptcy might not be that remote, according to respected New York University finance professor Edward Altman, who sees about a 46% chance that one or both of the Detroit giants could default on their obligations within the next five years.

Altman, who invented a financial model the predicts the mathematical likelihood that a company may go under, said in an interview Tuesday with Bloomberg Television that according to his model "both companies are in very serious shape, and the markets reflect that."

Altman, who teaches at NYU's Stern School of Business, asserted in the interview that "the model is saying that these companies are on the verge of bankruptcy."

On the other hand, Citigroup analyst Itay Michaeli said in a recent research note that the carmakers are unlikely to seek bankruptcy protection, should they be unable to shore up their liquidity, more likely opting for a recapitalization attempt that could involve such actions as balance sheet recapitalizations through debt-equity exchanges, fresh debt financing, further labor concessions or alliance or merger and acquisitions options.

While bankruptcy seems to have lost much of its old stigma over the past few years, as many companies have used strategic bankruptcy filings to give themselves breathing room while they restructured, Michaeli said that a company as dependent upon consumers and their perception of the company the way an auto manufacturer is might find that tactic problematic.

"One cannot predict consumers' predilection for buying vehicles from a bankrupt automaker," he warned, so a bankruptcy filing by GM, Ford, or smaller rival Chrysler - which almost did go bankrupt back in the 1970s - "would likely see more harm than good done to enterprise value during the Chapter 11 process."

The analyst said that "ironically, because one [carmaker's] bankruptcy filing could potentially provide some volume improvements to the others, domestic [carmakers] may shun strategic filings in order to 'outlive' their competitors."

Should GM ever find itself in that uncomfortable position, he predicted, "we could envision a scenario where the company restructures its unsecured debt while simultaneously negotiating better labor terms and new financing, possibly with a strategic partner."

SemGroup slides after bankruptcy filing

SemGroup's shocking fall from the respectable perch it held just a week ago, when its 8¾% notes due 2015 were trading around par, came to an abrupt conclusion Tuesday, as the company and several subsidiaries filed for Chapter 11 protection from their creditors. The company's debt includes $2 billion of secured obligations and the $594 million of unsecured 8¼% bonds.

A trader saw those bonds at 11 bid, 14 offered. Another saw them even lower, at 8 bid, 11 offered, well down from levels around 21 bid, 23 offered they held on Monday, before the Chapter 11 filing.

The bonds have been trading flat, or without their accrued interest, since they began their slide last Thursday and Friday and default became a realistic possibility.

SemGroup ran into liquidity problems last week related to its oil-hedging activities and warned at that time that it might have to file for bankruptcy as part of a financial restructuring. The liquidity issues sprung up after it was forced to pay $1.96 billion in the first quarter to satisfy margin calls, the company said in Chapter 11 documents filed with the U.S. Bankruptcy Court in Wilmington, Del.

SemGroup's publicly traded subsidiary, SemGroup Energy Partners LP, was not included in the bankruptcy filing.

WaMu up despite bad numbers

Traders saw Washington Mutual's bonds - nominally 6-B investment-grade credits which have recently been trading off junk desks - as having firmed, even though the problem-plagued thrift reported a $3.3 billion second-quarter net loss.

A trader saw WaMu's 4% notes due 2009 up 1 point on the day at 93 bid, 94 offered, while another said that its 7¼% notes due 2017 had advanced to 70 bid, a 5 point gain from previous levels.

At another desk, a market source saw the company's 4.20% notes due 2010 move up to around the 82.5 level in busy dealings - though no large-block trades - a gain of around 1½ points.

One of the trader s said that the bonds' rise seemed counterintuitive, since "to me, the earnings looked horrible."

However, he allowed the possibility that the bonds may have risen on technical factors, such as short covering, on investor perception that the numbers could have been worse, and on the company's assertions that having raised billions of dollars of new capital earlier this year, its cash position is solid, with no further need to access the capital markets and no liquidity problems in sight.

WaMu said that its tangible equity to total tangible assets capital ratio increased during the second quarter to 7.79% from 6.40% in the first quarter, resulting in approximately $7 billion of capital in excess of its targeted 5.50% level.

It said that the increase "reflects the effects of the $7.2 billion capital raise, the reduction of the company's balance sheet by $10 billion and the loss for the quarter. The company also maintained strong levels of liquidity during the quarter, with over $40 billion of readily available liquidity at quarter end."

XM expected but no talk

The primary market failed to generate any news on Tuesday.

XM Satellite Radio Holdings Inc. plans to price a $400 million issue of five-year senior bullet notes on Wednesday, via JP Morgan, Morgan Stanley and UBS Investment Bank.

Proceeds will be used to refinance debt in connection with the pending merger of XM with Sirius Satellite Radio, Inc.

Well after Tuesday close market sources said that no price talk had been circulated.

On Tuesday afternoon XM reported that its second quarter 2008 net loss improved to $120 million, compared to a second quarter 2007 net loss of $176 million.

Meanwhile its subscriber acquisition costs in the second quarter of 2008 improved by $10, falling to $65 from $75 in second quarter 2007.

Also on Tuesday afternoon a market source pointed out a Wall Street Journal story reporting that FCC commissioner Michael Copps has voted against the XM-Sirius merger.

Manitowoc a maybe

Although most sources from high-yield syndicate desks are looking for July to come to a quiet end, and to be followed by an even quieter August, one syndicate official said the market could see some deals during the next three to four weeks.

The official specified that whatever comes would likely surface in the form of new corporate issuance.

This source does not look for meaningful news regarding the LBO backlog before summer's end, and estimates that its present size is approximately $100 billion split roughly in half between bank loans and bonds.

One investment banker said Tuesday that depending upon how the Manitowoc Co. Inc. $2.925 billion credit facility is received some of the financing could be shifted to a tranche of high-yield bonds.

Manitowoc held a senior managing agent bank meeting on Tuesday in New York, and will hold another one on Thursday in Chicago.

JP Morgan, Deutsche Bank, Morgan Stanley and BNP Paribas are the joint lead arrangers and joint bookrunners on the deal which is presently structured as a $400 million revolver, a $900 million term loan A, a $300 million term loan X and a $1.325 billion term loan Y, with all tranches expected to carry initial pricing of Libor plus 300 basis points.

The term loan Y has been upsized twice already, first moving to $1.075 billion from $800 million, and then to $1.325 billion from $1.075 billion.

Proceeds will be used to help fund the acquisition of Enodis plc.

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