Bonds fall broadly as all bids get hit; Lehman leads actives; Tribune off as Cubs sale seen delayed

By Paul Deckelman and Paul A. Harris

New York, Oct. 10 - One of the wildest weeks in the history of Wall Street mercifully came to an end on Friday - and it wasn't a moment too soon for high yield market denizens, who saw the value of their bonds erode badly in line with the sharp fall which equities took all five days of the week.

Traders saw numerous issues hammered down by multiple points, as accounts needing to raise cash liquidated holdings, hitting whatever bids they could in order to sell bonds and convert them to cash.

One trader said that investors were "hitting the bids that they could hit, not the ones they had to hit" - meaning that better-quality issues were often being sold, undeservedly, for points lower by accounts looking to unload paper, while the really bad stuff, that nobody was offering to buy, remained in the portfolios.

Among specific names, Lehman Brothers Holdings was very active, as its bonds fell in the wake of Friday's auction to determine the settlement price for the failed New York-based investment banking house's billions of dollars of outstanding credit-default swaps contracts.

Another active financial name was Morgan Stanley, some of whose bonds have been beaten down to levels between the 50s and the 70s despite their nominally investment-grade rating and consequently are being quoted and sometimes even traded off junk bond desks. The bonds slid in line with a steep fall in the investment-banking houses' New York Stock Exchange-traded shares, which swooned on fears its deal to get a $9 billion investment from Mitsubishi UFJ Financial Group might still be in jeopardy. Moody's Investors Service also put the company's bonds under scrutiny for a possible downgrade.

Automotive benchmark names like General Motors Corp., GMAC LLC and Ford Motor Co. continued to take a pounding, even as GM and Ford firmly denied market speculation that either was thinking of a bankruptcy filing.

Primary activity remained non existent.

Market indicators lower

The widely followed CDX index of junk bond performance, which had plunged by some three full percentage points on Thursday, was seen down perhaps another 1/8 point at 79 bid, 80 offered on Friday, a trader said. The KDP High Yield Daily Index slid 218 basis points to end at 58.57, as its yield ballooned out by 83 bps to 15.62%.

In the broader market, advancing issues trailed decliners by a nine-to-two margin. Activity, represented by dollar volume, fell by 6% from the levels seen on Thursday.

"It was just insane today," a trader declared, unbelievingly.

He referenced former Federal Reserve chairman Alan Greenspan's celebrated warning of some years ago that the financial markets were being carried away by "irrational exuberance," adding "now it's the other way. People are getting hit with redemptions and are selling the only things they can find bids on and as a result, the good credits are getting punished."

He noted that a credit like Constellation Brands Inc. - "strong credit, good numbers, the whole thing - those bonds are down 8 to 10 points."

Hedge funds, he said, "are forced to take delivery. They can't. So as a result, they sell whatever they can sell." Even "the good, stable mutual funds are being hit with redemptions. It's just an overreaction on the panic side."

The trader continued that "there is some smart money out there - if the bond is worth 80, they're bidding 70 and it's getting hit. That's basically what's going on." He noted that there was one particular bond, which he chose not to name, where "a guy was bidding 87 or 88 last week. He couldn't buy it. He just bought them at 80."

The problem is "if you're getting hit with redemptions, you can't be choosy. So you have to hit whatever bid is out there. As a result, people are not looking at yields, they're not looking at relative value. They're just looking at "how much money do I get when I sell the bond?"

The situation is "totally insane. Good decent credits, that don't need any immediate banking, are getting punished - because they're the only ones that have bids." The converse of that, he indicated, was that inferior, poorly performing credits were not being bid upon because no one wants them, and so they continue to clog up the portfolios.

"The bid," he concluded, "is king."

Another trader said that things were especially "crazy in the morning," in line with a steep fall in equities as that market opened. After that, as stocks tried to come back, there was also a rally attempt among bonds, which did for the most part end off their lows - but still well down on the day.

"There were very few names trading, and the reason for that is you start selling that you can as opposed to the stuff you have to.

"The names did drop a lot, then came back at the end of the day."

Lehman leads things lower

A trader saw Lehman Brothers' senior unsecured bonds, like its 6 7/8% notes due 2018, fall as far as 8 bid, 10 offered intraday, before they "bounced back up" to end down a point on the day at 10 bid, 12 offered. The gyrations followed the auction at which the settlement for CDS contracts on Lehman's debt was set.

At another desk, a market source saw those bonds ending at 12, down around a point on the day while Lehman's 5 5/8% notes due 2013 - swinging wildly between par on the upside and just over 8 on the downside, finally ending just under 12, down ¼ point. Both bonds were among the most actively traded issues on the day.

Lehman's 6.20% notes due 2014 ended just under 12, down 3/8 point.

Morgan Stanley gets mauled

Although technically not junk bonds - they are rated A1/A+/AA- - Morgan Stanley was trading like badly distressed junk. Its 3 7/8% notes due 2009 fell 2½ points to the 90 range, while its 4% notes due 2010 lost almost 4 points to close just over 71. Activity was described as busy.

The company's shares meantime collapsed by as much as 46% intra day, before finally finding a bottom and coming about half way back, still ending down $2.71, or 22.25%, at $9.68 on volume of 206 million, over five times the average daily action.

Morgan Stanley got murdered on renewed investor fears about whether its pending $9 billion deal to sell a 21% stake to Japan's largest lender, Mitsubishi UFJ, might still fall apart at the last minute or come up for renegotiation on more onerous terms. Investors were also made jittery as Moody's said it may reduce the second-largest U.S. investment bank's credit rating on concern the financial crisis threatens earnings and investor confidence.

Fox-Pitt analyst David Trone said in a research note that Morgan Stanley's shares have been under "extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet and long-term earnings prospects are sound."

However, on Friday, Moody's announced that it would scrutinize Morgan Stanley's ratings for a possible downgrade, warning that it expects that "an extended downturn in global capital market activity will reduce Morgan Stanley's revenue and profit potential in 2009, and perhaps beyond this period. In addition to the depressed market environment, Morgan Stanley will need to adapt the firm's business activities and balance sheet to operate in a bank holding company structure. This could limit profit opportunities for Morgan Stanley, though the firm's risk profile could be lowered, thus mitigating this concern.

"As well, customer and investor concerns regarding wholesale investment banks have also put pressure on Morgan Stanley. Investor, counterparty and customer confidence is critical to the funding and profit generation of the firm, especially in a hostile market environment. During its review, Moody's will focus on the success of the actions that management takes to alleviate these confidence pressures and maintain customer franchises, while retaining key producers in a difficult environment."

Earlier in the week, Morgan Stanley said that Mitsubishi's investment had received the necessary key regulatory clearances. Spokesmen for both Morgan Stanley and Mitsubishi UFJ reiterated on Friday that the deal is set to be completed by Tuesday

Analyst Trone said that further details about the depth of Mitsubishi's "major" funding support for the beleaguered Morgan Stanley would likely be disclosed at or after the formal closing.

Autos spin their wheels

Separate morning declarations by General Motors and Ford, that the carmakers have no plans to go bankrupt, market scuttlebutt to the contrary, did little to help their bonds.

A trader saw General Motors' benchmark 8 3/8% notes due 2016 being quoted down 5 points at 21 bid, 23 offered, while GMAC LLC's 8% bonds due 2031 dropped 4 points to 25 bid, 27 offered and Ford Motor Co.'s 7.45% notes due 2031 were also down 4 points at 26 bid, 28 offered.

Another trader saw the GM bonds trade down to 18 bid, 20 offered, while the Ford bonds, after starting in the 20s dropped down to that same level before bouncing back to 22 bid, 24 offered on "a lot of activity" in the volatile bonds.

A trader saw Hertz Corp.'s 8 7/8% notes due 2014 - a big loser on Thursday - "down a couple" of points at 65 bid, 67 offered, speculating that the car rental giant's bonds were falling in line with the problems of competitor Avis, noting that the latter's credit risk "went way up."

Tribune tripped up

A trader saw Tribune Co.'s 4 7/8% notes due 2010 "down a couple of points" at 45 bid, 48 offered.

"The asking price was way down," he said, on news reports that the current credit crunch will likely delay Tribune owner Sam Zell's plans to sell one of the company's crown jewels, the Chicago Cubs - a deal which would include its historic park, Wrigley Field, as well as a stake in a local sports TV network - for as much as $1 billion, as some potential buyers find financing harder to come by. "The Cubs sale is by no means a slam dunk," he said.

Another market source saw the bonds fall as low as 47 bid from Thursday's closing levels around the 55-56 area, although the bonds bounced back up later on to around 53, all on relatively small trades.

An analyst agreed that "obviously yes - a billion dollars, a few months ago, was probably easier to get. It's less easy now, although there are a lot of people with a lot of money around Chicago who might be able to come up with a billion dollars."

He noted that Mark Cuban, the billionaire owner of the NBA's Dallas Mavericks team, has been mentioned as a potential buyer, and "I don't think he needs to go to a bank." He also noted that investors affiliated with the Chicago-based private equity firm Madison Dearborn Capital Partners LP fall into that same category.

"I don't think the Cubs would have a hard time finding people to buy it," he said, joking that "the Chicago people don't want the guy from Texas [i.e. Cuban] buying it and taking it out of town."

Even with the currently unsettled conditions, the analyst said that new Tribune owner Sam Zell would be better advised to not try and wait until the markets calm down, because "given the trend in the business and the minimal room he has over his debt covenants, I think he would be more anxious to get the money now than later. Based on his third-quarter numbers, he had a little room - but he's not going to get a better price later on."

Noting that the Cubs' hopes of breaking their 100-year World Series championship drought had been dashed with the club's first-round playoff loss to the Dodgers, he quipped that "if they had been in the World Series, he might have gotten a better price."

Overall, he said that Cubs - whose fan base extends far, far from the Windy City - are 'a great franchise." But "nowadays getting a billion dollars is tougher than it used to be - unless you've got it in the bank."

Apria stockholders approve LBO

No issues were priced during the week to Friday in the primary market, which has been inactive since Perkins & Marie Callender's Inc. completed a $132 million transaction on Sept. 24.

Although no deals are expected to price during the week ahead, there was a development Friday on a transaction that, up until the point that the global capital markets became seized with panic, was believed to be close at hand.

Apria Healthcare Group Inc. announced Friday that its stockholders voted to approve the $21 per share cash LBO by Blackstone Group, a deal that was struck on June 18.

The LBO is expected to be completed during this quarter.

The financing includes a $150 million asset-based revolver which launched on Oct. 3 with price talk of Libor plus 275 basis points, and $1 billion of senior secured notes.

Banc of America Securities, Wachovia Securities and Barclays Capital are leading the financing.

No news has been heard on the notes.

However Apria has been expected to be one of the near-at-hand offerings if and when the high-yield primary market reopens.

Such a reopening, however, does not appear likely in the near term, according to high-yield syndicate officials who watched the turmoil unfolding in the global equity markets and credit markets during the past week.

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