All eyes are on Federal-Mogul's bank debt this week as the clock ticks on the company's opportunity to file for Chapter 11 bankruptcy. If the company does not file by March 31, the debt is expected to trade up about 10 points, according to some traders. Dealers last week were reportedly talking down levels in an effort to snag the paper. Levels on the "B" tranche were quoted in the 50-52 range.
"People will be watching this over the next week," a trader said, alluding to the opportunity to file for bankruptcy. "It's simple: It will either happen or it won't. If they don't file, it's good. If they do, it's bad." He predicted the paper will trade up 10 points if the company does not file. A spokesman at Federal Mogul declined to comment.
The company has a 90-day preference period, ending in late March, to file for bankruptcy. Once that period ends, dealers said, the pendulum swings in the debt holders' favor. "The preference period gives the company time to propose restructuring. Once they lose that, the lenders have a say in what they can propose. You could argue that the lenders have the upper hand at that point, and it could result in better prices on the bank debt," a dealer explained. However, market players say Japanese banks are the main holders of Federal Mogul's bank debt and are said to be "in no rush" to unload the paper.
Federal Mogul hit a low of the 30s at the end of last year, as the automotive sector stumbled and levels softened in the market overall. However, when the company got an amendment to the bank deal in January and the holders got collateral, levels spiked. "The levels were run up to 65 when the banks got a pledge of collateral. Significant new money was raised, which was a critical factor," said a market watcher.
J.P. Morgan Chase leads the deal, which breaks down into a $400 million revolver, a $600 million term loan "A" and a $400 million term loan "B." A bank spokeswoman could not be reached by press time. Federal Mogul, based in Southfield, Mich., makes automotive parts.