WaMu bonds up as hedge fund takes stake; Idearc resumes slide; autos off; funds see $153 million gain

By Paul Deckelman and Paul A. Harris

New York, July 31 -Washington Mutual Inc.'s bonds were seen as "a big mover" Thursday, in the words of one junk trader, after a British hedge fund said in a regulatory filing that it had amassed a 6% stake in the Seattle-based savings institution.

Earnings were on the minds of many players. Good quarterly results boosted the bonds of such credits as Goodyear Tire & Rubber Co. and Iron Mountain Inc. Anticipation of financial results to be reported Friday gave Boyd Gaming Corp. a boost.

However, General Motors Corp., which is also slated to report Friday, was seen solidly lower on a combination of factors, including investor angst about the numbers the Detroit giant will release, the big loss reported by GM's 49%-owned loan division GMAC LLC, and a Standard & Poor's downgrade of GM, GMAC, and the carmaker's two domestic competitors, Ford Motor Co. and Chrysler.

Idearc Inc., whose bonds fell on Tuesday on its own poor numbers but appeared to have firmed a couple of points on Wednesday, was back on the slide on Thursday.

Primary market activity was meanwhile virtually non-existent.

Funds rise $153 million on week

And as trading was winding down for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday some $153 million more came into the weekly-reporting funds than left them. It was the second consecutive inflow, following the $26.4 million cash infusion seen in the previous week, ended July 23.

Outflows have still been seen in four weeks out of the last seven, dating back to the week ended June 18. During that time, the funds have lost a net of $634.276 million, according to a Prospect News analysis of the AMG figures. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time $3 billion of inflows were recorded, according to the Prospect News analysis. Before April, outflows had been recorded in most weeks.

With the calendar third quarter now well underway, inflows, after that slow start, remain solidly ahead, with 18 inflows versus 13 outflows seen in the 31 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous adjustments and revisions, are now estimated at $1.299 billion, up from around $1.146 billion the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - 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, more recently, hedge funds.

However a senior high-yield syndicate official said that cash is flowing into the asset class from sources other than the high-yield mutual funds, and added that coupon income is also bolstering cash.

Prospect News asked this official whether positive cash flows are apt to translate into a more meaningful new issue calendar anytime soon.

Not likely, the source replied, adding that such a calendar is a few more weeks away.

Market indicators point south

Back among the established issues, a trader said that the widely followed CDX index of junk bond performance was down 3/8 point on Thursday, quoting it at around 93¼ bid, 93½ offered. The KDP High Yield Daily Index slid by 27 basis points to end at 70.69, while its yield rose by 8 bps to 10.59%.

In the broader market, advancing issues trailed decliners by a small margin. Activity, represented by dollar volume, rose by 17% from the levels seen in Wednesday's session.

A trader said that "there wasn't much to report," adding that the market was clearly softer.

WaMu a winner on hedge fund stake

A trader said that Washington Mutual "was the big mover," calling its 4% notes due 2009 "a heavily traded bond, all over the place," before finally settling at 86 bid, 87 offered which he called "slightly up," maybe around a point.

WaMu's 4 5/8% notes due 2014 were up more than 2 points to just under the 49 mark.

Its 8¼% notes due 2010 were seen to have firmed to 68 bid.

The bonds "had been dropping for the last week, or week and a half," following the company's July 22 announcement of a $3.3 billion quarterly loss, "and then were slightly up today." He said that "they were on CNBC for a while, talking about how maybe [the company's situation] wasn't quite as bad" as previously thought.

He also noted a 12% rise in the troubled company's shares, which occurred after hedge fund Toscafund Asset Management LLP disclosed a 6% stake in the nation's largest thrift. The London-based fund said that it had accumulated 105.5 million WaMu shares, enough to make it the second-largest shareholder behind investor David Bonderman's TPG Capital, which holds 227 million shares.

After having pushed up as much as 22.6% intraday, the shares retreated but still ended up 59 cents, or 12.45%, to go home at $5.33. Volume was 195.4 million shares, nearly three times the norm.

Goodyear, Iron Mountain up on earnings

Elsewhere, earnings seemed to be the name of the game, with a number of credits firmer on better quarterly numbers.

A trader saw Goodyear's bonds edging up, although he added that "didn't see a lot of" the Akron, Ohio-based tire company's paper. He said that while the company's floating-rate notes hung in around 99.375, "about where they had been," its 9% notes due 2015 were at 101 bid and its 8 5/8% notes due 2011 were at 102.5, both "up slightly," about ½ point for each, adding that "it's not that big of a deal, across the board."

At another desk, Goodyear's 7.857% notes due 2011 were seen having firmed more than a point to the 99.5 level.

Goodyear, the largest U.S. tire manufacturer and third biggest in the world, reported that during the second quarter it earned $75 million, or 31 cents per share, up from $56 million, or 26 cents per share, a year ago. Excluding one-time earnings, Goodyear's profit for the quarter was 66 cents per share, beating Wall Street's expectations by more than a nickel.

Sales rose 6.5% year-over-year to $5.24 billion from $4.92 billion a year earlier. Goodyear - which, like most automotive-linked companies has been hurt by the sharp erosion of the U.S. auto market - was helped greatly by a strong showing in its international business.

Iron Mountain also reported relatively benign numbers, which caused its 8 5/8% notes due 2013 to gain nearly a point and end just below 102 bid. A trader at another desk figured its 7¾% notes due 2015 to be trading at 100.5, which he called up ½ to ¾ point.

Boston-based Iron Mountain, which specializes in storing documents and records, saw its quarterly earnings actually decline slightly, to $35.9 million, or 18 cents a share, from $39.1 million, or 19 cents a share, a year earlier. However, those earnings were in line with analysts' expectations - and it upped its full-year revenue guidance to $3.05 billion to $3.09 billion, up from its previous projections of $3.02 billion to $3.08 billion. Wall Street anticipates revenues of about $3.06 billion.

Boyd better on expectations

Boyd Gaming is scheduled to unveil its quarterly numbers on Friday - and ahead of that release, the Las Vegas-based casino operator's 7¾% notes due 2012 were seen by a market source to have risen more than 4 points on the day to the 83 bid level.

A market source at another desk who saw the bonds at 83, called it a 5 point move.

Analysts estimate that Boyd's per-share earnings will come in somewhere between 18 cents and 33 cents, with the consensus around 27 cents.

However, despite investor enthusiasm, even the high end of those forecasts is well down from the 46 cents a share which the company earning in the 2007 second quarter.

GM, other auto names lower

Investors meantime harbor no illusions about General Motors, which is also scheduled to report earnings on Friday. Analysts are predicting losses ranging anywhere from 70 cents to $4 per share, with the consensus at about $2.63, wider than $2.30 a year ago.

A trader saw GM's benchmark 8 3/8% notes due 2033 down 2 points at 49 bid, 51 offered.

Another pegged them a point lower at 49.5 bid, 50.5 offered, and saw domestic arch rival Ford's 7.45% bonds due 2031 at that same level, both down 1 point.

Another trader said that the GM bonds, and those of Ford, were "off 3 points across the board" after the carmakers' debt was downgraded a notch by Standard & Poor's. A second trader also saw the GM benchmark bonds down 3 points at 49 bid, 50 offered.

GM's 7 1/8% notes due 2013 were seen down 3 points as well at 56.

GMAC LLC's 8% bonds due 2031 lost a point to end at 55 bid, 57 offered.

S&P cut the corporate credit ratings for General Motors and Ford, as well as Detroit rival and Chrysler, to B- from B previously, maintaining a negative outlook for all of them. S&P also lowered its issuer credit rating on GM's 49%-owned auto financing arm GMAC.

The ratings agency said that the downgrades reflects expanding cash losses in the carmakers' North American automotive operations caused by sharply lower U.S. light-vehicle sales and the recent dramatic shift in demand away from large pickup trucks and sports utility vehicles amid higher gas prices and the weak economy.

It said that its ratings on each of the traditional Big Three reflect "multiple problems" that each company faces in returning its domestic automotive operations to profitability and positive cash generation.

The ratings downturn came on the heels of GMAC's announcement that it had lost $2.48 billion in the second quarter, versus its year-earlier $293 million profit, and ahead of Friday's scheduled release of GM's quarterly numbers. Ford put out its numbers - showing its largest-ever quarterly deficit, $8.67 billion, or $3.88 per share, on July 24.

GMAC's loss was its fourth consecutive quarter of red ink, stretching back to last year's third quarter. The Detroit-based lender got slammed in both of its major areas of operations - automotive finance, where it was forced to take a $718 million writedown of the value of SUV leases that it financed, due to the complete shriveling of the re-sale market for SUVs and the gas-guzzling 4x4s' loss in value, and in the mortgage market, where GMAC's wholly-owned Residential Capital LLC subsidiary lost $1.86 billion in the quarter versus a $254 million deficit a year ago. It was Minneapolis-based ResCap's seventh straight quarterly loss.

Idearc heads back downward again

A trader saw Idearc's 8% notes due 2016 dropping 6 points to 44 bid, 46 offered. Another trader, seeing those bonds around that same level, said that Idearc "melted down."

At another desk, a market source saw the bonds at 44.5, calling them down more than 5 points. And yet another saw them down nearly 7 points at 44, and called them one of the most heavily traded names of the day.

The Idearc notes had plummeted about 10 points on Tuesday, to about the 49 level, when the Dallas-based telephone directory publisher reported poor numbers for the second quarter. However, the bonds had seemed to bounce back a little on Wednesday, to around the 50-51 area, before heading back downward on Thursday.

But while Idearc was resuming its slide, the first trader said sector peer R.H. Donnelley Corp., whose bonds had risen several points on Wednesday after it posted some not-too-bad numbers, "hung in there." Its 8 7/8% notes due 2016 were quoted around the 49.375 area, around the same area where the Cary, N.C.-based directory publisher's 6 7/8% notes due 2013 ended up.

However, Donnelley-owned Dex Media Inc.'s 8% notes due 2013 were seen down another 1½ points at 62.5 bid.

No Ferrellgas trading seen

Several traders said that they had seen neither hide nor hair of Ferrellgas, LP's new 6¾% mirror notes due 2014, which priced at 85 on Wednesday to yield 10.627%. The general consensus seemed to be that the smallish deal - it was reduced to $200 million from $250 million originally - had been "snapped up and put away," as one put it.

Investor sees volatility

A money manager from a high-yield mutual fund said that the broad market was off 3/8 to 5/8 point on Thursday, depending upon the name and the sector.

The automotive related, financial and directories sectors led Thursday's retreat, the manager added, noting that General Motors Acceptance Corp. reported a $2.5 billion loss for the second quarter of 2008, and Idearc Inc. earlier in the week reported that its second-quarter profit fell 30%.

The investor added that presently the market is in the throes of volatility sparked by fundamental economic worries.

"It's a melting ice cube," the buy-sider commented.

Junk backlog at $62 billion

The primary market failed to generate news on Thursday.

A high-yield syndicate source who spoke to Prospect News on Thursday forecast that new issue news from now to Labor Day, and well beyond, will continue to be dominated by the LBO bond backlog, which this source presently tallies at $62 billion.

This official pointed out that the amount of bonds in the BCE, Inc. LBO deal alone is north of $10 billion.

Seeking clarity on Clear Channel

A couple of news items drew the market's attention to the expected $2.31 billion of senior notes backing the LBO of Clear Channel Communications, Inc.

There was a Moody's rating on the notes: Caa1.

Also an informed source said that the bank side of the deal officially closed Wednesday, and added that the LCDS started trading, with the spread last quoted in the high 700s, in the range of 790 to 800 bps.

This sell-sider also said that one of the dealers sold $500 million of the Clear Channel term loan in the low-80s context on Wednesday.

A money manager who plays both bonds and bank loans reported being approached on Wednesday with an all-you-can-eat offer on the Clear Channel term loan in the low 80s.

"We passed on it," the investor said, adding that the calculation involved an assumption that the loan was being sold to private equity firms, with the dealers providing financing - a not altogether attractive scenario if you're a cash buyer.

When asked about the bonds this investor sniffed in disbelief, saying that Clear Channel's leverage and present market conditions would make the sale of the bonds nigh on to impossible.

Gone fishin'

For weeks this high-yield mutual fund investor has been professing no interest whatsoever in the junk primary market.

During Thursday's conversation the buy-sider reported that this disinterest continues.

"For now there is more value in the secondary," the investor said, adding that any new offer would need to be priced very attractively indeed to merit attention.

This investor continues to keep an eye on the bank loan market, but has not made a play there during the past week and a half.

And the buy-sider continues to be on the defensive

"Basically right now you're not so much trying to trying make money.

"You're trying not to lose money."

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