Friday morning Refco's term loan was holding at around 75 and its bonds were at 27-28. Those levels came after a wild Thursday that had the bank loans starting the day at 92 before dropping down to 57-58 at around noon. "It was sitting in the lows at lunch time," one portfolio manager said. "Maybe I saw a 57, but then I had to go throw up. It's just amazing, definitely one for the record books." The loans eventually went back up and ended the day at 70-73 as distressed accounts starting coming in. The company's 9% '12 bonds plummeted to 35 from 75 Thursday (CIN Web site, 10/13), before dropping again Friday. Refco's term loan was trading at 101.25 and its bonds at 108.75 before Phillip Bennett, ceo, was suspended from the company under allegations of fraud.
Information or lack thereof was the big issue last week. Investors complained that they were not getting anything useful out of the bank group. "The story was, the company is going to need a waiver with connection to the lateness of financials, but this does not look like a blow up type situation and we will be out to you with a waiver request and that is a way to get more fee, a larger spread," one portfolio manager said of what he was hearing from banks. But nothing really followed, and the market started to panic. "As a result of the absence of information, people are thinking the worst," another investor said. "The net message, total absence of information equals meltdown. The more information, people can make more informed decisions about what the right level for the paper is."
B of A, CSFB and Deutsche Bank led the $875 million credit to back Thomas H. Lee Partners' $2.25 billion leveraged buyout of Refco in the spring of 2004. The deal consisted of a six-year, $75 million revolver and a seven-year, $800 million term loan "B" (LMW, 7/26/04). CSFB, B of A and Goldman Sachs were joint book-runners on Refco's initial public offering two months ago. When the original bank deal was launched, some investors were spooked by the brokerage's business. The concern was that there were no real assets securing the deal and that's the worry now. "The only asset they have is their name and that is all screwed up," one trader said. Another trader added, "People think it will file for bankruptcy and if that happens there are no assets to take control of."
Refco announced Friday that Refco Securities would start unwinding proprietary and client positions. It also imposed a 15-day moratorium on withdrawals because liquidity at its subsidiary Refco Capital Markets, which represents a large portion of its business, is no longer sufficient to keep it in operation. Standard & Poor's lowered its long-term counter-party credit rating on Refco Group to B- from B+. It also cut its subordinated debt to CCC from B- because of the moratorium on the withdrawals. "The company's operating subsidiaries either may not have sufficient liquidity or capital to upstream cash to Refco, or may be prohibited from doing so by regulators," said the rating agency in a press release. Moody's Investors Service downgraded all Refco's ratings to Caa2 from B2.
