Junk gyrates; Chesapeake Energy off after new funding package; Ford falls; funds plunge by $590 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 16 - Continuing to follow the lead of the volatile equity markets, junk bonds were seen gyrating around Thursday, though at mostly lower levels. Weakness during the morning was followed by modest moves off the earlier bottoms later on, especially once stocks caught a bid and bounced back from their early lows - the bellwether Dow Jones Industrial Average, down as much as 380 points early in the day in a continuation of Wednesday's dizzying dive of 733 points, ended up some 401 points.

One of the major losers was Chesapeake Energy Corp., which on Wednesday had cut its cash flow projections for the next two years in the face of the current credit-crunch originated slowdown in the energy business; on Thursday, it announced that it had lined up as much as $750 million of new bank financing, which will, as usual, rank ahead of its bonds in the capital structure.

Ford Motor Co.'s bonds were driven lower, though on no specific news about the Number-Two domestic car manufacturer; meanwhile, traders saw Ford arch-rival General Motors Corp.'s bonds all over the lot, although the latter's benchmark issue continued to languish at around 20 cents on the dollar.

Numerous other names were seen down by multiple points, including Community Health Systems Inc., Qwest Corp., Hertz Corp. and AbitibiBowater Inc.

Funds fall by $590 million on week

And as trading was winding down for the session, 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 Wednesday, some $590 million more left the weekly-reporting funds than came into them.

It was the fifth consecutive outflow, including the $471.7 million cash exodus seen the week before, ended Oct. 8. Those five weeks, with outflows over that time totaling $1.706 billion, according to a Prospect News analysis of the AMG figures, represent a sharp reversal of the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows had been seen in seven of those eight weeks, according to the Prospect News analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been evenly matched during the last 18 weeks, dating back to the week ended June 18, with eight inflows and 10 outflows, the funds have still lost a net $1.87 billion during that time, according to the analysis, mostly due to the past two weeks' large cash losses and the massive $651.2 million outflow seen in the week ended June 25. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter now underway, inflows, after that slow start, remain ahead - albeit modestly - with 23 inflows versus 19 outflows seen in the 42 weeks since the start of 2008, according to the analysis.

Market sources say net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $45.6 million, well down from $635.6 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

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.

Market indicators lower

The widely followed CDX index of junk bond performance, which had fallen by about 2 points on Wednesday, lost another 1¼ points on Thursday, a trader said, quoting it at 78½ bid, 79 offered. The KDP High Yield Daily Index slid 107 basis points to end at 53.61, as its yield gapped upward by 54 bps to 16.21%.

In the broader market, advancing issues trailed decliners by a margin of slightly less than two to one. Activity, represented by dollar volume, fell by 23% from the levels seen on Wednesday.

A trader said that "things have definitely gotten worse" over the past few sessions, particularly once the stock market-influenced rebound on Tuesday had run its course and it was back to business as usual - meaning more erosion - on Wednesday.

Of Thursday's dealings, he said, "it's a snowball effect - it starts off small going down the slope, and now we have pretty much an avalanche. One thing leads to another - deterioration in the market creates liquidation, which creates more bids being hit and values being cut in half.

"It's an ugly scenario, any way you look at it. Every time you think something looks cheap, about an hour later, it's trading lower - if it's trading at all. There are very few bids out there."

Another trader - looking at the generally negative tone in the market - declared that "people are selling stuff for the wrong reasons - because they still have to liquidate. That's what's going on."

He said that whenever an investor needing to raise cash would see a bid, "they hit it."

"Everything opened weak," another trader said, although he acknowledged that by the end of the session, some issues were in fact moving up for their lows.

Chesapeake lower on outlook, funding

Chesapeake Energy was one of the notable losers on the day; the Oklahoma City-based independent oil and gas producer's 6¼% notes due 2018 were seen by a market source as having dropped by nearly 10 points on the session to about the 66 level. A second source also saw a slide in the 61/4s into the mid-60s from the lower 70s.

Chesapeake's other paper was mostly down, although less dramatically. Its 6½% notes due 2017 fell to below 70, down 3¼ points, and down 2.75 points on a round-lot basis to 70. Its 7½% notes due 2013 fell to 80.75, down more than 3 points in round-lot trading.

A trader said that the 7 5/8% notes due 2013 fell a point to 79, while its 7¼% notes due 2018 dipped to 68.625 bid, down from 70 in round-lot dealings.

However, he did see Chesapeake's 6 3/8% notes due 2015 pushing up to 71 bid from 69.5 on Wednesday and asked "who says everything is down?"

Another market source saw those bonds up as much as 4 points by day's end, at 73.5, although mostly on odd-lot trades; in round lots, it was only up ½ point to 70.

A trader called the 7 1/8% 2018s down a point at 68 bid, 70 offered.

Chesapeake on Wednesday said that it would cut its cash-flow projections for the next two years, citing lower natural gas prices and the efforts of the ongoing cash crunch, which is depressing activity across the economy in general. The company is now expecting total cash inflows of between $7.8 billion and $9 billion in 2009, down from its prior forecast of between $9.9 billion and $11.5 billion. In 2010, it projects that cash flow will come in between $8.2 billion and $9.5 billion, down from between $9.2 billion and $10.8 billion.

It also said that it would cut back on its spending for acquiring acreage for drilling; in fact, Chesapeake has recently sold some acreage assets.

Although Chesapeake's chief executive officer, Aubrey McClendon, said on a Wednesday webcast that Chesapeake has "plenty of cash today and will continue to build cash through the quarter" - it said last week that it had drawn down its credit facility and now has $1.1 billion in cash on hand, and plans to generate as much as $3 billion cash in the fourth quarter from the sales of acreage and production - Chesapeake moved to augment its liquidity on Thursday, announcing that it had arranged for a new $460 million revolving credit line, expandable to as much as $750 million with additional bank participation.

Although the company's bonds were mostly lower - particularly the 2018 notes - its New York Stock Exchange-traded shares rose by $2.01, or 12.30%, to close at $18.35. Volume of 59 million shares was more than double the usual turnover.

Ford stalls out

In the automotive sphere, Ford Motor Co.'s benchmark 7.45% bonds due 2031, which had finished on Wednesday at 32.5, opened a good 8 points below that level Thursday, and spent most of the day trading in a 25-26 context, with many of those trades for large blocks of bonds. A few of the trades went below those levels, including several around 21. However, near day's end there was a sizable trade around 32, leaving the bonds essentially unchanged on a round-lot basis, a market source said. But subsequent smaller trades hammered the bonds back down into the lower 20s. At another desk, the bonds were seen down nearly 10 full points at the 23 level.

There was no fresh news out about the Dearborn, Mich.-based Number-Two domestic car and truck manufacturer that would explain the gyrations of its long bonds in active dealings.

Elsewhere in the automotive realm, a trader saw General Motors' benchmark 8 3/8% bonds due 2033 "back in the teens today," down 1 point to 19 bid, 21 offered. He also saw GM finance affiliate GMAC LLC's 8% bonds due 2031 down a point at 24 bid, 27 offered, while the Ford '31s he called unchanged at 27 bid, 29 offered.

However, another trader said the GMAC bonds "moved up. They seemed to have some snap today." He saw the 8s going out at 29 bid, which he called up 1½ points. As for GM, he saw the benchmarks end at 20 bid, 21 offered, "sort of where they have been bouncing around, similar to yesterday."

At another desk, a trader saw the GM bonds 2 points better on the day at 21 bid, 22 offered, while seeing the Ford flagship issue unchanged at 24 bid, 26 offered.

However, yet another trader said "General Motors paper - it seems like it's all getting in line. The longer stuff is all trading dollar-for-dollar now - they're all in a 19.5-21 range," converging, which he said was "not a good sign at all," since that kind of bond-price movement frequently precedes a bankruptcy filing or other major event of default by a credit.

That trader agreed with the assessment of still another trader who characterized the 8 3/8s, trading around 20, down slightly from Wednesday, as trading at "a bankruptcy level." The latter trader said that with the '33s only off 3/8 on the day "it was a good day for that bond," which has been hard hit recently.

Among the shorter-dated GM issues, the latter trader saw the 7.20% notes due 2011 off ¾ point at 36, while seeing the 8¼% bonds due 2023 at 19.5 bid, versus 18.375 on Wednesday. "I can't believe it," he exclaimed in mock astonishment, "a GM bond that's actually up on the day."

Most names seen lower

Apart from the autosphere, traders saw numerous issues down by multiple points. One of the most actively traded issues, with over $50 million changing hands, was Community Health Systems' 8 7/8% notes due 2015; the big ($3 billion) liquid issue, a favorite of accounts looking to sell something to raise cash, has lost some 20% of its value over recent weeks.

A trader saw the bonds dip to a round-lot level of 79.5, down about 7/8 point on the day, which he said "actually isn't too bad," given the multiple-point drop that some other credit were undergoing, and which the Community Health bonds themselves have sometimes recently experienced. Actually, he said, the bonds had rebounded a little from their day's lows around 78.5.

Another market source saw the Franklin, Tenn.-based hospital operator's bonds get as low as 77 before coming back to end at 81, down nearly a point.

Other names getting hammered down included iStar Financial Corp., whose 5.15% notes due 2012 ended off 3 points around the 45.5 mark; Aramark Corp., whose 8½% notes due 2015 "have been getting hit every day," a trader said, quoting them down 3½ points to 78.5 bid, and Hertz, which was "really hurting," he quipped, seeing the car-rental giant's 8 7/8% notes due 2014 down by ¾ point to 70.75. Another market source meantime saw the Hertz bonds down more than 3 points in active trading to just above the 69 level.

Qwest Corp.'s bonds "got smacked," a trader said, seeing the Denver-based telecommunications company's 7¼% notes due 2011 down 4 points at 80 bid, while its 7½% notes due 2014 were down 5 points from levels two days ago and its 7 5/8% notes due 2015 were 4 points lower at 75.

AbitibiBowater's 8.85% notes due 2030 were "down big," a trader said, "and getting hit the past few days." The bonds closed at 16.75, down from 20 bid two days ago.

WaMu edges lower

Among the financials, a trader saw Washington Mutual Inc.'s senior holding company notes, such as its 4% notes due 2009 or its 4.20% notes due 2010 at 66 bid, 69 offered, calling that down 1 point on the day - but down about 10 points from Wednesday's intraday high point of 76 bid.

He meantime saw Lehman Brothers Holdings Inc.'s senior notes, such as its 6 7/% notes due 2018, trading in a generic 7.5 bid, 9.5 offered context.

Bond insurer MBIA Inc.'s 14% surplus notes due 2033 were quoted at 512 bid, 53 offered, which a trader called unchanged, but he noted that the bonds were lower earlier, around 48 bid, 49 offered, because "everything opened weaker" and then moved up later in the day as junk bonds, like stocks, seemed to catch a bid.

Acco leads the larger losers

A market source saw Acco Brands Corp.'s 7 5/8% notes due 2015 nosedive some 20 points, down to the 53 level, in line with a nearly 11% slide in its NYSE-traded shares, which dropped by 50 cents to $4.10. No fresh news was seen out on the Lincolnshire, Ill.-based maker of Swingline staplers and other branded office products.

Charter Communications Inc.'s 8¾% notes due 2013 were also seen down by double digits, finishing at 60 bid, down 12½ points on the day.

Also among the big losers, another source meantime quoted Pinnacle Entertainment Inc.'s 8¼% notes due 2012 as having swooned by as much as 17 points on the day down to the 66 level. However, another source said that the Trace bond-tracking service showed no dealings today, with the bonds having traded at 84 Wednesday, down 1½ points, on several large-block trades.

In that same gaming sphere, a trader saw Harrah's Entertainment Inc. as a name that "everybody's waiting to go into bankruptcy," with all of its 2015-16-17-18 paper "trading in the teens now - all 17-19. There's a lot of convergence in this market. It looks like a filing is coming somewhere down the line."

Anticipating Brocade

Although there was no new issue news, the market buzzed with anticipation of next week's expected roadshow for Brocade Communications Systems Inc.'s $400 million offering of six-year senior unsecured notes (B2/BB-) via Banc of America Securities and Morgan Stanley.

No official news surfaced Thursday on the deal, which launched Wednesday and is expected to start on an investor roadshow sometime next week, market sources tended to be focused on the transaction.

One factor sharpening that focus, of course, is that Brocade is presently believed to be the only high-yield bond deal in the market.

It's too early in the process for official price talk.

Hence, the question du jour: at what rate might Brocade print its new six-year notes?

A market source claimed that Brocade's opening unsecured bridge loan rate would be Libor plus 700 basis points, translating to approximately 11½%, with 50 basis points step-ups each quarter. However this source was unable to say at what rate the bridge loan is capped.

Meanwhile the Brocade Libor plus 400 bps term loan, which priced at an original issue discount of 96.50 in September, is currently trading at 90 bid, resulting in an approximate yield of 10.65%, according to leveraged capital markets sources not in the deal.

"I think getting the Brocade bond deal off anywhere with a 13% handle would be a great outcome," one of these sources said.

Credit: good news/bad news

Junk market sources saw both good news and bad news on the credit front Thursday.

Spotting three-month Libor at 4.38%, a syndicate official said that the forward Libor curve appears to be falling, and added that Libor is expected to drop to 2.75% by year-end.

"Everyone is expecting Libor to drop like a rock once the dust settles, and people get a handle on the fact that the government is guaranteeing all transactions between banks, which will ease the credit pressure," the official said.

"Once it happens Libor is going to start to collapse toward the Fed Funds rate."

Hearing this, a mutual fund manager agreed that the government guarantees should loosen credit, but warned that potential inflation makes it difficult to anticipate where Libor will be at year end.

So much for the good news.

The bad news is that spirits-maker Diageo (A3/A-) had to pay a 462.5 bps spread to Treasuries in order to raise $1 billion on Thursday via the sale of 7 3/8% five-year notes, a high-yield syndicate official said.

"Remember," the official counseled, "the two things that people are buying these days are cigarettes and alcohol."

High-grades and loans

Lately the high-grade market and the leveraged loan market are the only places one high-yield mutual fund manager is shopping.

"I bought things I never dreamed I would buy," the investor said, citing as an example General Electric Capital Corp. bonds at Treasuries plus 350 bps.

"That's wide of where high-yield spreads were a year ago and a half ago," the buy-sider said.

"With yields like that in these higher quality companies I don't know why you would reach down for high-yield unless you're really getting distressed valuations.

"We're getting close, but we're still not there yet."

Another extra-curricular play this high-yield mutual fund manager made was the Neiman Marcus Group Inc. term loan.

Beaten up on Wednesday by a raft of bad numbers in the retail sector - the specialty retailer's sales were off last month by 15.8% - the loan paper came at a bargain on Thursday, the investor said.

Thursday's price for the Neiman Marcus loan paper: 66.

And the dramatic price moves now rocking the bank loan market render it a place where a junk bond investor can go to shop in familiar surroundings, the investor added.

"Two or three months ago the Neiman Marcus loan was 95," the investor asserted, adding that at 66 the five-year secured paper yields 16%.

"Granted, the New York economy is bad," the investor conceded.

"Granted the business is going to be weak for the next six months, or maybe a year.

"But this is a two-times leveraged trailing EBITDA company.

"Say it goes down 50%, and you're four-times leveraged through the loan.

"That's bad but not toxic.

"And you're being paid equity-like returns for secured risk."

Making sense

This investor's advice to the Prospect News high-yield primary market desk: Get a fishing license.

"The high-yield market doesn't make sense where it is," the buy-sider asserted.

"Loans have to go higher or bonds have to go lower. The spread between them is too narrow.

"You can't have a more senior portion of the capital structure trade wide of the more subordinated portion. It can't work like that over an extended period of time.

"It will be arbitraged."

This investor looks for a couple of hedge funds to start buying secured paper and shorting the bonds.

"You have a perfect hedge and you can actually pick up principal for being more senior in the capital structure," the fund manager said.

This high-yield mutual fund manager conceded recently seeing a modest amount of redemptions, and estimates that the buy-side is now sitting on a higher than normal percentage of cash, at around 6% to 7%.

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