GM, Ford off ahead of D.C. bailout showdown; oil slide hurts energy names; funds off by $60 million

By Paul Deckelman and Paul A. Harris

New York, Dec. 1 - General Motors Corp.'s bonds, and those of its major domestic arch-rival, Ford Motor Co., were mostly seen lower on Monday as investors awaited Tuesday's scheduled submission by Detroit's battered Big Three of their comprehensive turnaround plans to a skeptical Congress, which wants details on just how GM, Ford and Chrysler LLC plan to turn their faltering operations around before the legislators will even consider giving the carmakers the $25 billion bailout they are seeking. The chief executive officers of the three companies - this time presumably arriving in the nation's capital by means other than expensive corporate jets - will personally make their pleas for aid before the relevant congressional committees later this week.

The continued slide in oil prices is taking its toll in the high yield energy patch, particularly in Callon Petroleum Co., whose shares and bonds have been sliding since its announcement late last week that it will suspend development on a key Gulf of Mexico oil field. Even the larger and considerably more financially secure Chesapeake Energy Corp. is seen facing challenges in the current environment.

Harrah's Entertainment Inc.'s bonds were better, as the Las Vegas-based gaming giant announced positive preliminary results from its current debt-swap effort. Harrah's rival MGM Mirage was also seen better, despite a lack of fresh news about the company. The not-unexpected news that Trump Entertainment Resorts Inc. will hold off on making the coupon payment that came due Monday while it negotiates with its holders was seen having little impact on that paper.

Traders said that overall, the market was lower, in line with a sharp drop in stocks, but they said that the junk decline was restrained, perhaps a function of the relatively quiet market on the first day back following the long Thanksgiving Day holiday break - and the first day of the final trading month of 2008.

Funds fall by $60 million on week

Market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., meanwhile said that in the week ended Wednesday $60 million more left the weekly-reporting funds than came into them. Those numbers normally make the rounds of trading desks on Thursday afternoon, but were delayed this week due to the Thanksgiving holiday break, which saw Junkbondland completely closed on Thursday and operating with half-staffing and for just a partial session on Friday.

The $60 million was the second consecutive outflow, following the $121.8 million cash exodus seen in the previous week, ended Nov. 19.

The high-yield mutual funds' net assets fell by $1.2 billion, to $41.6 from $42.8 billion over that time period, according to a market source, who added that the funds' net assets are down nearly 40% year-to-date.

The two consecutive outflows strengthened the recently negative tone of junk fund flows; in the last 11 weeks, including the latest results, there have now been eight outflows, including a skid of five straight 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 11-week period have totaled $1.447 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 24 weeks, dating back to the week ended June 18, with 11 inflows and 13 outflows seen, the funds have still lost a net of $1.61 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 heading into the homestretch, inflows, after that slow start, remain ahead, with 26 inflows versus 22 outflows seen in the 48 weeks since the start of 2008, according to the analysis. According to market sources, net inflows to the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $304.1 million, down from $364.1 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 11-week run of straight inflows.

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 head south

The widely followed CDX High Yield 11 index of junk bond performance fell by 1¼ points on Monday, a trader said, quoting it at 72¾ bid, 73 offered. The KDP High Yield Daily Index meantime fell by 21 basis points to 48.18, while its yield widened by 8 bps to 17.23%.

In the broader market, advancing issues trailed decliners by a better than five-to-four margin. Overall market activity, reflected in dollar volumes, was nearly 20 times the virtually comatose post-holiday pace seen in Friday's abbreviated session.

Even with that increased volume level - versus a baseline of virtually zero, of course - a trader said that Monday's session needed "almost non-existent."

Another trader suggested that it was "a most uneventful day, at least in relation to the dramatic drop in stocks," which brought to an abrupt end the heady, almost giddy advance seen over the previous five sessions. Profit-taking off the hefty gains racked up over the four trading days last week and on the Friday before that was a part of the retreat - but so was a shriveling of the fragile newfound hopes that the worst of the financial crisis may be past, that the government bailouts announced last week, on top of the previous billions, would finally be enough to jump-start the frozen credit markets, and that president-elect Obama's newly appointed financial team would ease investor angst and reawaken market confidence.

Latent recessionary fears were officially confirmed by the non-profit National Bureau of Economic Research, which said the economy had actually been in a recession for a year, since last December. That was enough to kayo the nascent rally and cause the Dow Jones Industrial Average to spit back up 679.95 of the more than 1,000 points it had racked up last week - the fourth-biggest daily one-day plunge ever in the bellwether market gauge, which ended the session down 7.70% at 8,149.09. Broader indexes were even harder hit, with both the Standard & Poor's 500 and the Nasdaq composite indexes down nearly 9% on the session.

But even with the latest equity debacle looming in the background, the trader said that high-yield market volume was "very light, for sure," and the stock rout did not translate into a widespread junk plunge.

He saw the Community Health Systems Inc. 8 7/8% notes due 2015 - thought by some to be a proxy for the overall market because of its large size, liquidity and widespread distribution -- trading "down, of course," going as low as 80 bid before ending on a round-lot basis at 80.5, versus 81.75 on Wednesday, the last time there were any sizable trades. However, he saw only $7 million of the Franklin, Tenn.-based hospital operator's bonds changing hands.

In that same sector, he saw HCA Inc.'s 9¼% notes due 2016 also lower, at 80.75 bid, versus 82 on Friday, on volume of $12 million.

Autos off as Hill showdown looms

With the chief executive officers of Detroit's beleaguered Big Three scheduled to be back in the hot seat this week on Capitol Hill, and with the three old-line domestic carmakers required to deliver their comprehensive turnaround plans to Congress on Tuesday, giving the lawmakers two days to peruse them before hearings begin later in the week, automotive bonds - which had jumped during Friday's sleepy half-session, in relatively active dealings - were mostly seen back on the slide on Monday.

While a trader quoted General Motors' benchmark 8 3/8% bonds due 2033 up 2½ points on the session to 19.5 bid, 20.5 offered, and saw Ford's 7.45% bonds due 2033 better by 6 points at 24 bid, 26 offered, most others in the market took a contrary view.

A market source at another desk saw the GM bonds lose more than 5 of the 6 points which those bonds had racked up on Friday, to finish at about the 19 bid level.

Another trader, quoting the bonds strictly on a round-lot basis, saw the benchmarks at 20 bid but called them down 3 points from Friday's last round-lot level and said it was the most active purely junk issue of the day, with over $24 million changing hands.

While seeing that issue down, he said that GM's 7.20% notes due 2011 traded up to 27 on a round-lot basis from 24 on Wednesday, just before the holiday break, noting "quite a disparity" between the two issues. But he also noted that there was "very light" volume on the '11s with just $2 million traded.

He saw GMAC LLC's bonds generally up about a point, with the lender's 8% bonds due 2031 trading at 34, though on just $3 million of volume and its 7¾% notes due 2010 at 55 bid, on $9.5 million; but its floating-rate notes due 2014 fell ¾ point to 27, with $8 million changing hands.

The trader also saw Ford's 7.45s final round-lot trade at 23, down from 26 on Friday, on volume of $9 million, while Ford Motor Credit Co.'s 5.80% notes coming due in January bumped up 5/8 point to 90.125.

At another desk, a market source saw the Ford Credit 7% notes due 2013 up a point at 44 bid, while its 7.25% notes due 2011 gained nearly a point to close at just under 45 bid. Parent Ford's 7.45s were quoted down 3 points at 23 bid.

The source also saw GM's 8.80% notes due 2021 up a point around the 20 mark, but saw GMAC paper mixed, with its 7% notes due 2012 nearly 2 points ahead at 34.5, but its 5 5/8% notes scheduled to come due next May losing 3 points to end at 67.

The bonds were mostly lower in line with a skid in the two carmakers' New York Stock Exchange-traded shares, with GM falling as much as 22.7% intraday before ending down 65 cents, or 12.40%, at $4.59. Volume of 58.5 million shares was 58% heavier than usual. Ford's shares swooned as much as 24.9% before ending down 14 cents, or 5.20%, at $2.55, on volume of 291.9 million, over 3½ times the norm.

Investors nervously waited the submission of the two companies' turnaround plans, and that of smaller rival Chrysler, by the Tuesday deadline set by congressional leaders. No details have been publicly released, although The Wall Street Journal reported that GM - looking to lop off some of its approximately $45 billion of outstanding debt, which costs it well over $1 billion in interest costs annually - might negotiate with its creditors about swapping some of that paper for equity in the company as part of its plan. GM is also considering trying to dispose of some of its brands, including iconic muscle-car maker Pontiac - a GM fixture since 1926 - Saturn, Saab, and/or the humongous Hummer. GM would prefer a sale to an outright shutdown, since the latter course would require considerable cash expense. The Journal further reported that although GM CEO Rick Wagoner has maintained that bankruptcy is not an option, the company's board would consider it if the bailout effort fails.

Ford, meanwhile, is considering the sale of its Volvo nameplate - the last remnant of Ford's ill-fated foray several years ago into the European luxury car market. Ford, with about $26 billion of debt outstanding, but with more of a cash cushion than GM, is not reported to be looking at any debt swaps at this time as GM is. The stated GM and Ford debt loads do not include the additional billions of bonds and other debt separately issued by their respective auto finance units, GMAC and Ford Credit.

The carmakers' plans are also expected to include some labor-cost concessions from the United Auto Workers union.

Wagoner, Ford CEO Alan Mulally and Chrysler counterpart, Robert Nardelli, along with UAW head Ron Gettelfinger, are due on Capitol Hill for make-or-break testimony on Thursday before the Senate Banking Committee and on Friday before the House Financial Services Committee. When they were last in Washington, the lawmakers raked the corporate chiefs over the coals for having traveled to the nation's capital in luxurious corporate jets, saying that was a sign that the executives were massively out of touch with the economy's problems, including those of their own laid-off employees. The executives are not expected to repeat that public relations blunder; Ford has already said that Mulally will drive himself to Washington from the company's Dearborn, Mich. headquarters in a gas-thrifty Ford hybrid vehicle to show that he "gets it." Travel plans for the other executives were not immediately disclosed.

Other auto names lower

Elsewhere in the sector, a trader saw United Auto Group's 7¾% notes due 2016 up ½ a point to 38.75, on volume of $10 million, "unusually high volume" for such a credit. He said the auto retailer is "not a name that I see very often in the Most Actives column."

Another trader said that from where he sat, "nobody can figure out why ArvinMeritor is as weak as it is," even though it's a part of the troubled auto industry. "Everybody keeps asking why - what the hell is going on with the company? Everybody is saying they should be up 10 or 15 points - but they're not."

The Troy, Mich.-based manufacturer of vehicle systems' 8¾% notes due 2012 were trading in the upper 50s early last month, but then after its latest quarterly numbers, they slid into the 40s - and briefly, into the upper 30s on several small trades early last week - before coming off those lows and trading Monday in a 49-50 context.

In line with a generally weaker auto sector, its NYSE-traded shares fell 75 cents, or 18.99% Monday, to end at $3.20, on normal volume of 1.6 million.

ArvinMeritor reported on Nov. 18 that it had a fiscal fourth-quarter net loss from continuing operations of $165 million, or $2.29 per share - far wider than its year-earlier loss of $23 million, or 32 cents per share. However, much of the loss was due to non-cash income tax charges of $183 million; excluding such one-time items, the company showed earnings of 38 cents per share, versus a 6 cent per share loss a year earlier.

But the company also said that given the tough market conditions, it expects to report an adjusted 2009 profit of 80 cents to $1 per share on $4.9 billion to $5.2 billion in sales - well under Wall Street expectations of some $1.35 per share of adjusted earnings, on around $6.8 billion of revenue.

Oil slide hurts energy names

Outside of the autosphere, traders noted softness in the energy sector, given the continued slide in world crude prices, which closed below $50 per barrel Monday on the New York Mercantile Exchange. One noted that Callon Petroleum's 9¾% notes due 2010 "have been getting crushed over the last couple of days."

He said that the Natchez, Miss.-based independent exploration and production company's bonds were down around 10 points since last Tuesday, quoting them Monday trading on a round-lot basis at bid levels between 70 and 74, but with small odd-lot pieces trading as low as the 50s, and most other odd-lot dealings in the 60s.

Meanwhile, he said "the equity's been getting crushed" - the NYSE-traded shares shed a whopping two thirds of their value in trading on Wednesday and Friday, against the backdrop of a surging stock market, and on Monday, they fell another 55 cents, or 22.45% of their remaining value, to end at $1.90 on volume of 2.3 million, over five times the average daily turnover.

The catalyst for that carnage, he noted was "they announced that they were going to stop drilling [in a key oilfield] because the expenses got too great. They suspended development of a couple of projects."

Callon said last week that it was suspending development on its 50% owned Entrada field in the Gulf of Mexico due to lower commodity prices and cost overruns. Entrada may be Callon's most important deepwater project, since it had about 73% of the company's estimated net proven reserves as of Dec 31, 2007. Callon had bought out multinational giant BP's big stake in the field last year, and had then moved aggressively to bring the field online by early next year, which would have doubled companywide production in the process. As recently as last Month, company executives had said on a conference call that they still thought the economics of the project were good and looked forward to completing it.

However, the slip-sliding price of oil has changed many calculations in the energy sector. In Monday's Nymex trading, the January contract for light, sweet crude fell $5.15, or 9.5%, to $49.28 a barrel, the lowest settlement since May 23, 2005. Current levels around just one third of the record high $147.27 close seen back on July 11.

Even larger, more financially secure E&P energy companies are feeling the pinch; Chesapeake Energy's 6¼% notes due 2016 were being quoted "down half a point or so" at 69 bid, 71 offered, while El Paso Corp.'s 7% notes due 2017 lost 2 points to end at 70. Denbury Resources Inc.'s 7½% notes due 2015 were also seen down a deuce at around 67.

In a research note on Monday, analyst Carl Blake of the Gimme Credit investment advisory service said that while Oklahoma-based Chesapeake has had some recent success in selling off properties to augment its cash position, including the just-closed $3.375 billion sale of about a one-third interest in its Marcellus Shale assets in Appalachia, "given the current financial environment and weak natural gas prices, we find Chesapeake's strategy of monetizing cash-producing properties and its commitment to outspending operating cash flow to be aggressive." He noted that the Marcellus sale, for instance, valued those assets "at a much lower price" than similar recent deals by industry peers, forcing Chesapeake to upsize the originally planned 25% sale to 32.5% in order to make up the cash shortfall.

And having no sooner closed that sale, the analyst cautioned, the company "will need to raise at least $570 million from additional transactions during the month of December to meet its goal of exiting 2008 with at least $3 billion of liquidity."

Blake also noted that permanent debt reduction appears to be "a low priority" for management. While there is no "imminent liquidity crisis" as Chesapeake "has no major debt maturities until 2012," still he cautioned that "its vacillating financial strategies cause us concern," and maintained his "underperform" rating on Chesapeake's senior bonds.

Harrah's higher on swap success

Harrah's Entertainment's bonds were seen better, as the Las Vegas-based casino giant announced strong preliminary results for its recently unveiled offer to take out some of its existing bond debt by giving holders new debt. It said that as of the early consent deadline on Friday, some $4 billion of existing debt had been tendered to the oversubscribed offer (see related story elsewhere in this issue).

Harrah's 5 3/8% notes due 2013 moved up to 23 bid from 20 last week, on $8 million bonds, while its 8 1/8% notes due 2011 were also up by 3 points to 38 bid, though only on volume of $1 million.

A trader also saw its 5½% notes due 2010 rise to 50 bid from 47 last week, although its 10¾% notes due 2016 -- the lowest priority notes in the laddered order - were up ½ point at 23 bid, 23.25 offered.

Among other gaming issues, a trader saw MGM Mirage's 8½% notes due 2010 trading at 62 on a round-lot basis, "a nice move" up from 56.75 last week, on $13 million traded. However, its 6% notes coming due next October lost a point and closed around 89.

Trump Entertainment Resorts' 8½% notes due 2015 got as low as 10 bid on the news of its missed coupon, and were trading on a round-lot basis at 13 versus 15 last Wednesday, but with only about $2.5 million of the bonds changing hands.

The Atlantic City, N.J.-based casino operator said it would not make the $53 million interest payment due Monday on the $1.25 billion of outstanding bonds, instead invoking the standard 30-day grace period, and saying it hoped to negotiate new terms with the debtholders.

Harrah's extends early deadline

The new issue market remained dormant.

On the restructuring front, Harrah's Operating Co., Inc. extended its private offers to issue up to $2.1 billion of new 10% second-priority senior secured notes for 10 series of outstanding notes.

Harrah's also lowered the acceptance cap for priority 2 notes to $500 million from $875 million.

The company said that roughly $4 billion, or 36%, of the old notes had been tendered as of the Nov. 28 close.

By reducing the amount of priority 2 notes - the longer-dated non-LBO notes - covered by the offer by $375 million, Harrah's appears to be making room for holders of the longer-dated LBO-related 10¾% cash pay notes and 10¾%/11½% toggle notes, said a sell-side source not in the deal.

At the outset of the exchange it was believed that those two issues, commanding comparatively high exchange prices of $0.70 and $0.57 on the dollar respectively, would be a comparatively small part of the exchange, the source added.

By allowing more room for the holders of the LBO paper, and therefore less room for the priority 2 notes, Harrah's may be attempting to prod holders of the more deeply discounted priority 2 notes to move into the deal, the source reasoned.

The LBO-related 10¾% cash pay notes closed higher on Monday at 23¼ bid, 23¾ offered, up from last week's close of 22½ bid, 23½ offered, according to a source from a hedge fund.

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