Junk higher across broad spectrum; new MGM gains, NRG up as Exelon presses; Tenet off on guidance cut

By Paul Deckelman and Paul A. Harris

New York, Nov. 4 - The junk-bond rebound rolled on again Tuesday, with high yield heading broadly higher, helped by a borrowed boost from both stocks and Treasuries - something that doesn't happen every day - as well as a sea-change in its own psychology. Even bad news that would have knocked bonds down not so very long ago seemed to have no effect - as an example, AK Steel Corp.'s bonds were higher, even as the steelmaker predicted that its shipments in the fourth quarter would be less than originally forecast.

However, not everyone was immune - Tenet Healthcare Corp.'s bonds retreated after the hospital operator reported third-quarter results that included a larger-than-expected operating loss, once a one-time gain from the sale of its interest in another company was factored out. Sector peer Community Health Systems Inc., considered something of a market bellwether, continued to push higher.

There was some movement in the energy sector, with NRG Energy Inc.'s bonds higher as would-be suitor Exelon Corp. pressed the Princeton, N.J.-based merchant power producer for an answer to its recent offer to acquire NRG; the latter company says it is still thinking the idea over.

There was also some upside in Dynegy Inc.'s bonds, although no fresh positive news that might explain that movement was seen.

Primaryside activity was nil; meanwhile, the recently priced deal from MGM Mirage continued to edge higher, finally getting back to around the level at which those bonds had priced last Thursday.

Market indicators better

The widely followed CDX High Yield 11 index of junk bond performance, which had risen by ¼ point on Monday, gained another 7/8 point on Tuesday, a trader said, quoting it at 82¼ bid, 82½ offered. The KDP High Yield Daily Index meantime shot up by 59 basis points to 54.65, as its yield tightened by 27 bps to 15.58%.

In the broader market, advancing issues led decliners by a better-than-three-to-two margin. Overall market activity, reflected in dollar volumes, rose by 43% from Monday's pace.

"Everything," a trader said, "was up a little bit." He quoted most issues a point or two better on the session.

"The world seems like a much different place" from a junk perspective than it was just a week or two ago, when Junkbondland seemed to be in a capitulation mode, another trader said.

"There's a different psychology, or mentality in the market right now - it's like night and day, because everyone is blowing off the bad news."

He said that there were "a couple of negative situations that came out [Monday], which the market just totally blew off."

The Election Day stock market, he said - amid polls indicating a likely Democratic victory - "seems like it doesn't care. The more important factor is that [the election campaign and its accompanying uncertainty] will be over after today, not who necessarily wins."

He also noted that the usual tension between stocks and Treasuries - when one is up, the other is usually down - was not a factor on Tuesday. "They both rallied today. I don't recall seeing that in months, where there was a significant move in both."

Investors hoping that Wall Street may somehow manage to pull off a year-end rally propelled the bellwether Dow Jones Industrial Average up 305.45, or 3.28%, to 9,625.28, its highest close in nearly a month. Broader market indexes were up was well. In Treasuries, the 10-year benchmark note was seen 19 bps tighter at 3.72%. "They both rallied significantly today in synch."

The view was similar from the junk buyside.

"A lot of stuff is up two or three points, including some of the more leveraged stuff," said a money manager from a high-yield mutual fund, who mentioned Sally Beauty Co. and TXU Corp. in this context.

"Everything has a much more positive tone," added the investor.

"Our funds have had positive NAV days for three days in a row, and maybe more," said the source, adding that one week ago the fund's net asset value was $5.30 whereas it was $5.37 on Tuesday.

"It's not a huge move, but it's in the right direction," the money manager said.

TARP traction

It is possible that junk followed equities on Tuesday, the investor conceded.

The financial headlines alluded to a relationship between Tuesday's substantial rallies in global equities to the U.S. presidential election, the buy-sider remarked.

However it's more likely that rally was pegged to the perception that the government intends to provide assistance to a wider range of financial companies, including specialty finance firms, in the Troubled Asset Relief Program (TARP), the money manager said.

For example, levels on CIT Group Inc.'s short-term fixed-rate issues were up 5 points on Tuesday, the buy-sider said.

"What the government has done appears to be working a little," the source commented.

'Dirt cheap'

Recent rallying in junk also has to do with high-yield being "dirt cheap," the money manager said.

The convertibles market is also up 10% in the past week, the buy-sider reckoned, adding that hedge funds aren't liquidating, and hence are not driving the price down.

Asked if hedge funds may be nearing the end of the massive deleveraging that has gone on through the second half of 2008 the money manager said "We'll find out soon because Nov. 14 would be the last day that hedge fund investors can notify relative to the 45-day period."

However, the tide of cash moving away from high-yield mutual funds has slowed over the past week, said the buy-sider, who also reported seeing inflows recently.

New MGM Mirage gains

Meanwhile last week's MGM Mirage deal rebounded smartly during the Tuesday session.

MGM's 13% secured notes due 2013, which priced last Thursday at 93.132 to yield 15%, were wrapped around that issue price on Tuesday, according to one source close to the deal who marked the bonds at 92¾ bid, 93¼ offered.

Later in the day a buy-side source spotted the MGM 13% notes due 2013 at 92 5/8 bid, 93 3/8 offered.

The notes got as low as 88 1/8 bid in intraday trading late last week according to a sell-side source not in the deal.

A trader quoted them at 92.75 bid, 93.5 offered.

MGM Mirage's established 7 5/8% notes due 2017 were meantime seen up almost 2 points at 60.75

AK Steel gains despite lowered guidance

AK Steel's bonds were better, even as the company trimmed its forecast for fourth-quarter steel shipments and operating profit.

A trader called its 7¾% notes due 2012 unchanged at 83 bid, 84 offered. However, another saw them up 1½ points to 84.5 bid.

A market source saw the notes open slightly above Monday's 83 bid closing level, and then continue to move up to 84.5, mostly on large-block trades. At one point, the bonds had gotten as high as 86.

The West Chester, Ohio-based maker of stainless, flat-rolled carbon and electrical steels for the automotive, appliance, construction and electrical power generation and distribution markets issued lower shipment guidance for the fourth quarter, citing weaker U.S. and global economic conditions.

The company now expects to ship around 1.2 million tons of steel product during the quarter, down from the roughly 1.4 million tons of shipments it projected back on Oct. 21, when it also announced third-quarter results.

AK also said that "because of lower anticipated shipment volume and potentially a lower average selling price than was included in the company's previous guidance," it now anticipates generating an operating profit of less than its previous estimate of $100 per ton.

"Two weeks ago," one of the traders said, "news like that would have caused the bonds to fall 3 points and the stock would be off a couple of dollars - but now we're in a whole different place."

AK's New York Stock Exchange-traded shares meantime rose 41 cents, or 3.03%, to 13.94%.

AK's strength did not carry over to sector peer United States Steel Corp., whose 7% notes due 2018 dipped by ½ point to 68.5. "Out of the blue, they were one of the most active issues," the trader said, "with over $40 million traded." Since those bonds usually aren't too heavily traded, he called that "an aberration."

Tenet off as numbers fall short

A trader called Tenet Healthcare's 9¼% notes due 2015 "down a couple" of points at 82.5 bid, 84 offered.

Another saw those bonds fall to 82.75 bid from 85 on Monday, while its 9 7/8% notes due 2014 dropped to 84.5 bid from 88.25 previously, with an active $16 million changing hands.

He also saw Tenet's 7 3/8% notes due 2013 lower by ½ point at 82, while its 6 3/8% notes due 2011 were a point down at 85.

Tenet, he said, was "bucking the trend" of the overall market, which was generally positive.

A market source saw the 9 7/8% notes bouncing around in a 5 point range between a low of 82 and a high of 87, after having opened slightly under Monday's close around 85, but ultimately, it could not hold its early intraday gains and finished around 84.

Tenet's bonds had risen on Monday in advance of the quarterly results.

Tenet's New York Stock Exchange-traded shares plunged $1.51, or 36.65%, to $2.61.

The Dallas-based hospital operator reported ostensibly good news about the third quarter - a swing into the black from red ink a year earlier, as Tenet earned $104 million, or 22 cents per share. That contrasts with its loss of $59 million, or 12 cents per share, in last year's third quarter.

However, that profit was primarily due to a $140 million gain from the sale of its interest in health care services company Broadlane Inc. to TowerBrook Capital Partners LP. Without that one-time profit and other special items, earnings came in with a 6 cent per share loss, about double what Wall Street was expecting.

While third-quarter admissions at company hospitals open at least a year rose 1.7% to 129,576 patients, commercial admissions - that is, patients with private medical insurance, Tenet's most lucrative type of revenue - fell 3.4% to just under 35,000. On the other hand, the less valuable government managed-care admissions rose by 13.5% to 27,485 patients.

Meanwhile, bad debt - the amount of uncollectable debt a hospital incurs from treating uninsured or underinsured patients - rose by 5.8% to $163 million from $142 million a year ago.

Community Health gains continue

Tenet rival Community Health Systems 8 7/8% notes due 2015 "had been in limbo" last week, a trader said, noting that they had lagged behind market advances over several days, bringing into doubt whether in fact they were a reliable proxy for the rest of the market, as some participants believe.

Those bonds - which had been beaten down to around 80 from prior levels near par as the junk market careened downward in September and most of October-had languished at levels as low as the upper 70s even when the junk market went up over two sessions early last week on better market sentiment. However, once the company came out with positive third quarter earnings around mid-week, it began moving back upward steadily over the next few sessions.

The Franklin, Tenn.-based hospital operator's issue is regarded by some in the market as a fairly reliable barometer of overall market trends because of its benchmark size of $3 billion and widespread holding. They rose to 88.5 on Tuesday - up some 3 points over Monday's finish at 85.5.

NRG up as Exelon demands answer

Elsewhere, NRG Energy's bonds were higher as takeover talk continued to swirl. A market source saw its 7¼% notes due 2014 gain 2 points to the 90 bid level, before coming off that peak to end around 89.25, still up more than a point, while its 7 3/8% notes due 2016 were likewise up better than a point at 88.75 and its 7 3/8% notes due 2017 finished a point better at 87.5.

Another trader saw the 2016 bonds up ½ point at 87.5 bid, 89 offered.

On Oct. 19, Chicago-based power generator Exelon to acquire all of the outstanding shares of NRG common stock in a $6.2 billion all-stock deal, exchanging 0.485 shares of Exelon common stock for each NRG share. NRG said at that time that it would consider the offer, but otherwise gave no commitment.

Exelon's chief executive officer, John W. Rowe, wrote to his NRG counterpart, David Crane, in a letter released Tuesday, wanting to know what has happening and pressing for an answer. He said that Exelon had been in contact with both equity and fixed-income investors from both companies and had gotten positive feedback, and reiterated the advantage of a combination of the two companies.

He also noted that "we have received strong support on our commitment to maintain investment-grade ratings and our financial discipline.

"Both companies' shareholders were encouraged that we have identified a structure that reduces execution risk and preserves the value created for shareholders. We also mentioned a possible structure to effect the combination through a negotiated transaction that would create further value for shareholders of both companies by allowing $4.7 billion of NRG senior notes to remain in place, reducing the burden of prepayment and refinancing; again, the response from the investors was very positive and supportive."

NRG responded pretty much as it did the first time; Crane and company chairman Howard Cosgrove wrote back to Rowe that their company is "taking the proposal seriously and undertaking a thorough and diligent review of the proposal. NRG's board of directors will respond promptly when our review of the Exelon proposal has been completed."

Dynegy gains, though on no news

A trader said Dynegy's bonds "had some activity," although he saw no fresh news out on the Houston-based power producer.

He pegged Dynegy's 8¾% notes due 2012 up 3¾ points at 87.75 bid, while its 8 3/8% notes due 2016 were 1½ points ahead at 78.25 He also saw its 7¾% notes due 2019 at 69.25 bid, a 2¼ point gain.

At another desk, a market source quoted the latter bonds up as much as 4 points at 71 bid.

Sprint runs up on Clearwire green light

Sprint Nextel Corp.'s bonds were seen better as federal regulators gave the Overland Park, Kan.-based wireless telecommunications company the okay to spin off and merge its new WiMax wireless broadband network with that of Clearwire Corp.

Sprint's 6% notes due 2016 were seen up 2 points on the day at 71.5 bid, on very busy trading of $35 million.

The company's 7 3/8% notes due 2015 were also up 2 points at 58 bid.

The Federal Communications Commission voted 5-0 on Tuesday in favor of Sprint's plan to combine its Xohm network with Clearwire's WiMax-like network.

The FCC thus follows the lead of the Justice Department, which has already indicated that it will allow the deal to proceed, but will continue to monitor it.

Google Inc., Intel Corp. and a group of cable companies are investing billions of dollars into the $14.6 billion venture.

Auto names move higher

Among the widely held automotive benchmark issues, General Motors Corp.'s 8 3/8% bonds due 2033 were seen by a trader up a point at 27 bid, and he saw its 49%-owned GMAC LLC financing arm's 8% bonds due 2031 about 2 points better at 46 bid.

Another trader saw the GM benchmarks up ½ point at 27.5 bid, 29.5 offered, and saw GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 down ½ point at 29 bid, 30 offered.

Among the shorter auto issues, GM's 7 1/8% notes due 2013 were quoted 3 points better on the day at 35 bid, but its 8¼% bonds due 2023 lost more than 2 points to close at 28. GMAC's 7¼% notes due 2011 were just over 61, off a little more than a point.

Primary remains quiet

The primary market once again produced no news on Tuesday, said sources, adding that players tended to be focused on the elections.

Precision Drilling Trust launched its $1.2 billion credit facility on Tuesday.

The deal also includes $400 million of junk bonds which were not mentioned during the Tuesday bank meeting, according to a source who attended.

The merger of Precision Drilling with Grey Wolf Inc. is expected to close on Dec. 10, the source added.

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