GM slumps after it's dumped to junk, Ford too; Greenbriar deal prices; funds see $400 million outflow

By Paul Deckelman and Paul A. Harris

New York, May 5 - What was once virtually unthinkable - the fall of the world's two largest automakers into junk bond status - became a reality Thursday, when Standard & Poor's downgraded the debt of General Motors Corp. and Ford Motor Co. to below investment grade.

Even though most savvy market people had seen this downgrade coming as the fortunes of the two once-invincible auto giants continued to deteriorate in recent weeks, their bonds nonetheless fell in response.

Also trending lower was Calpine Corp., even as the San Jose, Calif.-based power generating company released its first-quarter results and tried to put all of the recent negative market rumors about its financial health to rest on its conference call.

In the primary market, Greenbriar Cos., Inc. successfully brought a $175 million10-year issue to market.

And after trading had wrapped up for the day, market participants familiar with the fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $400 million more left the junk funds in the week ended Wednesday than came into them.

That stretched the funds' losing streak to 12 consecutive weeks, including the $228.4 million outflow seen in the previous week (ended April 27).

In those dozen weeks, net outflows have totaled about $5.693 billion, according to a Prospect News analysis of the AMG figures.

That comprises most of the $6.619 billion cumulative outflow that the funds have seen since the start of the year, an increase from $6.219 billion seen the week before, according to the Prospect News analysis. Outflows have now been seen in 15 weeks out of the 18 so far this year, the analysis further reveals.

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

The fund flow numbers are considered a measure of junk market liquidity trends.

Most significant, according to one source, is that the consecutive weeks of net outflows now number 12. Hence, if high-yield mutual funds undergo an outflow for the week ending May 11, the string of negative flows will tie the record of 13 consecutive negative weeks that took place from Sept. 22, 2000 to Dec. 15, 2000.

GM, Ford lower on ratings cut

The liquidity numbers are just one more piece of negative news sapping the market's vitality, along with the downturn in the equity markets that followed S&P's one-two blow against the Number One and Number Two carmakers.

The ratings agency lowered its long- and short-term corporate credit ratings on GM, on the carmaker's financial arm, General Motors Acceptance Corp. and on all related entities, to BB/B-1 from BBB-/A-3, and said the outlook is negative.

S&P said the downgrade to non-investment-grade reflects the conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages. It also cited concerns that GM's important sport utility vehicle line will no longer be as profitable as it once was.

Adding to the overall uncertainty about the company's future is Wednesday's news that billionaire investor Kirk Kerkorian's Tracinda Corp. intends to increase its ownership stake in GM to about 9% from 4% currently, although S&P did say that this was not a factor in its decision to downgrade GM.

GM and Ford "were front and center in high yield today," said one market source, who saw GM's most widely followed bond, the 8 3/8% notes due 2033, swooning as low as 71.5 bid from prior levels at 78.125. Although he did hear some quotes around 73 going home, he said the 71.5 level was probably more valid because the volume of trading at the lower levels was much greater.

He said that trading in both GM and Ford was very active - so much so that the Nasdaq TRACE bond tracking system was having difficulty keeping up with all of the action in the two carmakers' bonds, and looked like it was running behind all day due to order imbalances.

"A lot of institutions now have to dump this," he said, noting that many accounts' investment guidelines forbid holding any issues rated as junk by one of the two largest ratings bodies. It should be noted that other investors working under such restrictive guidelines had already unloaded their holdings in both GM and Ford in anticipation of just such a move, adding to the recent negative climate for both bonds, since the two carmakers have literally tens of billions of dollars of outstanding bond debt.

The source saw GM's 9.4% notes due 2021 trading down to 81.5 bid from 88, while GMAC's 6.55% notes due 2019 and 7.4% notes due 2017 were each down between two and three points on the day, ending at 71 and 84, respectively.

The GMAC bonds had smaller losses, he opined, because "its CFO had lobbied hard with the ratings agencies to treat GMAC differently than GM corporates," - although that didn't stop S&P from cutting the ratings on both GM entities down to the same level Thursday.

At another desk, a trader saw the 8 3/8s fall to 74 bid, 75 offered from 79 bid, 80 offered previously, and saw the GMAC 8% notes due 2031 drop nearly eight points on the day to 78 bid, 79 offered.

Yet another trader saw the 8 3/8s - which he said "seems like the one most people who have not been involved in GM before are watching" - fall to 72 bid, 73 offered after news of the downgrade from 74 bid, 75 offered before, and from Wednesday levels at 78 bid, 79 offered.

The bonds "hung in there, and bounced off their lows to 73 bid, 75 offered at the end, off a couple of points, but not like it was a 10-point move. A lot of this was priced in already."

He also saw Ford's bonds "off five to six points" after its downgrade by S&P, with the carmaker's 7.45% notes due 2031 dropping to 75 bid, 77 offered from 80 bid, 81 offered before.

S&P cut Ford's long- and short-term corporate credit ratings, and those of its Ford Motor Credit Co. and all related entities - except for those of the Hertz Corp. Car rental subsidiary - to BB+/B-1 from BBB-/A-3, with a negative outlook. Hertz remains barely investment grade, at BBB-, in the wake of Ford's recent disclosure that it was evaluating strategic options for Hertz, including its potential sale.

The ratings agency said Ford's downgrade to junk status reflects skepticism about whether management's strategies will be sufficient to counteract mounting competitive challenges.

As was the case with GM, S&P also noted the likely weakness going forward of sales in its once-lucrative SUV segment of the market.

The first market source said that from where he sat, Ford "seemed to weather" the downgrade better than GM. "By and large, Ford lost three points [on the longer end of the curve], while the shorter duration stuff only dropped a point or two."

He saw Ford's 9.15% notes due 2021 three points lower at 94 bid, while its 7.4% notes due 2046 were also down three at 71.

He quoted Ford Motor Credit's 6.4% notes due 2008 at 91, down several points on the day, while its 5.7% notes due 2010 retreated to 91.375 bid from 93.

Other sources reported volatility in the wake of the news.

While most agreed that the General Motors downgrade was a fait accompli, one sell-side official admitted to having been taken off guard by the Ford news.

"I think the Ford downgrade took some people by surprise," the source said. "I also think that the GM downgrade came sooner than a lot of people expected.

"I believe that these actions were priced into the bonds and were widely anticipated.

"Still, this news has a lot of people re-thinking their positions in high yield."

Partial rebound

Another market source, contacted approximately 90 minutes after the news of the downgrades broke, said that the numbers bear out the contention that the ratings actions were already priced in.

"The market is pretty volatile but it's starting to fill back in," the source said midway through Thursday afternoon.

"The GM '33s were 79.50 bid, 81.50 offered early this morning. They got down to 73 bid, 74 offered. But they will probably work out to be 75.50 bid, 76.50 offered.

"Of course they have been moving around a lot.

"I think the low in the bond was 72, which was back when this first started. It's caught the bottom after the fact.

"I think most of the news has been priced in and people have to make a judgment."

This market source assented to color that Prospect News has been hearing since the middle of March, namely that most of the portfolios that would need to shed GM and Ford debt, were it to fall below investment grade, have likely already done so.

When Prospect News followed by asking this source if the huge amount of paper from the two automakers - over $500 billion of combined debt, according to some estimates - wouldn't swamp the market with supply, the source said: "It won't be new issue supply because they won't be issuing new bonds.

"I doubt that they will be in the markets, at least for the remainder of this year and probably longer.

"They don't need to be in the high-yield market. They can certainly go to the bank and do a collateralized loan a lot cheaper than they can by going into the debt markets.

"And I don't think they want to set a level of 11% on a new issue, which is where the stuff is trading now."

Suppliers hurt too

A trader said that the GM and Ford downgrades seemed to have more impact on the auto supplier sector than on the auto parts retailers; among the former, he said, Collins & Aikman Products Co.'s 10¾% notes due 2011 fell to 72 bid, 73 offered, from 75.5 bid, 76.5 offered. Among the latter group, Pep Boys's 7½% notes held steady at 94 bid, 96 offered, although he noted that the company's bonds were hanging in now because "they had already recently been grinding lower every day," from 101 bid, 103 offered just a couple of weeks ago.

Calpine down

Outside of the automotive sector, Calpine Corp.'s bonds were lower, with traders quoting the company's 8½% notes due 2011 having fallen to 53 bid, 55 offered from Wednesday levels at 60 bid, 62 offered.

A trader saw the company's 8½% notes due 2008 retreated to 53 bid, 55 offered from 61 bid, 63 offered on Wednesday.

While one trader thought it was because "no," people weren't impressed by the company's conference call during which company executives declared that recent market buzz that Calpine would go bankrupt was "all false" and said they would be able to refinance or repurchase maturing debt (see related story elsewhere in this issue), the other trader said that the call was not the problem.

He said that he had heard that after the call, the same hedge fund whose objections to Calpine's sale of its Saltend British facility had sparked the recent negative market rumors about Calpine's ability to take care of its obligations, Harbert Distressed Investment Master Fund Ltd., had filed a lawsuit in Canada against the company.

"It was the lawsuit that pushed the bonds down by seven points," he said.

Details were hard to come by. A spokesman for Harbert declined comment on the lawsuit story - but did acknowledge that something was up, referring all questions to a lawyer in the Canadian province of Nova Scotia. Due to the lateness of the hour, neither the attorney nor officials of the courts in Halifax returned phone calls seeking confirmation.

Harbert Distressed last month released a letter criticizing Calpine for the planned sale of the Saltend plant, claiming that Calpine would not be able to meet its obligations to holders of two series of bonds issued by Calpine's Canadian financing subsidiary. Even though Calpine asserted it was in full compliance with its financial and legal obligations, the dispute sparked market rumors of a possible default or even bankruptcy - also denied by Calpine.

New issue news continues to trickle

Meanwhile in the primary market, the Ford and GM ratings news may have slowed down an already slow pace of issuance.

One deal priced, as Lake Oswego, Ore.-based railroad equipment and services provider, Greenbrier Cos., Inc., priced $175 million of 10-year notes (B1/B+) at par on Thursday to yield 8 3/8%, 12.5 basis points wide of the 8 1/8% area price talk.

Banc of America Securities and Bear Stearns & Co. were joint bookrunners for the debt refinancing deal.

Although as many as three other deals were believed to be on tap to price during the session, no terms were heard as Prospect News went to press.

Talk on GSI, PetroQuest

Assumption, Ill., agricultural equipment and services company GSI Group Inc. is talking its $125 million offering of eight-year senior unsecured notes (B3/B-) at 10¾% to 11%, with pricing expected on Friday via Lehman Brothers.

Elsewhere, PetroQuest Energy Inc. is talking its $150 million offering of eight-year senior notes (Caa1/CCC+) at a yield in the 10½% area, with pricing also expected on Friday.

Credit Suisse First Boston has the books.

And in a market that has recently seen myriad concessions to bond investors, the company is also providing an additional debt incurrence test covenant to the bond. In order for PetroQuest to issue additional debt its adjusted consolidated net tangible assets divided by total debt must be greater than two-times.

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