Sabic mega-deal prices; Thornburg up on asset sale; ResCap remains volatile

By Paul Deckelman and Paul A. Harris

New York, Aug. 20 - The recently hibernating high yield primary market came back to life Monday with the pricing of Saudi Basic Industries Corp.'s $1.5 billion offering of eight-year bonds through its Sabic Innovative Plastics Holding BV unit, although most of the paper was allocated overseas. That paper was heard to have traded higher after being freed for secondary activity, although activity was thin.

Among established secondary issues, Thornburg Mortgage Inc. was a standout performer, rising on the news that it had sold some $20.4 billion of mortgage loans from its portfolio as a means of cutting risk - even though the embattled Santa Fe, N.M.-based lender had to take almost $1 billion in losses to get rid of that paper.

Mortgage names remain under pressure, even in the wake of Friday's surprise move by the Federal Reserve to cut its discount rate to reassure jittery investors that the central bank won't allow a credit crunch arising from the meltdown of the subprime lending industry to continue. Residential Capital Corp.'s bonds were seen mixed, in active trading, with one issue several points up and another several down. That in turn translated to a mixed performance by ResCap's owner, GMAC LLC.

In the housing market, closely linked to mortgages, traders saw the bonds of WCI Communities Inc. having firmed smartly, after the troubled Bontia Springs, Fla.-based builder announced that it had reached agreement with its lenders on waivers and amendments to its credit facility covenants, as well as an agreement with would-be acquirer Carl Icahn on changes to the company's board.

Sell-side sources marked the broad high yield market unchanged on Monday.

Generally speaking, a trader said, the widely followed CDX index of junk performance was up 1/8 point at 95-95 3/8. The Bank of America Securities High Yield Broad Market Index on the other hand was off 0.06% and its loss for the year is 0.15%. The KDP High Yield Daily Index was up 0.04 to 77.71, while its yield eased by 1 basis point to 8.50%.

One syndicate official, noting that equities were flat, said that the high yield secondary market was very quiet.

However the primary, which passed seven sessions, or 11 calendar days, with no new bonds clearing the market, saw a transaction completed much as it had been expected to do on Monday.

Sabic Innovative Plastics Holding BV priced a downsized $1.5 billion issue of eight-year senior unsecured notes (B1/B+) at par to yield 9½%.

The yield was printed on top of price talk that had been lowered from earlier guidance which had the notes pricing at a discount to yield 10¼%.

The preponderance of the issue was placed with institutional investors in the Middle East, according to an informed source who added that there were also investors in the deal from Europe and the U.S. The source said that there was also some private money in the transaction.

Citigroup, ABN Amro, GE Capital, HSBC and JP Morgan were joint bookrunners for the Rule 144A for life notes. Proposed registration rights were withdrawn from the issue.

The deal, to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic) for $11.6 billion, initially came to market as a $2.765 billion equivalent offering of eight-year notes in tranches of $1.95 billion and €590 million. The proposed euro-denominated notes have been withdrawn.

One to cross off

An informed source told Prospect News that perceptions of the Sabic bond deal split largely along geographic lines, with Middle Eastern investors perceiving the B+ rated senior unsecured notes due 2015 as a cheap way to get into A+ rated Sabic Group risk.

The company did not offer an explicit guarantee, the source clarified, but for these investors there is value in the company's word and the fact that Sabic has stood behind its subsidiaries in the past.

The source also said that there had been a lot of interest in the paper among U.S. accounts, but not at the level where it was priced.

All in all, the source summarized, Sabic was a unique transaction that garnered special interest.

Given that uniqueness, Prospect News asked the source whether the completed Sabic transaction tells observers anything about the present state of the primary market.

The official responded that the deal shows that "in certain pockets of the world there is liquidity" for such an asset, and that investors there are ready to deploy that liquidity where they see value.

The source also said that in a primary market environment in which big deals have been postponed, delayed, downsized and, restructured Sabic is one more financing commitment that can be crossed off the forward calendar.

"Each one takes us closer to a solution," the official added.

A view to September

Prospect News continued on Monday to press sources to peer into the coming month and forecast whether or not the primary market - currently in a late summer lull that is said to have been exacerbated by subprime-related difficulties in the credit markets - will see a pickup in activity.

On Monday a syndicate official from a private placement desk that has a lot of clients who are active in the high-yield market made reference to the backlog of postponed deals.

"We're not going out until late September," the official said, adding that the investment banks presently want to get out of some of the backlog of risk that has built up on their books as a result of those postponed deals, and that until they manage to distribute it high yield levels will be lower.

Issuers that can wait to do a financing will probably do so, the source added.

"Who is going to buy in the new issue market when bonds in the secondary market are so much cheaper?" the official asked rhetorically, adding that the junk market is now down approximately 150 basis points from where it had been before the sell-off.

The source calculated that on a 10-year bond that spread-widening essentially translates to a 10 points downward price move. On a seven-year bond it's seven points, and on a five-year its probably five or six points, the source added.

Secondary levels are probably artificially depressed, but if investors become convinced that is where the new market is going to be for a long time issuers may resign themselves to go forward with financing plans, the official added.

Others might reason that things are bound to tighten back up, and will wait.

Sabic deal trades upward

When the new Sabic 9½% notes due 2015 were freed for secondary dealings early in the afternoon (ET) Monday, a trader saw the bonds straddling their par issue price at 99.75 bid, 100.5 offered. He observed that "most of it went overseas."

Another market source agreed, noting that while there had been some placement to "traditional U.S. and European firms, mostly it was given to Middle Eastern guys."

He said that there were, at most "a handful of trades," with most of the bonds going to investors who would "buy them and put them away." He saw the early-afternoon trading levels around 100.5 bid, 101 offered.

Thornburg up on asset sale

A trader saw Thornburg Mortgage's 8% notes due 2013 at 78 bid, 80 offered, up from 75 bid, 78 offered, to which those bonds had risen on Friday. Another trader saw the bonds at that same level as well.

Over the past week, Thornburg's bonds have been gyrating up and down by multiple points - sometimes as much as 20 points in a session - a volatility born of the lender's difficulty in accessing the capital markets in the wake of the subprime fallout. Ironically, Thornburg is anything but a subprime lender, considered to have mostly high-quality assets.

Thornburg moved to unload some of those assets on Monday, selling more than 35% of the assets and reducing its borrowings to cut its risk.

While the company's bonds went up - another source saw them up as much as 4¾ points around the 80 level - Thornburg's shares fell as much as nearly 12% when it also said that it will take a loss of about $930 million on the transactions.

Besides selling the more than $20 billion of loans, Thornburg reduced its short-term borrowings by an equivalent amount.

The company said that it had sold most of its lowest-yielding assets, including unprofitable loans. The announcement said that Thornburg expects to remain profitable on an operating basis in the third quarter.

ResCap bonds moving around

While Thornburg was moving to stabilize its situation - even at the price of taking a nearly $1 billion writedown -another high yield mortgage name was taking some lumps.

Residential Capital's 6 3/8% notes due 2010 were seen up 3½ points on the session, around 73 bid, but its 6½% notes due 2013 were being quoted down some 2½ points at around the 70.5 level.

The lender's bonds were seen among the most actively traded issues in the market.

Those gyrations in turn were reflected in the movements of the bonds of GMAC LLC - the former General Motors Acceptance Corp. The big automotive and residential credit company, now just 49% owned by eponymous former corporate parent General Motors Corp. - was also an actively traded name in Monday's dealings.

Its 8% notes due 2031 were seen slightly lower at around the 88.5 bid level, while its 7¾% notes due 2010 was quoted down more than 3 points, in busy dealings, at about the 94 level. GMAC's 6¾% bonds due 2014 were nearly a point lower at 86 bid.

WCI up on covenant, board changes

The troubles of the mortgage industry have impacted heavily upon the homebuilders, who have been struggling with their own problems of reduced sales in a climate of somewhat higher mortgage interest rates over the last two years.

But there was good news for investors in WCI Communities. A trader saw its 9 1/8% notes due 2012 rise to 81 bid, 83 offered from 74 bid, 77 offered earlier, while its 7 7/8% notes due 2013 pushed up to 76 bid, 78 offered from 72 bid, 75 offered. He saw its 6 5/8% notes due 2015 at 72 bid, 74 offered, up 3 points on the day.

Another trader saw the 9 1/8s at 80 bid, 82 offered, up 5 points, noting that "they settled their board dispute, so they made sure their board was set up so that after the merger, everything was good there, and they also settled some of their credit covenant [matters] which sent the bonds up."

WCI announced the agreement with its lenders giving it more operational flexibility, and the separate agreement with billionaire investor Carl Icahn, who had unsuccessfully tried to take control of WCI earlier in the year. Under the terms of the agreement, Icahn and current management will each put three directors on the company's board, with other directors to be appointed by other large shareholders.

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