Better tone continues in shortened session; autos gain on bailout hopes; exchange offer boosts Station Casinos

By Paul Deckelman and Paul A. Harris

New York, Nov. 26 - The tone of cautious optimism seen in the junk bond market on Tuesday was continuing on Wednesday, traders said, helped along by another upside day on Wall Street - the fourth in a row, the first time that has happened in many months. However, trading in the junk precincts was restrained, with many desks only half-staffed, if they were manned at all, and trading for the whole market winding down ahead of Thursday's Thanksgiving Day holiday.

General Motors Corp.'s bonds, and those of its 49%-owned GMAC LLC car loan financing unit, were seen better, though on relatively light volume, in line with a sharp rise in the Detroit-based automotive giant's shares on renewed investor hopes that GM and domestic arch-rivals Ford Motor Co. and Chrysler LLC might be able to convince Congress to okay their request for $25 billion in bailout money. Ford's shares and bonds were also up. Among the part-supply names, American Axle & Manufacturing Holdings Inc.'s bonds were better.

Apart from the autosphere, Station Casinos Inc.'s bonds were seen higher in the aftermath of Tuesday's late-session announcement that the Las Vegas-based operator of local-market casinos will exchange new term-loan debt for over $2 billion of existing bonds, at a steep discount to the outstanding notes' face value.

Market indicators better

The widely followed CDX High Yield 11 index of junk bond performance, which was up by 1 3/8 points on Tuesday, pushed up by more than a point in thin trading, a market source said, quoting it at 74.83, versus Tuesday's level of 73¾ bid, 74¼ offered. The KDP High Yield Daily Index meantime rose by 37 basis points to 48.14, while its yield tightened by 16 bps to 17.16%.

In the broader market, advancing issued led decliners by an almost two-to-one margin. Overall market activity, reflected in dollar volumes, plunged by 58% from Monday's pace.

"There was some light volume early on," a trader said, seeing gains in Sprint Nextel Corp. and MGM Mirage.

"Things definitely had a better tone," with "better buyers for Ford, and for homebuilders coming into the market, even despite the S&P and Moody's downgrades [of several homebuilding names] . It almost seems like S&P and Moody's are becoming less and less of a factor. I think people are kind of taking ratings and throwing them out the window with the way things are trading and with some of the moves in sectors well ahead of any ratings actions.

"But we definitely saw some accounts looking to do some stuff on a half-day, which was a little bit shocking."

High yield - which had warily allowed itself to be carried higher on Tuesday after having skeptically stayed on the sidelines during the exuberant equity surges the previous two sessions - again drew some inspiration from stocks, which overcame early jitters growing out of the latest negative economic statistics to end solidly higher on the session, the first time Wall Street has strung four winning sessions together since April. The bellwether Dow Jones Industrial Average rose 247.14, or 2.91%, to end at 8,726.61, a gain of more than 1,000 points on the week and the biggest four-day gain seen in the widely followed market measure since 1932. Broader market indexes like the Standard & Poor's 500 and the Nasdaq composite were also higher - the S&P index by more than 3% and the Nasdaq by better than 4%.

A second trader said that "overall, there is still a better tone, but with the limited players that are around, and the ones that are around were just sort of watching, there wasn't a whole lot to report on."

Yet another trader said that from where he sat, the day was "a lot of nothing. There was not a lot of volume. It was a pretty boring day - and that was pretty much expected."

He said junk marketeers showing up for work on Friday - with another half-session slated and many people anticipating being out - would see more of the same. "The only people who are gonna show up Friday are the people who lost the coin-toss today."

HCA Inc.'s 9¼% notes due 2016 were up 1 to 1½ points on the day, a high-yield syndicate official said, adding that with $3.2 billion outstanding this LBO-related issue is a very liquid one.

"This is the first time since late August that stocks have been up four days in a row," the source added, referring to Wednesday's 2.9% rise in the Dow Jones Industrial Average.

The remark was characteristic of the upbeat color heard as the holiday foreshortened pre-Thanksgiving week unwound.

Quiet day for market benchmark

A trader saw Community Health Systems Inc.'s bonds going out wrapped around 81 bid, which was "pretty much where they were [Tuesday] and up from the beginning of the week when they were in the high 70s," around a 78-79 context.

Another saw the bonds at 81.5 bid, up from 80.75% on Tuesday, but saw less than $3 million of the issue changing hands - far less than usual for the Franklin, Tenn.-based hospital operator, whose bonds have been seen by some junk participants in a proxy role for the overall market because of the issue's large size and widespread distribution. "Call it a supposed benchmark," he suggested.

GM, Ford drive higher

Renewed investor hopes for a federal bailout of the troubled automobile industry - encouraged by a positive prediction from a Deutsche Bank analyst - caused General Motors' shares to shoot upward, and its bonds to come along for the ride.

A trader saw GM's benchmark 8 3/8% notes due 2033 at 15 bid, up a point, on $6 million bonds traded. He saw "a nice pop" for its 7.20% notes due 2011, up almost 4 points to 24 bid, on $8 million traded.

He saw GMAC's 8% bonds due 2031 up ½ point at 26, but only on "light volume" of about $3 million. GMAC's 7¾% notes due 2010 gained 1½ points to 53.75, on $5 million traded.

The bonds were towed higher by an explosive surge in the Detroit giant's New York Stock Exchange-traded shares, which zoomed by as much as 64.8% intraday before going out up $1.25, or 35.11%, at $4.81. Volume of 101.8 million shares was triple the usual level.

Over on the Ford side of the fence, a trader opined that "it didn't look like any of the Fords were active," although he did see its 7.45% bonds due 2031 up 1 1/8 points at 20, though on only $8 million of bonds traded.

However, at another desk, the Ford long bonds were seen above the 22 level, up more than 3 points on the day. Ford Motor Credit Co.'s 8% notes due 2016 rose to 43 bid, up more than 3 points.

Ford's Big Board shares meantime shot up by 49 cents, or 29.52%, to end at $2.15, on volume of 172.9 million, some 2½ times the average daily handle.

The carmakers' bonds and shares got a boost from renewed investor bailout hopes after Deutsche Bank analyst Rod Lache warned in a research note that "there is growing concern about the risks to the U.S. economy that would be derived from inaction" by Congress on the carmaker's plea for billions in immediate bailout money. He suggested that "it is our sense that the debate [over whether to give the carmakers help or watch them go bankrupt] has shifted somewhat" from where it was a couple of days ago, when the Big Three CEOs got back on their private jets and flew home to Detroit empty-handed, with rebukes from congressmen ringing in their ears.

They now have a second chance to make the case for why they should be bailed out, with detailed proposals from each carmaker due in Washington by Tuesday. Lache believes that they "will likely present relatively aggressive plans" to show how their failing fortunes can be turned around if their liquidity problems are overcome. "We believe that any legitimate plan must address both cost and revenue challenges."

Ironically, the carmakers' case may be helped by an event which they had no control over and nothing to do with - last weekend's massive government rescue of Citigroup. With Uncle Sam having opened his seemingly-bottomless wallet to front the struggling banking giant another $20 billion in cash, on top of the $25 billion it got a month ago, and to extend guarantees on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets, what the Big Three are asking for doesn't look like that much anymore. "The proximity of these bailout hearings to the Citigroup bailout may have also tipped the scales somewhat," Lache said.

However, a carmaker bailout is still by no means a done deal - the analyst cautioned that "winning over skeptics will require U.S. automakers to submit plans that demonstrate an ability to achieve cash flow break-even at relatively low demand and conservative market share levels."

Elsewhere in the automotive sector, a trader saw Big Three supplier American Axle & Manufacturing Holdings as "a surprise" upsider, its 7 7/8% notes due 2017 ending at 25 bid, up 2 points.

Station rolls dice on exchange

A market source saw Station Casinos' bonds clinging to the higher levels to which they had moved in very late dealings Tuesday after the gaming company announced plans to take out its existing senior and senior subordinated bonds by offering holders new term-loan debt, though at a discount to the bonds' face value.

Its 6% notes due 2012 moved up to around the 31-32 bid level, on a number of round-lot trades; on Tuesday, the bonds had been trading around 24 bid before the announcement, but shot up beyond 30 at the close on several large late trades.

A market source called that a 2 point gain on the session, while another trader pegged the bonds at 31.5 bid, up 2½ points, on turnover of $11 million.

Its 7¾% notes due 2016 were also around that 31 region, up from 29 at the close on Tuesday and well up from levels about 10 points below that before the exchange offer announcement.

The company's 6 7/8% subordinated notes due 2016, which had been trading around 7 bid pre-news and then punched upward to 10 late Tuesday, fell back to around the 7 level by Wednesday morning.

Trading in the latter two issues was considerably quieter than the 6s.

Under the terms announced Tuesday, Station will issue $459 million of new 10% senior secured term-loan debt due 2016 and will give that to the holders of its senior bonds - the $450 million of outstanding 6s and the $400 million of outstanding 73/4s - at an exchange rate of 54 cents on the dollar for those holders tendering their existing notes by the 5 p.m. ET Dec. 5 consent deadline; that total consideration includes a 3 cent per dollar consent fee. If not all of the senior bonds are tendered by the offer's expiration at midnight ET that same day, Station will distribute the rest of that senior secured term debt on a pro-rata basis to the tendering holders of its three series of subordinated bonds - the $700 million of outstanding 6 7/8s, plus its $450 million of 6½% notes due 2014 and $300 million of 6 5/8% notes due 2018 - and will then issue enough new 10% junior secured term loan debt due 2016 to pay those holders total consideration of 20 cents on the dollar for their bonds, which includes the 3 cent per dollar consent fee. Both deadlines are subject to possible extension. Station has set a minimum tender amount of 60% of the total amount of outstanding existing notes, and said that if 82.5% or more of the notes are exchanged, the new ownership's loan would take the form of unsecured, junior subordinate loans.

When it issues the term loan debt, Station will concurrently borrow between $450 and $500 million from so-called "sponsor" entities affiliated with the privately-held company's existing equity owners. The company is nearly 76% owned by Los Angeles-based real estate company Colony Capital, with the remaining 24.1% owned by members of its founding Fertitta family, including its chairman and chief executive officer, Frank Fertitta III, who ran the $5.4 billion leveraged buyout with Colony that took the company private a year ago. The exchange offer is conditioned upon successful completion of the financing.

The company - hard-hit by the severe slowdown in the gaming industry due to current economic problems, even though it occupies a unique niche of catering mostly to "local-market" gamblers in the Las Vegas area rather than trying to compete head-to-head with larger, flashier operators for high-rolling tourists - said that the exchange offer and the borrowing to fund it are aimed at "significantly" reducing the outstanding principal amount of the company's debt and its cash interest costs. According to regulatory filings, it had $5.4 billion in long-term debt for the third quarter ended Sept. 30, and had paid out $281.9 million in interest during that period.

MGM ends week on high note

In that same gaming sector, a trader said that MGM Mirage moved higher, with its recently priced 13% notes due 2013 "up considerably from the beginning of the week," going out at 86.25 bid versus 83 bid, 85 offered on Tuesday and up further still from the 78 bid, 79 offered level at which those bonds had started the week.

Another source called those bonds little changed around the 84 bid level, with none offered. Meanwhile, among its more established issues, the Las Vegas-based casino giant's 5 7/8% notes due 2014 closed on a round-lot basis at 51.75 bid, well up from 48.5, while its 7½% notes due 2016 gained 2½ points to end at 51.5.

A market source saw the MGM 6 5/8% notes due 2015 more than 3 points better at 52 bid.

Harrah's Operating Co. LLC's 5 ¾% notes due 2017 gained more than a point to close at 15.5.

Brisk activity for Sprint bonds

A trader saw Sprint Nextel's 6% notes due 2016 as probably the most active junk issue, with $17 million traded - a considerable amount in a relatively quiet pre-holiday half-session. He saw the bonds unchanged at 56 bid, the level to which they had climbed over the previous couple of sessions on no real news, and opined that it was "unusual to have a volume of $17 million and for it to actually be unchanged."

He also saw Sprint's 8 3/8% notes due 2012 up a point at 69 bid on turnover of $7 million.

A second trader suggested that "Sprint ran up on the Bell Canada news," although he said he "didn't really see much volume there" other than the 6s. "They pushed a little higher."

Another market source, though, pegged Sprint's 6.90% notes due 2019 at the 57 level, up more than 2 points on the day, but doubted whether the BCE news would have any impact on the Overland Park, Kan.-based wireless provider.

Montreal-based BCE Inc., the parent company of Bell Canada, is going private in a C$52 billion buyout by a consortium led by the Ontario Teachers' Pension Plan, along with other investors, but it said Wednesday that based on the buyout's debt levels and market conditions, its outside accounting firm, KPMG, has determined that a solvency opinion is unlikely to be produced by the deal's scheduled closing date of Dec 11. Such an opinion is a necessary prerequisite for the deal to go though.

BCE's split-rated (Baa1/BB+/BB-) 9½% notes due 2010 were seen down about ½ point Wednesday to 103.5 on several smallish odd-lot trades. Its NYSE-traded shares meantime swooned as much as 40.5% in intraday dealings before finishing at $20.63, still down $10.65, or 34.05%, on volume of 22.2 million, more than 18 times the norm.

Among other telecom names, Qwest Corp.'s floating-rate notes due floating-rate notes due 2013 gained ½ point to 70.5 bid on volume of $6 million.

A trader said that "the biggest downsider" of the day was Paetec Holdings Corp., whose 9½% notes due 2015 dropped to 56.25 from 58 previously, with $5 million traded. He saw no fresh news out about the Fairport, N.Y.-based telecom operator, noting that normally, "I never see it trade, but on a day like today, to be down like that," could be a sign that something is up with the company

NXP, Freeport, Blockbuster seen active

Among other fairly active bonds, a trader said that Dutch chip maker NXP BV's 9½% notes due 2015 were "surprisingly" busy as they pushed up to 18 bid from 16.25 earlier, on volume of $16 million. However, at another desk, a market source, while seeing the bonds busily traded and going out at 18, said that was actually a drop of more than a point on the day.

The trader also saw Freeport McMoRan Copper & Gold Inc.'s floating-rate notes due 2015 firm to 62.75 bid from 61.5, with $13 million of the bonds changing hands.

The Phoenix-based metal mining company's 8¼% notes due 2015 did even better, up nearly 3 points on the day at 74.375 bid, though on considerably lesser volume.

Blockbuster Inc.'s 9% notes due 2012 gained 1½ points to end at 49, on volume of $12 million, in line with a surge of 10.20%, or 10 cents, in its NYSE-traded shares, which ended at $1.08, following Tuesday's announcement that the Dallas-based video-rental company plans to go deeper into the potentially lucrative, but crowded, field of "on-demand" video.

Blockbuster is trying to transform itself from a traditional "bricks-and-mortar" video-store chain operation, hoping its new technology for delivering movies right to the customers' TV sets via set-top box and high-speed internet connection, rather than making them go to its stores to rent a film, will give it a leg up on pesky rival Netflix Inc., which is also trying to move beyond its core operation of mailing DVDs to customers with its own "on-demand" technology. The two rental companies are also battling the on-demand rental operations of such cable-TV operators as Comcast Corp. and Time Warner Inc.

Rite Aid rebound

A trader saw "a pretty big move" for Rite Aid Corp.'s bonds, though on relatively limited trading. He saw the Camp Hill, Pa.-based drugstore chain's 8 5/8% notes due 2015 at 28.75 bid, up from 26 previously, while its 10 3/8% notes due 2016 gained nearly 4 points on the day at 67.75.

There was no news out about the company, but the trader said it was "just a matter of , in some situations, just like these issues gapped two to four points lower per day, and [the selling was] totally overdone, they're going to gap back up as people realize that things were oversold here."

No corporate deals in November

The primary market, meanwhile, remained quiet.

With Wednesday's pre-Thanksgiving primary market session turning out no news, as expected, the month of November came to a close with only one deal pricing - a so-called "LBO legacy deal."

On Nov. 12 underwriters converted Catalina Marketing Corp.'s $490 million high-yield bridge loan into two tranches of notes (Caa1/B-).

November saw no new corporate issuance whatsoever.

The primary market has seen $71.84 billion of issuance priced in 133 dollar-denominated tranches on the year to the end of November.

By comparison, in 2007 to the Nov. 30 close there was $157.72 billion of issuance in 371 tranches.

Since 2001 two years have seen lower dollar amounts of issuance to the Nov. 30 close: 2001 saw $70.4 billion while 2002, with just $53.2 billion, remains the lowest year-to-Nov. 30 amount in recent years.

However 2008's 133 tranches represents by far the fewest number of deals generated by the high-yield primary market since 2001. The next lowest amount was 2002's 224 tranches.

The 2008 deal volume to the end of November is off 64% on a year-over-year basis, and is 63% below the average volume for the previous seven years.

BCE: A deal with few friends

BCE Inc. announced on Wednesday that it has received a preliminary view from KPMG that based on current market conditions and the amount of debt involved in the LBO financing it does not expect to be in a position to deliver an opinion that BCE would meet the solvency tests in the acquisition agreement by the LBO's scheduled Dec. 11 closing date.

A positive solvency opinion is a condition to closing of the transaction.

At the same time, KPMG indicated that BCE would meet all solvency tests under its current capital structure.

The BCE deal is not dead yet, but certainly in trouble, according to a high-yield syndicate official not involved in the transaction.

The LBO deal was struck before the markets went into full correction in the summer of 2007.

Ever since, the mammoth debt financing - including $11.3 billion equivalent of junk bonds and C$23.05 billion of bank debt - has been characterized as the leveraged markets' "Sword of Damocles."

Perhaps the only friends the deal has are the existing stockholders, one high-yield syndicate official reckoned on Wednesday, adding that most of the debt underwriters, and possibly the equity sponsors, would like to see the deal disappear.

The exchanges

Meanwhile when December gets underway market-watchers will be focusing on the recent distressed exchange deals that have come into the market.

In these deals companies propose to trade out of existing issues at deeply discounted prices in return for new notes or loans with higher interest and/or greater security.

The first of these deals to reach the finish line, from Hovnanian Enterprises, Inc., expired at the beginning of the week, and did not go well, sources say. Of a possible $250 million of bonds only $29.3 million were tendered.

Meanwhile there are distressed exchange deals presently in the market from GMAC, Neff Corp., Realogy Corp., Harrah's Entertainment Inc., Station Casinos, Inc. and Interface, Inc.

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