Junk bonds fall across board in market rout; primary stilled; funds see $804 million outflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 4 - After several days of half-heartedly moving downward, encouraged by weakness in stocks stoked by fears of a renewed recession, the high-yield market on Thursday took the plunge and threw itself with abandon into a full-fledged capitulation mode.

In the words of one trader, "if there was a half-way decent bid out there, it got hit," resulting in dozens of pages of trades on Trace, the vast bulk of them to the downside.

In many cases, traders said, names were down by multiple points on the day.

Some of the issues getting whacked down were credits that were already in trouble in recent sessions, such as papermaker NewPage Corp., tanker operator General Maritime Corp. or aircraft manufacturer Hawker Becchcraft Acquisition Co. LLC. - the latter company the big loser on Wednesday, with some of its bonds down nearly 20 points on disappointing earnings.

Others were companies that had earnings out on late Wednesday or on Thursday, generating new negative news and pushing their bonds lower, such as chemical maker Huntsman International LLC and Leap Wireless International Inc., the parent of pay-as-you-go wireless operator Cricket Communications Inc.

Still, others like gaming powerhouse Caesars Entertainment or pharmacy operator Rite Aid Corp. had no news out, but were just big, familiar liquid issues that got caught in the selling wave.

Paradoxically, there were some junk names whose stock absolutely got killed on earnings, but whose bonds were nonetheless little-traded, such as Chiquita Brands International and Cooper Tire & Rubber Co.

Here and there was even a bond or two posting a gain, but those advances were small, took place on relatively light volume and represented no real trend.

Overall, statistical indicators of junk market performance were hugely on the downside.

And high yield mutual funds - considered a reliable proxy for junk market liquidity trends in general - showed their first downturn after four straight weeks on the upside, as $804 million more left those funds than came into them in the week ended Wednesday.

With so much volatility and uncertainty, there meantime was little activity seen in the junk primary arena.

Ballarpur prices preferreds

With the global capital markets in free fall on Thursday, the high-yield primary produced very little news.

In the dollar-denominated primary market, India's Ballarpur International Paper Holdings B.V. priced a $200 million non-rated issue of 9¾% subordinated perpetual preferred notes at par via joint bookrunners HSBC and RBS.

The fixed-rate to variable-rate notes feature a coupon step up in February 2017 and another in February 2022.

Fund trackers see outflows

Not surprisingly, money is flowing out of the high-yield bond asset class, according to weekly reports from EPFR Global and Lipper-AMG, two firms tracking cash flows to and from various asset classes.

High-yield bond funds saw $1.13 billion of outflows for the week to Wednesday, EPFR Global said.

The flows have been persuasive in both directions, according to recent reports from EPFR.

The funds saw a $754 million inflow for the week to July 26, prior to which they sustained $503 million of outflows for the week to July 19.

Factoring in the most recent outflow, the high-yield bond funds have seen $13.6 billion of inflows year to date, according to a Prospect News analysis of EPFR weekly reports.

EPFR's calculations show 23 weeks of inflows so far this year against eight outflows.

As stated, Lipper-AMG reported $804 million of outflows from the high-yield mutual funds for the week to Wednesday.

That follows the $304 million inflow seen in the week to July 26.

Thus far in 2011, Lipper-AMG has reported 21 weeks of inflows and 10 weeks of outflows.

Lipper-AMG's year-to-date flows for funds reporting on a weekly basis is $3.47 billion, according to a sellside source who closely tracks the data.

Other debt-side asset classes sustained outflows for the week to Wednesday, a market source said. Bank loan funds saw $261 million of outflows, and investment-grade bonds saw $430 million of outflows, according to Lipper-AMG's reports, the source noted.

Analysts say that the mutual fund flows represent a small though observable and quantifiable percentage of the total amount of cash at play in the various asset classes.

Primary on hold

Thursday's stock market rout was contagious, a hedge fund manager remarked, noting that in addition to a drop in the CDX16 HY index, investment-grade bonds widened by seven basis points, and the barrel price for crude oil dropped by $5, in line with price drops seen throughout the commodities space.

Treasuries rallied persuasively, the manager noted, spotting 10-year government paper yielding 2.41% at the Thursday close, 21 basis points lower on the day.

"Investors may have been distracted by the debt ceiling debate," suggested a syndicate banker who was referring to the protracted political battle between the executive and legislative branches of the U.S. government over whether to raise the debt ceiling of the United States - thus allowing the government to pay its bills - and under what conditions to do so.

"With the debt ceiling debate out of the way, people are looking at the economy, and they obviously don't like what they see," the banker added.

Aside from the above-mentioned preferred deal from India's Ballarpur, the high-yield primary market remained inactive on Thursday.

The week began with one deal on the active calendar as business that was expected to price before the end of the first week in August.

M&G Finance Corp. marketed its $500 million offering of seven-year senior notes (expected ratings B3//BB) in London early in the present week, following a U.S. roadshow, which was conducted during the final week of July.

Marketing now concluded, the status of the J.P. Morgan-led deal is day to day, market sources say.

There are also two deals on the calendar, which are scheduled to price during the week ahead.

Jeld-Wen, Inc. is in the market with a $575 million offering of seven-year senior secured notes (B3/CCC+) via Bank of America Merrill Lynch, Wells Fargo, Barclays and KeyBanc.

And Rock Ohio Caesars LLC plans to sell $380 million of seven-year second lien notes (/B/), via Credit Suisse and Deutsche Bank.

However, until the volatility subsides, the primary market is apt to remain very quiet, sources said on Thursday.

"We have deals to bring," claimed a syndicate official. "Of course you would not launch a deal on Friday in a market like this.

"And given what we saw today, next week is sort of up in the air. Right now we're advising issuers - even the optimistic ones - that it will probably be better to hold off," the official added.

Market measures get mauled

With stocks having their worst day since late 2008 - the bellwether Dow Jones Industrial Average swooned by 512.76 points, or 4.31% to end at 11,383.68 - junk had no choice but to follow along, and its indicators plunged much deeper into negative territory than they had over the previous several sessions.

A trader saw the CDX North American Series 16 HY Index fall by a breath-taking 2 15/16 points on Thursday to end at 96 13/16 bid, 96 15/16 offered, its lowest level since early 2010. The index had been unchanged on Wednesday.

The KDP High Yield Daily Index plummeted by 48 basis points on Thursday to end at 74.32, on top of Wednesday's 3 bps plunge.

Its yield widened out by 17 bps to 7.10%, on top of Wednesday's 12 bps rise.

And the Merrill Lynch High Yield Master II Index nosedived by 0.615% on Thursday - its single biggest loss of the year. It was the market measure's third consecutive loss and sixth downturn in the last seven sessions, including Wednesday's 0.29% retreat.

That left the index's year-to-date return at 5.03%, down from Wednesday's 5.68% and down as well from its 2011 peak level of 6.362%, set on July 26. Thursday's cumulative return was its lowest since the 4.993% recorded back on June 30.

'Everything was down'

A trader surveying the carnage opined:"You could say that everything was down. If there was a half-way decent bid," it was getting hit.

He reeled off a laundry list of junk names down by multiple points, each with at least several millions of dollars worth of bonds having changed hands, including West Hartford, Conn.-based Pentagon contractor Colt Defense LLC's 8¾% notes due 2017, down 7 points on the day to end at 78¾ bid on over $5 million traded, Houston-based energy operator ATP Oil & Gas Corp.'s 11 7/8% secured notes due 2015 down more than 6 points at 92¼ bid, with over $11 million of turnover, and Columbus, Ohio-based specialty chemicals maker Momentive Performance Materials Inc., whose 9% notes due 2014 lost 5 points to close at 96 bid, with over $6 million traded.

"I could just read pages and pages and pages [of Trace trades] - everything is down multiple points," he exclaimed.

He continued, "Even guys who don't want to sell something - if they see a bid that's too good, they're selling stuff out of their position because they know that bid should be hit and they'll be able to by it probably 2 points cheaper tomorrow."

A second trader said that he "didn't even know where to begin: There are probably 40 or 50 names I could highlight that are down multiple points today."

He declared, "You could easily point to your 'go-go' names and find stuff down 1 or 2 points there, then when you go off the run, you can find another 30, 40 or 50 names that are down at least as much. And then you get some 'story names' that are down much more than that."

'Story names' get socked

For instance, he said that French shipping company CMA CGM SA's 8½% notes due 2017 were wrapped around a 50 bid, "and that bond was traded at 60 [on Wednesday]."

The company, which sold an upsized $475 million of those notes earlier in year, pricing them at par along with a euro-denominated tranche on April 14, has been struggling for a while. It has been beset by difficulties ranging from accusations - denied by the company - that it had illegally ferried disguised cargoes of weapons from Iran to ports where the shipments could go to terrorist groups. This came on the heels of its announcement on Wednesday that its liquidity stood at $675 million at the end of July, somewhat lower than the markets were looking for. That caused the bonds to fall even before Thursday's blood-letting.

The trader also cited General Maritime, whose bonds have been taking their lumps for a while on investor worries about the health of the global cargo shipping industry, which is beset by weakened demand for product shipping and a glut of new oil tankers and other cargo ships fighting for cargoes.

He saw the New York-based oil-tanker operator's 12% notes due 2017 also wrapped around 50; on Wednesday. The notes had fallen into the upper 50s from Tuesday's closing levels in the 60-61 bid area.

As recently as July 21, the 12s had been trading around 72 bid, while at the end of June, they were in the 80s and had traded as high as 87¼ bid back on June 9.

"You have 'story names' that are getting hit, more than the 2 to 3 points that you're seeing the high-beta stuff [lose] - it's just a nasty day," he added.

More turbulence for Hawker

Another such 'story name' rally taking its lumps on Thursday was Wichita, Kan.-based aircraft manufacturer Hawker Beechcraft Acquisition Co. whose bonds - quoted down between 15 and 20 points on Wednesday after disappointing second-quarter numbers - were "not super active," but still down "another 3 to 4 points," a trader said.

He pegged the company's 8½% notes and 8 7/8% notes due 2015 in the mid-50s, while its 9¾% notes due 2017 were in the mid-40s.

Another market source placed the 8½% notes at 56½ bid, down 4 points.

On Wednesday, the company - a maker of business jets and other general aviation craft, as well as military trainers - reported that in the three months ending June 30, it had net sales of $581.7 million, down $57.6 million, or 29%, from levels the year before.

While operating income was slightly better with a loss of $19.6 million versus a loss of $20.7 million for the 2010 second quarter, Hawker's liquidity was much lower this time around, with just $382.4 million available as of June 30, well down from liquidity at the end of the first quarter on March 31 of $546 million.

Still another recently topical name - despite an absence of relatively fresh news, one way or another - has been Miamisburg, Ohio-based coated paper manufacturer NewPage Corp. Its 10% second-lien notes due 2012 were seen trading around 16 bid, down 4 points from Wednesday's closing levels, while its 11 3/8% first-lien notes due 2014 eased to 85¾ bid, down "only" 2½ points to 853/4, a market source said.

More than $30 million of the 10% notes and in excess of $20 million of the 11 3/8s changed hands, putting each high up on the Junkbondland most-actives list for the day.

Earnings take a toll

For some credits, disappointing earnings certainly didn't help matters on an already down day.

One such name was Huntsman International LLC, whose 78 5/8% notes due 2021, the most actively traded issue in the Salt Lake City-based chemical manufacturer's capital structure, dropped by 4 points to 107¼ bid. This was in tandem with a plunge of $5.49, or 30.52%, in its New York Stock Exchange-traded shares, which closed at $12.50. Volume of 22.1 million shares was over six times the norm.

The shares and bonds fell after the company reported second-quarter results, including per-share earnings of 47cents, unchanged from a year earlier and down around 2 or 3 cents per share from analysts' estimates. While the company posted sizable gains in revenue, that was largely offset by increased costs.

Likewise, San Diego-based wireless telecom provider Cricket Communications' 7¾% notes due 2020 retreated by some 4 5/8 points to end at just under 90 bid on volume of over $7 million. That followed parent Leap Wireless International's report late Wednesday of a wider second-quarter loss ($65.2 million, or 85 cents per share, compared with a loss of $18.2 million, or 24 cents per share, a year ago), lower-than-expected revenues ($761 million, versus about $780 million forecast) and a net loss for the quarter of 103,000 subscribers.

Leap/Cricket and Huntsman were just two of the dozens of companies reporting numbers , but a trader, while acknowledging that some of the moves may have been related to companies posting poor, or even merely disappointing earnings, added "unless every company reported earnings today," there were other catalysts.

"It didn't matter. If it was a half-way decent bid, people were [hitting it]. It was 'sell what you can, not what you have to.' "

No-news names knocked around

Even if there was no particular news out on a given name, its bonds still likely went down, especially if it was a widely held, normally actively traded issue.

For instance, Camp Hill, Pa.-based drugstore operator Rite Aid's 8 5/8% notes due 2015 were seen down 3 points on the session at 90¼ bid.

Another such name was Las Vegas-based gaming giant Caesars - the old Harrah's Entertainment, Inc. - whose 10% notes were "one of the most active" issues of the day, a trader said, dropping 4 points to close around the 82 mark.

At another desk, a market source called the 10s down over 3 points at 82 bid.

Very little on the upside

A trader - asked if anything was up among the recognizable junk names - scanned the list for several minutes and said he found nothing.

"There were a couple of little names" that were up, but he said that out of about 30 pages of Trace information, "maybe on the last page, if you sorted it by price change, you have stuff that's up anywhere from one-eighth to a half-point, but it was like 300 bonds traded or 500 bonds traded."

A second trader agreed, asserting "I don't know of anything that is up in high yield today."

Stephanie N. Rotondo contributed to this report

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