Junk trading stalls ahead of holiday break; Blockbuster firmer; investors ponder Elan dilemma

By Paul Deckelman and Paul A. Harris

New York, Sept. 4 - The junk bond market quietly coasted into the long-awaited Labor Day holiday break on Friday, with most levels pretty much unchanged from Thursday's close and volume drastically truncated during what amounted to a half-session, in all but name.

Traders did see some continued upside movement in Blockbuster Inc.'s bonds, which have been riding the crest of positive momentum all week after the Dallas-based DVD, Blu-Ray and video-game rental giant took two positive steps to enhance its liquidity picture.

Energy Future Holdings Corp.'s bonds, which had been on the downturn all week after Standard & Poor's cut its outlook for the Texas-based power producer, were seen managing to rebound a little.

A ratings agency move was seen paying off for Ford Motor Co.'s bonds, quoted up after an endorsement by Moody's Investors Service.

There was a little bit of upside movement, though on very light volume, in Elan Corp.'s bonds - perhaps a recovery from the lower levels they hit on Thursday following an adverse court ruling in the pharmaceutical company's legal battle with its joint-venture drug-development partner over allegations Elan breached its development deal when it agreed to let Johnson & Johnson invest more than $1 billion in the company earlier this year.

After Thursday's pricing of Beazer Homes USA Inc.'s secured notes deal - the timing of which came as a surprise to some in the market - the primary sector again fell silent, waiting for the anticipated pickup in new-deal activity following the three-day holiday break.

Market indicators end firmer

Back among the established issues, a trader saw the CDX Series 12 High Yield index - which had lost 1/16 point on Thursday, continuing a recent slide - rebounding by 3/16 point on Friday to finish at 87¼ bid, 87¾ offered. However, despite that rise, the market measure finished a full point below the 88¼ bid, 88¾ offered at which the CDX had ended the previous week, on Friday, Aug. 28.

The KDP High Yield Daily Index, which gained 7 basis points on Thursday, added another 12 bps on Friday to close at 66.39, as its yield tightened by 4 bps to 9.26%. That put the index ahead of its week-earlier finish of 66.22, with a 9.36% yield.

In the broader market, advancing issues - which led decliners for a second consecutive session on Thursday, by a better than six-to-five ratio, maintained their lead Friday, though by around a nine-to-eight margin.

Overall market activity, reflected in dollar-volume totals, slid nearly 72% from Thursday's already sedate pace.

A trader proved to have a talent for understatement in declaring that "it was very quiet - we've got a lot of people out today.

"I think the market closed at 10 [in the morning]."

Officially, the day was a full session, with the Securities Industry and Financial Markets Association having decided earlier this year to do away with the traditional recommendation for an early market close on the Friday before Labor Day. However, that proclamation by the bond market's umbrella organization had all of the impact of King Canute trying to hold back the tide by royal fiat - for all intents and purposes, the trading day was over soon after it had just begun.

"Trace volume for most of the latter part of the summer has been anywhere between $1 billion and $1.2 billion," a trader said. "But volume today, as we speak [at mid-afternoon], is less than $300 million, which indicates that today is not just ridiculously slow, but incredibly slow - like Christmas Eve material.

"On some of the shorter days, or slower days, we've had Trace volume between $600 and $900 million - so that shows you that volume today was a third of what we get on the slowest days of the summer. So there was no real trend."

At another desk, a trader said that "yeah, there was a little noise this morning, but it was just some trades. It looks like trading has shut down [as of mid-afternoon]. I haven't seen the Trace monitor take up more than $10 million bonds or so, the last two hours. It looks like it's about a third of what it's been."

"I don't see much change in anything."

Yet another trader added that "I don't think anything has done anything special."

Blockbuster boom continues

A trader said that Blockbuster "did trade today - but it was on very light, thin volume." He saw the company's 9% notes due 2012 trading at 60¼ bid on Friday, versus around 60 on Thursday, "so that was unchanged - but they did trade. They held on to their gains."

However, another trader saw the Blockbuster bonds 'sort of at the high" at 60 to 611/2. He saw a few trades in the bonds around 60, and called them up from prior levels late Friday around 581/2, "so they're up a point, a point and a half." But there was "not a lot of trading" in it.

Blockbuster easily qualified as one of the week's stellar performers, since the 9s began the week trading at under 50 bid - and ended it about 10 points better.

The movie-rental company's bonds rose on a double-feature of good news, gaining about 2 or 3 points on Monday in belated response to the previous Friday's announcement that it has sold its Irish retail entertainment chain, Xtra-vision Ltd., and would reap proceeds of $45 million, which would enhance the company's liquidity.

That advance had an encore on Wednesday, when the notes gained about another 5 points to about the 58 level, as Blockbuster said that it had reduced the size of a letter-of-credit facility it has maintained on behalf of its former corporate parent, Viacom Inc., to cover the latter's liability relating to store leases signed when it still owned Blockbuster. By cutting that facility to $25 million from $75 million, Blockbuster augmented its own liquidity picture by another $50 million. The bonds were seen holding their gains in Thursday's session, before moving up again - albeit on light trading - on Friday.

TXU bonds bounce back

Blockbuster's neighbor in Dallas' Downtown business district, Energy Future Holdings Corp. - the old TXU Corp. - was seen by one market participant to be "trading up a little bit. I'm not sure why."

He saw the company's Texas Competitive Electric Holdings unit's 10¼% notes due 2015 - which on Thursday had been trading between 64 and 66¼ - trading at 67 on Friday.

"It's up a little bit - I'm not sure what's going on," he said. Volume in the credit was light - $1 million, "and that was it," he declared.

Another trader also saw the latter bonds at 67, calling them 2 points better on the session.

The TXU complex - both the Texas Competitive bonds and those of its parent - had been sliding in recent sessions, with traders wondering whether the fact that the company plans to tap the credit markets soon for as much as $4 billion of secured debt, senior to its current unsecured bonds in the capital structure, may have been a factor.

Another recently seen negative was Monday's news that Energy Future Holdings had its outlook cut to negative from stable by S&P, on the likelihood that it would use its payment-in-kind option for toggle notes during the October 2009 to April 2010 payment period - which would be the third time that the company has had to resort to using its alternative to making the regular cash payments.

Ford firms after Moody's move

Also on the upside Friday, a trader saw some Ford Motor Co. paper trading, with the Dearborn, Mich.-based Number-Two domestic carmaker's 9½% notes due 2011 firming to 99 3/8, a gain of more than 2½ points on the day.

At another shop, a market source saw the 7½% notes due 2012 issued by Ford's automotive financing arm, Ford Motor Credit Co., up ½ point, citing the Moody's upgrade of Ford's corporate family ratings to Caa1 from Caa3 and its lifting the outlook on Ford to "stable" from "negative."

He saw those bonds at a 94-94½ context, up from 93 to 93½ on Thursday.

The ratings agency declared that "the period of greatest risk in Ford's restructuring has passed," and pointed out that the carmaker has sufficient liquidity and has slowed its cash burn enough to sustain itself until 2011.

Ford has already predicted that it expects to be breaking even on annual basis by that time.

Nortek adds to debt accord news gains

For a second straight session, Nortek Inc.'s 10% senior secured notes due 2013 were seen better, helped by Thursday's news that the Providence, R.I.-based building products company and its corporate parent NTK Holdings Inc., had reached a restructuring and lockup agreement with a "substantial portion" of its bond holders to put into effect a restructuring of the company's debt which will effectively give bondholders full ownership of the troubled company.

Nortek envisions the deal will purge $1.3 billion of debt from its balance sheet.

The 10s - which on Thursday had risen to 98 3/8 bid from 95¼ on Wednesday - kept right on going Friday, quoted up another 1 1/8 points at the 99½ level.

Elan investors scrutinize Biogen ruling

There was a slight and quiet flurry of activity in the bonds of Irish drugmaker Elan Corp., following a federal court ruling on Thursday that could either spell the end of Elan's partnership with Biogen Idec Inc. in the development of the multiple sclerosis medication Tysabri - which by some estimates accounts for as much as 50% of Elan's current share value - or, alternatively, the possible end of its new alliance with healthcare products giant Johnson & Johnson, which has agreed to invest $1.5 billion in Elan.

The company's Elan Finance Corp./Elan Finance plc 7¾% notes due 2011 were gyrating around on Thursday in anticipation of a court ruling in the legal battle between one-time allies Elan and Biogen, falling from opening levels just under par to a close of 971/2, after a federal judge in New York ruled that Elan's investment agreement with J&J constitutes a breach in its partnership with Biogen.

The bonds bounced back on Friday to their original levels around 99¾ bid, a market source said, although there were only several small odd-lot trades at the higher levels.

The court ruling came as part of the fight over that Johnson & Johnson investment agreement. Back in July, J&J agreed to invest $1.5 billion in Elan in exchange for an 18.4% ownership stake, with Elan then being able to use that much needed windfall to further its development of a potentially lucrative anti-Alzheimer's drug it is working on in a joint venture with another partner, Wyeth. However, one clause of the J&J agreement allows Elan to tap its new investor's very deep pockets for funding to buy out Biogen's 50% stake in Tysabri, should the latter firm be sold.

Biogen objected, claiming that Elan was violating the terms of the deal between the two companies, since, in practice, Johnson & Johnson, rather than joint-venture partner Elan, would effectively be grabbing Biogen's Tysabri rights in the event of a change of control.

It filed suit in late July, giving Elan 60 days in which to either back out of the Johnson & Johnson contract or at least fix the offending section. Elan responded with its own court initiative seeing to block the Biogen suit - but now has been declared in breach of its Tysabri partnership. The court gave the company until Sept. 26 to amend the investment agreement to remove the offending section, or risk the loss of all rights to Tysabri, currently Elan's biggest product.

Trying to verbally thread the needle, Elan said Thursday night that it remains "committed to working with Johnson & Johnson to close the transaction as quickly as possible," - but added that it hopes to do so in a manner "consistent with the Biogen-Elan Tysabri collaboration agreement."

New Beazer bonds still unseen

For a second consecutive session, traders saw no trace - or, perhaps, no Trace - of Atlanta-based homebuilder Beazer Homes USA Inc.'s new 12% senior secured notes due 2017, which priced on Thursday at what one trader called "a pretty deep discount" of 89½ to yield 14.215%.

The $250 million deal, upsized from the originally planned $160 million, was heard by a market source to have been driven by reverse inquiry, with the order book three-times oversubscribed, and with severe allocations.

$84 billion year to date

Friday's session passed, as expected, with no news surfacing in the primary market.

For the week, the new issue market saw just under $575 million price in two deals.

Hong Kong's Country Garden Holdings Ltd. priced a $300 million issue of five-year senior notes (Ba3/BB-) at par to yield 11¾%, at the tight end of the 11¾% to 12% price talk.

JP Morgan was the bookrunner for the property developer's deal which was viewed primarily as an emerging markets corporate play.

Also Beazer Homes USA, Inc. priced an upsized $250 million issue of 12% eight-year senior secured notes (B1/CCC+) at 89.50 to yield 14.215%.

Citigroup ran the books for the deal, which was priced off the investment-grade desk. The offering was increased from a planned $160 million.

With the pre-Labor Day week's deals included in the tally, to the end of summer, the 2009 new issue market has seen $84 billion of issuance in 198 junk-rated, dollar-denominated tranches, according to Prospect News data.

Eyes toward autumn

The primary market is apt to see a gradual pick-up in activity during the four sessions that comprise the post-Labor Day week, sources say.

"We're thinking we could see five deals next week," a syndicate banker told Prospect News on Friday.

However the Sept. 15 week could see a dramatic increase in the volume, the banker warned.

Although specific issuer names have been in short supply, sources profess visibility on deals from sectors including energy, resources, technology-media-telecommunications, health care and retail.

Warner Chilcott prominent

Among the few issuer names that were available, heading into Labor Day, the most conspicuous was Warner Chilcott plc.

The Rockaway, N.J.-based specialty pharmaceutical company is expected to bring $1.4 billion of senior unsecured notes to help fund its acquisition of Procter & Gamble Co.'s pharmaceuticals business.

The committed bridge financing is from JP Morgan, Morgan Stanley, Barclays Capital, Bank of America Merrill Lynch, Citigroup and Credit Suisse.

Earlier in the week a trader from a high-yield mutual fund said that the Warner Chilcott bonds could surface during the first half of the month, and added that it will be "early September's big deal."

However on Friday a syndicate official said that later September seems to be a more likely time-frame for the billion-plus acquisition financing, which is expected to await the outcome of the $2.75 billion bank loan that is also part of the debt package.

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