Nortel slammed on sales warning; AIG gyrates after Fed bailout; Lehman, Morgan Stanley keep on falling

By Paul Deckelman and Paul A. Harris

New York, Sept. 17 - Nortel Networks Corp.'s bonds got walloped Wednesday after the Toronto-based telecommunications equipment maker warned that its sales for this year would be off from last-year's levels and well below Wall Street's estimates as it faces "significant pressure" from lower capital expenditures by its customers.

Apart from that steep fall, most of the day's activity was again centered on the beleaguered banks and brokerage firms, whose bonds - some of them still nominally investment grade - traded freely around the junk precincts, and on heavy volume, as the financial sector continued its massive nervous breakdown.

American International Group Inc.'s recently battered bonds were on a dizzying ride, first shooting up as investors digested the news of the $85 billion bailout of the troubled insurance giant by the Federal Reserve, but then coming back down from those heights after the initial euphoria about the company being saved from bankruptcy began to wear off.

Also lower were the bonds of Lehman Brothers Holdings Inc., helped not at all by the news that a sizable chunk of the bankrupt investment bank will be sold to U.K.-based Barclays plc, and Morgan Stanley, being pushed by powerful, but panicky market forces into the same kind of shotgun marriage to a commercial bank that Morgan Stanley rival Merrill Lynch & Co. ended up in. But that kind of forced merger-mania among the money institutions may also see Washington Mutual Inc. enter into some kind of a tie-up, and that company's bonds actually firmed a little - a rarity - on the news that a key hurdle to doing a deal had been removed.

Led by Nortel and the flailing financials, the junk market's overall tone was "pretty ugly," a trader said, with losers including the formerly resurgent General Motors Corp. and other auto names.

A banker, meanwhile, said that the high-yield market is touching all-time wides on the indexes, with wides that are "more pronounced than 9/11 and 1998."

The source professed the expectation that the Banc of America Securities High-Yield Index's spread to Treasuries would top the 1,000 basis points before the Wednesday session ended.

High-yield remains disciplined

Despite the widening, the official said, the high-yield market is in good shape.

"I spoke to ten investors today, and they're sitting on a ton of cash," the sell-sider said.

"They're not panicked. They're not selling off existing holdings.

"They're just kind of waiting."

The official said that the capital markets turbulence is more the result of a financial system crisis than of a fundamental blowup.

Nevertheless, the source added, the turmoil in the financial services industry needs to play out before there will be a regeneration of the high-yield primary market.

That, the source added, is going to take weeks.

Market barometers battered again

The widely followed CDX index of junk bond performance, after holding steady on Tuesday, fell by ½ point Wednesday, a trader said, quoting it at 89 3/8 bid, 89 5/8 offered, while the KDP High Yield Daily Index eased by 10 basis points to end at 69.04, as its yield jumped 25 bps to 11.28%.

In the broader market, advancing issues again trailed decliners by a seven-to-two margin. Activity, represented by dollar volume, was up about 8% from the levels seen on Tuesday.

A trader described the day's proceedings as "unbelievable," marveling that he had actually received inquiries from a client about an issue of AAA rated General Electric Co. paper - which, like everything else, has widened out to previously unheard-of levels despite the blue-chip company's sterling fundamentals - even though, as he pointed out, "I'm a junk bond guy."

Another trader called the market tone "pretty depressing - the market was all over the place," but was mostly being dragged lower by the financials.

A trader colorfully, if scatologically declared that "anything that has a financial overtone to it is just in the shitter." He said that it "doesn't matter" about the company's news or overall fundamentals at this point. He noted that AIG's bonds "that yesterday were trading at 65-70, today, they're trading 45-50. Why? Because the government bailed them out? You tell me. It's just everybody saying 'get out'" of the whole sector.

Yet another trader declared that the day's proceedings "really ended on a crappy note," as the stock market went into a last-hour tumble that hammered the bellwether Dow Jones Industrial Average - lower by a not-too-unreasonable 180 points at 3 p.m. ET - down to a yawning 450-point loss at the close.

Junk "ended the day cratering. I didn't see much down the stretch - but it's not a good way to end the day." He said that "it looks ugly, across the board, and ended on a fairly ugly note, too." He speculated that it would "probably carry into [Thursday's session], I would imagine." However, that, he said would provide "a lot of opportunity, if you want to buy cheap bonds." For instance, he said, Polypore Inc.'s 8¾% notes due 2012 were bid at 96. "I was bidding 99 last Friday."

Nortel knocked down

Apart from the train wreck that much of the financial sector has become, telecom equipment maker Nortel's bonds were easily the disaster of the day, sliding in tandem with the company's shares on the ominous projection of lower sales ahead, making it the latest in a string of tech-industry vendors to reduce its forecast for the rest of the year.

Nortel bonds "got crushed," a trader said, seeing its 10¾% notes due 2016 trading at 77 on a round-lot basis, well down from 90.5 previously, a loss of 13½ points, while its 10 1/8% notes due 2013 dropped to 80 from prior levels at 92.375, and its floating-rate notes due 2011 lost 8 points to close at 82.

A market source at another desk said the 103/4s had opened down about 5 points on the session and continued to slide to well under 80, a more than dozen-point drop from Tuesday's close in busy large-block trading.

Its floating-rate notes due 2011, which had also finished the previous session around 90, were likewise down several points at the opening, and continued to cascade down in active dealings to just under 84.

Its 10 1/8% notes due 2013, which had finished Tuesday around the 92 mark, the source said, slid to 85 at the opening, and then retreated further to around 82-83.

Nortel's New York Stock Exchange-traded shares meantime opened down more than $1 from Monday's close of $5.30, and then proceeded to plunge almost 51% at one point before ending down $2.62, or 49.43%, at $2.68, on volume of 38 million, over five times the norm. So far this year, the shares have lost about three-quarters of their value.

The bonds and shares plummeted after North America's largest maker of telecommunications gear warned that its revenue totals for this year would fall anywhere from 2% to 4% from the $10.95 billion of sales recorded last year. That surprised and dismayed the financial community, which on average had been expecting that sales would be up about 2% year-over-year - based on Nortel's own previous projections of percentage sales gains in the low single digits.

It also said that revenues for the current quarter will likely come in at $2.3 billion, 14% below last year and well under the roughly $2.65 billion that analysts have been estimating.

Nortel blamed the anticipated shortfall on greater-than-expected capital spending cutbacks by its big telephone company customers in response to economic slowdowns in the United States and its home base of Canada. Nortel generates most of its sales in the region. It also blamed decisions by other customers to hold off on new information-technology and optical investments.

Besides the macroeconomic factors, Nortel - which keeps its accounts in U.S. dollars - also cited foreign exchange fluctuations, as well as some product-delivery problems that have pushed some shipments back to the fourth quarter.

Nortel said that it would explore the possible sale of its metro ethernet business, and would look for other ways to tighten its corporate belt as well. The metro ethernet operation currently is just a relatively small part of the overall company - but one which Nortel had expected would yield lucrative future returns.

"It is clear that the business environment in which we operate requires additional immediate and decisive actions," Nortel's chief executive officer, Mike S. Zafirovski, declared in a company statement.

The warning about the anticipated lower sales for the current quarter and the year follows a dismal second quarter, in which the company lost $113 million - a wider loss from a year earlier, on revenue of $2.62 billion. When it released its second-quarter results last month, Nortel also warned that the weakening global economy would pose "increasing risk."

AIG all over the place after bailout

As has been the case all week, American International Group's bonds were being actively traded around the junk markets, even though they technically remain investment-grade instruments, at least for now.

The bonds swung wildly as investors grappled with Tuesday night's news that the Federal Reserve had reversed its earlier opposition and will loan the staggering New York-based international insurance powerhouse $85 billion - in return for taking a nearly 80% ownership in AIG. The deal buys AIG time to sell off some of its businesses in order to come up with $14.5 billion of additional collateral made necessary by credit-agency ratings downgrades. Federal officials feared that letting AIG follow Lehman Brothers Holdings Inc. down the tubes and into bankruptcy would create a shattering domino effect on world financial markets, given the wide exposure that banks and other financial companies have to AIG.

A market source saw AIG's most widely traded issue, its 5.85% notes due 2018, gyrating around on heavy volume of almost $60 million, although that pales next to the over $200 million of those same bonds that changed hands on Tuesday. The bonds were seen having opened at 58 bid, well up from the levels at which they finished on Tuesday and then popped as high as the mid-60s, before coming down from that peak to stabilize in the mid 40s - about unchanged on a round-lot basis from where the bonds had gone home on Tuesday, though still about 10 points above the levels at Tuesday's close, which saw a bunch of smallish trades in the lower 30s.

Another trader quoted the bonds going out at 43, versus the prior day's 44.75, and said that the bonds had popped higher "the first thing in the morning" on a couple of big-block trades of over $5 million, before coming back down. The bonds were yielding 19.21%.

The trader also saw AIG's 4 5/8% notes coming due next May 15 trading at 65, and noted that works out to a yield of 85%. $30 million of the bonds were traded.

While the bonds seemed to get a boost, however short-lived, from the news the company would be spared bankruptcy by being taken over by Washington, AIG's already badly decimated NYSE-traded shares plunged as much as 47% in the early going before finally stabilizing only slightly above that low, to finish at $2.05, down $1.70, or 45.33%, on volume of 546 million, more than six times the usual turnover.

Lehman keeps losing

Traders saw Lehman Brothers' bonds, now officially junk-rated at B3/CCC-/CCC, actively traded and considerably lower.

Both the senior and the subordinated bonds were seen having lost about half of their value during the session, with a trader quoting the senior 3.95% notes due 2009 at 17 bid, 20 offered, and trading flat, without the accrued interest in the wake of the Chapter 11 filing. That was about half of what they were trading for the previous day. The level, he said would be "good for any senior notes," which all trade on top of one another.

He meantime saw the Lehman subordinated paper like the 6½% notes due 2017 and the 7½% bonds due 2038, trading at 1 bid, 2 offered.

Another trader saw the Lehman seniors, like the 6 7/8% notes due 2017 trading at 17, down 14.5 points on the session from prior levels around 31.5. He pronounced the bond "the most active issue with over $101 million traded.

As for the junior notes, he saw those decline to under 1, from prior bid levels around 3-5.

The bonds got no boost from the news that Barclays plc had agreed to acquire the bulk of the Wall Street firm for $1.75 billion. Barclays will buy much of Lehman's securities business - but without having to take the risk of further losses on the firm's badly distressed commercial real-estate and mortgage assets. For its money, Barclays will get about 10,000 of Lehman's 26,000 employees, as well as its franchise, brand name, technology and clients. It will also get Lehman's valuable Manhattan headquarters building and two data centers.

The Barclays purchase will be separate from Lehman's talks to sell its asset-management business, including its flagship Neuberger Berman unit.

Morgan Stanley falls as Wachovia beckons

A solidly investment-grade-rated name seen trading at junk desks was Morgan Stanley, whose bonds and shares - the latter hammered down some 24% in heavy trading - were pushed lower as the Number-Two independent investment bank became the latest target for short sellers and for nervous investors worried about the viability of its business model in the suddenly - and radically - changed landscape.

A trader saw $83 million of its 3 7/8% notes due in January 2009 closing on a round-lot basis at 74.75 - a yield of 111%. "Again, this is a bond that's maturing 1/15/09, and Morgan Stanley is A1/A+. This pretty much gives you the picture of what went on today."

He also saw $177 million of the company's 6 5/8% notes due 2018 making a final round-lot level of 64.5, for a 13.25% yield. However, another market source saw the bonds finishing the day at 75, down 3 points, after having bounced around from the mid-50s to the mid 70s.

Its 5.50% notes due 2017 lost over 3 points on the day to finish at 62, after having first fallen as low as 55.

Late in the session, stories circulated that Morgan Stanley had been in talks with Wachovia Corp. on a possible combination. However, Wachovia has also had its mortgage troubles - its $25 billion purchase of Golden West Financial Corp. in 2006, at the height of the housing boom exposed it to large mortgage losses. Reports said that the two companies might negotiate a transaction more along the lines of a merger of equals than a rescue such as Bank of America's transaction with Merrill Lynch.

WaMu moves up

The battered bonds of Seattle-based thrift Washington Mutual, on the other hand, were seen actually having improved as speculation mounted that the company could be sold - either whole, or in parts. A trader said that its 4% notes due 2009 "kind of went up and down a little intraday," hitting a low of 43-45 before closing at 47 bid, 49 offered, up a point on the day.

WaMu hired Goldman Sachs to explore a possible sale. Goldman reportedly has been shopping WaMu around for several days and has approached Wells Fargo, HSBC, Citigroup and J.P. Morgan Chase, among others, about a possible deal.

News reports also said that federal regulators have approached JP Morgan and Wells Fargo.

A possible sale was made a bit easier when WaMu's biggest shareholder, TPG, the private equity firm, waived its right to be compensated for dilution from any future capital raising. A TPG-led investor group put $7 billion into WaMu earlier this year.

GM, other non-financials, ease

Although the financials dominated the proceedings, the non-financial credits went along for what was mostly a downside ride. A trader saw General Motors' benchmark 8 3/8% bonds due 2033 down 2 points at 48 bid, and saw GMAC LLC's 8% bonds due 2031 lose 5 points to end at 49.

Another trader saw the GM long bonds down 1½ points to 49 bid, 50 offered, while domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 lost 2½ points to end at 50 bid, 51 offered.

A trader said GM "got hit again," seeing the benchmark bonds down 1 point at 50 bid, while GMAC's 8s dropped 3 points to 50.5, He said the Ford long bonds closed at 50.5, down "only 1 point, which in this [negative] market, is pretty good."

In other names outside the autosphere, a market source saw Finlay Fine Jewelry's 8 3/8% notes due 2012 down 20 points at 16 bid, in line with a 21% slide in the company's shares on heavy volume, but with no news seen out about the New York-based jewelry retailer.

And a trader said that for a non-financial name, Charter Communications Inc.'s 11% notes due 2015 were "really active," with $41 million traded. The St. Louis-based cable TV operator's bonds fell 4 points to 67 bid. Charter Operating's 8% notes due 2012 lost more than 3 points to close at 92.5.

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