Junk market seen little changed despite gyrating stocks; primary quiet

By Paul Deckelman and Paul A. Harris

New York, Aug. 10 - While the stock market was plummeting downward Friday and then rocketing back upward - at least relative to its lows - as the Federal Reserve and other central banks pumped massive amounts of liquidity into the world banking system to alleviate a possible credit crunch, the high yield market was not really much affected, traders said, junk players mostly watching the stock gyrations and hugging the sidelines.

One of the few really big movers seen, they said, was the troubled Movie Gallery Inc., after the problem-plagued video rental chain reported a sharply wider quarterly loss from last year and its auditors issued the dreaded "going concern" warning in its 10-Q filing.

Primaryside activity, meantime, was all but non-existent as participants wisely chose to avoid being whipsawed by the ups and downs of the equity and Treasury markets.

Secondary seen relatively quiet

Secondary market performance, as measured by leading indexes, was mixed. While a trader saw the widely followed CDX index up 1/8 point at 94 1/8-94¾ - this after having plunged more than a point on Thursday - the Banc of America Securities High Yield Broad Market Index was off 0.20% on the session, to a 0.39% year-to-date return. The KDP High Yield Daily Index retreated 0.10 to 78.12, well below its 52-week high of 82.63.

While the equity markets were swinging sharply in line with the more than $100 billion of total currency infusions from the Fed, the European Central Bank and other central banks - the S&P 500 more than made up its early 1.6% deficit to end up 0.55 at 1453.64, while the Dow Jones Industrial Average slashed what at one point was a 213-point loss to just 31.14 (0.2%), finishing at 13,239.54 - "it wasn't all that crazy" in junkbondland, the first trader said.

After Thursday's dramatic pullback, "I think our market's pretty well sold out," he said, at least "for the time being, until a huge supply comes." That's fairly unlikely in the near term, with a number of prospective deals having recently been postponed, withdrawn altogether because of deteriorating market conditions, downsized, restructured or switched over to bank debt or some other type of financing. "That's kind of a problem, getting that supply done. So I think we're kind of treading water here."

He said that "we weren't that active. The messages really slowed down at the end of the day."

Another trader declared "it looks pretty boring in the bond world" compared with the dramatic peaks and valleys seen in the equity arena.

He said that at his shop "we were watching stocks more than anything." With equities having come back at the end of the day, once liquidity had been injected into the markets, "maybe the world isn't over."

A hopeful view

"It's amazing," a third trader said, "because our market did not react as you would think - the last two days, our market has felt, not necessarily firm, but definitely not weak. It's kind of holding."

He said that "we probably have guys looking to buy, versus sell, outnumbered by 4-to-1. The Fed came in and assuaged a lot of the fear in the market this [Friday] morning when they did their repos, an unprecedented three times. But our market was about unchanged."

While there are still mines bobbing up in the water, potentially ready to explode - he noted the end-of-day headlines about the Goldman Sachs Alpha hedge fund being down 24% for the year - "for the moment, it feels like things are OK, and we're just kind of holding, and we'll see how it works out."

The trader noted that a number of companies, such as EchoStar Communications, reported decent earnings in the past week, "so from a fundamental standpoint, the high yield market is in reasonably good shape. We have buyers pretty much across the board looking for paper at lower levels. A lot of it is bottom-fishing, but the guys that really had to sell did so two weeks ago."

While there could be "more [junk fund] redemptions and that kind of thing, next week," he acknowledged, "I would have expected the market to be down several points today, and it opened up down a little bit - but it came right back.

"Some stuff was down a little bit," Friday, "some stuff was up a little bit, but it was a very mixed bag. It responded well to the Fed's infusion of liquidity."

He said that it was important for market participants to "see through the panic, fear and loathing mentality." The focus, instead, should be "on the fundamentals. Stuff is lower, and except for the hedge funds being forced to sell, a lot of insurance companies, and money managers, who have cash, are looking to buy. It's just a matter of price now."

Noting the new deal for Vector Group that priced earlier in the week, and the fact that "we're hearing of some transactions getting done sort of behind the scenes, I think we'll see a calming down in the next couple of weeks, and things getting back to normal."

A more ominous view

A much less sanguine view of the situation comes from Bill Featherston, a managing director for J. Giordano Securities Group in Stamford, Conn.

"The more uncertainty there is, the worst it's going to get," he warned. The new-deal calendar at this point "is a very questionable calendar in terms of whether they will actually be able to bring some of these deals that are stuck in the pipeline.

"I think whenever you have this much uncertainty, the market is going to act in some way rationally. You'll have spikes up, when you approach a weekend perhaps, and you'll have spikes down, when people discover that between the foreign central banks and the Fed, the liquidity has gotten so bad that they have to inject money into the system. And all the while, you'll have names like Countrywide Financial coming up with pronouncements like they did today that they'll have to eat some of their own loan production because they basically can't sell it."

Featherston said that in the short term, the Fed liquidity injections are "a good thing because it shows the Fed is paying enough attention and is not going to let things get out of hand - longer term, it's perhaps a bad thing," because it's a sign the system is "in disarray."

Noting the high yield rally seen in the beginning of the week, until it was stopped cold on Thursday, Featherston dismissed it - and Fed assertions that the subprime problems won't have lasting impacts on the greater economy - as so much "wishful thinking."

Movie Gallery moves lower

One of the few junk names seen actually doing much of anything Friday was Movie Gallery. A trader said its 11% notes due 2011 fell sharply in trading late in the session after the embattled Dothan, Ala.-based Number-Two U.S. video rental store chain operator released its 10-Q quarterly report showing a much wider second-quarter loss versus a year earlier - and warning that its ability to continue as a going concern is in doubt.

"Movie was quoted a lot," a trader said, noting that by the end of the session, the bonds were traded in a wide 15 bid, 20 offered context, down from Thursday's finish around 23 bid.

However, he said there had been "not a whole lot of volume."

Another trader saw the bonds off 5 points on the session at 15 bid, 18 offered, citing the company's "poor" quarterly results.

Movie Gallery's Nasdaq-traded penny-stock shares plunged 8 cents Friday (17.80%) to 37 cents, while volume of 1.8 million shares was about 1½ times the norm.

In its quarterly report to the Securities and Exchange Commission, the company said that its per-share loss jumped some twentyfold to $9.96 in the latest period, ended July 1, versus 47 cents a year earlier. Revenue slid 6% to $561.2 million from $601.3 million a year ago. As of the end of the quarter, the company had $45.5 million of cash and cash equivalents, while debt stood at $768.4 million, with no borrowing capacity available under the senior credit facility it announced just this past March.

An inability to comply with the financial covenants contained in that bank credit agreement forced the company last month to seek forbearance from its lenders, who have agreed to hold off on taking any action to enforce their rights through this coming Tuesday while Movie Gallery and the lenders negotiate new terms that the company presumably can fulfill.

But Movie Gallery also said in the SEC filing that its high debt load, lack of any borrowing availability, wider losses and the need to renegotiate terms, as well as tighter credit terms imposed by many of its vendors, "raise substantial doubt as to our ability to continue as a going concern."

Primary quiet

Sources on both the buy-side and the sell-side said that the cash market was unchanged on Friday, apart from isolated name-specific action.

A high yield mutual fund manager had the high yield-tracking CDX index closing at 94 5/8 bid, 94 7/8% offered, up 1½ points on the bid side on the day.

This investor added that earlier in the week the index hit a high of 95 7/8 bid, and said that it is up because players have been covering "a huge short.

"And this time it pulled the cash market with it," the investor added.

In the primary market there was no action again on Friday. Nor had any been anticipated.

$546 million week

With no issues pricing Friday the Aug. 6 to Aug. 10 week came to a close having seen two issuers raise a combined total of $546 million by pricing one tranche of notes apiece.

Year-to-date issuance at Friday's close came to $111.84 billion in 290 dollar-denominated tranches.

So despite the fact that the new issue market has been more or less becalmed for three weeks, on a year-over-year basis 2007 issuance continues to run more than 37% ahead of that seen in the record-setting issuance year of 2006, which had seen $81.17 billion price in 236 tranches by the Aug. 10 close.

Deals in the market

High yield syndicate sources were in broad agreement on Friday that as far as the primary market is concerned there are three deals in the market.

GE Plastics remains in the market with a $2.765 billion equivalent two-part offering of eight-year notes to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic).

The Pittsfield, Mass.-based supplier of plastic resins plans to place $1.95 billion and €590 million of the notes.

Citigroup, ABN Amro, GE Capital and HSBC are joint bookrunners.

On Friday a market source, not in the deal, said that talk was circulating the market that the "Sabic" deal was likely to undergo covenant and structural changes.

The Downstream Development Authority of the Quapaw tribe of Oklahoma also remains in the market with its $235 million offering of eight-year senior notes (B-) via Banc of America Securities.

Finally Aeroflex Inc. is also believed to still be in the market with its $370 million offering of 10-year senior notes via Goldman Sachs.

Maintaining discipline

In the face of extreme volatility in the stock markets, and the credit markets which some are characterizing as "frozen," the high yield market has maintained a modicum of discipline, sources tell Prospect News.

On Friday a money manager from a high yield mutual fund said that "buy-and-hold" investors, including mutual funds and insurance companies, have money and are not under pressure to sell bonds in order to raise cash, and thus are not putting pressure on the market.

Hedge funds have been, and may still be, "unwinding," the money manager said.

When the hedge funds sell something, the mutual funds or insurance companies, realizing the hedge funds are under pressure to raise cash, are tending to submit "down-bids."

"The good thing this time is that the Street doesn't have the capital to go out and short the market," the investor asserted.

"They're too worried about other things right now. They can't afford to go out and short the cash market and just drive it down."

Bargain shopping

Elsewhere a high yield syndicate official said that a couple of hedge funds have each spent $200 million to $300 million over the past couple of weeks bargain shopping.

The source said that they tended to be playing the higher-rated energy- and defense-related names, and added that the plays typically involve $2 million or $3 million, here and there.

The source added that high double-B credits have been beaten up along with the rest of the broad market during the present sell-off, and perhaps overly so, and people are seeing bargains.

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