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Published on 12/3/2008 in the Prospect News High Yield Daily.

Freeport freaks out investors; auto finance names gain; Constellation shines on planned debt-cutting

By Paul Deckelman and Paul A. Harris

New York, Dec. 3 - Freeport McMoRan Copper & Gold Inc.'s bonds and shares were tarnished on Wednesday, after the Phoenix-based metals mining concern cut its copper output and sales forecasts for the next two years in response to weak demand for the metal, and said it would suspend its dividend to conserve cash.

Other big losers included Energy XXI Gulf Coast Inc. and, for a second day in a row, Nova Chemicals Corp.

Bonds of Ford Motor Credit Co. and GMAC LLC were seen mostly higher - in some cases by multiple points - ahead of Thursday's crucial Capitol Hill appearance by the chief executive officers of their respective parent companies, Ford Motor Co. and General Motors Corp., who along with the CEO of Chrysler LLC will be making their second appeal to Congress for a big-bucks bailout of the beleaguered business. However, the parent companies bonds were seen mixed, with GM's flagship issue down by several points, as a key senator cast doubt on whether a bailout plan could pass his chamber.

Upsiders on the day included Constellation Brands Inc., which made some money on foreign exchange hedging and plans to use it to cut debt.

Retailers Limited Brands Inc., Saks Inc. and Dollar General Corp. were seen higher, as was Michaels Stores Inc.

Market indicators turn mixed

The widely followed CDX High Yield 11 index of junk bond performance, which rose by ¼ point on Tuesday, lost 3/8 point during Wednesday's session, a trader said, quoting it at 73 bid, 73 3/8 offered. The KDP High Yield Daily Index meantime declined by 5 basis points to 48.22, while its yield rose by 8 bps to 17.34%.

In the broader market, advancing issues again led decliners by a narrow margin. Overall market activity, reflected in dollar volumes, was about 8% below the pace seen in Tuesday's session.

A trader said that operating in the current market "is so frustrating - it's item by item. People aren't paying attention to yields, or dollars, or anything. When they have to sell something, they sell."

He said that the market was being "whipsawed" by conflicting forces. "Try trading in this market - one guy says that equities [which junk often trades in tandem with] have bottomed - but then you look at a news headline that says the default rate is going to be 20%."

On Wednesday, shares were again volatile, swinging between large losses and big gains on investor indecision on whether things are getting better or worse, before finishing higher, with the bellwether Dow Jones Industrial Average Dow ending up 172.60 points, or 2.05%, at 8,591.69. Broader market measures like the Standard & Poor's 500 and the Nasdaq composite indexes, each finished more than 2% higher on the day, Wall Street's second consecutive rise and its seventh gain in the last eight sessions.

But over in Junkbondland, he said, "you look at these headlines and people don't know what to do. Stocks are up, it's down, it's up, it's down. The more you watch the screens, the more you're confused."

Another junk market dynamic, he said was "there's still some unwinding - some people just have to unwind something. So unfortunately, the good credits get penalized, because [a good credit] is the only thing that has a bid."

A case in point, he argued, is Community Health Systems Inc.'s 8 7/8% notes due 2015 - seen by some as a proxy for overall market movements because of its large size, great liquidity and widespread distribution. The Franklin, Tenn.-based hospital operator's bonds - still trading at or above par as recently as late September - have lost about 20% of their value since then, as accounts needing to raise cash have sold out their positions, always confident that there would be a buyer. After recently going as low as the high 70s, they had moved up to an 80-81 context in Tuesday's dealings, although they were not among the more active credits. The bonds fell back down to around the 78 level on Wednesday afternoon, though again, on not a lot of volume - but a market source said the they had turned back upward later in the day on a couple of large-block trades, to end a little north of 80 bid, essentially unchanged.

But while some fairly decent credits have been hammered unfairly, he said, the recent market tsunami seems to have passed other names buy. One such issue, he said is Corrections Corp. of America - such credits "hold up." The Nashville-based private prisons operator's 7½% notes due 2011 are "a stable" BB credit - and "they're trading at 96-97, which is almost unheard of in this market."

A trader at another shop, looking at Wednesday's overall activity, opined that he saw "a much better tone - but yet we have our share of losers."

Freeport falters on copper-mining cuts

One such name, he said, was Freeport McMoRan, which on Wednesday warned that because of declining prices for two of its key products, copper and molybdenum, it was lowering its copper output for 2009 and 2010, cutting its sales estimates and suspending its equity dividend as a cash-saving measure.

The company said that it will slash its copper output by about 200 million pounds, or 5%, this upcoming year, and by an even steeper 500 million pounds, or 11%, in 2010. It accordingly revised downward its estimated copper sales by 4.7% in 2009 and 11% in 2010. The lower copper production - which will mostly come in its North American mining operations - will cause it to cut its estimated capital expenditures by about half, to some $1.1 billion. Suspending the annual $2 dividend on its common will save the company around $750 million.

Equity investors were aghast at the latter prospect, and took its New York Stock Exchange-traded shares down as much as 22% during the day's dealings before they finally finished down $3.77, or 17.28%, at $18.05. Volume of 51.1 million shares was more than twice the usual turnover.

On the bond side of the fence, the trader said, with the shares "getting hit from the get-go," Freeport's most actively traded issue, its 8¼% notes due 2015, swooned to a late round-lot level of 70.25 bid from prior levels at 73.5 bid, with nearly $40 million of the bonds changing hands. A market source elsewhere quoted those bonds at around the 71 level, down nearly 3 points.

The trader also saw Freeport's 8 3/8% notes due 2017 fall 3 points to 68 bid, from 71 bid, with $16 million bonds traded.

Other declining Freeport issues included its floating-rate notes due 2015, which lost a point to 61, on $5 million traded, while the company's 6 7/8% notes due 2014 were down a deuce on a round-lot basis, at 77 bid with $3 million traded.

Energy XXI, Nova, also large losers

Also on the downside, Nova Chemicals Corp.'s 6½% notes due 2012, which had fallen 10 points on Tuesday on lower sales expectations, were seen by a source as having slid another 5 points Wednesday to 55 bid, although a second source saw a less pronounced drop of around 2 points to 57.5.

A trader meanwhile saw Energy XXI Gulf Coast's 10% notes due 2013 fall to 40.25 bid on a round-lot basis, from 45 on Monday, on $13 million of bonds traded. He said he had not seen any news on the Houston-based independent oil and gas exploration and production company, but surmised that "something must be up with them."

Energy names have been generally lower recently, in line with the continued slide in world oil prices on account of the worsening global economic slowdown. Light, sweet crude of January delivery fell another 17 cents, or 0.4%, to $46.79 a barrel in Wednesday trading on the New York Mercantile Exchange - the lowest settlement since Feb. 9, 2005.

Other junk energy names seen lower on Wednesday included Chesapeake Energy Corp., whose 6¼% notes due 2018 lost more than a point to end at 64.5, and whose 7¼% notes due 2018 were seen down as much as 4 points, also to the 64 level.

A trader saw Tesoro Corp.'s 6¼% notes due 2012 drop a point to 68 bid, on relatively light dealings. However, another market source saw the San Antonio, Tex.-based petroleum refiner's 6 5/8% notes due 2015 slide by more than 6 points on the session to 56 bid.

Investors toast Constellation news

On the upside, Constellation Brands' bonds were solidly better, a trader said, after the Fairport, N.Y.-based alcoholic beverage maker and importer - known for such celebrated wine brands as Paul Masson, Manischewitz, Taylor and Robert Mondavi, as well Corona and St. Pauli Girl beers and Schenley and Fleischman's liquors -- said that it had closed out some foreign currency hedge positions "to take advantage of the recent strength of the U.S. dollar," and would realize some $50 million in after-tax proceeds, which would be used to reduce its borrowings.

He saw Constellation's 8 1/8% notes due 2012 push up to 86.5 bid from 85.75 on Tuesday, while its 8 3/8% notes due 2014 were up by a like amount to 87.75 bid from 87.

"The bonds are up about ½ point or so on the news," he said. "The company's doing well, and they did the arb[itrage]. So the bonds are up across the board," although he characterized the actual activity in them as "very light." However, he added, "there's more buyers than sellers in that name, I'll tell you that."

He quipped that Constellation - the world's biggest wine company - would likely continue to do well despite the downturn in consumer discretionary spending because "everybody needs wine in this environment, anyway."

Retailing names on a rebound

Some junk retailing names were seen better on Wednesday, apparently helped by a combination of not-so-bad quarterly results and investor hopes that the strong Black Friday buying seen in some areas would continue through the all-important year-end holiday shopping season, when many stores rack up at least one-quarter to one-half of all of their sales for the year.

Among the winners were discount retailer Dollar General, with a trader seeing its 11 7/8% notes due 2017 up more than 2 points to 83.75, on $10 million of bonds turned over. Its 10 5/8% notes due 2015 are part of that same elite club as Corrections Corp's bonds - junk trading north of 90; in Dollar General's case, about $6 million of the bonds were seen trading just above 94 on Wednesday.

Saks Inc.'s 9 7/8% notes due 2011 were seen having gained 3 points in Wednesday's dealings to 68 bid, even as the high-end New York-based department store operator was being cut two notches by S&P to single-B, though with a stable outlook.

Limited Brands' split-rated (Ba1/BBB-/BB+) 6 1/8% notes due 2012 were being quoted up 4 points at 67; the operator of the pricy Victoria's Secret lingerie chain staged a glitzy media event, complete with international modeling star Heidi Klum, as it unveiled its plans to step up its promotional efforts. As part of that sales campaign, it was scheduled to stage its nationally telecast annual fashion show on Wednesday night.

A trader meantime saw Michaels Stores' 11 3/8% notes due 2016 gain 1¼ points in round-lot dealings to 27 bid, versus 25.75, on $14 million of the bonds traded, probably helped by the Irving, Tex.-based art supply chain's latest numbers, which were not as bad as some in the industry had feared.

However, he saw the company's 10% notes due 2014 at 37.875, "actually down" from 39 on Tuesday, with $12 million traded, adding that he was "shocked that that one got hit."

He saw no trading in Michaels' 13% notes due 2016.

At another desk, the 10s were seen down more than 2 points at 36.5.

Auto finance ahead, awaiting D.C. decision

With the CEOs of GM, Ford and Chrysler due on Capitol Hill on Thursday to explain and defend their renewed request for a multi-billion-dollar government bailout of the struggling Big Three, bonds of Ford and GM's respective credit arms were seen better by several points, even as their corporate parents' paper was seen more mixed.

A trader saw GM's 8 3/8% benchmark bonds due 2033 down a point at 20 bid, 22 offered.

Another trader said those bonds had fallen to 20 from prior levels at 22.5.

A market source at another desk saw almost $30 million of the bonds change hands at around 20.5 bid, well down from the day's peak levels above 24, and down from Tuesday's finish around 22.

Among the shorter GM issues, its 7.20% notes due 2011 were seen off ¼ point at 26.25 bid, while its 7 1/8% notes due 2013 were at 25.75. But another market source pegged that latter bond down nearly 3 points on the day at 23.

GMAC LLC's 8% bonds due 2031 eased by ¼ point to 29.25, a trader said, while seeing its floating-rate notes coming due in May - the most actively traded GMAC issue, with over $13 million traded - up 2½ points at 68.75. Its 6 7/8% notes due 2011 gained a point to 44 bid.

Another market source saw GMAC's 6 7/8% notes due 2012 up more than 2 points to 42.5 bid, while its 7% notes due 2012 moved up to 43 bid, up over 5 points on the day.

A trader saw Ford Motor Co.'s 7.45% bonds due 2031 up ½ point at 26.5 bid, 28.5 offered, while another also saw them trading in round lots at 26.5, calling them up 3/8 point, on $12 million traded.

The latter trader saw the carmaker's 5.80% notes slated to come due a little more than 4 weeks from now, on Jan. 12, at 94 bid, well up from 89.5 on Monday - but pointed out that the bonds were still yielding 71%.

However, its 9.98% bonds due 2047 finished on the downside, off more than 3 points at 21.5 bid.

Ford Motor Credit Co.'s 7.25% notes due 2011 were seen up nearly 8 points on the day at 53.5 bid, while its 7% notes due 2013 gained nearly 3 points to 50 bid.

As CEOs Rick Wagoner of GM, Alan Mulally of Ford and Robert Nardelli of Chrysler were each driving to Washington from Detroit on Wednesday in their own company's most fuel-efficient and environment friendly vehicles, trying to repair the massive P.R. damage to their cause that the executives did last month when they each flew into the nation's capital in luxurious corporate jets, other officials from those companies, the United Auto Workers union and even local car dealers from around the country were on the Hill, lobbying senators and representatives in favor of the bailout, whose price tag is now estimated at least $34 billion.

Local UAW leaders meantime met and agreed to make sizable concessions to the troubled carmakers, whose high labor costs, versus those of their "transplant" rivals away from Detroit, have been held up by skeptical lawmakers as a key factor in the Big Three's uncompetitiveness.

But even those promises of scrapping the controversial "jobs bank" program that pays laid-off auto workers 95% of their wages, may not be enough to swing enough votes in favor of the bailout.

Senate majority leader Harry Reid admitted Wednesday that a Democratic-proposed plan to tap the $700 billion Wall Street rescue fund to help the traditional U.S. automakers does not have the votes to pass. Republicans and some Midwest Democrats meanwhile advocate an alternative plan that would fund the carmakers' loans from an existing Energy Department program already directed at the auto industry.

Senate hearings on the carmakers' loan request are slated for Thursday, with a House session set for Friday.

The restructuring front

"The primary market was quiet," a high-yield syndicate official said.

"I wouldn't be surprised if we're done for the year."

In lieu of an active forward calendar, players remain focused on debt restructuring exchange deals that offer holders of existing notes the opportunity to trade into better secured paper at steep discounts to par. Many of the existing bonds are trading at massive discounts.

Developments surfaced Wednesday on Station Casinos Inc.'s $459 million debt exchange deal.

Senior unsecured and senior subordinated creditors unified in opposition to the exchange, according to an 8-K document filed with the SEC.

Claiming to represent 66% of the holders of the old notes in the exchange, this unlikely alliance appears to have the firepower to bring the company to the negotiating table.

Two factors, insufficient collateral and an inter-credit agreement among senior secured lenders, may have forged this novel alliance (see related story in this issue).

Announcements from Finlay, Neff

Meanwhile Neff Corp. announced the receipt of tenders from holders of $168.7 million, or 73%, of its $230 million of its 10% senior notes due 2015 at the original consent deadline of Dec. 2.

The early deadline has now been extended to 5 p.m. ET on Thursday.

The offer will still expire at 11:59 p.m. ET on Dec. 15.

The deal offers to exchange unsecured bond holders into senior secured term loan lenders by exchanging out of the 10% unsecured notes into the new term loans at $0.45 on the dollar.

Elsewhere Finlay Fine Jewelry Corp. said it obtained consents from holders of $162.8 million, or 81.4%, of its 8 3/8% senior notes due 2012, allowing it to exchange some of the notes for new third-lien senior secured PIK notes and sell $20 million of new second lien senior secured PIK notes.

Finlay needed consents and waivers from holders of at least a majority of the notes.

Worries about further debt

The buzz in the market about the parade of distressed exchange deals holds that the most aggressively structured ones, unsurprisingly perhaps, are meeting the greatest resistance from bondholders.

In this context the above-mentioned Station Casinos deal and the Harrah's Entertainment, Inc. $2.1 billion exchange offering new 10% second-priority senior secured notes to holders of 10 series of existing bonds, were mentioned by a high-yield syndicate official who is not in either deal.

Among the bones of contention which have surfaced in the Harrah's deal is a fear that investors' positions on the capital structure could be "primed," meaning eroded by future debt deals.

"People are concerned that Harrah's could get this tranche done, and in theory at least prime these guys," the source said.

"With Harrah's you had the LBO bonds which more or less primed the old high-grade bonds. Now they're doing the second-lien bond that could prime the LBO bond.

"People are seeking to prevent that from happening."

Locking in the losses

Prospect News asked this official if there is a perception on the sell-side that these deals, which allow issuers to lock in steep price depreciations in their securities, are eroding the net asset values of the high-yield accounts.

"Not necessarily," the sell-sider cautiously replied.

The companies are monetizing the price depreciations and capping the upside should the market trade significantly higher, the official added.

"But some of these bonds are trading as low as 8 cents on the dollar. If you think that bond has a decent chance of being taken out anywhere close to par you are probably fooling yourself."

This official believes that exchange deals will continue to be the market's focus in 2009, as a means for companies to term out some debt, since the primary market is effectively closed.

"The problem is that some companies don't have the flexibility within their credit agreements to offer preferential security to existing bondholders, and don't have enough cash to make it attractive enough to investors," the source warned.


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