GMAC continues climb, GM moves up; Starwood hot on takeover buzz; funds jump $691 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 - It was back to work - sort of - on Friday for the junk bond market, although volume was still pretty anemic, with many traders and other participants still on an extended New Year's week holiday, not to return until Monday.

Against a backdrop of thin trading, most names were seen having moved higher, the overall market helped by the smart rally by Wall Streeters delighted to be looking at a truly pathetic 2008 -stocks' worst year since the Depression days - in the rear-view mirror.

As was the case over the last few sessions of 2008, the automotive names dominated, pushed by recent news developments, including General Motors Corp. - finally - getting the first installment of its $13.4 billion lifeline from the federal government.

Also moving up was GM's automotive financing arm, GMAC LLC, continuing to glide on the momentum of its own end-of-the year good news - approval of its request to become a bank company, completion of its bond exchange offer, and provision of several billion dollars of funding under the governments' TARP program.

Outside of the autos, market participants were watching the strong surge in the bonds and shares of split-rated Starwood Hotels & Resorts Worldwide Inc., pushed upward on takeover speculation sparked by the signing of a confidentiality agreement with one of its large shareholders, Equity Group Investments, controlled by real estate billionaire Sam Zell.

In the primary market, although it's a new year, participants were telling the same old story - not much at all was going on, as new-dealers waited for market personnel to return to full strength, and potential issuers were deterred by the hefty yields being exacted by the market - where deals are possible at all - and waited to see how various economic developments would play out before venturing back to the capital markets.

Funds up by $691 million on week

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 Tuesday, $690.8 million more came into the weekly-reporting funds than left them.

It was the fifth consecutive inflow, following the massive $729.3 million cash infusion seen in the previous week, ended Dec. 23. Over the past five weeks, net inflows have totaled $1.818 billion, according to a Prospect News analysis of the AMG figures.

That was enough to take what had up to that point only been a relatively modest overall trend of year-to-date inflows - as low as $43.5 million at one point in late October - and finish off the year in high style, with $2.122 billion of inflows recorded for the year, their high for the year.

In a year which had 53 reporting weeks, thanks to a statistical quirk, there were 31 weeks in which net inflows were seen, versus 22 net outflows.

Meanwhile, flows among those funds which report on a monthly basis, rather than a weekly one, were unchanged in the latest week, which left the year-to-date inflow number for such funds at $2.726 billion.

Year-to-date aggregate flows - consolidating the cumulative net inflows of the weekly- and monthly-reporting funds - rose to a net inflow of $4.849 billion, with just one session remaining to be counted for the eyar.

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 comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Biggest back-to-back inflow since 2003

The combined $1.42 billion influx of cash that AMG reported during the past two weeks represents the biggest back-to-back inflows since late August 2003, according to a high-yield syndicate official.

Altogether the funds saw $1.8 billion of inflows during December, the source added.

Cash to put to work

The conspicuous inflows which the high-yield mutual funds saw during the fortnight ending Jan. 30 came in addition to a perceived build-up of cash on the buy-side, syndicate officials remarked on Friday.

"The equity markets are rallying," one official observed.

"People are wanting to think that the market is going up. Volatility is down over the past few weeks, but part of that is probably due to people not being in the office.

"Obviously the markets in general have been up. However I don't think we have a view that that is going to last, meaningfully."

Market indicators push up

The widely followed CDX High Yield 11 index of junk bond performance was seen to have risen by ½ point on Friday, with a trader quoting it at 79¾ bid, 80¼ offered. The KDP High Yield Daily Index meantime rose by 12 basis points to 52.89, while its yield tightened by 4 bps to 14.54%.

In the broader market, advancing issues led decliners by a three-to-one margin. Overall market activity, reflected in dollar volumes, was almost three times the sharply reduced pace seen in Wednesday's pre-New Year's session.

A trader said that there was "nothing to report" about the session.

Another trader opined that "it's really horrible. The skeleton crews were in and nobody wanted to play."

He added that "quotes were lacking - I literally had very few on the pad."

GMAC continues post-bank okay rise

He said that GMAC "opened up unchanged," from prior levels, pegging the Detroit-based automotive and residential lender's 8% bonds due 2031 at 55 bid, 57 offered.

He saw "some activity in the GMAC name, still at the higher levels from New Year's Eve."

He said overall, there was "not much activity," and that investors appeared to be "happy with the new plans, the new restructuring and the new money," which in GMAC's case amounts to $5 billion coming from the Treasury's Troubled Asset Relief Program. That government aid under the $700 billion bank bailout plan followed the Christmas Eve decision by the Federal Reserve to allow GMAC to convert to a bank, even though it had not met the previously established capital raising guidelines and had not gotten holders of 75% of its bonds to sign onto the company's offer to exchange new debt, cash and preferred stock for those bonds.

However, he pointed out that "all of that is old news - it's not a today event."

Those GMAC long bonds had been trading in a 30-32 context as late as the abbreviated Dec. 24 pre-holiday session. Then, hours after the markets closed that day, the Fed made its announcement and the GMAC bonds had shot up to a 44-46 context when trading resumed Dec. 26 after the holiday break. The bonds continued to firm, ending at 51 this past Tuesday and around 53 on Wednesday, although during the session, round-lots traded higher, around 55-56. The '31s moved up to 57 in Wednesday's dealings, although a market source said no round-lot dealings were seen.

The source said that probably the most actively traded GMAC bonds were the company's 6¾% notes due 2014; over $4.5 million of the bonds changed hands at 64 bid - a not unsubstantial total on a relatively quiet session like Friday's. But while that source saw those bonds up nearly ½ point, another estimated the bonds to be 4 points lower, and also saw GMAC's 7.75% notes due 2010 down a point at 86 bid.

But that second source also saw a strong surge in some of the lender's other debt - GMAC's 6 7/8% notes due 2012, up a robust 6 points on the day at 77, and its 6 7/8% 2011 bonds up nearly 4 points at 82. Its 7¾% notes due 2011 gained over a point in busy dealings to end at 82 bid.

GM gains as Treasury comes through

GMAC's 49% owner, GM's 8 3/8% bonds due 2033 were meantime seen by several traders in a 20-22 context. That was up from the 16 bid, 17 offered context at which those bonds had been trading on Wednesday, and well up from the 13-16 range in which they had traded in the sessions before that. GM's 7.20% notes due 2011 gained nearly 4 points to 82 bid.

GM's New York Stock Exchange-traded shares meantime accelerated by 45 cents, or 14.06%, to close at $3.65, although volume of 25.9 shares was only about five-eighths of the usual daily handle.

The GM bonds and shares rose on the news that the Treasury had given the cash-strapped carmaker the first $4 billion of what will eventually be $13.4 billion of federal bailout money, allowing the carmaker to continue to operate without sliding into bankruptcy while it tries to straighten out its operations.

However, the clock is ticking - GM, and Chrysler LLC, which also was approved for $4 billion of emergency funding, although that's its full allotment - face a March 31 deadline by which they must prove to federal regulators overseeing the bailout that they have a viable plan, including labor cost concessions and agreements from the holders of most of GM's bonds to exchange those bonds.

With that deadline now looming, one of the traders said that even having gotten the first installment of its money, "I would still say that GM will be forced to file a pre-packaged bankruptcy. I don't see how [they can avoid it] - GM has to retire or equify two-thirds of their debt, which is pain and suffering for those two-thirds that do that.

"It's hard to envision in this kind of an environment where there should be no party that benefits more than another, that the holdouts would be allowed to be made whole. They're going to have to file for Chapter 11 and that will sort of level the playing field within the GM capital structure."

He also noted that even if GMAC manages to tap whatever federal moneys it can get, now that it is a bank, and if things improve there, "GM has to eliminate any benefit from GMAC improving anyway, by getting rid of their equity investment," which currently stands at 49%, as a condition of the government aid for GMAC.

But even if GM will have to file for Chapter 11 at the end of the day, "I don't think there will be any tumultuous filing by GM," the trader said. "My vision is that there will be a prepackaged bankruptcy" - a relatively quick, non-contentious pre-packaged filing, after the various stakeholder groups have agreed-on terms.

GM executives like CEO Rick Wagoner have insisted that the carmaker has no plans to file for bankruptcy, and opponents of the idea say that it would be the kiss of death for any automaker, since no one will buy a car from a company which theoretically might not be around in a year or two to provide warranty service on the buyer's vehicle.

But the trader downplayed that concern, predicting that "somewhere in the next month or two, the government will spell out what kind of financing they are going to make available under a debtor-in-possession financing agreement, and as well, allow the warranties [given to carbuyers] to stay in place, under some facility I'm sure they'll think of, and that said, GM filing - they'll say 'we need to file, just to get our finances in order' - will be in and out in six weeks, or whatever. I don't think that will affect their sales at all. I think there will be confidence that the government will see through that they come out on the other side and come out a stronger entity."

Elsewhere in the autosphere. GM arch-rival Ford Motor Co.'s 7.45% bonds due 2031 were at 28 bid, 30 offered.

Ford's credit arm, Ford Motor Credit Co.'s 7% notes due 2012, rose 2 points to 70 bid.

Starwood a star on Zell acquisition possibility

Among non-auto names, split-rated (Baa3/BBB-/BB) Starwood Hotels' 6¾% notes due 2018 were seen up more than 3 points at the 59 level. The lodging giant's NYSE-traded shares meantime zoomed $2.90, or 16.20%, to $20.80, on volume of 11.3 million, over twice the norm.

News reports said that Starwood disclosed that it had signed a confidentiality agreement with real estate billionaire Sam Zell's Equity Group Investments, which currently owns about 8% of Starwood.

The agreement allows Equity Group to gain access to confidential Starwood data not publicly disclosed to other shareholders, implying that the acquisitive Zell could be examining the books in preparation for making an offer for Starwood, or at least raising his stake.

Such a deal, should it occur, would be a bold move by Zell, who has recently been in the news with the bankruptcy of his Tribune Co. media and sports entertainment empire, which the real estate tycoon bought in a highly leveraged M&A deal in 2007.

High-grades first

As expected, there was no primary market news in Friday's session.

In order for the high-yield new issue market to open back up, the high-grade primary needs to undergo significant improvement, a syndicate source said.

"We also need to see significant improvement in the loan market, both primary and secondary," the official added.

The banker conceded that executions in the high-grade market appear to be steadily improving.

"Deals are getting done at smaller discounts to where existing bonds are trading," the banker allowed, but added that high-yield watchers are now on the lookout for an appetite among bond investors for lower-rated investment-grade credits.

"Things have definitely improved and are moving in the right direction," the banker said.

"However for high-yield to open up in any meaningful way we're going to have to see more improvement and continued improvement in high-grades."

LyondellBasell's bridge

News earlier in the week that LyondellBasell Industries AF SCA hired advisers to help the company evaluate its strategic options, including a possible Chapter 11 bankruptcy filing, had the company's existing bonds trading in the single digits, a market source said Friday.

As to the $8 billion equivalent high-yield bridge loan backing the acquisition of Lyondell, the Netherlands-based petrochemical company earlier in the week entered into an agreement that postpones the payment of $160 million of fees and $121 million of interest payments to Jan. 4 from Dec. 31.

Hard information as to the extent of the dealers' exposure to the bridge risk was not forthcoming on Friday, however many sources were not in their offices trailing the holidays.

Nevertheless much of the bridge is believed to remain on the dealers' balance sheets, say market sources not in the deal.

One source suggested that the banks likely marked the position ahead of year-end.

Citigroup, Goldman Sachs, Merrill Lynch, ABN and UBS Investment Bank are involved in the bridge.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.