Junk holds on even as stocks sink; GMAC little moved despite wider loss; Pinnacle gains on gaming votes

By Paul Deckelman and Paul A. Harris

New York, Nov. 5 - Wall Street's pre-election rally Tuesday may have faded come Wednesday, done in by profit-takers and renewed market focus on expected negative economic data, but in Junkbondland, things were seen pretty much holding their own, with most market measures trending higher.

One example of that continued more positive trend was GMAC LLC, whose bonds were seen relatively little changed, despite wider third-quarter losses which the Detroit-based automotive and residential lender reported, largely the result of considerable red ink at its Residential Capital LLC mortgage unit.

And bonds of coal companies like Peabody Energy Corp. and Massey Energy Co. were steady, apparently unfazed by Tuesday's election to the presidency of Barak Obama, who was quoted by Republicans during the campaign as having said that companies building new coal-fired power plants face the prospect of being "bankrupted" by his administration's strict application of cap-and-trade regulations for carbon emissions.

Also on the political front, Pinnacle Entertainment Inc.'s bonds were up, given a boost by voter decisions Tuesday in gaming-related referendums in Missouri and Ohio.

On the primary front, new-deal activity remained quiescent, although MGM Mirage's recent offering of five-year bonds continued to inch upward.

Market indicators mixed

The widely followed CDX High Yield 11 index of junk bond performance, which had risen by 7/8 point on Tuesday, fell by that same amount on Wednesday, a trader said, quoting it at 81½ bid, 82 offered.

However, the KDP High Yield Daily Index meantime rose by 25 basis points to 54.90, as its yield tightened by 11 bps to 15.47%.

In the broader market, advancing issues led decliners by a five-to-four margin. Overall market activity, reflected in dollar volumes, rose about 11% from Tuesday's pace.

"The high yield market for the most part held there all day, as the Dow crapped out," a trader said, remarking on the bellwether Dow Jones Industrial Average's plunge of 486.01 points, or 5.05%, causing it to end at 9.139.27. Other broader indexes followed suit.

But in high yield, he continued, "we really didn't see most of our levels getting any cheaper."

"So," said another trader, sardonically, "Obama is in and we're on our way to prosperity. Happy days are here again - a chicken in every pot, and everybody's driving a new Chevy."

Yet another trader remarked that "what a difference 24 hours and a Democratic president make," in commenting on the sudden negative turnaround in equities on Wednesday, adding "although he may just be the scapegoat." He contrasted that with the strong pre-election rally "when he was expected to win - all of a sudden, everyone is dumping on it. Market psychology is impossible to figure out."

However, cooler heads seemed to prevail among junk marketeers because "in any case, I really did not see a lot of selling. Of course, there were selective issues that were down, but I didn't see widespread weakness in response to the equity market." However, he acknowledged, there were "players who just pulled in the reins and ran to the sidelines once again."

But the day in high yield was described as decent by a syndicate official who added that although cash junk was lower on the session by about ½ point, it did not suffer nearly so much as equities.

The major U.S. stock indexes all retreated by more than 5% during the post-Election Day session.

"Things gave up in the afternoon," the source said, adding that there were "a few of the good" names actually up on the session, on decent volume.

GMAC steady despite wider loss

A trader said that GMAC's 8% bonds due 2031 "hung in there" despite the wider losses the company reported, seeing them at 45.5 bid, 46.5 offered, down perhaps a point. "That was about it" on the loss, he said.

He also saw GMAC's 6 5/8% notes due 2012 "right around 51-52 - pretty much unchanged."

He said that all of GMAC's bonds "had run up a lot " late last month when they got the approval to participate in a Federal Reserve commercial paper facility aimed at unfreezing the locked-up market for short-term debt, with the 6 5/8s formerly trading at 57. "Now they're back down to 51 - they've all lost 5 or 6 points since that run-up happened that day."

Another trader saw the GMAC 8s "down a couple" of points, quoting them 2½ points lower at 45 bid, 47 offered.

Yet another saw the 8s down ¾ point at 45.75, but said that GMAC "was not down as much as you would think, given the size of the reported loss."

And at another desk, the GMAC's 8s were actually quoted a point higher at 44.5 bid, 46.5 offered.

GMAC - 49% owned by General Motors Corp. and 51% owned by Cerberus Capital Management LP - reported a third-quarter loss of $2.52 billion, widening out from $1.6 billion a year earlier. Revenues slid to $1.72 billion from $2.25 billion a year ago - a 24% drop.

The bigger loss was largely due to the troubles of GMAC's wholly owned Residential Capital mortgage lending unit, which lost $1.91 billion as the housing and mortgage industries remained in turmoil. While that was less than the $2.26 billion that ResCap lost a year earlier, GMAC still warned that absent new economic support for its Minneapolis-based problem child, there was "substantial" doubt about ResCap's ability to survive as a going concern.

A trader meanwhile saw ResCap's 6 1/8% notes scheduled to come due on Nov. 21 at 88 bid, down from the last previous level, 92, seen last Wednesday - while its 6 3/8% notes due 2010 were actually up 5 points at 23.625, despite the poor numbers which GMAC reported for ResCap and its "going concern" warning.

"Maybe it's just a dollar-play thing - the riskier a credit is, the yields get out of whack because nobody wants to own a high dollar-price risky security," he suggested.

He noted that the settlement of any trades done Wednesday would be on Nov. 10, so the 6 1/8% note is in effect a 10-day piece of paper - and its yield was 436%, or 43,600 bps over comparable Treasuries. "How's that for a return - if you get paid at par on the 21st?" He said that given GMAC and ResCap's current financial problems, such a scenario was "probably unlikely. I'm guessing they'll do some kind of exchange" to take out the $162.734 million of the currently outstanding bonds - either new debt or debt for equity.

GM stays parked; Ford falls

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 unchanged at 27.5 bid, 29.5 offered. He also saw the Ford Motor Co. 7.45% bonds due 2031 down 1½ points at 27.5 bid, 29.5 offered.

Another trader quoted the GM benchmarks at 29.625 bid, down 1/8 point on the day, and saw the company's 7.20% notes due 2011 unchanged at 38 bid.

He saw Ford's 7.45s at 28 bid, versus 30.75 before, but on "very light volume - just a couple of million."

However, at another desk, the Ford bonds were seen unchanged at 24 bid, 28 offered. GM's long bonds were up ½ point to 27 bid, 29 offered.

Influential TV investment guru Jim Cramer meanwhile opined Wednesday that he believes that the incoming Obama administration "is sophisticated enough" to realize that capital as well as labor must be helped in any kind of federal rescue action for the beleaguered auto industry, and predicted that "the government will guarantee the bonds" of GM and Ford - though not their common stock - as well as making sure that "the unions will be preserved and the factories will be preserved" - even if the carmakers themselves as we now know them are not.

Cramer warned in an interview on his TheStreet.com website that the government will eventually have to save GM the way it saved AIG - by taking an 80% ownership stake in it, and would presumably do likewise for Ford and Chrysler, calling the Big Three carmakers collectively "the backbone" of the U.S. industrial economy.

He said that the huge losses suffered by GMAC and ResCap, which indirectly affect GM'S finances, are "a great opportunity" to craft a rescue plan for the struggling automotive giants.

Coal steady despite Obama concerns

Coal-company bonds held their own, even with the renewed media focus in the last days of the election campaign on Barack Obama's opposition to new coal-fired power plants and an alleged threat by the president-elect to "bankrupt" any company building such facilities.

A trader said that the coal names "didn't seem too active." He saw Peabody Energy's 6 7/8% notes due 2013 trading around 90 bid, "about the same," while the St. Louis-based coal operator's 7 3/8% notes due 2016 were at 86.5 bid, versus levels around 84.5 bid several days earlier.

He saw Massey Energy's 6 7/8% notes due 2013 "were about the same" at 81.5 bid,. 82.5 offered, so the election of Obama "didn't really affect these levels at all."

Another trader saw Massey's bonds up ½ point at 82.5, while the Peabody 6 7/8s were ¼ point better at 90.25 and its 7 3/8s gained ¾ point to 86.75.

Coal suddenly became a red-hot topic in the last days of the campaign when the Republicans began airing a recording of an interview Obama had given to the San Francisco Chronicle earlier this year in which he outlined his position on global warming and curbing the use of energy sources which leave a large carbon "footprint."

"What I've said is we would put a cap-and-trade policy in place that is as aggressive if not more aggressive than anyone out there," Obama told the Chronicle's editors. "So if someone wants to build a coal-fired plant, they can. It's just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that's being emitted." The Republicans claimed that Obama wants to "bankrupt" a major industry for ideological reasons; the Democrats claim that the interview excerpt was quoted out of context.

Pinnacle hits a peak after vote

In another politically-related development, Pinnacle Entertainment's 8¼% notes due 2012 were seen up nearly 4 points at 74.5 bid, and the Las Vegas-based gaming company's New York Stock Exchange-traded shares ended up 37 cents, or 6.23%, at $6.31.

J.P. Morgan analyst Joseph Greff said in a research note that "we think, given the decisions in both Missouri and Ohio, that Pinnacle is the biggest winner this Election Day, as the removal of Missouri loss limit will benefit Pinnacle at their Four Seasons/Lumiere Place property in downtown St. Louis."

Ohio voters rejected a measure that would allow casinos, thus limiting new entrants into the Midwest gaming market. Missouri voters voted to lift a $500 daily cap on a gambler's permissible losses.

Elsewhere in the gaming sector, MGM Mirage's new 13% notes due 2013 were seen having edged up to 93 bid, 93.5 offered. The Las Vegas-based gaming giant had priced $750 million of the notes Thursday at 93.132 to yield 15%. The bonds initially traded later that session as low as 89, but have been gradually moving back up to around their issue price since then.

First Data gains as merger is lost

Elsewhere, a trader saw First Data Corp.'s 9 7/8% notes due 2015 "pretty active" in the 67-68 area, up 1 point, even as the Denver-based electronic commerce and payments processing company terminated its pending proposed merger with Atlanta-based InComm. At another desk, those bonds were seen up more than 1 point at 68.5 bid, in busy trading.

The trader also saw Land O' Lakes Inc.'s 8¾% notes due 2011 trading around 97.5 bid, "which is kind of the low-water mark" for the Arden Hills, Minn.-based dairy producer's bonds.

A trader said that Community Health Systems Inc.'s 8 7/8% notes due 2015 "kind of hung in there," staying in an 87-88 range, while another saw the bonds at 87.75 - although he called that down from the 88.5 level at which the Franklin, Tenn.-based hospital operator's benchmark bonds were trading Tuesday.

What the high-grade guys are paying

The primary market was quiet but syndicate officials were examining the investment-grade sector for clues.

On Wednesday shareholders of Hercules Inc. voted in favor of the merger agreement in which Ashland Inc. will acquire Hercules for $18.60 per share in cash and 0.0930 of a share of Ashland stock, in an approximately $3.3 billion transaction.

Ashland, which intends to fund the acquisition with proceeds from a $1.75 billion leveraged loan and $750 million of senior unsecured notes, believes that given market conditions its interest expenses will be 200 basis points higher than it anticipated when the deal was struck in July, said a capital markets source who said the information surfaced during a conference call.

That should bring interest on the debt to somewhere in the vicinity of 9½% to 10½%, the source added.

"That's what the high-grade guys are paying!" exclaimed a high-yield syndicate official, upon hearing this estimate.

For example, Altria Group, Inc., in a $6 billion three-part senior unsecured notes deal (Baa1/BBB/BBB+) priced on Wednesday, issued $3.1 billion of 9.7% 10-year notes at 99.931 to yield 9.711%, or Treasuries plus 600 bps.

Meanwhile the buzz in the high-grade market - also circulating the junk market, given that the high-grade issuers are paying rates that would have been at the high end of the junk curve 18 months ago - is that recent investment-grade issuers are none too happy with the prices they're paying to raise cash in that market.

In another deal, Virginia Electric & Power Co. priced $700 million of 8 7/8% senior notes due 2038 (Baa1/A-/A-) at 99.995 on Monday.

In the secondary the new notes traded to 105 bid, 106 offered, a source said, but added that they faded a bit on Wednesday.

Sources say that recent high-grade issuers, seeing such sizable pops in the secondary, are wondering why their bonds didn't originally print with lower coupons.

This lament failed to kindle much sympathy, however, from a trader who listened to it.

"In a market like this it's very important to leave plenty of spread on the table for investors," the source said.

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