Junk gives up most early gains as stock sour; GM mixed on numbers; Myers deal postponed

By Paul Deckelman and Paul A. Harris

New York, July 31 - What started out as a strong advance for the junk market Tuesday ended up on a disappointing note, traders said, with the market giving up most of its early gains to end largely unchanged to only marginally higher.

They said junk took its cue from the behavior of the equities market, which started strong, towed upward by much better-than-expected earnings from General Motors Corp. - but which ended on the downside, the early gains squandered amid new fears about the damage the recent subprime loan industry blowout might be doing to the overall banking industry and the economy.

GM debt was seen bouncing around, as the early gains faded. The bonds were ending mixed, with some issues still up on the day, others not.

The GM earnings news gave a big leg up to troubled auto electronic components maker Delco Remy International Inc.'s bonds, particularly as the Anderson, Ind.-based company announced that it had reached an agreement firming up its relations with GM, a major customer.

Another big gainer in an otherwise mostly lackluster day was Western Oil Sands Inc., on the news the Canadian energy company is being bought by Marathon Oil Corp.

In the primary market, yet another prospective new deal has been put on the back burner due to unsettled market conditions, as Myers Industries Inc. was heard to have postponed both its pending bank loan deal and bond issue, which were to have been used to fund the company's leveraged buyout.

Another prospective bond deal that is not going to get done is CanWest Global Communications Corp.'s $365 million offering; the company instead will turn to bridge financing.

And two other deals, for CEVA Group plc and East Valley Tourist Development Authority, have been restructured to make them more palatable to would-be investors, high yield syndicate sources said.

"The market was flying in the morning," a trader said, "but it went out with a whimper," as the early advance lost steam, in line with the stock downturn.

He said there was "not a lot of cash activity - it was all CDS [credit default swaps], all these big program trades and stuff."

All told, he said, "it was pretty disappointing. Things started out pretty strong, with good reporting by GM. The bonds were up as much as 3 or 4 points, at one point, and then they ended up unchanged or up 1/4. The stock was up over $1 and ended up down 21 cents. The stock market was up pretty strong, but then ended up down a lot.

"I think we've got a lot more blood-letting" in store, he added.

"It was a pretty volatile day," another trader said, "as the index that everyone follows traded up, but then kind of leaked out as we rounded [down] the session.

"There didn't seem to be widespread selling," he said, adding that "here and there, people were able to put some money to work."

The first trader noted that the widely followed CDX index of junk bond performance, which had risen nicely during Monday's session to close above 92, went up by as much as 2½ additional points on the day Tuesday - but then, as stocks turned south and junk players began pulling in their horns, those early gains vanished, and the index closed at 903/4-911/4, down 1 3/8 points on the day.

And with regard to the recent trampling that has taken place in the junk market, a source told Prospect News on Tuesday that the Merrill Lynch High Yield Master II index widened 126 basis points during the month of July, boosting the yield-to-worst spread to 424 basis points.

The source added that the spread spiked to 428 basis points on July 27, its widest since May 2005.

GM cruises to profitable quarter

General Motors gave the junk bond market and the equity market alike a big jump start in the early going, as the world's largest auto maker announced second-quarter net income of $891 million, largely due to its lucrative overseas operations. GM's North American operations still posted a $39 million net loss for the quarter, but it was considered a vast improvement from its year-ago performance.

That pushed the GM bonds up 3 or 4 points, the trader said, although he saw the company's benchmark 8 3/8% notes due 2033 closing out the day perhaps ½ point higher at 81 bid, 81.5 offered.

The cost of a CDS contract on GM ended the day in a range of 645-655 basis points - up sharply from the early tight level of 560 bps, though still well below the bloated levels above 800 bps to which those contracts had moved last week.

Another source put the 8 3/8s down about 5/8 point at 82, and saw the 8% notes due 2031 issued by GM's still 49%-owned General Motors Acceptance Corp., now GMAC LLC, down ¾ point at 92.25.

However, at other desks, GM's bonds were seen considerably better on the day.

A trader quoted the 8 3/8s up 1½ points at 82 bid, 83 offered, saw the company's 8¼% notes due 2023 a whopping 5 points better at 83 bid, 85 offered, while its 7 1/8% notes due 2013 were at 88 bid, 90 offered, up 3 points.

Another market source saw the latter bonds at 87 bid, up 3 points.

Remy rockets upward

Elsewhere in the automotive arena, a trader saw Remy International's 8 7/8% notes due 2007 "jump a bunch" of points, ending at 107 bid, 110 offered, which he called up 10 points on the day.

Another market source saw those bonds open just above 102 - actually down a point from Monday's finish - but then jump to above 108 in the afternoon, on the news of the GM agreement. GM is a major Remy customer. Several large trades boosted the bonds to around 108.5 at the close, the source indicated.

Remy's other bonds were seen quieter, although its floating-rate notes due 2009 were seen having moved up to par bid from prior levels in the high 98s.

Besides announcing its agreement firming up its relationship with GM, Remy, which expects to file a prepackaged bankruptcy case to implement its restructuring proposal, said it had lined up debtor-in-possession and exit financing from its banking group.

Takeover fuels Western Oil Sands rise

Elsewhere, Western Oil Sands' 8 3/8% notes due 2012 were seen having jumped to around 110 from recent levels in the 106 area, on the news that Marathon Oil, the fourth-largest U.S. oil and gas company, agreed to buy it out in a $6.2 billion deal.

Marathon will pay $3.6 billion in cash and about $1.9 billion in shares and will assume debt of $650 million, including the bonds.

The deal, when completed, will give Marathon control of a 20% stake in the Athabasca Oil Sands Project, one of the world's largest untapped reservoirs of unconventional crude oil.

Bally gets a boost

A trader saw Bally Total Fitness Holding Corp.'s 10½% senior notes due 2011 bid at 103.5 in the morning, although he could not say whether they went anywhere after that.

A source at another shop had only Monday's levels for those bonds, at 104.5 bid, and for the company's 9 7/8% subordinated notes slated to come due on Oct. 15, seen at 91.

Yet another trader said that the subordinated notes were trading at a wide 87 bid, 90 offered, which he called up a point on the day.

Bally's shares - trading over the counter since their delisting by the New York Stock Exchange - were up 4½ cents (12.32%) to 41 cents - apparently given a boost by the possibility that the troubled company might still opt for a restructuring plan which does not freeze out the current shareholders, as the official company reorganization plan would.

Shareholder Harbinger Capital Partners filed a draft of an alternative pre-packaged Chapter 11 plan of reorganization with the Securities and Exchange Commission.

Harbinger said it is willing "to provide the current equity holders with some combination of cash and equity in the reorganized company" after Bally announced its plan to move forward with a its own prepackaged reorganization.

The Chicago-based fitness center chain operator on Friday announced that over 99% of the holders of the 10 1/2s and 78% of the holders of the 97/8s who cast ballots prior to expiration of the solicitation period voted in favor of its own plan, which would essentially turn the company over to its bondholders.

The company also said at that time that it had been unable to reach agreement with a group of shareholders who had put forward an alternate reorganization plan, and decided to go ahead and file its own plan - although it told those shareholders that it is prepared to continue discussions on their proposal.

On Tuesday, that shareholders' group led by Harbinger Capital Partners Masters Fund I Ltd. said in a filing with the Securities and Exchange Commission that it continues to negotiate with Bally.

"The group has been and remains willing to provide the current equity holders with some combination of cash and equity in the reorganized company," Harbinger said in its filing. The alternate plan would include a $228.5 million cash investment in exchange for 100% of the company's equity and a reduction of its subordinated bond debt to $200 million. That plan would also pay current shareholders about 40 cents cash per share.

The new deal market

Most, but not all, of Tuesday's primary market news was negative.

First, the good news.

Information surfaced on two deals which, in the face of the extremely choppy conditions said to presently prevail in the primary market, have taken a licking but appear to still be ticking.

CEVA Group, plc slashed its junk bond deal by $1 billion equivalent, replacing that debt with bridge financing.

The company, which is in the debt markets for financing to help fund its acquisition of Netherlands-based logistics and supply chain management company, EGL Inc., meanwhile restructured the remaining $400 million tranche of second-lien secured notes - a tranche which didn't even exist when CEVA launched the deal.

The secured notes will be offered only in a dollar-denominated fixed-rate tranche. Proposed euro-denominated and floating-rate tranches were withdrawn.

The talk is for a yield in the 10% area.

Pricing is expected on Wednesday.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. are joint bookrunners.

Elsewhere, East Valley Tourist Development Authority downsized to $275 million from $290 million its offering of senior secured notes (B+) on Tuesday.

In addition the Coachella Valley, Calif.-based gaming company decreased the maturity of the notes to seven years from eight years.

East Valley Tourist Development also increased the price talk. The notes are now expected to price with a coupon of 10½% to yield 11%. Previously the notes had been talked at the 9½% area.

The project financing deal, which is being led by bookrunner Merrill Lynch & Co., is expected to price before the end of the week.

In a prior restructuring the company withdrew a planned tranche of seven-year floating-rate notes.

Deals in the dust

Now for the bad news.

Primary market watchers bore witness as two more bond transactions were withdrawn due to market conditions.

Myers Industries Inc. postponed its $265 million offering of 10-year senior subordinated notes (B3/CCC+).

Goldman Sachs & Co. was the bookrunner.

Proceeds were to be used to help fund the acquisition of the Akron, Ohio, manufacturer of polymer products by GS Capital Partners.

Elsewhere CanWest Global Communications Corp. announced the postponement of its C$365 million high-yield debt offering, replacing it with bridge financing.

Goldman Sachs & Co. and Credit Suisse were the bookrunners.

Proceeds were to be used to help fund the acquisition of Alliance Atlantis Communications Inc. by CanWest and GS Capital.

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