Junk market hangs in despite stock slide; Freescale in free-fall; N.Y. Times bonds gyrate after new financing

By Paul Deckelman and Paul A. Harris

New York, Jan. 20 - The Age of Obama officially began on Tuesday with the inauguration of America's 44th President - but nobody on Wall Street was mistaking it for the Age of Aquarius, as stocks tumbled broadly in their worst Inauguration Day decline ever, investors unnerved by continued worry about the health of the banking sector. In Junkbondland, however, most investors refrained from doing anything rash, with traders seeing the market a little easier across the board, but no great stock market-like rout.

Only a few names really stood out as big losers, among them Freescale Semiconductor Inc., whose bonds "got murdered," as one trader put it, which also helped drag down sector peer NXP BV. However, another tech name, the split-rated Motorola Inc., was "definitely bucking the trend," another trader said, finishing on the upside.

Elsewhere, United Rentals Inc.'s bonds were seen moderately lower after the Greenwich, Conn.-based equipment rental company announced lowered guidance.

Sealy Corp.'s bonds remained on the downside, the erosion seen Friday on bad quarterly numbers continuing into Monday's session.

New York Times Co.'s split-rated bonds were actively traded at sharply higher levels - although mostly on relatively smallish odd-lot trades - on the news that the cash-strapped publisher had lined up $250 million of fresh funding in the form of new high-coupon six-year notes, plus warrants, from current investor Carlos Slim, but the bonds came off those elevated levels later in the day on a series of large-block trades to end relatively little changed.

Primaryside activity was negligible.

Market indicators modestly lower

The widely followed CDX High Yield 11 index of junk bond performance, which lost 3/8 point on Friday, dropped another ¾ point on Monday, a trader said, quoting it at 75 bid, 75½ offered. The KDP High Yield Daily Index fell by 21 basis points to 54.32, although its yield only inched upward by 1 bps to 13.83%.

In the broader market, advancing issues surrendered their lead over decliners, which they trailed by a five-to-three margin. Overall market activity rose by 8% from the curtailed levels seen during Friday's abbreviated session, which ended early ahead of Monday's full market close for the Martin Luther King Day observance.

A trader said that "although the trend is down, of course - how could it not be?" in the face of what he termed "a financial meltdown" decimating stocks, "I don't see a lot of activity. I'm really not seeing accounts unloading bonds here."

He opined that "the majority of players are more awestruck by what's happening with our banking system, and trying to figure out what is the best path going forward. I think there are a lot of confused players out there right now."

They could not have been very reassured by the behavior of the stock market, which sank to its lowest levels since mid-November on investor panic that the nation's battered banking system would need additional tens of billions of dollars to stabilize it - a report from Freeman Billings Ramsey Group, Inc., for instance, warned that the biggest U.S. lender by assets, Bank of America Corp., alone would need at least $80 billion to restore its capital to adequate levels, causing the Charlotte, N.C.-based banking giant's shares to plunge nearly 30%, dragging the bellwether Dow Jones Industrial Average, of which B of A is a component, down 332.13 points, or 4.01%, to end at 7,949.09. In the broader equity market, the Standard & Poor's 500 index plummeted 5.28%, while the Nasdaq composite index swooned by 5.78%.

"Who would have expected Bank of America common [stock] to be trading at $5, and Citigroup to be trading with a $2-handle? Goldman is down $11 at $61 [it ultimately went even lower, off nearly $14, to $59.20]. J.P. Morgan is trading at a $52 week low, and State Street is down 21 points, and you can go on and on," the trader said. "It's incredible. It really is. It's ugly."

Despite that massive carnage, however, the immediate effects on the junk market were actually pretty restrained. The stock blowout "doesn't necessarily mean that high yield should be sold in here. People are [instead] taking a step back and trying to calculate the best strategy going forward."

He added that "with the Dow being down [over] 300 and financial services getting pummeled, our market is holding in there - not that there's a lot of buying or support bids to hold it up, but there's a lack of selling."

He also said that "it seemed pretty quiet, activity-wise - the most active issue only had [about] $16 million. "We've had days recently where the most active had anywhere from $30 million to as high as $80 million."

Really distressed lower - but most junk hangs in

He saw Idearc Inc. as probably the most active issue heading into the late afternoon, with around $16 million changing hands. The company's bonds were down a point on the day in round-lot trading at 3.5, while a market source at another desk pegged them at 3.75, down some ¾ point on the day.

A second trader agreed that despite the brutal bludgeoning that stocks were undergoing, "we were only down I'd say about ¼ point - if that - in the go-go type stuff. The more-distressed stuff was down a little lower," including Idearc. He saw the troubled Dallas-based telephone director publisher's bonds "going out with a 3-handle," down about a point on the day.

He also saw Harrah's Entertainment Inc.'s 10¾% notes due 2016 trading down around a point at 25. "The more distressed things are feeling some pressure - but that was throughout the day, regardless of equities."

That having been said, though, he reiterated that "generic go-go high yield is only off about ¼ point on the bid side," such as the junk market's unofficial barometer, Community Health Systems Inc.'s 8 7/8% notes due 2015. That kind of movement, he said, "is really nothing to shake a stick at, even with equities selling off and bank stocks hitting new lows. "

He said that it was unclear whether "it's the calm before the storm, or people are just too focused on Washington and equities right now, and we're not really seeing it - or if it's just an overreaction in the equity markets right now."

He further described the relative calm of the junk market in the face of the stock market debacle as "kind of eerie that you see stocks getting crushed - it feels like the world is coming to an end looking at the equity side, where it looks like they're going to revisit [last] fall - but then, our prices are hanging in there. You don't know if you're supposed to be hitting the first bid you see and waiting for the rest of the market to follow, or if you're supposed to be dipping [into your funds] and buying. It feels like we're at an inflection point and it will be interesting to see if we follow equities [Wednesday] morning."

Yet another trader agreed with the proposition that "junk didn't do half badly" on a day that saw stocks getting killed.

The first trader said that when all was said and done, "the majority of the market was down ¼ to ½ point overall. There was very light actual trading activity, with a handful of issues trading up and down on relative news."

He saw Franklin, Tenn.-based hospital operator Community Health's bonds at 93.375, off just slightly from 93.75 on Friday. "I think that's held in remarkably well - only down 3/8 point, and that's on decent volume of $9 million."

Other names also pretty much hanging in and easing only around ¼ to ½ point included Qwest Corp.'s 8 7/8% notes due 2012, which were down ¼ point at 95.875 bid, on volume of $14 million, while fellow telecommer MetroPCS Wireless Inc,'s recently priced 9¼% notes due 2014 were likewise down ¼ point at 92.25 bid, with $13 million traded.

Freescale in a frenzy

There were, of course, exceptions to that general trend of only small movements to the downside, and none more prominent than Freescale Semiconductor.

A trader said that the Austin, Tex.-based computer chip manufacturer's bonds "got murdered," seeing its 10 1/8% notes due 2016 down 6 points at 22 bid, 23 offered, while its 8 7/8% notes due 2014 did even worse, collapsing 10 full points to 27 bid, 28 offered.

He laid the blame for the big dive on Friday's downgrade of Freescale's ratings by Standard & Poor's, which cut the company's corporate credit rating to B- from B+, lowered its senior secured rating to B- with a recovery rating of 3 from BB with a recovery rating of 1, and sliced its senior unsecured and subordinated ratings to CCC with an unchanged recovery rating of 6 from B-. While the ratings were removed from CreditWatch, the outlook remains negative.

The agency cited its belief that "Freescale's near- to intermediate-term operating prospects and related credit measures will be adversely affected by the current economic environment," with sharply lower revenues for 2009 due to its concentration in the troubled automotive sector; those lower revenues will in turn hurt gross profit margins. At the same time, the agency cautioned that Freescale "will maintain its research and development spending to ensure an ongoing pipeline of new product design wins," all of which may cause EBITDA to "contract sharply so that the debt-to-EBITDA ratio could deteriorate, potentially to over 12 times for 2009 in S&P's view."

The trader said that Freescale's troubles meantime "put pressure on NXP," with the Dutch semiconductor maker's 7 7/8% notes due 2014 down 5 points to 35 bid, 37 offered, while its 9½% subordinated notes due 2015 lost 7 points to 10 bid, 12 offered.

But Freescale's fall and NXP's knockdown did not lead to a domino effect across the tech sector; a trader said that Schaumburg, Ill.-based electronics manufacturer Motorola's 7 5/8% notes due 2010 were "active," with $11 million traded, and "actually up" by ¾ point at 93.25.

And he saw its 6 3/8% bonds due 2037 at 53.875, up 1 3/8 points on $10 million of turnover, "definitely bucking the [downside] trend."

That trader also saw Santa Clara, Calif.-based Agilent Technologies' 6½% notes due 2017 steady at a round-lot price of 73.5 - the same level where it had last traded in any size, nearly two weeks ago, so "go figure."

United Rentals off on bearish guidance

A trader saw United Rentals' 6½% notes due 2012 at 83.5 bid, 84.5 offered, which he called down ½ point. However, another trader pegged those bonds down nearly 3 points on the session at 83, on volume of $11 million, noting that "they got hit more than other bonds," after the company released bearish guidance.

It projected total 2008 sales of $3.27 billion, down from prior guidance of sales between $3.3 billion and $3.4 billion, and also said that earnings will come in below its forecast in October of $2.55 to $2.65 per share.

United Rentals further said that it will take a $1.1 billion fourth-quarter goodwill impairment charge, mainly due to acquisitions which it made between 1997 and 2000.

It additionally reported that it bought back some $130 million face amount of several series of its outstanding bonds during the quarter, for just $82 million in cash, but that debt-front progress did not help the bonds; one of the traders also quoted its 7¾% notes due 2013 at 71 bid, down from 72.75 previously, although just $1.5 million of the bonds traded. He suggested that the debt news did not outweigh the bearish guidance announcement because "they used valuable cash to take out those bonds."

Sealy still stumbling

A trader saw Sealy Corp.'s 8¼% notes due 2015 quoted at "a very wide" 47 bid, 55 offered, but saw actual trading in the 49-49.5 area.

Another trader saw the bonds at 49.5 bid, down from 50 on Friday, though on only $2 million of trading.

However, another trader called the bonds 47 bid, 49 offered, "down a couple" from prior levels that he estimated at 50 bid, 52 offered.

On Friday, the Trinity, N.C.-based mattress-maker's bonds had fallen upon its release of its quarterly numbers, which showed an unexpected loss for the fiscal fourth quarter ended Nov. 30 of $42 million, or 46 cents per share, versus its year-earlier net income of $17.1 million, or 18 cents per share.

Times gyrates on Slim news

A trader saw New York Times Co.'s 4½% notes due 2010 trading at 87 on a round-lot basis - well up from the 82.25 bid round-lot price seen back on Jan. 8, its last previous large-sized trade, apparently pushed upward by the news that Mexican billionaire Carlos Slim will provide $250 million in much needed cash.

However, he noted that the bonds had been "very active" in odd-lot trading, and a market source at another desk saw those bonds swing wildly from Friday's closing level around 86 to intra-day levels as high as 95, though all on fairly small trades.

Late in the session, though, those bonds began to come down from those peaks, on a series of larger trades in an 85-87 context.

The company placed $250 million of new six-year notes with two companies controlled by Slim - notes carrying a coupon north of 14%, which the trader termed "not a good sign".

Fresenius holds gains

Apart from that private placement, primary activity was nil. German healthcare company Fresenius SE's new 9% notes due 2015, meantime were still "hanging in right around the par level" a trader said; those bonds had jumped up to that rarified altitude on Thursday and Friday, after the $500 million of dollar notes priced Thursday at 93.076.

Another trader called the bonds par bid, 101 offered.

Charter eases on advisor report

The bonds of Charter Communications Inc. were lower on reports that Charter hired law firm Kirkland & Ellis and investment bank Lazard Ltd. to advise the company about a possible bankruptcy, the investor said.

Last week Charter disclosed that subsidiaries CCH I Holdings, LLC and Charter Communications Holdings, LLC missed $73.7 million of interest payments due Jan. 15 on some of their outstanding senior notes.

CCH I Holdings was scheduled to make an $8.4 million interest payment on its $151 million of 11 1/8% senior notes due Jan. 15, 2014; a $39.2 million interest payment on its $581 million of 13½% senior discount notes due Jan. 15, 2014; and a $13.1 million interest payment on its $217 million of 12 1/8% senior discount notes due Jan. 15, 2015.

Meanwhile, Charter Holdings was scheduled to make a $900,000 interest payment on its $18 million of 10¼% senior notes due Jan. 15, 2010; a $900,000 interest payment on its $16 million of 11¾% senior discount notes due Jan. 15, 2010; a $2.6 million interest payment on its $47 million of 11 1/8% senior discount notes due Jan. 15, 2011; a $4 million interest payment on its $60 million of 13½% senior discount notes due Jan. 15, 2011; and a $4.6 million interest payment on its $75 million of 12 1/8% senior discount notes due Jan. 15, 2012.

The company entered a 30-day grace period which runs through Feb. 15.

The money manager, who only agreed to speak on background, believes that the St. Louis-based cable TV and internet services provider may have finally run out of options.

"I don't see how they can refinance their way to survival," the buy-sider said.

"Once you are in the grace period the odds of getting current are less than 50-50 historically."

The investor said that damage to bondholders may be limited because most of Charter's bonds have likely fallen into the hands of accounts that specialize in distressed situations.

However, the investor added, an event such as the possible Charter bankruptcy is never as "priced into the market" as the stalwarts of the high-yield universe would have you believe.

One on the road

The Tuesday session turned up no primary market news.

Only one deal is on the active forward calendar.

Landry's Restaurants, Inc. was scheduled to begin a roadshow on Tuesday for its $270 million offering of senior secured notes due 2011.

The deal could price during the week of Feb. 2.

Credit ratings remain to be determined.

Jefferies & Co. is the bookrunner.

Meanwhile, among the possibles on the shadow calendar, Intelsat Subsidiary Holding Co., Ltd., a subsidiary of Intelsat, Ltd., announced last week that it plans to fund a cash tender for two series of outstanding notes with an offering of new senior notes.

The size of the tender is $200 million, which is the likely size of the bond deal, Dianne VanBeber, Intelsat's director of investor relations, previously told Prospect News.

Goldman Sachs & Co., the dealer manager for the tender, is the likely underwriter for the new senior notes, VanBeber added.

And HCA, Inc. is likely to show up in the near term with a deal driven by reverse inquiry, likely to be led by JPMorgan, according to a buy-side source.

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