GM bonds lower in quiet pre-holiday session; funds see $138 million outflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 10 - General Motors Corp. bonds traded lower Thursday in the wake of Wednesday's disclosure that the giant carmaker will have to restate its 2001 numbers - one more body blow to a reeling domestic auto industry.

Former GM unit Delphi Corp.'s bonds were also seen on the downside, in the wake of poor numbers reported Wednesday and the possibility of a strike against the bankrupt Troy, Mich.-based automotive components company.

Overall the high-yield market failed to catch a meaningful lift from rallying stock prices during the Thursday session. Although the Dow Jones Industrial Average charged ahead over 98 points, junk ended the day unchanged to slightly lower, according to one source.

A single issue priced in the primary market as Yioula Glassworks Group, SA, of Athens, Greece, printed a 9% yield on its new 10-year bond. The deal, which was upsized to €140 million from €130 million, priced at the wide end of the 8¾% to 9% price talk, via Citigroup.

That was the extent of Thursday's primary market news, sources said, as the market sleep-walked through a rare full-day pre-holiday session heading into the three-day Veteran's Day break.

And as things were winding down for the day and for the week, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $138 million more left those funds in the week ended Wednesday than came into them.

It was the ninth straight weekly outflow, following the $132 million hemorrhage seen in the previous week, ended Nov. 2; in that time, outflows have totaled $2.894 billion, according to a Prospect News analysis of the AMG figures. Outflows have now been seen in 10 weeks out of the last 11 and in 16 weeks out of the past 18. During that latter timeframe, net outflows have totaled about $3.767 billion - up from the previous week's $3.629 billion total, according to the Prospect News analysis.

For the year so far, outflows have now been seen in 36 weeks of the 45 since the start of the year, against only nine weekly inflows. Cumulative net outflows for the year total around $10.806 billion, according to the Prospect News analysis, up from $10.668 billion last week.

The latest series of outflows pretty much establishes that the junk funds have reverted to the trend seen earlier in the year, when outflows totaling about $6.776 billion were seen in 15 straight weeks from mid-February through late May, according to the analysis. After that, there was a short period in which no clear trend could be seen, with about a month of inflows and outflows showing up on alternating weeks - but since July, money has been almost consistently flowing away from the funds.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Despite the continued trickle of money out of those funds, the junk bond primary market does not seem to be particularly anemic. After a quiet October, November has seen brisk action - including more than $2.5 billion of new debt priced in just one session, on Tuesday, and a calendar filling up amply with large new deals, not to mention a slew of smaller deals.

But a buy-side official told Prospect News on Thursday that the market is in a "malaise," with continued outflows and companies opting to raise cash in the bank loan market rather than the presently choppier junk bond market.

Session quiet

With the primary quiet, what little activity there was, was centered in the secondary market - but even there, traders said not much was happening.

"I really expected a little bit more activity," a trader said, "Because The Bond Market Association actually recommended that it not be an early close, so I thought it would not be typical of the day prior to a three-day weekend - but I was wrong. It was extremely quiet. There were a few bonds trading, but overall, there was very little activity."

"About the only thing going on," another quipped, "was people wondering why they were even there, working a full day." Normally the session before a three-day holiday would be abbreviated, ending at 2 p.m. ET, but the Bond Market Association withdrew its earlier recommendation for an early close because that would affect a scheduled Treasury 10-year note auction.

"Today was like a holiday," yet another market participant said. "People were just waiting around for the results of the Treasury auction." With brisk participation levels, the yield on the 10-year Treasury note fell to 4.56% from 4.65% late Wednesday, sending bond prices up.

GM falls

The major mover in the junk market was GM, which was traded pretty actively, considering the overall quietude of the market, in the wake of Wednesday's revelations contained in a Securities and Exchange Commission filing that an accounting error caused the Detroit-based automotive giant's 2001 earnings to be overstated by $300 million to $400 million, or up to 35% of its reported earnings.

That caused GM's bonds and those of its General Motors Acceptance Corp. financing subsidiary to move lower on Wednesday, and they continued to skid on Thursday, particularly the bonds of the parent company.

"GM was down another couple of points," a trader said, "and everything [in the automotive sector] was down in sympathy."

The company's 7 1/8% notes due 2013 were down nearly two points on the session at 74.5.

At another shop, a trader saw GM's benchmark issue, the 8 3/8% notes due 2033, trading in a 69.5-71 range, thought to be an historic low for that bond since its issue slightly over two years ago. Those bonds were down from closing levels around 72 on Wednesday, so "they definitely were a little lower."

At the same time, he saw GMAC's flagship bonds, the 8% notes due 2031, trading at levels between 101 and 103, with "a bunch of trades" in the 101-101.5 area, down from Wednesday's closing prices around 102 bid, 102.5 offered, "so they were weaker too."

There were, he said, "a heck of a lot of trades," even if only looking at round-lot dealings of over $1 million, "so that is one very active bond."

Another trader said that the GM 8 3/8s had pushed down to 69.5 bid, 70.5 offered late in the session in response to the news of the earnings restatement, Wednesday's downgrade by Fitch Ratings, and the possibility of a strike at Delphi, GM's biggest components supplier, breaching the psychologically important 70 threshold. "That's got to be their [all-time] low," he said.

Meantime, he saw the GMAC bonds "down a little, but not so much [as the GM bonds] because of all of the cash they have." He quoted the 8s at 101.5 bid, 102.5 offered.

GM's New York Stock Exchange-traded shares were meantime seen at a 16-year low, closing down $1.12 (4.53%), at $23.51, on volume of 35 million, almost four times the norm. At one point intra-day, the shares went as low as $22.75 - the lowest they've been since 1982.

Investors were also nervously watching a vote by GM's unionized employees on the company's demands that those workers and its retirees pay a larger share of their own healthcare costs. GM has said that spiraling healthcare costs must be brought in line for the company to remain economically viable. Although the United Auto Workers union leadership reluctantly approved the plan, backing from their members is by no means certain.

Trading in GM bonds and shares was further roiled by Bank of America Securities analyst Ron Tadross' warning of an increased risk of bankruptcy by the auto giant. He raised the likelihood of a GM bankruptcy filing to 40% from 30% previously, while lowering his target stock price to $16 from $18.

GM's fortunes are seen closely tied to the fate of Delphi, which GM spun off in 1999, but which has now descended into bankruptcy, driven there, in part, by high labor costs Delphi inherited from its erstwhile parent.

Delphi's efforts to cut its employee costs by as much as 60% have raised the possibility that unionized workers there might strike should it attempt to abrogate their current labor agreements, which would mean big trouble for GM, Delphi's single largest customer.

Delphi lower

Delphi's own bonds have meanwhile sunk into the 50s in the weeks following its early October bankruptcy, and its 7 1/8% notes due 2029, for instance, were down another two points on Thursday, traders said, to 56 bid, 57 offered. On Wednesday, Delphi reported a third-quarter net loss of $788 million ($1.40 per share), far wider than last year's third-quarter deficit of $119 million (21 cents per share). Revenue was $6.28 billion, down from $6.64 billion in third quarter 2004.

Friendly's melts on earnings

Elsewhere on the earnings front, investors "weren't too friendly," a trader said, after Friendly Ice Cream Corp. reported third-quarter numbers, taking the Wilbraham, Mass.-based ice cream producer and restaurant operator's 8 3/8% notes due 2012 down to 91.5 bid from 93.5.

"People were not enamored of their earnings," he said, which saw the company's net income for the three months ended Oct. 2 ease to $3.4 million (43 cents per share) from $3.5 million (44 cents per share) a year earlier, as revenues declined to $143.6 million from $153.1 million a year ago, a decrease of $9.5 million, or 6.2%. For the first time since the first quarter of 2001, comparable restaurant sales decreased 4% for company-operated restaurants and 2.6% for franchised restaurants from year-earlier levels.

Granite gains

On the upside, Granite Broadcasting Corp.'s 9¾% notes due 2010 firmed to 94.5 bid from levels about a point lower earlier in the week after the New York-based television station ownership company reported favorable third-quarter results. Net revenue increased 7.1% to $20.8 million, the company said, as decreases in political advertising revenue and national non-political advertising revenue were more than offset by increases in local non-political revenue and the inclusion of a full quarter of operations of new affiliated stations in Fort Wayne, Ind., and Duluth, Minn.

Little or no bond movement was seen for Salton Inc., which reported fiscal first-quarter numbers.

While the Lake Forest, Ill.-based small-appliance maker swung to a profit from a year-earlier loss, this was largely due to the inclusion of asset-sale proceeds. However, the company also touted the progress it was making on reducing debt (see related story elsewhere in this issue).

Taking a header on Calpine

Meanwhile two sources who said that at present high-yield players are keenly focused on the outcome of Calpine Corp.'s attempt to gain access, via a court order, to the proceeds from a $395 million asset sale which are currently locked in an account by Bank of New York.

"That trial starts Friday and could theoretically be over by the end of the day, or maybe on Monday," the source said.

"If Calpine wins its bonds go up a lot - maybe 10 points or more.

"That should provide an emotional lift for the high-yield market during what is traditionally a very strong seasonal month.

"If Calpine loses it will have the opposite effect on the bonds and will obviously be bad for the high-yield market.

The general thought is that Calpine ought to win. But the bonds are trading with some uncertainty as to that outcome."

$2.89 billion issuance best in eight weeks

With the bond market closed Friday for Veterans Day in the United States, the primary market ended the four-day week beginning Nov. 7 having seen $2.89 billion price in eight dollar-denominated tranches. Most of that issuance came Tuesday when $2.55 billion priced in half a dozen tranches making it the biggest single day in junk since July 27 - the day of the mammoth $3 billion SunGard Data Systems, Inc. transaction when $3.99 billion priced in four tranches.

The Nov. 7 week is the biggest week in high-yield since the week from Sept. 9 through Sept. 16, which saw just over $3.83 billion in 16 tranches.

The Nov. 7 week's $2.89 billion of issuance took 2005 year-to-date issuance to just over $86.5 billion in 335 dollar denominated tranches, as the market continues to trail well behind 2004 in year-over-year issuance volume: by the Nov. 10, 2004 close there had been nearly $117.85 billion of issuance in 476 tranches.

The coming week

The Nov. 14 week figures to be a busy one in the primary market with just north of $3.0 billion of issuance lined up.

The biggest issuer currently on the road with a deal that is expected to price in the coming week is Avago Technologies Finance Pte., Ltd. with $1 billion in a multi-tranche deal that will help to fund the buyout of Singapore-based Agilent Technologies Inc.'s semiconductor unit by Kohlberg Kravis Roberts & Co. and Silver Lake Partners.

The deal, led by Lehman Brothers, Citigroup and Credit Suisse First Boston, kicks off its U.S. roadshow Monday and is expected to price by the end of the week.

Another Asian issuer with bonds that are being shopped by U.S. high-yield investors is Malaysia's Megasteel Harta, with $450 million of senior secured notes (B1/B+). The five-year non-call-three notes are talked in the high 10% range and the 10-year non-call-five notes are talked in the high 11% range.

Credit Suisse First Boston has the books.

An emerging markets trader who focuses on Asian names told Prospect News on Thursday that of the two tranches the five-year deal is getting the lion's share of attention from investors.

Elsewhere the week's prospective issuers include:

* EPL Finance Corp. (El Pollo Loco) with $150 million eight-year senior notes (Caa1/CCC+) via Merrill Lynch & Co. and Banc of America Securities. The deal is talked at 11¾% to 12%, and expected to price Monday;

* Team Health Inc.'s $265 million eight-year senior subordinated notes (Caa1/B-) via JP Morgan, Lehman Brothers and Merrill Lynch;

* E*Trade Financial Corp.'s $250 million 10-year senior notes (expected B1/B+) via Morgan Stanley and JP Morgan;

* Compton Petroleum Corp. Finance Co.'s $300 million of eight-year senior notes (B2) led by Credit Suisse First Boston and Morgan Stanley;

* Orchard Supply Hardware Stores Corp.'s $235 million of eight-year senior notes (B2/CCC+) via Lehman Brothers, Citigroup and JP Morgan;

* SS&C Technologies, Inc.'s $205 million of eight-year senior subordinated notes (Caa1/CCC+), with Wachovia Securities, JP Morgan and Bank of America in the lead; and

* Targus Group International Inc.'s $150 million of eight-year senior subordinated notes (B3/CCC+) via Goldman Sachs & Co. and UBS Investment Bank.

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