Auto bonds drive lower as CEOs hit Hill; positive tone fades as stocks dive; funds gain $185 million on week

By Paul Deckelman and Paul A. Harris

New York, Dec. 4 - The junk bond secondary market was seen in retreat on Thursday, in line with a late-session downturn in equities, ahead of Friday's dreaded November employment numbers, but the downturn was orderly, rather than a rout, traders said.

Automotive names were seen mostly lower, led by General Motors Corp., as CEOs from GM and domestic arch-rivals Ford Motor Co. and Chrysler LLC appeared before a Senate committee to beg for a $34 billion government bailout - with many lawmakers still not convinced - and with renewed speculation about using the bankruptcy process to restructure one or more of the Big Three, a road down which the executives would prefer not to go.

Outside the autosphere, Freeport McMoRan Copper & Gold Inc.'s bonds were down once again, a day after the Phoenix-based metals mining company warned that it expects lower copper output and sales over the next two years. Papermaker AbitibiBowater Inc. announced job cuts and plant closings, but while its bonds were seen lower, not much activity was seen in them. Sector peer NewPage Corp.'s bonds were meantime seen sharply lower, although no fresh news was seen coming from the Miamisburg, Ohio-based company.

Upsiders on the day included Unisys Corp., Jarden Corp., and - despite a Standard & Poor's ratings downgrade - Isle of Capri Casinos Inc.

Funds up by $185 million on week

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 $185.3 million more came into the weekly-reporting funds than left them.

That broke a string of two straight outflows, including the $60 million cash exodus seen in the previous week, ended Nov. 26, although the recent trend of junk fund flows remains negative; in the last 12 weeks, including the latest results, there have now been eight outflows versus just four inflows in that time. At one point, there was a skid of five straight outflows through the week ended Oct. 15 that totaled $1.706 billion, according to a Prospect News analysis of the AMG figures. Net outflows in that 12-week period have totaled $1.262 billion, according to that analysis. That recent run of mostly outflows stands in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10, when inflows were seen in seven of those eight weeks, according to the analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 25 weeks, with 12 inflows and 13 outflows seen, the funds have still lost a net of $1.425 billion during that time, according to the analysis, mostly due to large cash losses in October -- $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 -- and the massive $651.2 million outflow seen in the week ended June 25, which was the biggest single cash hemorrhage of the year. 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 in its final weeks, inflows, after that slow start, remain ahead, with 27 inflows versus 22 outflows seen in the 49 weeks since the start of 2008, according to the analysis.

According to market sources, 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 $489.8 million, up from $304.5 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 aforementioned 11-week run of straight inflows.

A market source meantime said that the funds which report on a monthly basis rather than reporting weekly saw an outflow of $5.9 million. That brought the net inflow for such funds down slightly to $2.572 billion from $2.579 billion the previous week.

Year-to-date aggregate flows - consolidating the cumulative net inflows of the weekly- and monthly-reporting funds - stood at a net inflow of $3.062 billion.

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 turn lower

The widely followed CDX High Yield 11 index of junk bond performance, which lost 3/8 point on Wednesday, lost 1/8 point during Thursday's session, a trader said, quoting it at 73 bid, 73 3/8 offered. The KDP High Yield Daily Index meantime fell by 28 basis points to 47.94, while its yield rose by 9 bps to 17.43%.

In the broader market, advancing issues trailed decliners by a 10-to-seven margin. Overall market activity, reflected in dollar volumes, was about1% above the pace seen in Wednesday's session.

A trader said that he "didn't really see a lot of activity or much direction - I think a lot of people are in limbo," explaining that over the past two weeks, since Nov. 21, "stocks have been performing really well, although more recently they've started to tank and are down today. They've been performing well considering the bad news that we've had, and going into [Friday's] unemployment [figures] - obviously, it's not going to be a good number."

With all of that going on, he said, "I really don't see high yield getting hit, necessarily, except for a few isolated names."

Another trader called Thursday's dealings "fairly active," with the market "kind of rockin' and rollin' all over the place."

He said that investors "tried to take Ford, GM and GMAC bonds a little higher, we saw a little trading there, but after the congressional testimony by these guys, the market kind of sold off a little bit."

He said overall, the market began the session firm, up 1/8 to ¼ point at the open, but said that it was "probably lower as we're closing out here."

Stocks he said, did not have "a horrific close, but they were down a couple hundred," with the bellwether Dow Jones Industrial Average ending off 215.45 points, or 2.51%, at 8,376.24. The broader S&P 500 and Nasdaq composite indexes were also lower, the former down almost 3% and the latter off more than that, ahead of what's generally expected to be pretty ugly non-farm payroll and unemployment rate statistics coming out of the Labor Department on Friday morning. In Junkbondland, he said, "we saw the same sort of bid-list type of inquiry, for the most part," although he said there was "decent two-way [flow]. More people are adding names, and guys are taking advantage of those bids."

Although the junk market is expected to start winding down for the year a little later this month, the trader opined that "we have a couple of weeks" before the slowdown really kicks in, probably in the week ended Dec. 19, the Friday before Christmas. "That's when things will really quiet down," he said. However, he noted that this year, "we had decent flows right through Thanksgiving, both the day before and the day after" - usually very sleepy times for the usually half-staffed market. "There were a lot of people in, trying to get stuff done. There are a lot of trades on the pad that [people] are trying to get executed before the end of the year."

He suggested that with the overall market really taking its lumps this year -- the authoritative Merrill Lynch Master II Index and similar market measures show junk on track to post one of its worst years ever, down more than 30% -- "the negative overhang from all of these hedge funds, a lot of hedge funds are closing down and that sort of thing, continue to weigh heavily on the market.

"But with such sellers looking to get out from under their junk paper," he said, "we've seen a lot of people try to take advantage of that - a lot of the more traditional large money manager types are buying stuff at very advantageous prices."

He said that "there's still some amount of liquidation going on, and that's been providing much of the impetus for a lot of the flow. A lot of names that have normally traded, or that haven't been very active in months, or years even - all of a sudden, bonds are coming out" as the hedge funds try to get rid of their holdings, either for the purpose of end-of-year book clean-ups, or "flat-out liquidation, to raise cash."

Freeport continues to flounder

One of the most active issues, solidly on the downside for a second consecutive session, was Freeport McMoRan. A trader saw its 8¼% notes due 2015 "continuing to get hit," down a point at 68.5 bid, on over $22 million of the bonds traded, while its 8 3/8% notes due 2017 were seen down 2 points at 66 bid, on $14 million traded.

Another trader saw the '17s at 65 bid, 66 offered, down a deuce on the day, while the '15s lost a point to 68 bid, 69 offered.

The company warned on Wednesday that because of declining prices for two of its key products, copper and molybdenum, it was lowering its copper output for 2009 and 2010, cutting its sales estimates and suspending its equity dividend as a cash-saving measure. Copper peaked at more than $4 per pound in July, but prices have since tumbled down to around the $1.50 level, as the slowing economy has cut industrial demand for the metal, particularly for copper products used in the building industry such as copper wiring and pipes.

Freeport said that it will slash its copper output by about 200 million pounds, or 5%, this upcoming year, and by an even steeper 500 million pounds, or 11%, in 2010. It accordingly revised downward its estimated copper sales by 4.7% in 2009 and 11% in 2010. The lower copper production - which will mostly come in its North American mining operations - will cause it to cut its estimated capital expenditures by about half, to some $1.1 billion. Suspending the annual $2 dividend on its common will save the company around $750 million.

Abitibi slates cuts; NewPage nosedives

Another industrial area hit hard by the economic slowdown has been papermaking, and on Thursday one of the largest producers, Montreal-based AbitbiBowater, announced that it will close or idle at least four paper mills and slash about 1,100 jobs, hoping to bring its production capacity into better alignment with falling demand.

A trader saw Abitibi's 8.55% notes due 2010 dip to 17.625 bid from 18.25 on Wednesday and its 8 3/8% notes due 2015 to 13 bid from 14.5. Its 7¾% notes due 2011 took a big hit, knocked down to 14 from levels around 20; however, none of the three were particularly actively traded.

Another trader saw some "decent-sized" flows in the paper, putting the 8.55s at 18 bid and the 8 3/8s at 14.

The first trader saw Abitibi sector peer NewPage Corp. as "one credit that sticks out, down double digits." He said its 10% notes due 2012 last traded on a round-lot basis at 39.5 bid, down a whopping 10-plus points from Wednesday's late level at 50, on $7 million of the bonds changing hands. He said he had seen no fresh news out on the credit.

Autos spin their wheels

As the CEOS of Detroit's beleaguered Big Three made their sales pitches to members of a Senate committee considering their request for at least $34 billion of loans between them - and apparently failing to sway some skeptical senators who remain opposed to concept of a taxpayer-funded bailout -- their bonds were also seen skidding off the path to mostly end lower.

A trader saw the autos weaker, although he said the sector was "very quiet." He quoted General Motors' benchmark 8 3/8% bonds due 2033 having fallen 2 points to 17 bid, 18 offered, while Ford Motor Co.'s 7.45% bonds due 2031 were a point lower at 27 bid, 28 offered.

He meantime saw GMAC LLC's 8 3/8% bonds due 2031 at 27.5 bid, 28.5 offered, down a point.

Another trader saw the GM benchmark bonds down 3 points at 17 bid, 19 offered, and said the Ford paper also lost 3 points, to 23 bid, 25 offered.

A trader said that the GM long bonds moved down to 18.5 bid, from 20 on Wednesday, with some $10 million traded, while its 7.20% notes due 2011 were down 3½ points on the day at 22.625. Hel also pegged GMAC's 8s down nearly 2 points at 27.5 bid, although its 5.85% notes coming due on Jan. 14 were actually higher, at a round lot level of 90 versus 88.25 on Tuesday, the most recent previous big-block trade.

And he saw the Ford 7.45s ease 1½ points to 25, while its Ford Motor Credit Co. 7 3/8% notes due next October were off ¼ point at 70.75.

Adding to investor angst about the sector is a revival of the dreaded "B" word - bankruptcy. Although the Big Three executives and congressional leaders like House speaker Nancy Pelosi continue to insist that that going to the courts is not an option on the table, some news reports indicated that privately, some lawmakers have talked about the government funding a prepackaged bankruptcy, with creditors, suppliers and other stakeholders agreeing to terms before such a filing in order to quickly move the reorganization through the courts; Bloomberg News reported that GM and Chrysler executives were at least considering acceptance of such a pre-pack Chapter 11 as the last-resort price of getting their multibillion-dollar bailouts.

However, critics of such a course point out that a bankruptcy would practically spell death for the filing car company, as car buyers would instantly switch to other companies out of fear of buying a vehicle from a company that might not be around much longer to do repairs and servicing down the road. They also note that a carmaker bankruptcy would likely spark Detroit's version of the domino effect, causing bankruptcies among at least some of the parts suppliers - and that in turn would severely disrupt operations at the remaining non-bankrupt carmakers, including the non-Big Three "transplant" manufacturers away from Detroit and could perhaps even push them over the edge as well.

Unisys leads upsiders

Not everyone was trading on the downside; Blue Bell, Pa.-based high tech solutions company Unisys Corp.'s 6 7/8% notes due 2010 were seen up about 4 points on the day around the 46 level, despite a lack of fresh significant news about the company.

A trader called Jarden Corp. "a surprise upsider," noting that the consumer products company's 7 ½% notes due 2017 gained nearly 2 points on the day to 69.75 on $8 million of bonds traded. "We rarely see them among the more active names, some something must be up for them to be both up and active."

And despite a ratings downgrade, a trader saw gaming operator Isle of Capri's 7% notes due 2014 up more than a point on the day, ending at 43 bid.

Capture the discount

The primary market remained quiet on Thursday.

Once again sources contended that the high-yield market's focus continues to trend away from new issues - which have become both a distant memory and a remote possibility - toward the burgeoning restructuring market where, in lieu of access to cash via the primary market, issuers are undertaking exchanges that attempt to "monetize" post-correction price depreciations in their securities and/or gain a little breathing room with regard to maturities.

Bondholders appear more favorably disposed to the latter type of deal, an investment banker said on Thursday.

"Players seem to be shunning deals in which the sponsors are trying to re-set the option price - i.e. try to capture debt at a discount - as opposed to extending the option," the source said.

"When there is a need to extend maturities and in turn get economics, and the company doesn't have alternatives, bondholders are going to be much more favorably disposed to help the situation."

This banker said that two exchange deals presently in the market, both from gaming concerns, are being perceived as situations in which sponsors are attempting to capture discounts.

One is the Harrah's Entertainment, Inc. $2.1 billion exchange deal offering new 10% second-priority senior secured notes to holders of 10 series of existing bonds, the other Station Casinos Inc.'s $459 million debt exchange holders of senior and senior subordinated notes with maturities ranging from 2012 through 2018 into senior secured third-lien and fourth-lien term loans due in 2016, also with a 10% coupon.

In the case of the Station deal there are no looming maturities whatsoever, the investment banker commented.

"Each situation is different. But deals where the sponsors think they can capture a discount will struggle."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.