Junk trading resumes, but jobs, stocks, Europe weigh on levels; Dynegy off; primary still quiet

By Paul Deckelman and Paul A. Harris

New York, Sept. 6 - It was back to work Tuesday for junk market denizens after an extended holiday weekend, though traders said that some participants remained absent, either to stretch the break still further or else to get the kids headed back to school on Tuesday or Wednesday.

Volume levels were up solidly from Friday's anemic pre-holiday session, but there was an overall negative tone to the market, which was beset by negative investor response to the poor August jobs numbers released Friday, renewed concerns that Europe's debt crisis is worsening and the continued beatdown in the equity market those factors have provoked.

Junk market statistical indicators, which had been mixed on Friday, all turned negative on Tuesday.

Numerous issues were down, many by multiple points, including such widely traded names as Caesar's Entertainment Operating Co., Community Health Systems Inc. and HCA Inc.

Dynegy Inc.'s bonds fell in response to an internal sale of some of its coal assets held by a subsidiary to the parent company - hailed by the shareholders as a way of giving the power generation company more flexibility, but damned by bondholders for potentially putting those assets out of their reach should the company restructure.

Even though the Labor Day holiday break marking the unofficial end of summer is now history, there was no abrupt revival of primaryside activity, an indicator that junk's problems won't be cleared up merely by the flipping of a page on a calendar. But participants were heard to be eyeing a possible upcoming bond issue that would help finance car-rental giant Avis' pending $1 billion acquisition of its European affiliate.

There will be activity

Once again, volatility sidelined the primary market on Tuesday as workers returned to their desks following the three-day Labor Day weekend in the United States.

No deals priced, and none were announced.

However, the dealers professed visibility on activity in the near-to-intermediate term.

"We could have something to announce tomorrow," said one syndicate banker who gave the now-customary caveat "... pending market conditions."

Another banker from a different syndicate said that there is a small drive-by deal that is "probably this week's business," again pending market conditions.

No names were volunteered. However, one syndicate source expects primary market news to surface in Europe.

"A couple of high-yield deals could be announced this week," said the debt capital markets banker, who works with both bonds and bank loans.

"There is definitely some stuff coming. There is a backlog of committed deals that has to get done and will get done."

Pricing is going to be tricky, the banker added.

"Nothing has priced in two weeks, so we need to see some benchmarks come through."

Flows positive through Friday

Cash flows to high-yield funds in the United States were positive through Friday, according to a syndicate banker who cited numbers that were reported by EPFR Global.

The five-day trailing flows, to Friday, were positive at $879 million, the banker said.

Friday saw a daily inflow of $130 million, the banker added. Thursday saw a $622 million inflow.

"Things are not all that bad," the banker insisted.

"From Aug. 30 through Sept. 2, we saw 30 basis points of tightening in the index.

"There is a healthy pipeline of deals. We're just waiting for the volatility to subside."

Yet another syndicate source was less certain and added that while the tightening seen through last Thursday did indeed take place, Tuesday's volatility may have reclaimed that amount of improvement.

The series 16 CDX North American High Yield index was 92 1/8 bid an hour after Tuesday's New York close, down 1¼ points on the day, the banker said.

Market indicators head south

In the secondary market, statistical measures of market performance, which had been mixed on Thursday and Friday, turned decidedly negative on Tuesday.

A trader saw the series 16 CDX North American High Yield index down by ¾ of a point on Tuesday after having lost 15/16 of a point on Friday.

The KDP High Yield Daily index plunged by 50 bps on Tuesday to 72.14 after having fallen by 9 bps on Friday. Its yield rose by 16 bps on Tuesday, on top of the 3-bps increase seen on Friday.

And the Merrill Lynch U.S. High Yield Master II index was down on Tuesday after six consecutive sessions on the upside. The index fell 0.777% versus an advance of 0.068% on Monday, albeit on virtually non-existing dealings in view of the holiday. On Friday, the index had edged up by 0.002%.

Tuesday's retreat dropped the year-to-date return to 1.575% from 2.37% on Monday and 2.30% at the close of trading on Friday. The year-to-date return remained well below the peak level for the year of 6.362%, which was set on July 26.

Bad news weighs on market

A trader said that the terrible non-farm jobs report released on Friday - the U.S. generated no new jobs on a net basis in August, a far worse showing than analysts expected - was a factor in the day's dealings, since very few people had been in to actually trade on the number on Friday ahead of the Labor Day break.

Europe was another factor, he said. While the U.S. financial markets were closed on Monday, the bourses sold off pretty much across the board on renewed investor worries of a eurozone debt crisis and concerns about the global economy.

"That doesn't help anything," he said.

Not surprisingly, when U.S. equity markets reopened on Tuesday morning after the long holiday weekend, they took their cue from Europe and also fell. The bellwether Dow Jones industrial average plunged by nearly 300 points in mid-morning dealings before righting the ship a little later in the day, when the Dow cut its losses to end down 100.96 points, or 0.90%, at 11,139.30. Broader indexes like the S&P 500 and the Nasdaq Composite also got pounded in the early going. They cut their losses later on but still ended down by 0.74% and 0.26%, respectively.

"It's a combination of all of those factors, absolutely," the trader said.

With all of that mayhem going on, Junkbondland "opened up weaker by 1 point to 2 points. We did regain some of that here this afternoon as equities came back to stabilize and close at their highs [for the session], but we're definitely down for the day, there's no question about it."

"It's kind of depressing down," another trader opined. "Most of the stuff you're seeing is trading down, with not a huge amount of activity."

He likened it to "a smorgasbord of names, with just about everything down 1 to 2 points."

He said that "when the [stock] market is down by 250 points first thing in the morning and the 10-year Treasury is trading with a 1 [percent] handle - it's interesting."

Market still quiet

While trading volume on Tuesday was several times the anemic levels seen during Friday's snooze fest of a session - which had been down nearly 75% in terms of dollar-volume from Thursday - a trader described the day as "pretty quiet as people tried to get back into the swing of things."

A second trader agreed that "volumes were higher today than on Friday, but it was still a very muted session" compared to usual volume levels.

"I think people took some time off to get their kids to school on the first day, probably, and it was just an opportunity [for others] to extend the long weekend a little longer one last time this summer."

He predicted that "volumes will probably pick back up substantially" on Wednesday, "and we'll get a better indicator of where this market is heading."

At another desk, a trader concurred that "it did seem like it was a little quiet. In some areas, folks are starting school today and [Wednesday]," with some market participants out for that reason.

"Other than that, it seemed like people were in, but they were kind of trying to figure out what to do for the upcoming month."

Harrah's hammered down

Among specific names, a trader saw the 10% notes due 2018 of Caesars Entertainment - the Las Vegas-based casino giant more popularly known by its former official name, Harrah's - as having traded as low as 71 bid, well down from levels around 79 on Thursday morning. He said that the bonds "have come back" a little and were going home Tuesday at 73 but were still down six points from their Thursday peak levels. He said that during Friday's dull and very light-volume session, the bonds had been quoted around 75½ bid, "so they're still down 2 to 3 points [on the day]." He called the credit "probably the easiest example" of well-known names that retreated by multiple points on Tuesday.

Another trader saw the 10s late in the session around 73-74.

A market source at another desk said the Harrah's bonds were, as usual, among the most actively traded junk issues on the day, with over $17 million having changed hands. He quoted the paper at 74 bid, calling the notes down 1½ points from Friday. Harrah's 11¼% senior secured notes due 2017, quoted trading in a 108-109 context last week, were trading at 106 on Tuesday, with over $12 million of turnover.

Another market source, also seeing the latter issue at 106½ bid, called that a loss of more than 4 points on the day.

Caesars' big rival on the Las Vegas Strip and in other gaming jurisdictions, MGM Resorts International, was also lower on the day, its bonds hurt by the same concerns over what the sluggish economy - flirting with a possible double-dip recession - may mean for an industry like gaming that relies so heavily on consumer discretionary spending at a time when consumers are scared and are hanging onto their wallets.

MGM's 7 5/8% notes due 2017 dropped more than 3 points on the day to 88¾ bid while its 6 5/8% notes due 2015 were down nearly a deuce at 91 bid.

Consumer names get clocked

In the travel sector, another business area held hostage by consumer sentiment, Miami-based cruise ship operator Royal Caribbean Cruises Ltd.'s 7¼% notes due 2016 lost 1¼ points to end at 102½ bid. But Atlanta-based Travelport's 9% notes due 2016 actually bucked the trend and gained 1 point to end at 81 bid.

Retailer GAP Inc.'s 5.95% notes due 2021 were at the top of the high-yield most-actives list, with almost $30 million traded, although the San Francisco-based apparel retailer's split-rated (Baa3/BB+/BBB-) paper is also popular with high-grade investors looking to reach down a little, credit-wise, to pick up some yield. The bonds traded at just under 94 bid, down 1 3/8 points from their levels late last week.

Fellow retailer Rite Aid Corp.'s 8 5/8% notes due 2015 were seen down more than 2 points on the day at the 88½ mark. Over $10 million of the Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator's notes changed hands on the day, putting it well up on the most-actives list.

Looking a little sickly

A trader saw Community Health Systems' benchmark 8 7/8% senior secured notes due 2015 at par bid, 101 offered, down from Friday's levels at 101½ bid, 102 offered.

A market source at another desk pegged the Franklin, Tenn.-based hospital operator's bonds off about 1 point at 100½ bid, with over $9 million having traded during the session.

Community Health's hospital sector peer HCA's 6½% senior secured first-lien notes due 2020 were down 2 5/16 points versus Friday's levels at just about 98 bid. Over $13 million of the bonds traded.

The Nashville-based health-care facilities operator's 7½% notes due 2022 were quoted off by a whopping 4 11/16 points from Friday's close, at 96½ bid, on busy volume of nearly $12 million.

Another trader saw the 6½% notes trading in a 98-99 context and the 7½% notes in a 97-98 range.

Dynegy drops on asset plan

A trader said that Dynegy's bonds "gave up a couple of points," which he said was in response to the Houston-based power generation company's Friday announcement that it had acquired direct ownership of Dynegy Coal Holdco, LLC, the indirect parent of its Dynegy Midwest Generation, LLC subsidiary, as part of a previously announced internal restructuring plan designed to increase Dynegy's flexibility and optimize its asset value by creating separate coal-fueled and gas-fueled power generation units.

While Dynegy's stock rose more than 8% on the news during an otherwise down day for the equity markets, the trader speculated that the transaction "may take [some of the assets] away from the bonds," pushing the bonds lower. The 7¾% notes due 2019 were off more than 3 points to end at 58 bid.

At another desk, a trader said the company's 8 3/8% notes due 2016 were "down a lot" - he estimated about 5 points - to 613/4, while its 7½% notes due 2015 slipped 1½ to 2 points to 64.

For bondholders, the transfer of the coal assets to the parent company mean that in the event of a bankruptcy at a subsidiary level, they cannot claim those assets in any recovery attempts. Market-watchers now fear that bondholders will be asked to participate in some sort of exchange that greatly undervalues their holdings.

"This latest action strips the coal assets away from bondholders without promising a direct return," Gimme Credit LLC analyst Kim Noland wrote in an afternoon report. "This is because the 'undertaking' can be reduced if [the Dynegy] parent or certain other subs retire or acquire [Dynegy Holdings Inc.] debt without having to compensate DHI."

Noland said that while she believed bondholders will "likely be coerced" into a distressed exchange of some sort, " the activist shareholders who are behind the 'de-levering' scheme probably won't push the company into bankruptcy because it would hurt the value of their own holdings."

Elsewhere in the Dynegy capital structure, the 7.67% notes due 2016 of Dynegy Danskammer LLC, a unit that operates a coal-fired power plant in upstate New York, dropped 1¾ points on the day to end at 61 bid.

Hovnanian falls pre-earnings

Hovnanian Enterprises Inc.'s 10 5/8% notes due 2016 were on the decline Tuesday ahead of the Red Bank, N.J.-based homebuilder's Wednesday earnings release.

One trader called the paper down 1½ points at 861/4. Another saw the debt falling nearly 3 points to 86½ bid.

The company had previously forecast a loss of 28 to 67 cents per share. Analysts are expecting a loss of 50 cents per share on revenues of about $292 million.

Stephanie N. Rotondo contributed to this report

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