Junk market mood sunnier with hurricane gone; issues firm while volume levels light; primary still

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - With Hurricane Irene now just an unpleasant memory, the junk market got back to business on Monday - although that business was pretty slow.

Traders said the secondary market definitely had a firmer tone to it, which was borne out by the behavior of statistical indicators, which rose across the board after having lost ground on Friday.

However, volume was very low due to a combination of people around New York and other Northeastern business centers affected by the storm either staying home to clean up or being unable to come in because of continued commuting or electric power problems in some areas. Another factor was just the usual last week in August lassitude, with many market participants having scoped this week out long ago as a vacation week ahead of the three-day Labor Day holiday weekend.

One source said that even if new deals were to emerge in this final week before Labor Day - an unlikely proposition - it would be an isolated, one-off event, not representative of a return of the new deal market at all.

Names pushed higher included such familiar market mainstays as Caesars Entertainment Corp., Community Health Systems Inc. and the recent megadeal from HCA Inc.

However, volume levels were considerably down from Friday.

High-yield bonds rallied along with stocks on Monday, according to a hedge fund manager.

The CDX 16 HY index was 93 5/16 bid, 93 11/16 offered, heading into the New York close, up 15/16 on the day.

As expected, the primary market produced no news during the Monday session, with sources divided as to the prospects of a substantial calendar materializing in the sessions following Labor Day.

Market indicators pick up

Stocks and junk bonds seemed to be once more in sync after a strange period last week, which, in addition to starting out with an earthquake and ending with a hurricane, featured stocks and junk largely diverging. One was up, the other was down and vice versa pretty much the whole week. Before that, the two risky asset classes seemed to have moved in the same direction more times than not.

But on Monday, stocks powered ahead with the bellwether Dow Jones Industrial Average up by 254.71 points, or 2.26% to end at 11,539.25, and broader indices also higher, with the Standard & Poor's 500 up 2.83% on the day and the Nasdaq Composite up by 3.29%.

In Junkbondland, stocks were seen generally firmer, as a trader saw the CDX North American Series 16 HY Index up by nearly 2 points, at 93 5/16 bid, 93 11/16 offered, after having retreated by¼ point on Friday.

The KDP High Yield Daily Index jumped by 29 basis points to end at 71.74, after having fallen by 12 bps on Friday. Its yield declined by 12 bps, to 17.98%, after having gone up by 5 bps on Friday.

The Merrill Lynch U.S. High Yield Master II Index rose by 0.276% on Monday, after having lost 0.122% on Friday. That lifted the year-to-date return to 1.065% from 0.719%. However, the cumulative return remained well below the peak level for the year of 6.362%, set on July 26.

A trader noted that with everybody having survived Hurricane Irene, which packed considerably less punch than originally feared and did less damage in the New York metropolitan area than predicted, "I guess people came back feeling better, because things seemed to be up."

A second trader suggested that "maybe the hurricane wasn't as bad as feared, so some of the financials did better," which lifted the market.

He also said: "The consumer spending number [reported by Washington] was a little better than expected," further encouraging investors.

However, at another desk, a trader said that he "didn't think the hurricane had a lot to do with [the market upturn]."

Instead, he said, "quite simply, we have endured our own number of things here, and I think people are buying into that a little."

He also opined: "There are some people are out there starting to speculate that [President] Obama," who has promised a major speech on job creation at the beginning of September, "has got to announce something pretty substantial over the next week or so, given how poorly things have gone. I think they expect something substantial to come out of him on either on the jobs front or on a housing front. Jobs are stalled, and housing is stalled, so there's no shortage of problems to be tackled."

"Everyone will have their opinion on whether it works or not, but I think people are starting to anticipate that he's going to say something pretty large next week, and there is probably some buying in front of that as well."

He added that it "was still not a lot of activity, but some of the things were quoted better."

Mainstream names head higher

The trader said that "nothing ran a ton," but that things generally were up by between one-quarter and one-half point on average."

For instance, he saw the 10% notes of Caesar's Entertainment Corp. - the Las Vegas-based casino giant formerly known as Harrah's Entertainment - trading at bid levels between 75 and 76 versus a 731/2-to-74½ context on Friday.

Another market source, however, quoted those bonds up 2 points on the day, at 75½ bid.

The first trader, meantime, said that "HCA, Community Health, CIT [Group Inc.], all were better by about a half-point."

Franklin, Tenn.-based hospital operator Community Health's $3 billion bellwether issue of 8 7/8% senior secured notes due 2015 was trading at 100¾ bid, while New York-based commercial lender CIT's 7% notes due 2017 gained a half-point to end at 96 bid, while its 7% notes due 2014 closed at 99¼ bid, little changed on the day.

Another trader said that Nashville-based hospital operator HCA's recently priced $3 billion offering of 6½% first-lien senior secured notes due 2020, which have become a benchmark issue, alongside the Community Health notes, was up by as much as 1 point to 1½ points Monday, in the 983/4-99 bid range, versus 97½ bid, 97¾ offered.

But the trader also said that trading volumes were way, way down, even on normally actively traded credits like HCA, attributing it, in part, to the hurricane. "New Jersey Transit wasn't running," he said, preventing people there from getting in. The Long Island Rail Road was also having problems on several of its southern branches because of the storm.

On top of that, he said, "it's ordinarily a quiet week. This is going to be one of the quietest weeks of the year."

Distressed names quoted better

A trader in the distressed-debt markets saw a similar quietude.

He said that "something like NewPage [Corp.], I would say, is quoted up a point," with the Miamisburg, Ohio-based coated-paper manufacturer's 11 3/8% first-lien notes due 2014 seen up 1 point at 85-86.

He said there was just "small volume, but nevertheless it's up a point. Very little volume," adding that sector peer Catalyst Paper Co.'s bonds were "the same way."

He saw the Richmond, B.C.-based papermaker's 11% senior secured notes due 2016 were at 65-67, although he noted that Catalyst has been in that range for a few days, and "I'm not seeing much activity. Very few of everything - quotes, trades and I have only seen just a couple of messages on each of those things [i.e., NewPage and Catalyst]."

Also among the forest-products names, the trader said that Sino-Forest Corp. paper "was definitely more actively quoted today than some of the other things," and the bonds were quoted up, despite the latest bad news for the Canadian-Chinese timber company, including Friday's suspension of stock trading, the resignation of CEO Allen Chan and downgrades to the CCC level by both S&P and Moody's.

He said that the 6¼% notes due 2017 were quoted between 28 and 32 bid and at 30½ bid at the end of the day, while the 10½ notes due 2014 were at 30-35. He called those levels up to 3 points better from the levels in the mid to upper 20s.

"People were looking for offerings," though he said he didn't know how much real activity there was since it's a 144A name."

The rise in financial stocks, led by insurance - helped by the perception that the insurers will be helped by lower-than-expected claims from Hurricane Irene - helped push some bonds higher.

The trader saw Radian Group Inc. 5 5/8% notes due 2013 at 77 bid, 79 offered versus 75-76, although there was "not a lot traded." He said that MGIC Inc.'s 's 5 3/8% notes due 2015 at 67-69, versus 64-66 last week.

"Not a lot traded, but there were one or two pages of quotes and comments versus just a couple for everything else."

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