GM loss restatement, reporting delay tows autos lower; SBA gains

By Paul Deckelman and Paul A. Harris

New York, March 17 - The news that General Motors Corp. lost more money last year than it originally reported and that it will delay the filing of its annual report with the Securities and Exchange Commission because of an accounting glitch related to the residential mortgage business of its General Motors Acceptance Corp. financial arm abruptly shifted GM, GMAC and most other auto sector bonds into reverse on Friday.

Even Dana Corp. - up until now seen streaking upward - was pulled lower on the news, along with the other auto parts names.

Outside of the autos, the news that SBA Communications Corp. plans to tender for its remaining zero-coupon/9¾% senior discount notes due 2011 and its 8½% senior notes due 2012 in conjunction with its acquisition of AAT Communications Corp. moved the Boca Raton, Fla.-based communications antenna tower operator's bonds higher.

Also seen higher were the bonds of William Lyon Homes Inc., whose chairman and chief executive officer offered to take the Newport Beach, Calif.-based homebuilding company private by buying the 25.5% of the company's common stock not currently owned by him personally or by related trusts.

Facing distractions that included the Lehman Brothers high-yield conference, the NCAA Men's national basketball tournament and St. Paddy's day, the Friday junk market got off to a quiet start overall, with one source seeing resilience despite a fresh regime of bad news from General Motors Corp.

This source, a sell-sider focused on bonds and bank loans, said that the high-yield was up three-eighths of a point to half a point overall on the week to March 17, in quiet trading.

However following the Friday close another sell-sider marked the market unchanged on the day tracking Treasuries, which eased a bit.

This source also mentioned that it had been a good week in junkland, as during the period Treasuries had rallied substantially which gave a boost to some of the stronger credits.

The primary market - whose major highlight this past week was Xerox Corp.'s quickly-shopped and solidly upsized $700 million offering of new 10-year notes, one of just three deals to price - was quiet on Friday, although a two-part offering of fixed- and floating-rate notes from Indiana gaming and hotel operator French Lick Resorts & Casinos was heard to be starting a roadshow.

Back among the established issues, "a lot of the auto stuff was down," a trader said. "It pretty much got hit right from the start."

Leading the way was GM, the proximate cause of the quick downturn, as market participants got to their desks and read Thursday night's news - that the troubled Detroit giant had revised its reported loss for 2005 upward to $10.6 billion ($18.69 a share), versus the $8.6 billion ($15.13 a share) of red ink reported in January. GM also said that it now expects a 2005 North American restructuring charge of $1.7 billion, versus the $1.3 billion it previously reported. The roughly $2 billion of additional losses are attributable to new charges related to job losses, GMAC and the bankruptcy of GM'S former parts manufacturing subsidiary Delphi Corp.

On top of the wider 2005 loss, GM said that it would restate results for 2000 through 2004 after mistakenly accounting for cash flows from ResCap, the mortgage unit of GMAC.

Those revisions and accounting errors will force GM to delay filing its 10-K report with the SEC.

Although company officials said that the annual report would be filed within two weeks, the embarrassing errors at one of the world's most closely watched companies - coming at a time when the underperforming GM is already under increased scrutiny by investors - seem to send a "Gang That Couldn't Shoot Straight" message of less-than-total competence to the financial markets, which reacted accordingly, as its bonds and shares retreated and spreads widened out on GMAC contracts in the volatile credit default swaps market.

The trader noted that the mis-step comes at the worst-possible time - as GM is trying to sell a controlling stake in GMAC in hopes of bringing in some cash and maybe raising the financial unit's credit ratings back to investment grade.

GM "definitely" was the cause of the weakness in the auto sector, he declared. "It will make it harder to sell [control of GMAC] if people think they can't get the finances right."

He saw GM's benchmark 8 3/8% notes due 2033 down 1½ points at 73 bid, 73.5 offered, while GMAC's 8% notes due 2031 tumbled 2½ points to 92 bid, 92.5 offered.

At another desk, GMAC's 8s were seen down two points to 92 bid. Its 7% notes due 2024 were around 74.25 and its 7.15% notes due 2025 were at 73.875, each "down a little under two points, across the board," a market source there said. The GM 8 3/8s were seen at 73 bid and its 8¼% notes due 2023 were at 71, each 1½ points lower.

Yet another trader said that the GM 8 3/8s "opened down three points in the morning on the accounting irregularities, then regained some composure," to end down 1½ points at 73 bid, 74 offered. Meantime, GMAC's 8s opened down two points, he said, at 92 bid, 93 offered, then came back a half point from those lows to finish at 92.5 bid, 93.5 offered, down 1½ points on the session.

In the volatile CDS market, where protection contracts that function like insurance policies to protect investors against an event of default are sold, the cost of protecting GMAC debt for five years widened out substantially in the early going, by as much as 70 basis points, or $70,000 per $10 million of debt insured, to about $470,000 from $400,000 previously; however, that figure was heard to have moderated a little later in the day, to about $442,000 per $10 million, or a 42 bps widening from Thursday's levels.

GM's New York Stock Exchange-traded shares fell $1.09 (4.91%) to close at $21.13, though the 17 million share volume was only slightly higher than the usual turnover.

Moody's Investors Service said the delayed filing increases the risk of a default under the company's bond indentures and credit facility covenants, and also said it would likely further stretch out the already slow-moving process of selling the 51% controlling stake in GMAC. It warned that it could further downgrade the long-term debt ratings of GM, currently at B2, GMAC now at Ba1, and ResCap, at Baa3 the only one of the three entities now at investment grade.

Fitch Ratings, which had previously put GM's B rating under a review for a downgrade, said it would stay there for now, while GMAC's BB rating and ResCap's BBB- could either be upgraded, downgraded or affirmed where they are, depending on events.

Standard & Poor's, which currently rates GM at B, GMAC at BB and ResCap at BBB-, noted that GM had projected having its annual report filed within two weeks. Any delay beyond that could cause the agency to put the ratings on review for a downgrade. But while S&P said the filing delay would have no immediate ratings impact, it warned that it heightens concerns about the integrity of GM's financial reporting and internal controls.

GM pulls down auto sector

The latest GM imbroglio acted as a drag on the auto names generally, traders said.

A trader saw GM rival Ford Motor Co.'s 7.45% notes due 2031 open down a point, but come back to only end half a point lower at 73.5 bid, 74.5 offered, while another trader saw those Ford bonds down a point on the day at 73 bid, 74 offered, although Ford Motor Credit Co.'s 7% notes due 2013 were pretty much unchanged at 88.375 bid, 88.875 offered.

The trader saw former Ford unit Viseton Corp.'s 8¼% notes due 2010 at 80.25 bid, 80.75 offered, down half a point.

Dana down

And he saw Dana Corp.'s bonds lower across the board, with the bankrupt Toledo, Ohio-based components maker's 6½% notes due 2008 at 79 bid, 80 offered, its 5.85% notes due 2015 at 76 bid, 76.5 offered, and its 7% notes due 2028 at 77 bid, 78 offered, all down 1½ points across the board.

It was the first session since Dana's March 3 Chapter 11 filing in which those bonds had failed to rise. They had been rising over the prior two weeks on technical factors such as demand for Dana bonds to fulfill settlement of CDS contracts, as well as on the belief by some investors that bondholders might see a substantial recovery due to Dana's extensive portfolio of foreign and domestic assets that could be liquidated.

Delphi gains on GM news

However, one automotive name which was seen solidly higher in response to the GM news was Delphi; a trader saw the bankrupt Troy, Mich.-based automotive electronics manufacturer's 6.55% notes due 2006 up ¾ point at 62.25 bid, 63.25 offered, while its 7 1/8% notes due 2029 rose half a point to 63 bid, 64 offered.

At another desk, a trader said that Delphi "was up a little bit, actually. It opened down moderately," off half a point, but came back to end up about a point or so. He saw the 7 1/8s ending a point better at 64.5 bid, 64.5 offered.

Delphi benefited from the fact that much of the extra $2 billion of losses that GM booked for the year - about $1.3 billion - were attributable to Delphi's bankruptcy; when it spun Delphi off in 1999, GM agreed to guarantee some pension and other post-retirement costs in the event of a Delphi bankruptcy or default.

Analysts and other observers suggested that the fact that GM had boosted its Delphi-related earnings charges by that $1.3 billion to some $3.6 billion, from $2.3 billion previously, could be seen as a sign that GM is finally stepping up to the plate to give its erstwhile problem child some serious help. GM, Delphi and the United Auto Workers union, representing several labor groups that cover 34,000 Delphi hourly workers - have been locked in three-way negotiations for weeks on how GM and the unions might be able to help Delphi cut its heavy labor costs without voiding the company's union contracts.

The parties are negotiating against a March 31 deadline Delphi imposed; the company says if no deal is in place by then, it will ask the bankruptcy court overseeing its restructuring to throw out the contracts and let it unilaterally impose a more manageable labor cost structure - although it should be noted that Delphi has already extended that deadline several times in hopes of making further progress.

Delphi's unions have said that throwing out the contract would lead to a strike that could destroy the stricken company, and could cause big problems for GM, which is heavily dependent on a steady flow of parts from Delphi, still its largest single supplier.

SBA higher on tender plan

Outside of the automotive realm, SBA Communications' announcement that it will acquire rival tower operator AAT Communications - and will buy back all of its own bond debt as part of that billion-dollar cash and stock deal - caused those bonds to firm smartly, traders said.

A trader saw the 8½% senior notes move up to 111.5 bid, 112.25 offered from prior levels at 109.75 bid, 110.75 offered, while its zeroes rose to 95.5 bid, 96.5 offered from 94 bid, 95 previously.

The company has $216.9 million of the discount notes still outstanding from the $402.02 million sold in December 2003, and $162.5 million of the 8½% senior notes left out of the $250 million issued in December 2004.

William Lyon higher

The trader saw William Lyon Homes' 7½% notes due 2014 up two points on the session on the news that the company's chairman and chief executive officer, retired general William Lyon, is offering to buy out the California homebuilder's other stockholders at $93 per share. Lyon currently owns about 47% of the company he co-founded some 50 years ago, but holdings by related family trusts bring that stake to just under 75%.

Although the announcement of the tender offer for the outstanding shares not held by Lyon and his interests made no mention of the company's debt, the trader saw its 7½% notes due 2014 at 84.5 bid, 85.5 offered, a 2 point gain.

However, another trader saw those bonds trading at 85.5 bid, 87.5 offered, and its 7 5/8% notes due 2012 at 86 bid, 88 offered; he called both unchanged on the day.

The news that Time Warner Telecom Inc. will sell $200 million of new convertible notes and use the proceeds to call a portion of the Littleton, Colo.-based telecommunications company's existing 10 1/8% senior notes due 2011 had little impact on those bonds, traders said, noting that they're already trading in the 105 region, around the anticipated takeout price.

However, a trader did see the company's 9¼% notes due 2014 at 107.75 bid, 108.75 offered, up a point on the day.

Another trader saw them up half a point at 107.625 bid, 108.125 offered.

The second trader meantime saw the new Angiotech Pharmaceuticals Inc. 7¾% senior subordinated notes due 2014 at 101 bid, 101.5 offered, perhaps half a point better than the levels they hit Thursday after pricing at par earlier in the session.

And he saw Xerox's new 6.40% seniors due 2016, which priced Wednesday at 99.413 but then firmed from that issue price, trading Friday at 100.25 bid, 100.75 offered, unchanged on the day.

Another low-volume primary week

In the primary market no issues were priced Friday, however the forward calendar modestly began to build.

Although high-yield syndicate officials have been forecasting that the new issue volume would increase as the month of March wanes and companies met their Sarbanes-Oxley financial certification requirements, that buildup did not materialize during the March 13 week.

With no issues pricing Friday, the week came to a close having seen a little less than $1.296 billion of proceeds raised in three dollar-denominated tranches, almost half a billion dollars shy of the previous week's $1.786 billion of proceeds in 6 tranches.

At Friday's close year-to-date business in the new issue market stood at $25.87 billion of proceeds, as the 2006 primary market begins to lag that of 2005, which had seen over $29.5 billion raised by its St. Patrick's Day close.

A year over year comparison turns up a much wider discrepancy with regard to deal volume: 2006 volume came to 65 dollar-denominated tranches at Friday's close, compared with 109 tranches that were completed by the March 17, 2005 close.

Xerox the week's highlight

Although the week's issuance was anemic, one sell-sider asserted Friday that the business which was transacted in the primary market included one unmistakable sign of the high-yield market's health.

On Wednesday Xerox Corp. priced a massively upsized $700 million issue of 6.4% 10-year senior notes (Ba2/BB+) at Treasuries plus 175 basis points in an a.m. to p.m. drive-by.

The bonds came at a dollar price of 99.413 to yield 6.481%, via JP Morgan and Goldman Sachs.

The issue was upsized from $400 million.

Noting the upsizing and adding that the new Xerox 6.4% notes due 2016 had been trading at a premium in the secondary market the sell-sider termed the deal "a strong statement about the liquidity of the market."

As a footnote to that statement about the liquidity of the market, the sources who commented Friday on the most recent $403.7 million outflow from high-yield mutual funds for the week to March 15, as reported Thursday by AMG Data Services, were unanimous in maintaining that there remains plenty of cash to put to work in junk.

"It's been kind of a slow bleed over the past month or so," one sell-side source said of recent weekly funds flows numbers.

"Things still feel strong," the source added.

"There were significant equity inflows. So maybe some accounts are re-allocating some money."

A little bit of build up

Friday also saw some incremental build-up in the forward calendar, as well as rumors of more business expected to be announced shortly.

Festival Fun Park will start a roadshow Tuesday for its $150 million offering of eight-year senior notes (B2/B).

JP Morgan has the books.

The bonds are being sold to help fund the acquisition of water parks operator Palace Entertainment by MidOcean Partners, from an investor group led by Windward Capital.

And a roadshow got underway Friday for French Lick Resorts and Casinos LLC's $270 million offering of first mortgage notes in two tranches (expected ratings B3/B-).

The Merrill Lynch-led transaction will include a tranche of seven-year floating-rate notes and a tranche of eight-year fixed-rate notes.

Proceeds will be used to develop, construct, and open a casino, two hotels, and related amenities in French Lick, Ind., and to fund an interest reserve escrow account.

Aside from those two announced deals a market source said that Burlington Coat Factory Warehouse, which launched its bank deal on Thursday, will launch a $500 million two-part bond deal during the March 20 week. The bonds are part of the overall $2.075 billion in debt financing, led by Bank of America and Bear Stearns, to fund the LBO of the company by Bain Capital Partners LLC.

And from the rumor mill Hughes Network Systems, LLC, was heard to be returning with a deal that it pulled in April 2005 due to market conditions.

The company is expected to come back soon with a $375 million offering of eight-year senior unsecured notes via JP Morgan and Bear Stearns, both of which led the deal that the company postponed. On Friday Moody's assigned its B1 rating to the proposed issue which will be sold in order to refinance a credit facility backing the buyout of SkyTerra Communications Inc.

The week ahead

As the March 20 week gets underway, only three deals are positioned on the forward calendar as business expected to be cleared by Friday's close.

Hard Rock Park is in the market with a $155 million offering of six-year senior secured floating-rate notes due 2012 (B3), via Deutsche Bank Securities.

Mobile Satellite Ventures is marketing $300 million seven-year senior secured discount notes via Merrill Lynch & Co. and Morgan Stanley. On Friday a source close to that deal told Prospect News that it is going well.

Finally, Saskatchewan Wheat Pool Inc. plans to price a C$150 million offering of seven-year senior unsecured notes (B) via TD Securities.

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