Marketeers back from break, but not much happening; Leap unit jumps on merger bid; mortgage names up

By Paul Deckelman and Paul A. Harris

New York, Sept. 4 - It was back to work Tuesday for the high yield market, with the Labor Day holiday weekend - the unofficial end of summer - now history, and, in theory, pent-up demand for business that wasn't taken care of over the sleepy week leading up to the holiday in either the secondary or the primary markets ready to be met.

However, that's not what was going on, as traders reported relatively little market activity, with many desks still half-staffed as people came straggling back in after the long break, still psychologically in a summertime mode and not ready to get down to brass tacks.

"Things felt better," a trader said. Taking a cue from better stocks - the Standard & Poor's 500 Index and the Nasdaq Composite Index each rose more than 1% on the day, while the bellwether Dow Jones Industrial Average climbed 91.12, or 0.7%, to 13,448.86 - "the market had a better tone. The world's a better place." However, he added "there wasn't all that much activity."

Another trader agreed that "the first day after the holiday, the market was better" - although the question was, would it stay that way.

A senior high yield syndicate official marked the broad market ½ point better in "anemic trading."

Among notable issues seen moving around, Cricket Communications International Inc.'s 9 3/8% notes due 2014 moved up solidly in fairly active trading on the news that MetroPCS Communications Inc. has proposed a $5.5 billion all-stock acquisition of Cricket's parent company, San Diego-based Leap Wireless International Inc., which aims to create the fifth-largest national wireless carrier in the U.S. There was no immediate response from Leap to the unsolicited offer.

Boston Scientific Corp.'s bonds, after having moved around pretty actively last week, were seen firmer, but considerably quieter on Tuesday, as the medical device maker - which last week announced a settlement of long-running investigations into one of its subsidiary's products - unveiled study results which appear to show another company product causes no more blot clots than the older technology it is designed to replace.

Mortgage-related names seemed better, including Thornburg Mortgage Inc. and Residential Capital Corp., the former having scored some new financing on Friday and the latter having lined up an asset sale to boost liquidity.

From out of the distressed markets came a couple of large movers, including a 5 point gain in some bonds of Tembec Inc., and even bigger gains in Delco Remy's bonds as that company's parent issuer, Remy International Inc., began soliciting noteholder consents to its planned pre-packaged Chapter 11 filing, though which the troubled automotive electrical systems manufacturer will implement a restructuring plan that will leave some of the bondholders owning all of the revamped company.

Even though the calendar has turned to September, with eight months now in the books, the primary market was seen trying to extend its summer vacation for at least one more session.

Back in the secondary, a trader saw the widely followed CDX junk bond performance index up ¼ point at 951/4-951/2. Among other market indexes, the Banc of America Securities High Yield Broad Market Index was up 0.18% on the session, for a year-to-date gain of 0.89%, while the KDP high Yield Daily Index gained 0.07 to end at 78.42, as its average yield narrowed 2 bps to 8.30%

Cricket bonds jump on Leap merger bid

The stock-swap deal for Leap Wireless outlined by Dallas-based MetroPCS also envisions that it will assume or refinance some $2 billion of Leap debt, including the Cricket Communications bonds. The announcement of the offer follows months of speculation that the two second-tier wireless carriers might combine. Indeed, MetroPCS' chief executive officer, Roger Linquist, said in a conference call regarding his company's offer for Leap that the two companies had been holding discussions, on and off, "going back four years now."

The Cricket paper was quoted as having opened just below the 101 mark Tuesday, up from its close last week around 98, and it had moved up to 102.5 by the close.

Another market source pegged the bonds at 101.25, but called that a 4¼ point gain, while seeing the would-be acquirer MetroPCS Wireless' 9¼% notes due 2014 meantime moving up to 101 bid from last week's 101.5.

A trader said that the Cricket bonds were "trading up to a likely change-of-control takeout price." He meantime saw the MetroPCS issue having risen a little to par bid, 101 offered.

Leap's Nasdaq-traded shares shot up $10.97, or 15.13%, to $83.47, on busy trade of 6.4 million shares, nearly six times the norm. MetroPCS' New York Stock Exchange-traded shares meantime moved up $1.36, or 4.98%, to $28.65, on volume of 7.2 million shares, about six times the usual daily handle.

In seeking the acquisition of its smaller rival, MetroPCS aims to grow itself into the Number-Five national wireless carrier, although with combined subscribership of about 6.2 million customers - about 3.5 million of its own plus 2.7 million Leap customers - the resulting entity would still be far behind such national giants as AT&T Wireless/Cingular, Verizon, Sprint Nextel and T-Mobile and would only have around half the subscribers of larger regional competitor Alltel, which provides service to much of the United States but which is generally not considered a national operator.

Linquist said on the conference call that he anticipates some $2.5 billion of synergies could be realized in a combination of his company with Leap.

MetroPCS currently serves its home turf of Dallas/Fort Worth, as well as such large metropolitan areas as Los Angeles, San Francisco, Sacramento, Miami, Tampa/Sarasota/Orlando, Atlanta, and Detroit, while Leap has a somewhat wider geographic footprint with wireless services 23 states, mostly in suburban and rural areas, although the company does hold service licenses for 35 of the top 50 markets, including Chicago, Milwaukee, Minneapolis, Philadelphia, Washington D.C, and Seattle.

Unlike the larger companies, which rely predominantly on subscribers who have formal written contracts providing service for a set period of time - usually at least one or two years - MetroPCS and Leap serve a different market niche, offering services for a flat rate with no signed contract for customers who either cannot afford a long-term commitment, or who do not want one.

Boston Scientific firms in calmer trading

Boston Scientific's most widely traded issue, its 6.40% notes due 2016, were seen by a market source up perhaps 1 point at just over the 91 mark. Those bonds had been one of the more actively traded issues last week, falling nearly 2 points Wednesday to an 89-90 context, recovering some of their lost ground on Thursday but then easing slightly during Friday's abbreviated session. Tuesday's activity in those bonds was considerably lighter.

The Natick, Mass.-based maker of medical devices announced last week that it will pay $16.75 million to settle once and for all investigations in 35 states plus Washington, D.C., into flawed heart defibrillators sold by Guidant Corp., now a Boston Scientific subsidiary. Boston Scientific bought Indianapolis-based Guidant last year for $27 million, but in the process inherited its sizable legal liabilities from the defibrillator case. The multi-state settlement comes a month after Boston Scientific agreed to pay $195 million to settle class-action lawsuits arising from the heart machines' problems, which led to a number of product recalls.

There was somewhat more positive news out of Natick on Tuesday, with Boston Scientific announcing study results that seem to indicate that the company's Taxus drug-coated stents, used to treat heart patients, are no more likely to cause blood clots than are the traditional bare-metal stents that Taxus and similar products seek to replace.

A stent is an expandable wire form or perforated metal tube inserted into a blood vessel to prevent or counteract a disease-induced localized constriction of the blood flow. Taxus is coated with drugs whose function it is to prevent scar tissue from forming new blockages after such artery-clearing surgery. After questions were raised last year over whether the medications might cause a higher rate of blood clotting than the traditional stents, which could be life-threatening in a heart patient, follow-up studies were undertaken.

The company is now hoping that those study results put the matter to rest, allowing for an improvement of coated-stent sales, which were hurt by the clotting controversy, falling to $437 million in the second quarter from $647 million a year earlier.

Mortgage names better

Traders saw the names of mortgage-related companies better, helped as much by their own company specific news as by Friday's statements from the president and the Fed chairman indicating that Washington action to do something about the mortgage crisis that has recently roiled the financial markets should be forthcoming.

A trader saw Thornburg Mortgage's 8% notes due 2013 move up to 88 bid, a 1 point gain, while another quoted the bonds at 87, but said that they were "better at that level, on the news that they raised some cash. They've been grinding steadily higher" from the lows around 50 which the Santa Fe, N.M.-based mortgage provider's bonds fell to several weeks ago when it revealed its problems in generating financing in a market suddenly too spooked to buy any kind of mortgage-backed securities - even a company like Thornburg, far removed from the subprime sector.

Thornburg announced that it had raised $1.44 billion from a securitization of home loans, this on top of last week's announcement that it had raised another $500 million through a sale of convertible preferred stock. Thornburg also recently sold some $20.5 billion of its loan portfolio in order to trim its borrowing costs.

Meanwhile, Residential Capital's bonds "continue to be somewhat active," a trader said. He quoted the 7 3/8% notes due 2010 up slightly at 79 bid, 80 offered, adding that the bonds were in the "78 [to] 78.5 zip code" Friday.

The trader also noted that the bonds started to get stronger last week. On Friday, the mortgage lender announced it had sold most of its health-care finance assets and operations to GMAC Commercial Finance LLC for $775 million. The sale was aimed at increasing liquidity.

A trader saw E*Trade Financial's bonds firmer, its 7 3/8% notes at 87.5 bid, 88.5 offered and its 8% notes due 2011 at 95.75 bid, 96, up from a recent bottom at 92.5

Big movers in distressed-land

A trader saw Delco Remy's bonds "up big time," after the parent issuer, Remy International Inc., the Anderson, Ind.-based automotive systems maker, announced Friday that it had begun soliciting noteholder consents to its pre-packaged plan of Chapter 11 reorganization.

He saw its 8 5/8% notes slated to come due on Dec. 15 as having moved up to 110 bid from 104 bid, 106 offered previously, while the company's other bonds were up even more - its 9 3/8% notes due 2012 having moved up to 115 bid, 120 offered from 92 bid, 94 offered previously, while its 11% notes due 2009 were also at 115 bid, 120 offered, up from 94 bid, 96 offered.

"They were both up 20 points," he said of the latter issues. "Those two issues are getting all of the equity, while the 8 5/8% notes are getting reinstated and apparently not participating in the equity."

Another trader who saw the bonds at similar levels said there was "a big short squeeze" in them - adding "but there shouldn't be." He said that the bonds were trading at "ridiculous" levels.

"They should be trading more like around 20 than 120," he quipped, also exclaiming "thank God I'm not involved" in the name.

Yet another trader said that Remy's 8 5/8s "continue to make big jumps," pegging the bonds up 12 points to 108 bid, 110 offered - but he saw a somewhat more conservative move for the other issues than the 20 point gallop the other traders saw, estimating the 11s as being up 10 points at 97 bid, 101 offered.

Another market source meantime had the 8 5/8s at 111, but the other two issues only at par.

And a trader saw Tembec's 8 5/8% notes due 2009 jump to 52 bid, 54 offered from 47 bid, 49 offered previously, while its 8½% notes due 2011 firmed to 46.5 bid, 48/5 offered from 43.5 bid, 45.5 offered, and its 7¾% notes due 2012 moved up to 45 bid, 47 offered from 42 bid, 44 offered.

He said he had seen no news to explain the move in the Montreal-based forest products company's bonds.

A trader at another desk who saw the bonds at those same levels thought they were up on the news, reported in the Toronto-based Globe and Mail newspaper, that "debt vultures" such as Toronto-based Cerberus Capital Management LP are buying asset-backed commercial paper issued by Canadian companies, "seeking to snap up securities on the cheap from distressed sellers," the paper said.

"People are talking as though Cerberus is in there buying plain old distressed paper rather than asset-backed stuff," the trader said, disbelievingly. He said that there was "no reason" for the Tembec paper to have gone up 3 points to 5 points on the day. "I don't think anything has materially changed with them," he said - the company still has the same problems it has been wrestling with for months.

The bonds "went up on air" - i.e. nothing of any substance - although he noted that a few weeks ago, "they also went down on air also," with the 8 5/8s dropping from around 60 to levels around 45.

He dismissed as old news the notion that the bonds went up because the bondholder had hired an advisor, snorting that "hiring an advisor doesn't mean anything" - the company has already said they are not at the point where they will talk to the bondholders or their advisors, so it's meaningless.

He also said it's crazy that the 8 5/8s are trading higher than the other issues "when they're all pari passu. Why should they be any different? They're trading as though those holders would get something extra in a restructuring - but you can't do that, or else you'll get all kinds of lawsuits. There should be no spread between those issues - yet the spread [between the 85/8s and the other bonds] has widened from about 2 points to 5 points."

He chalked the price rise up to "people just pushing bonds around."

Primary stays quiet

Meanwhile, as was the case in the run-up to the holiday, the primary market produced no news whatsoever.

One sell-side source who spoke to Prospect News on Tuesday morning asserted that the last straight-up junk deal to price was the Sabic Innovative Plastics Holding BV $1.5 billion issue of 9½% senior unsecured notes due 2015 (B1/B+) which priced at par on Aug. 20.

The preponderance of that issue was placed with institutional investors in the Middle East.

However it should be noted that on Aug. 29 Mexico's Maxcom Telecomunicaciones, SA de CV priced a $25 million add-on to its 11% senior notes due Dec. 15, 2014 (B3/B) at 103.00, on top of price talk, in a Rule 144A/Regulation S placement.

An eye to the supply

A senior high yield syndicate official told Prospect News that it is becoming obvious that a lot of high yield bond business planned for the third and fourth quarters of this year will likely be pushed into 2008.

Much depends upon how the "risk overhang" resulting from unplaced junk bonds and unsyndicated leveraged loans clears the market, the official said.

In a story published on Aug. 23, Prospect News estimated that risk overhang to be $312 billion, based upon an examination of existing data.

On Tuesday the senior syndicate official turned to the potential bond portion of that overhang and said that between $75 billion and $100 billion of bonds need to somehow be cleared before the primary market can be expected to resume a meaningful level of activity.

"It's going to take a while for us to wade through this supply," the source said, adding that had the junk bond market held together half of that $75 million to $100 million would already be placed.

There's still cash

The senior syndicate official recalled that in early 2005 the credit ratings downgrades of GM and Ford to speculative grade from investment grade sent a jolt through the market, and observed that "by October we were back to the races.

"It's a little different situation here," the source said, referring to the present difficulties in the international credit markets.

"But we know that the accounts have cash, despite what AMG says."

The official was referring to AMG Data Services' reporting of 11 consecutive weeks of outflows from the high yield mutual funds, ending on Aug. 22.

The negative streak ended last week, when AMG reported that the mutual funds saw $83.4 million of inflows for the week ending Aug. 29.

This official added that the AMG inflow-outflow data does not accurately represent the overall liquidity of the high yield asset class, which remains high.

"At some point the accounts are going to have to put that money to work because keeping that cash in money market accounts is not what their shareholders are paying them to do," the official asserted.

The source also said that even now players are selectively resuming positions in high yield.

"At the end of August you started to see real money accounts - insurance funds and pension funds - add to positions again, at these depressed levels. But they are very name- and sector-selective.

"That's what will continue to drive secondary volumes."

First Data: guinea pig

Along with other market observers this senior syndicate official expects the first true test of the leverage markets to come not in the form of a junk bond deal, but rather as a leveraged loan, when First Data Corp. attempts to syndicate all or part of its $14 billion term loan.

This source added that the rumor du jour, on Tuesday, held that the bank deal is coming on Thursday.

However the source was somewhat skeptical, adding that for the past three weeks the First Data term loan represents about all anyone in the leverage markets has had to talk about.

"It's probably going to be the guinea pig," the source said, adding that a respectable portion of the loan needs to be syndicated before there can be meaningful discussion about attempting to place the anticipated $8 billion of high yield bonds.

Stephanie Rotondo contributed to this report

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