Countrywide, ResCap better on mortgage plan talk; XM up as deal nears completion; Legend hits the road

By Paul Deckelman and Paul A. Harris

New York, Nov. 30 - The possibility that the Federal Reserve may again cut interest rates in its final meeting of the year and speculation that the Bush administration is working on a plan with the mortgage industry to stop the swelling rate of residential foreclosures which is at the heart of the credit crunch currently affecting the financial markets helped to brighten the overall tone of the market Friday as it closed out November and headed into the year-end homestretch.

One of the biggest gainers was Countrywide Financial Corp., the largest independent U.S. mortgage lender and also one of the key parties in the talks taking place under the direction of Treasury Secretary Henry Paulson, the White House's point man on trying to find a solution to the mortgage crisis.

Other mortgage-connected names like Residential Capital LLC and its corporate parent, GMAC LLC, were also seen higher, presumably helped as well by the positive news developments. So were homebuilders such as Standard Pacific Corp. whose sales have been badly impacted by the tighter credit environment.

One financial name hurt by its exposure to the mortgage problems which was not firming on Friday was E*Trade Financial Corp. Its bonds and shares continued to head southward, intensifying the negative momentum that emerged Thursday afternoon when analysts and investors began closely scrutinizing the terms of the $2.55 billion cash infusion which the New York-based online brokerage announced earlier Thursday - a deal which includes unloading its big asset-backed securities portfolio for only a small fraction if its worth and obligating itself to heavy interest payments to its "rescuer."

Elsewhere, traders saw XM Satellite Radio Holdings Inc.'s bonds, and those of rival satellite broadcaster Sirius Satellite Radio Inc., better, on speculation that their proposed merger will finally win Justice Department approval - one investment house was saying that the green light was imminent and could have even come Friday, although that turned out not to be the case.

Other sources said that the broad market was better on Friday, and continued to cite the prospect of a cut in the Fed Funds rate as the catalyst for a rally in the junk market during the last half of the post-Thanksgiving week.

"Things are not that bad, one high yield syndicate official asserted, adding that the double-B sector of the index, trading at a spread to worst of 450 basis points, may be somewhat oversold.

This source added that one force which may be inhibiting the market is a desire on the part of the buy-side to close out the year.

With the recent volatility portfolio managers may wait until the new year to resume activity, the source added.

In the primary market, Legends Gaming (Diamond Jacks Casino) was heard to be hitting the road to market a $220 million five-year issue of senior secured notes.

Better tone seen

Overall, a trader said, market sentiment was better in junk.

He said that bonds kept running up in the morning, "but levels got very quiet around lunch." He theorized that "it's month-end for a lot of people, year-end for some others, so things kind of shifted gears."

But he said that he "definitely saw better buying out there," although there also were "some accounts that did take advantage of the rally and take some money off the table - but overall, the market was pretty firm."

Volume, he said, was "pretty light, so it was hard to tell, with some of the market players not really participating. Any real movement was hard to get real conviction on."

Another trader said that the widely followed CDX index of junk bond performance was "alright," up about ¼ point at 95 5/8 bid, 95 7/8 offered. Among other market barometers, the KDP High Yield Daily Index pushed up by 0.44 to end at 77.98, while its yield tightened by 12 basis points to 8.52%.

Overall market volume edged up about 4% from Thursday's levels, while advancing issues topped decliners by a better than two-to-one margin.

Countrywide climbs on mortgage plan talk

One of the big gainers was Countrywide Financial, whose 6¼% notes due 2016 were seen up as much as 6½ points at one stage in the day, a market source said, at 66.5 bid, well up from prior levels around 60, before coming off that peak to end around 64.

Another trader said that the news that a mortgage relief plan for beleaguered borrowers was in the works helped Countrywide's bonds "quite a lot," quoting the 61/4s at 62.5 bid, 64.5 offered, up from "a 59ish" level on Thursday.

At another desk, a trader called the bonds 3 point gainers at 62 bid, 63 offered, while its 4¼% notes slated to come due in about two weeks were ½ point better at 98.

Its 4% notes due 2011 were also ½ point better at 74, a source said, while he had the 61/4s up nearly 4 points at 63.75.

The Calabasas, Calif.-based mortgage giant's New York Stock Exchange-traded shares meanwhile zoomed as much as 29% intraday before coming off that peak and settling in up $1.52, or 16.34%, at $10.82. Volume was 98 million shares, not quite triple the norm.

The bonds and shares moved up solidly on the news that government banking regulators and executives of companies such as Countrywide, Citigroup and Wells Fargo & Co. had held talks on crafting a plan to stop the cascade of mortgage foreclosures that have hurt the financial companies - which depend on selling pools of un-defaulted mortgages to investors in order to keep funding their lending operations - and, especially, the homebuilders, whose fortunes depend on the availability of credit to homebuyers. News reports said that Treasury chief Paulson might announce the details of such a plan some time in the coming week, perhaps even as soon as Monday, when he is scheduled to deliver an address to a national housing conference.

The major thrust of the initiative would be to get the lenders to extend for a number of years the unusually low introductory rates that were offered over the past few years on subprime mortgages made to borrowers with weak credit histories. Many of those borrowers have found their low "teaser" rates have now reset to much higher levels, upping their monthly payments and in some cases, leading to default and foreclosure.

Even more of the loans are scheduled to re-set at the higher rates in the coming year - meaning time is of the essence to prevent a further, larger wave of defaults than has already been seen. The idea is to freeze the interest rates the borrowers are paying on their mortgages, giving them time to refinance and shift into fixed-rate loans.

ResCap, GMAC also lifted

Besides Countrywide, traders said other mortgage-linked names like Residential Capital, a Countrywide rival, also benefited from the hopeful speculation. A trader saw its 6 1/8% notes due 2008 up 3 points on the day at 77 bid, 79 offered, while another trader saw its 7½% notes due 2013 up 1 point at 64 bid, 66 offered.

A market source at another desk put ResCap's 8 3/8% notes due 2015 up 1½ points on the day at 65 bid.

Good news for ResCap, in turn, was seen as good news for the Minneapolis-based lender's corporate parent, whose recent quarterly results showed a big loss related to red ink at its problem mortgage unit.

GMAC's 8% notes due 2031 were seen by one source to be up 4 points on the day at around the 88 level, although another trader pegged the bonds 2 points higher at 85 bid, 87 offered. Its 6% notes due 2011 were seen having gained 3½ points to 86.5. GMAC paper, as usual, was among the most busily traded names of the day, a market source indicated.

Builders get a boost

A trader said that the hope that the mortgage crunch might ease helped the battered homebuillders, whose bonds were up "across the board."

He saw "a big mover" in Irvine, Calif.-based builder Standard Pacific, quoting its 6 7/8% notes due 2011 up 3 points at 67 bid, 68 offered. Another trader called Standard Pacific's 7% notes due 2014 half a point higher at 64.5 bid, 66.5 offered.

The first trader also saw William Lyon Homes' 7½% notes due 2014 as 3 point winners at 58 bid, 60 offered, although at another desk, the company's 10¾% notes due 2013 were marked down 1 point at 60.

Among other sector names, KB Home 8 5/8% notes due 2008 were up a point at 98, while Beazer Homes USA Inc.'s 8 3/8% notes due 2012 were up 2½ points at 76.5 and WCI Communities Inc.'s 9 1/8% notes due 2012 were up 2 points at 58.

However, another trader said that the builders' stocks "had a decent day, but the bonds didn't go anywhere." He saw WCI "better offered, but the bid side was pretty much unchanged" from Thursday. He saw the company's 9 1/8% notes at 55.5 bid, 57 offered. "It seemed to be better sellers out there. I didn't see any relief rally in the bonds."

E*Trade an exception

While most of the companies dealing in mortgages one way or another - either by writing them or by selling houses to people who obtain them - were seen better on the prospect that whatever deal is worked out between the feds and the lenders will stop the hemorrhaging everyone is feeling, one name was left out: E*Trade, which writes mortgages through its on-line financial service, and which has a big and troubled portfolio of mortgage- and other asset-backed securities.

The New York-based financial services company's big deal to sell that $3 billion portfolio for $800 million, or about 27 cents on the dollar, as part of a $2.55 billion cash infusion from an investment syndicate led by Citadel Investment Group, seemed to be dismaying both stock and bond investors, who took the company's securities lower for a second straight day.

A trader saw E*Trade's 7 7/8% notes due 2015 down 4 points on the day at 71.5 bid, 73.5 offered, while its 8% notes due 2011 lost nearly 4 points to end at 76.5. Both issues had initially shot up Thursday on news that the company would be getting a big cash infusion and unloading its headache-making ABS portfolio, but had finished lower as those early gains faded on investor skepticism that the cash transfusion would really help the company much, given the price it will have to pay for it - it will issue Citadel $1.75 billion of 12½% senior notes as part of the deal.

Those concerns caused Moody's Investors Service to lower the company's debt ratings. On the equity side, the slide continued, on the news that several brokerages, including Goldman Sachs and Credit Suisse, cut their earnings estimates for the company, citing the high cost of the bailout.

XM gains on merger completion hopes

Apart from the financial names, traders said that XM Satellite Radio's bonds were up on expectations that its merger with rival Sirius would be completed soon. A Bear Stearns research note said that could come as soon as Friday, while other reports more cautiously said it could happen over the weekend or early in the coming week, or just "very soon."

A trader put XM's 9¾% notes due 2014 up 1½ points at par bid, 101 offered, citing the renewed speculation about completion of the deal.

Another trader said that on the strength of the rumors that the deal should go through over the weekend, he saw the 93/4s "better bid for" at 100.5 bid, 101 offered, although they got as high as 101 bid at one point.

However, he said Sirius was "pretty much unchanged," with its 9 5/8% notes in the mid-to-high 90s.

"There was a lot of chatter, a lot of talking about it. I didn't see much actual activity, but a lot of accounts were questioning - they were kind of curious as to where things would shake out. I'm pretty curious myself. Hopefully, it will keep us busy on Monday."

New Texas Competitive bonds above issue price

Among newly priced bonds, a trader saw Texas Competitive Electric Holdings Co.'s $3.75 billion of new notes continuing to trade slightly above the two tranches' respective Thursday issue prices.

He saw its 10¼% cash-pay bonds due 2015 at 95.75 bid, 96.25 offered, up from their 95 issue price, while its 10½% toggle notes due 2016 were at 94 bid, 94.5 offered, up from 93.25 at issue

Legends launches $220 million

In the primary market, Legends Gaming, LLC, along with Legends Finance Corp., began a roadshow on Friday for a $220 million offering of five-year senior secured notes (B), according to an informed source.

The debt refinancing deal, which is being led by bookrunner Jefferies & Co., is expected to price during the Dec. 10 week.

Legends Gaming currently owns and operates two gaming properties located in Bossier City, La., and Vicksburg, Miss., under the DiamondJacks Casino brand. The company has offices in Frankfort, Ill.

Record remains in sight

With no deals pricing on Friday the post-Thanksgiving week came to a close having seen $1.909 billion of issuance.

Year-to-date dollar-denominated high yield issuance at the Friday close stood just below $154 billion, according to Prospect News data - less than $3.0 billion away from surpassing the approximately $157 billion issuance record set last year.

The week ahead

Some sources are expecting the rally in junk during the latter half of the post-Thanksgiving week to provide a catalyst that will propel some of the sidelined LBO financing deals to market during the coming week.

However there was a good deal of uncertainty on Friday as to how those deals might proceed.

On Friday morning one investment banker said that the two new tranches of the Texas Competitive Electric $3.75 billion of senior notes, which priced on Thursday, were wrapped around the issue prices.

The company priced $2 billion of 10¼% eight-year series B cash-pay notes at 95.00 to yield 11.216%.

In addition TCEH priced $1.75 billion of 10½% nine-year PIK toggle notes at 93.25 to yield 11.747%.

The investment banker said that it was something of a disappointment that the notes had not traded higher, as they are a bellwether of sentiment regarding the LBO risk overhang.

Later in the day a source was spotting both of the Texas Competitive tranches trading above the issue prices.

The only deal that is roundly believed to be business for the first full week in December is Sequa Corp.'s $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+) via Lehman Brothers.

However an informed source told Prospect News on Thursday that underwriters are in no hurry, and want to allow bond investors plenty of time to see how the recently priced term loan B trades in the bank loan secondary market before commencing discussions as to the prices at which the buy-side will start to take interest in the Sequa bonds.

Following Friday's close a source close to the loan deal spotted the Sequa term loan trading at 96½ bid, 97 offered. The same source had the loan going out Thursday at 96 3/8 bid. The deal priced at 95.

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