Investors Bail Out of Refco's Bonds

[HenryTo]

Quote: "The market value of Refco bonds maturing in 2012 fell as low as 30 cents on the dollar, from 76 cents on Wednesday and 108 last week." The shares would also definitely have taken another plunge if it has been allowed to trade the full day today. I haven't witnessed any company that has gone down so much so quickly.
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Investors Bail Out of Refco's Bonds

By MARK WHITEHOUSE and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL
October 14, 2005

The price of Refco Inc. bonds yesterday plunged to levels that suggested the derivatives-trading company might renege on its debts, adding to concerns in a junk-bond market already jittery over troubles in the automotive industry.

Investors headed for the exits as Refco shut down trading subsidiary Refco Capital Markets Ltd., citing a shortage of cash. Also, people familiar with the situation said yesterday that Refco may be meeting with its bankers to discuss the company's financial situation.

The market value of Refco bonds maturing in 2012 fell as low as 30 cents on the dollar, from 76 cents on Wednesday and 108 last week. The price of the company's traded loans fell as low as 60 cents on the dollar, from more than 90 cents Wednesday. Ratings firm Standard and Poor's downgraded Refco's "junk," or speculative-grade, subordinated debt two notches, to triple-C from single-B-minus.

"I can't think of one other situation in my experience in high yield where bonds folded this quickly," said Tom Huggins, a portfolio manager at Eaton Vance Management, a Boston-based asset-management firm that owned some of Refco's bonds. "It's a small part of the market, but it's certainly having an effect on the sentiment in the market."

Refco bonds, with less than $400 million in face value outstanding, represent less than a tenth of a percent of the market for junk, or high-yield, bonds. That market was down yesterday, mainly on worries about problems in the auto sector, including the recent bankruptcy of auto-parts maker Delphi. Altogether, auto-sector companies make up as much as 12% of the high-yield market.

"The market is down because of the autos," said Raymond Kennedy, a high-yield portfolio manager at Pacific Investment Management Co., or Pimco, an asset-management firm based in Newport Beach, Calif. "There's clearly a change in risk appetite, and it has accelerated with Delphi."

Mr. Kennedy, who had some Refco bonds in his portfolio, said his fund had sold much of its position before reports of the company's problems appeared on Monday, and had continued selling afterward. Buyers were also coming forth, albeit at low prices. Traders said a significant number of Refco bonds changed hands yesterday, with a total of about $200 million traded in the bonds and the loans combined.

A company's bonds typically don't trade as cheap as Refco's unless investors expect the company to renege on its debts in the near future. But market professionals were hesitant to read too much into the price, because so little information was available on Refco's genuine financial position. The company has said that investors should not rely on its financial statements going back to 2002.

"I don't think the market price of Refco could tell you much right now," said Mr. Huggins. "If the company says you can't rely on the numbers, how can you come up with an enterprise value?"

Refco's lenders may be entitled to start pressuring the company about its outstanding loans. Last year, Bank of America Corp., Credit Suisse Group and Deutsche Bank AG arranged an $800 million loan and $600 million debt offering for Refco as part of a large investment made by Thomas H. Lee Partners LP, the Boston-based private-equity firm that helped bring Refco public and remains a major shareholder.

The banks have been calling to meet with the company and its representatives since earlier in the week, according to one of the people familiar with the matter. The meeting, which could also include nonbank holders of the syndicated debt, is expected to include a financial update of the company's regulated and nonregulated businesses and a review of the conditions and covenants of the company's debt agreements. It's unclear whether the banks will try to renegotiate the terms of the loans.

Yesterday, Refco announced that it hired several new advisers, including Goldman Sachs Group Inc. as financial adviser and former Securities and Exchange Commission Chairman Arthur Levitt.


Corporate bonds

J.C. Penney Co.'s credit ratings got a makeover yesterday after Fitch Ratings raised them to investment-grade status.

Fitch now rates the Plano, Texas, retailer a triple-B-minus -- its lowest investment-grade ranking -- from double-B-plus. The ratings outlook is stable.

"The upgrade reflects Penney's solid operating momentum and meaningful debt reduction, which together have yielded significant improvement in the company's credit profile," said Fitch in a release accompanying the ratings action.

The move affects $4.6 billion of debt, split between $3.4 billion of senior unsecured notes and debentures and a $1.2 billion unsecured bank facility, Fitch noted in the release.

"We are pleased that Fitch recognized the company's improved operating performance and strong financial position," said Quinton Crenshaw, a J.C. Penney spokesman.

The company is rated Ba1 by Moody's Investors Service and double-B-plus by Standard & Poor's -- the ratings firms' highest speculative-grade ranking -- with a positive outlook.

Treasurys

Treasury prices recovered some of their earlier losses late yesterday, but concerns about inflation risks for the economy remain high. The benchmark 10-year note is near its highest level since the end of March. Fostering the renewed rise in yields is the realization that concern over inflation pressures will keep the Federal Reserve squarely on its interest-rate-tightening path for an extended period.

At 4 p.m., the benchmark 10-year note was down 5/32 point, or $1.5625 per $1,000 face value, at 98 9/32. Its yield rose to 4.469%, as yields move inversely to prices. The 30-year bond was down 17/32 point at 109 31/32 to yield 4.697%.

--Michael Mackenzie and Aparajita Saha-Bubna contributed to this article.

Write to Mark Whitehouse at mark.whitehouse@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com