Junk slides as Lehman, WaMu paper gets pounded; GM, autos give up recent gains

By Paul Deckelman and Paul A. Harris

New York, Sept. 15 - The high yield bond market was almost universally lower on Monday, traders said, as players took their cue from the carnage that enveloped the equity markets in the wake of the bankruptcy of Lehman Brothers Holdings Inc., the forced sale of Merrill Lynch & Co. to Bank of America, and the frantic efforts to keep troubled insurer American International Group Inc. from going under.

Lehman and AIG bonds were trading off junk desks at considerably lower levels Monday, as were the bonds of Washington Mutual Inc., especially after the big Seattle-based thrifts ratings were cut to junk levels.

Outside of the flailing financials, the overall market tone was weaker, although activity was restrained. Traders noted that General Motors Corp.'s bonds - recently strong, along with the bonds of rival carmaker Ford Motor Co. - coughed up all of their gains from last week "and then some," as one said.

Sources were marking the broad high-yield market sharply lower on Monday.

"Investors are just sitting there," a senior high-yield syndicate official said.

"No cash bonds traded today. It was all CDSs. Everyone is trying to find out their credit counterparty risk, and what trades they have on.

"It's a mess."

Primary is closed

The Monday session produced no primary market news.

And from sources roundabout the market Prospect News heard that the high-yield primary is essentially closed for the foreseeable future.

"I can't imagine anyone launching a deal this week or next week, or even the week after," a banker said.

"It's going to take some time for people to get their heads around this," the source added, referring to the news about Lehman.

Another high-yield syndicate official said "The primary market is basically closed for at least this week and probably next week.

"Investors don't seem to know where to go from here. Who knows if this the bottom or just the beginning?

"When you don't know those things it's tough to get deals done.

"If the opportunity presents itself, however, everyone is going to rush in to get their deals done."

Yet another banker simply said that no one is going to think about the primary market.

"Some of the other investment banks may be under pressure," the source said.

"Working for a commercial bank is being seen as a safer bet these days."

Rate cut not needed

There was an astonishing uniformity among the sell-siders who spoke to Prospect News on Monday, regarding the Lehman/Merrill news on the primary: i.e. the primary is closed.

However, an even more uniform set of responses surfaced when discussion turned to the possibility that the Federal Reserve's Federal Open Market Committee might cut the Fed Funds rate when it meets this week.

Sources on both the buy-side and sell-side insisted, in no uncertain terms, that such a move would be unhelpful.

"The odds for a rate cut have apparently gone up," said a portfolio manager.

"But there is a sentiment out there that the Fed is already pushing on a string.

"Bernanke is providing liquidity in other ways that are more effective than a rate cut, which won't open the spigots and show people that they can make a lot of money.

"I hope they don't do it," the buy-sider said. "I think money is already cheap enough."

Meanwhile a sell-side source said that a Fed cut won't boost confidence.

"It's going to hurt the dollar, which needs to strengthen," the sell-sider said.

"And it certainly isn't going to help the housing market, which is the underpinning of this whole mess.

"The 30-year Treasury is at 4.12%. That used to be the basis for the 30-year mortgage. And that would be a great basis - an aggressive basis - for a 30-year mortgage, now.

"But it's the spread between the 30-year Treasury and what the mortgage lender is willing to quote that is now pushing mortgages higher.

"A cut in the Fed Funds rate holds absolutely no solution to that problem."

Market indicators head south

The widely followed CDX index of junk bond performance was fell 2½ points on the day, a trader said, quoting it at 90½ bid, 91 offered, while the KDP High Yield Daily Index slid by 74 basis points to end at 69.87, as its yield ballooned out by 26 bps to 10.85%

In the broader market, advancing issues trailed decliners by about a four-to-one margin. Activity, represented by dollar volume, slipped some 27% from the levels seen on Friday.

The junk market, a trader said "was ugly."

But he said that "while the tone was extremely poor, it was sporadically quiet. I think people were taking a breather and digesting all the info."

With much of the attention focused on the ostensibly investment-grade financials that have now slopped down into junk bond land, he said, "if you're in it, you're obviously concerned about it, while if you're not in it, you're taking a close look at where there might be a value to the trade, and that certainly had the focus of a lot of people.

He said that "we've just started to see this sector bleed into our space" - he noted the official Standard & Poor's downgrade of WaMu to junk - "so we're actually starting to see the aftermath of all of these writedowns and so forth in an official capacity, from the ratings agencies," and predicted that this "will precipitate a technical move here." He explained that with a lot of investment-grade bonds not able to own anything junk-rated any longer," there would be selling pressure on that paper.

He said that "we've had a lot of hedge funds looking at it [the fallen-angel investment grade financial paper] - but we haven't seen a full-force push into this space yet. I think we're just starting to see the tip of the iceberg here."

He noted that Lehman paper, for instance, had started trading off the junk desks at many shops, and predicted that "you'll see that volume become more and more a high yield product, as opposed to trading off a high-grade desk."

Apart from the financials, he said, things were "sporadic - bits of different stuff. There wasn't any really noticeable theme one way or another. Generally speaking, people didn't like much of anything. If they were looking to buy anything, it was just buying value at a distressed price point."

WaMu gets whammed

A trader said that Washington Mutual was "the most active" name that he saw. "All were getting hammered."

He said that its 4.20% notes due 2010 last traded at 40 on a round-lot basis, versus 49 on Friday. He saw $17 million of the bonds, and noted that the yield on the bonds had pushed up to 90%.

He also saw WaMu's 5½% notes due 2017 at 37.75, well down from 51 bid, for a 21% yield. He said a busy $15 million had traded.

And the thrift operator's 4% notes due in January 2009 - "a five-month piece of paper" was last trading at 60 bid from 75.25 previously, constituting a swollen 205% yield.

At another desk, WaMu's 7¼% notes due 2017 were seen down 10 points at 25 bid, 28 offered.

Lehman takes its lumps

He said that all Lehman subordinated paper had crashed down to 3 bid, 5 offered from the low to mid 60s before, while its senior notes fell into the 34 bid, 36 offered area from previous levels in the lower-to middle 80s.

He also saw AIG's 5.85% notes due 2018 having fallen to 52.5 bid, from 69.5 offered on Friday.

At another desk, a trader said that Lehman "got smoked across the board," and saw its 3.95% notes due 2009 fall to 28 bid, 31 offered from 51 at the close Friday.

He saw its 6½% notes due 2017 trade at 3 bid, 6 offered, well down from prior levels at 55.

"In general, it was horrible," he said. People were looking to get out of the financials at any price before they hit zero."

Autos give up gains

Apart from the financials, the automotive bonds - which had firmed smartly last week on expectations that Congress would approve a $25 billion loan package for the carmakers - were well down, "giving up everything they gained last week and then some," a trader said.

General Motors Corp.'s benchmark 8 3/8% bonds due 2033 were seen by a trader having fallen to 50 bid from 57.5 on Friday, while its GMAC LLC's 8% bonds due 2031 were 3½ points down at 54.

Another said that the '33s fell to a round-lot level of 51.5 from 58.5 on Friday on active volume of $18 million. GM "got hammered," he said, seeing the 7.20% notes due 2011 drop some 3¾ points on the day to 71.75.

A trader said that former GM unit Delphi Corp.'s bonds, like its 6½% notes due 2009, dropped to 10 bid, 15 offered from prior levels at 15 bid, 17 offered.

A trader said that Ford Motor Co.'s benchmark 7.45% bonds due 2031 were lower at 51 bid, 52 offered.

Another said the Ford bonds were "active - and crushed," losing some 5¼ points to 52.5.

New Frontier bonds not traded.

Traders said there was no sign of the new Frontier Oil Corp. 8½% senior notes that priced Friday at 98.58, a discount to par.

"It probably wasn't as active as you might think," one said.

He said that the lack of trading in the new issue - and the fact that the company's existing 6 5/8% notes were 1 point lower - meant that "you probably could have bought those new ones at 97.5" But he said that he "didn't see one market from any of the broker community in those bonds today."

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