Coventry prices upsized split-rated deal; MGM Mirage up on Dubai deal; ResCap on a roll

By Paul Deckelman and Paul A. Harris

New York, Aug. 22 - High yield saw signs of a recovery Wednesday and sources said that the broad high yield market was strong on Wednesday.

One observer said that investors are cautiously returning to the high grade bond market, and to a lesser extent into high yield.

The source added that there was a little bit of a bid for double-B paper, and even for single-B, on Wednesday.

However, the source added, investors continue to keep their distance from the lower quality.

This source also expects the market to remain volatile.

In the primary market no issues priced on Wednesday. Nor did the new issue market produce any news but one split-rated deal was completed.

Coventry Health Care, Inc. upsized to $400 million from $300 million its issue of 6.3% seven-year senior notes (Ba1/BBB/BBB-), launching and pricing them at a 190 basis points spread to Treasuries.

However an informed source told Prospect News that the high yield accounts were not involved in the split-rated deal.

Further evidence that a corner may have been turned came from the secondary market, where Residential Capital Corp.'s bonds continued to rise, investors apparently convinced that the crunch will not seriously harm the big residential lender. ResCap's corporate parent, GMAC LLC was actively traded Wednesday, although its bonds remained mixed.

Elsewhere, MGM Mirage's bonds were seen up between 2 and 4 points, in line with a rise in the La Vegas-based casino giant's shares, on the announcement that the company had signed a $5 billion deal with Dubai World, which will take a 50% stake in MGM Mirage's ambitious CityCenter development project in the Nevada city, and take a 9.5% stake in MGM Mirage itself.

The rise in MGM Mirage's bonds also pushed some other gaming operators upward on Wednesday, including Isle of Capri Casinos Inc., Manadaly Resort Group and Station Casinos Inc.

Meanwhile a senior high yield syndicate official was not hearing about any substantial bids on Wednesday, although the source acknowledged that junk did strengthen during the session.

"The market is more or less shut down," the official said, adding that the big accounts are not presently "sanguine" about junk.

"They are constructive on some names at the right price, but the calendar hasn't gone away," the official said.

Bank loans will lead

When Prospect News asked a senior high yield syndicate official whether activity will pick up in the primary market after Labor Day, the source responded that the September will likely get off to a slow start.

The official is not looking for the sell-side to come back from the Labor Day break and put out a bunch of deals, but expects that the forward calendar will continue to be pushed off because the loan market has not corrected itself.

"Until the loan portion of some of these LBOs clears there is no reason to try to do bonds," the official stated, adding that without the loan portions of the LBO financings "what happened to Servicemaster and Dollar General and U.S. Foodservice will happen again.

"Until you have relative value established in the bank loan market why would you look at the bonds?" the source asked rhetorically.

This official said that one possible September scenario for the high yield primary market involves corporate refinancing, but specified that such refinancing deals, in order to clear, would have to be modestly sized.

Given the right deal at the right size, the source said that the procedure would be to "line up a few lead orders" before actually announcing the deal.

"If a couple of those deals would price and trade well it would give people more confidence," the senior syndicate official added.

'Everything is great' - NOT

A trader said that the widely followed CDX index of junk performance was up 5/8 point at 95 5/8 95 7/8. The Bank of America Securities High Yield Broad Market Index rose 0.36%, bringing its year-to-date return to 0.40%. The KDP High Yield Daily Index was up 0.30 to 78.20, while its yield tightened to 8.35%.

Overall, the trader said, "everything was up and traded higher," adding with some degree of irony that "the world is a wonderful place again, so everything is great. They'll be rolling out those big deals any day now."

He said that investors must have been convinced that the actions of the Federal Reserve to boost market liquidity and calm the markets by cutting its discount rate and encouraging the four largest U.S. banks to borrow from its discount window Wednesday - which they did - must have worked.

"And there's just a lot of money out there," waiting to be put to work. That capital had been held back over the past several weeks amid the market turmoil.

However, he cautioned that "even though things are up, and people don't feel so uncomfortable with risk, the fact that they've changed the standards for loans to individuals and corporations means that credit is not going to be as readily available as it was before, and a lot of people are even going out of the mortgage business.

"So I've got to think that people are going to have a harder time borrowing to buy, on mortgages and credit cards and so forth, and that's going to hurt the economy. It's already hurting the automobile industry, even though the bonds seem to be trading higher."

Indeed, he saw General Motors Corp.'s benchmark 8 3/8% notes due 2033 up a point in the 82-83 range, and Ford Motor Co.'s flagship 7.45% notes due 2031 up nearly a point as well, despite the fact that "they're cutting back production, that announcement came out today, and these car sales are just abysmal," with Detroit's Big Three now collectively holding less than 50% of the domestic market share for the first time ever.

ResCap rise continues

For a second straight session, Residential Capital's bonds continued to gain strength, likely a sign that investors feel the worst of the subprime market meltdown chaos is over, at least for the moment.

The trader saw ResCap's bonds up by 3 points across the board.

A market source elsewhere pegged its 6 3/8% notes due 2010 up 3½ points on the session at the 79 level, and saw its 6 1/8% notes due 2082 up 5 points to 82 bid.

A source, in turn, saw ResCap parent GMAC's 8% notes due 2031 up nearly 3 points on the day at 90.5 bid. Its 6 7/8% notes due 2012 gained 1 point to 88.5.

A trader at another desk called the 8s up ½ point on the day at 90 bid, 91.5 offered.

However, another source saw the company's 5 1/8% notes due 2008 down around 1/3 point, at 96.5.

The GMAC and ResCap bonds were among the most heavily traded issues of the day, one of the sources indicated.

Among other issues linked to the mortgage industry, a trader saw Thornburg Mortgage Inc.'s bonds at 78.5 bid, 79.5 offered, "where they opened up. There wasn't much activity there."

Another trader quoted Countrywide Financial Corp.'s 6¼% notes due 2009 up a point at 90 bid, 91 offered, while its 4¼% notes due 2007 were ½ point up at 96.5 bid, 98 offered. Well after trading had wrapped up, as the nation's largest mortgage lender - nominally investment grade but recently trading like a junk bond - announced that Bank of America has made an equity investment of $2 billion in the company.

MGM Mirage jumps on Dubai World investment

Elsewhere, MGM Mirage' s bonds were seen up anywhere from 2 to 4 points on the announcement of the big deal with Dubai World, the Middle Eastern emirate's international investment company.

The heaviest dealings came in MGM Mirage's 7½% notes due 2016, which were seen around the mid-99 area, up more than 3 points on the session. A market source indicated that there were also considerable dealings in the company's 5 7/8% notes due 2014, seen up around 2½ points on the day at 93.75, and its 7 5/8% notes due 2017, up about 2 points to the par level. The company's other bonds were also seen up several points, though on lighter activity. A source saw its 6 5/8% notes due 2015 quoted at 95.5, up 2½ points.

The bonds "were very busy," said a trader, who added "they popped up 2 points or so early on and stayed there all day. There was a decent amount of activity."

At yet another desk, the company's 6.88% notes due 2016 were seen 3 points better at 95.5 bid, while its old Mirage Resorts 7¼% notes due 2017 gained 3½ points to 96.5.

The bonds moved up in tandem with MGM Mirage's New York Stock Exchange-traded shares, which jumped $6.62, or 8.91%, to $80.94, on volume of 8 million shares, nearly triple the usual turnover.

Under the terms of the deal, Dubai World will pay $2.7 billion for half-ownership in CityCenter, a vast mixed-use luxury residential, resort and retail complex currently being developed by MGM Mirage on 76 acres fronting on the famous Las Vegas Strip. The project is expected to be open for business by late 2009.

According to the company, CityCenter will include a 4,000-room casino/hotel resort, two 400-room non-gaming boutique hotels, multiple towers housing over 2,600 luxury condominiums and condo-hotel units, and some 470,000 square-feet of retail and entertainment space.

Costing about $7.4 billion, it is the largest privately-funded real-estate development ever. The joint venture will obtain project specific financing to fund remaining project costs.

MGM Mirage Chairman and Chief Executive Officer J. Terrance Lanni told reporters that the deal would let his company cut its debt by some $6 billion, by using project financing through the joint venture to fund the construction rather than having to use its own cash flows and credit lines.

More than $2.7 billion of the total $7.4 billion construction cost is already expected to be offset by the sale of condo units - and Lanni said that Dubai World, with its roster of ultra-wealthy clients and contacts throughout the Middle East and elsewhere in the world, is "already selling villas and condos to people we don't even know. They're selling condominiums for four times per square foot higher than we are," he said, in noting the potential synergies from the deal.

Another such benefit, the MGM Mirage executive said, is that Dubai World's excellent credit rating - versus MGM Mirage's 4B status (Ba2/BB/BB for most of its debt) and its ownership of significant positions in several banks should allow the partners to finance the project without having to contend with the current turmoil in the credit markets.

The news that MGM Mirage has recruited a deep-pocketed partner with access to other financial high-rollers to largely defray the cost of CityCenter and let the gaming company wipe several billion dollars of debt off its books was seen as a positive development by Standard & Poor's, which put MGM Mirage on CreditWatch for a possible upgrade to its BB rated corporate credit and senior unsecured ratings and its B+ subordinated ratings.

The agency said that the deal is expected to have "a profound impact on the company's balance sheet,", adding that if "a significant portion" of the estimated $3.9 billion gross proceeds to MGM Mirage are used to permanently reduce debt, "a one-notch upgrade of the ratings would be considered."

Among the factors S&P will study, it said, will be MGM Mirage's willingness to keep its leverage in the 4 to 5 times range.

The terms of the deal also call for MGM Mirage to continue to act as the project developer. When the project is complete, the joint venture entity, CityCenter Holdings LLC, will be the 100% owner, paying MGM Mirage a $2.7 billion cash distribution for its share, plus additional consideration of $100 million for completing the project on time and within the budget. MGM Mirage will then manage the casino resort, the Vdara condo-hotel tower as well as the development's retail activities, for a management fee.

Dubai World will also take 9.5% stake in MGM Mirage - 54% owned by billionaire investor Kirk Kerkorian - for about $2.4 billion. Through its Infinity World Investments subsidiary, Dubai World will purchase up to 28.4 million shares of MGM Mirage via a combination of a public tender offer for 14.2 million shares of the currently outstanding stock not controlled by Kerkorian's Tracinda Corp. personal holding company at a price of $84 per share, about a 13% premium over Tuesday's closing level of $74.32, and an agreement to subsequently purchase an additional 14.2 million shares directly from the company. The deal will bring Kerkorian's stake in the company down to just over 51%.

The 90-year-old tycoon earlier this year floated a plan to possibly buy CityCenter and MGM Mirage's nearby upscale Bellagio gaming resort, but abandoned it in favor of finding other strategies to increase the company's value.

Other gamers rise with MGM Mirage

The rise in MGM Mirage's bonds also pushed some other gaming operators upward on Wednesday. These included Station Casinos, whose 6% notes due 2012 were seen up a point at 93 bid, and Isle of Capri, whose 7% notes due 2014 rose 1½ points to 88 bid. Mandalay Resorts' 7 5/8% notes due 2013 rose 1 5/8 point to 97.625, while Fontainebleau Las Vegas Holdings LLC's 10¼% notes due 2015 added on 2¼ points to end at 88.

The gaming sector had been mixed on Tuesday, with some issues seen lower, notably Trump Entertainment Resorts Inc.'s 8½% notes due 2015, which lost 3 points on Tuesday to finish at 80.5, as well as Majestic Star Casino LLC/Majestic Star Casino Corp. and Pinnacle Entertainment Inc.

Among the upsiders in the sector on Tuesday had been MGM Mirage - its 6 5/8% 2015 notes crept up about a point to 93 - and Native American gaming operators Pokagon Gaming Authority and Little Traverse Bay Bands of Odawa Indians.

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