Countrywide zooms on B of A buyout buzz, helps lift most junk issues; funds see $285 million outflow

By Paul Deckelman and Paul A. Harris

New York, Jan. 10 - If anybody on Wall Street had predicted a day or two ago that Countrywide Financial Corp.'s short-dated notes would once again be trading not far from par and its longer-term paper would be flirting with the 80 bid level, those hearing such a prediction would likely have shook their head and dismissed it as the delusional ravings, or at best, wishful thinking of someone unlucky enough to be long those bonds.

But that's exactly where that paper was at the close of trading on Thursday, undergoing a dramatic revival after several days of intense turmoil which had seen the Countrywide bonds slated to come due this spring trading below 80, for a 75% yield, and the widely traded 2016 bonds hammered down to below 40, as bankruptcy rumors swirled around the troubled mortgage lender.

And the astonishing turnaround took place within the space of about two hours late in the session, as news reports that Countrywide was in talks to possibly be acquired by 16% owner Bank of America hit the tape and started a buying frenzy that sent the Calabasas, Calif.-based company's shares as well as its bonds climbing rapidly, and even caused an easing in Countrywide's debt-protection costs, which had skyrocketed earlier in the week on the bankruptcy fears.

With Countrywide leading the way, junk bonds and equity both finished broadly higher Thursday, also given a boost by clear signals from Federal Reserve Board chief Ben Bernanke that the central bank will almost certainly lower interest rates again when its policy committee meets at the end of the month, with many in the market expecting a cut of at least 50 basis points. The prospect that Countrywide's troubled saga might have a happy ending, courtesy of its deep-pocketed potential white knight, was seen helping sector peer Residential Capital LLC's bonds push solidly higher as well.

Even other companies which have recently had their share of troubles were seen solidly better with multiple-point gains, such as Quebecor World Inc., facing a looming deadline for lining up some new financing, and Bon-Ton Stores Inc., despite poor December sales figures and a lowered outlook.

Fellow retailer Finlay Fine Jewelry Inc., however - also victimized by quiet cash registers during the just-passed holiday season - could not get out from under its own bad fortune, and its bonds tumbled, one of the few big losers on the day.

Back on the upside, another big gainer was Young Broadcasting Inc. - whose bonds had suffered their own sharp slide earlier in the week, but which was buoyed Thursday by the stronger market in general and the television station owner's announcement that it is putting its most valuable asset, its San Francisco station, up for sale.

A high yield syndicate source saw the market higher but added that trading in cash bonds was mixed and credit-specific.

In the wake of "Ben Bernanke to the rescue" headlines, quoting the Fed chief as standing poised for "substantive additional action" on the interest rate front, the stock market bounded. However the outlook for lower short-term rates had a more muted impact on junk, high yield sources said.

In the primary market, syndicate sources heard that Jabil Circuit Inc. would be selling a split-rated issue of 10-year bonds, while price talk emerged on Southwestern Energy Co.'s $400 million offering of similarly-tenured notes.

Funds down $285 million

Meanwhile, a market source familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, some $285 million more left those funds than came into them.

Hence flows for the year to Jan. 9 stood at negative $289.3 million (that total includes the final three market sessions of 2007), the source said.

It was the fourth consecutive weekly cash exodus, including the modest $4.5 million outflow seen in the previous week, ended Wednesday Jan. 2 (AMG initially reported a $2.9 million outflow for the week to Jan. 2, but subsequently revised its report to the greater number, according to a market source); in that four-week stretch, dating back to the week ended Dec. 19, outflows have totaled some $644.1 million, according to a Prospect News analysis of the AMG figures. Outflows among the weekly reporters totaled $2.75 billion in 2007.

However, as has been the case for much of the past year, the trend was somewhat different among those funds which report on a month-by-month basis rather than reporting weekly. Those funds saw $13.9 million of outflows during the most recent period.

Year to date, the monthly reporting funds have seen positive flows of just under $375 million, according to the market source.

Hence year-to-date aggregate flows, factoring numbers from the weekly reporters and the monthly reporters, stood at positive $85.6 million to Wednesday's close.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Market measures point northward

A trader saw the widely followed CDX index of junk bond performance up ½ point on the day at 92¼ bid, 93 5/8 offered. The KDP High Yield Daily Index rose 0.33 to 75.98, while its yield tightened by 8 basis points to 9.10%

In the broader market, advancing issues outnumbered decliners about five to four. Overall activity, reflected in dollar volume, was off by about 9% from Wednesday's levels.

A trader said that Thursday "in general was a weird trading day," in which "nothing happened" for most of the day until the Countrywide news came out, which lit a late fire under the market. "It was pretty slow in the morning, and then most of the afternoon, it was dead."

He said that "even after Bernanke spoke, there really wasn't a ton [of activity] going on. Then all of a sudden Countrywide does this - and everything else went crazy. That was about the day."

Another trader said that the market "opened up soft and was heading lower. We saw the CDX contract tick down to around the 92½ - 92 5/8 level, down another ¼ to ½ point. Guys were hitting bids - we kept seeing the higher-beta names get hit and people moving into shorter-maturity, stronger 4-B and 5-B type names."

But that was before the Countrywide news flashes began showing up on screens, and the bonds really took off then, and brought much of the junk market along with them. The trader saw the CDX move back up above the 93 mark, "which is a pretty nice move back, with decent buyers and sellers, pretty much at every level, on the way down and on the way back up."

Countrywide climbs on B of A reports

The stories about the purported Countrywide talks with B of A - first in the online edition of The Wall Street Journal and then on other news sites - all attributed their information to unidentified persons said to be close to the proceedings. There was no official confirmation from either B of A or Countrywide.

The Countrywide bonds - which had gotten absolutely hammered the past several sessions on renewed bankruptcy fears - shot dramatically higher over the last two hours or so of trading on Thursday.

"The subs are up as much as 40 points," the trader said. "They could be as good as 80 bid. It's a vicious, vicious short squeeze that's going on, that some guys got caught in."

He said that at his shop, "we saw some hedge fund-type players in buying the thing [Wednesday], over the last two days, and the bonds have rallied pretty substantially on this news.

"Who knows what will come of it - but nobody's denying it, so that's usually a pretty good sign" that something is indeed going on. "If Bank of America was not in talks with them, they [B of A] would be the first one to come out and say there's nothing to it."

A market source saw Countrywide's widely traded 6¼% notes due 2016, which had fallen to intraday levels as low as 39-40 on Wednesday, up to a close of 79 on Thursday, better by more than 37 points, while its shorter paper, like its 3 1/8% notes coming due in May, rose to about 95.5 bid, up more than 13 points. Its 5.80% notes due 2012 were seen more than 24 points higher at 85 bid.

For much of the day, the bonds traded near their Wednesday closing levels, well down from where they had been at the start of the week before they were driven down by rumors Countrywide might have to file for bankruptcy, which the company denied, although the denials gave little reassurance to skeptical junk marketeers.

But once the news about the reported B of A talks hit the tape, around 2 p.m. ET, said Bill Featherston, managing director of J. Giordano Securities in Stamford, Conn., the bonds began "spiking up and down."

He raised the possibility that with the financial markets on shaky ground because of turmoil last year among mortgage originators like Countrywide - and the ripple effect among banks, bond insurers and other financial industry players - perhaps there was a little bit of prodding from Washington "behind the scenes" for such acquisition talks.

"I wonder whether the Fed didn't give [B of A] a nudge, or maybe the Treasury Department, saying 'look, you're already in for $2 billion'" - so why not complete the process?" B of A invested $2 billion in Countrywide over the summer, a crucial cash infusion which many observers believe saved the mortgage lender from going under at that time.

"It's not that they're 'too big to fail'," Featherston said. "But they're certainly an important cog in the homebuilding and home mortgage market."

While protecting its $2 billion investment might be an additional motive for such talks, the banking giant might be dumping good money after bad with such a deal, should it come to fruition because, Featherston said, "Countrywide still has a tremendous amount of liabilities on their books which to me aren't worth anything. As one guy put it, is this going to be a negative cash transaction -in other words, its Countrywide paying B of A to buy them, because the liabilities are formidable - formidable!"

Others disagreed on that point. Another trader said that if the news stories of talks are true and some kind of acquisition deal is in the works, Bank of America "is buying a really cheap asset. The [B of A] stock was up 56 cents and its bonds did better on the day. Its [credit default-swaps debt protection cost] was tighter. They're buying it for next to nothing. It's really a distressed sale. I don't know if it's a 'take-under' or a takeover - but in any case, they're buying it for pennies on the dollar. It's a very smart move."

He noted that the CDS spread on contracts protecting holders of Bank of America debt against an event of default tightened by about 3 basis points Thursday to 67 bps bid, 69 bps offered - a sign that investors are more confident about the company.

Some see ResCap higher

With Countrywide's possible good news serving as a catalyst, some traders saw other financial names also higher. A trader saw Residential Capital's 6½% notes due 2013 jump to 61 bid, 63 offered from 54 bid, 56 offered on Wednesday.

However, Thornburg Mortgage Inc.'s 8% notes due 2013 were "down a bit," off ½ point at 81 bid, 83 offered.

At another desk, ResCap's 7% notes due 2011 were seen having gained more than 7 points to nearly 63, while its 8 3/8% notes due 2015 were pegged up more than 6 points on the day at 61 bid.

E*Trade Financial Corp.'s 8% notes due 2011 "kind of traded up on the CFC-B of A news," a trader said, seeing the online financial services provider's 8% notes due 2011 up 4 points at 82 bid, 84 offered. Its 7 7/8% notes due 2015 were seen more than 6 points better at 73.

But another trader said that he "didn't really notice" much activity among the other mortgage names. "It was pretty much centered around Countrywide in the afternoon. The rest of the stuff [in the sector] was quoted - there really was not much trading going on."

He opined that "I don't know how [B of A] buying Countrywide would help ResCap." The latter company, he said, "still has the mortgages that they have, and they'll be a problem [for ResCap], probably."

He also noted that American Express Co. announced a $440 million before-tax charge to cover rising customer defaults and also forecast earnings this quarter below analysts' estimates, which "put a little damper on things" in the financial sector.

Housing firmer, but quiet

One would think that with potentially good news in the mortgage sector, the homebuilders, who depend upon a healthy mortgage industry to provide the credit that is the lifeblood of housing sales would also be climbing.

But any rise was restrained.

A trader saw Tousa Inc.'s 8¼% notes due 2011 unchanged around 44 bid, 46 offered, and saw WCI Communities Inc.'s 9 1/8% notes due 2012 continuing their retreat, losing a point to end at 51 bid, 53 offered, although he said that the bonds were down even more - about 3 or 4 points - earlier in the session. He called Standard Pacific Corp.'s 7% notes due 2014 up a point at 65 bid, 67 offered.

But a second trader said that he had not really seen much activity among the builders, beyond "some buyers" for Standard Pacific.

And another trader said the sector in general was "very quiet - there wasn't much change, even with all of the market volatility."

But construction equipment rental bonds were up, with industry leader United Rentals Inc.'s 6½% notes due 2012 up 4½ points at 92, while Neff Corp.'s 10% notes due 2015 jumped 5 points to 46.5 bid, 48.5 offered.

Quebecor bounces back

Outside of the mortgage/housing/construction axis, many bonds were seen on the rise - even a troubled name like Quebecor World, whose 4 7/8% notes due 2008, badly beaten down over the past few sessions, came roaring back up, gaining 7 points to end at 81 bid, a market source said.

The Canadian commercial printer faces a Tuesday deadline from its banks for coming up with $125 million in new funding, and should it clear that hurdle, faces other large financial obligations over the next few months.

Retailers' mostly on the rise

The struggling retailing sector also saw considerable strength on Thursday, pulled higher by the generally better tone.

Bon-Ton Stores' bonds were once again among the most actively traded issues on the day.

A trader saw its 10¼% notes due 2014 - which had fallen 5 points on Wednesday - move back up to 68 bid, 70 offered from 65.5 bid, 66.5 offered. At another desk, the Bon-Ton bonds were being quoted as high as 70 5/8.

Yet another trader said that the York, Pa.-based retailer's bonds were up about 2 points to 68 bid, 69 offered despite "bad numbers" - it reported an 11.3% fall in December same-store sales versus a year ago and cut its full-year earnings guidance by $1 per share to the 50-80 cent range - explaining that the results "probably were not as bad as people feared they might be, so they could be taken as a positive, almost."

Also among the retailers, the trader saw Toys 'R' Us, on the other hand, post "good numbers," that helped move the Wayne, N.J.-based specialty retailer's 7 5/8% notes due 2011 up a point to 80.5 bid, 81.5 offered.

Claire's Stores Inc.'s 9¼% notes due 2015 were seen up 4 points at 65 bid, 67 offered.

Finlay plunges

But Finlay Fine Jewelry's 8 3/8% notes due 2012 "got killed, down 15 points," a trader said, while another agreed that the bonds had fallen to about a 40-41 context from prior levels in the mid-50s after the New York-based jewelry merchant lowered its fourth-quarter outlook and predicted a full-year loss, citing weaker-than-expected holiday sales.

Young up on asset-sale plan

Young Broadcasting's 10% notes due 2011 - which earlier in the week fell more than 10 points into the upper 60s - had "a real reversal" Thursday, a trader said, jumping to 76.5 bid, while its 8¾% notes due 2014 were up 9 points to 69 after the troubled New York-based television station operator announced plans to sell its most valuable asset, KRON-TV in San Francisco, the sixth-largest television market in the U.S. - and the only one of its 10 stations located within a major metropolitan area.

There was no immediate word on potential buyers, or the likely price tag of such a transaction.

Southwestern Energy sets talk

Meanwhile news rationing remained in place in the new issue market, where the only development was price talk on a four B deal from Southwestern Energy Co.

Jabil Circuit, Inc. announced a split-rated deal.

Southwestern Energy set price talk for its $400 million offering of 10-year senior bullet notes (Ba2/BB+) at the 7½% area on Thursday.

The notes are expected to price around noon Friday.

JP Morgan, Banc of America Securities LLC and RBS Greenwich Capital are joint bookrunners for the debt refinancing deal from the Houston-based company engaged in oil and gas exploration and production company.

Southwestern Energy is one of a trio of $400 million deals that are in the market.

In fact, the three are the only deals in the market, according to sell-side sources.

The other two offerings are from Atlas Energy Operating Co./Atlas Energy Finance, bringing 10-year senior notes (B3/B) in a debt refinancing deal via JP Morgan and Wachovia Securities, and Solutia Inc., which is selling an offering of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities.

Atlas and Solutia are expected to price next week.

From the crossover sector, Jabil Circuit launched a split-rated $300 million offering of 10-year senior notes (Ba1/BBB-/BB+) on Thursday.

The debt refinancing deal, which is being led by Citigroup and JPMorgan, was announced as Thursday-Friday business. However at Thursday's close no terms had surfaced and no priced talk had been heard, a market source told Prospect News.

The deal did not seem to be generating a great deal of interest among high yield market watchers.

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