Junk is sunk, even as Wall Street jumps; autos still struggle, Freeport falls, but some names hang in

By Paul Deckelman and Paul A. Harris

New York, Nov. 18 - The late rally on Wall Street on Tuesday seemed to have little or no positive impact on the junk bond market, participants said, with issues broadly lower and some names down multiple points. "There's absolutely no support" in the market, was how one trader put it, noting that high yield seemed to be in a capitulation mode almost as bad as anything he's seen lately - and no cathartic end in sight.

Among the big losers were automotive bonds, particularly as the Big Three carmakers, General Motors Corp., Ford Motor Co. and Chrysler LLC, sent their chief executive officers to Capitol Hill to almost literally beg Congress - many of whose members remain deeply skeptical - that they need at least $25 billion just to stay in business in the near term.

Automotive parts makers who could be badly hurt should one - or more - of the Big Three slide into bankruptcy were also well down, including Arvin Meritor Inc., which issued 2009 guidance well below what the analysts have been looking for.

Outside the autosphere, Freeport McMoRan Copper & Gold Inc.'s bonds were seen among the notable losers, falling in tandem with a slide in the Phoenix-based precious metals mining company's shares, after several equity analysts downgraded the latter securities.

Retail names continued to suffer, including Neiman Marcus and Rite Aid Corp.

Here and there, a few upsiders did emerge, including, oddly, such badly battered retailers as Bon-Ton Stores Inc. and Finlay Enterprises Inc. Another issue showing some strength seemed to be Chiquita Brands International Inc., following its shares up.

The primary arena, meanwhile, remained a ghost town.

Market indicators head south

The widely followed CDX High Yield 11 index of junk bond performance, which had lost ¾ point on Monday, continued to slide on Tuesday, with a market source quoting it at 77.36, down from Monday's 78 bid, 78½ offered, while another source pegged the index at 76.96. The KDP High Yield Daily Index meantime swooned by 96 basis points to 50.67, even though its yield was actually quoted as having come in by 13 basis points to 16.20%.

In the broader market, advancing issues trailed decliners by a margin of almost two to one. Overall market activity, reflected in dollar volumes, rose by 34% from Monday's pace.

A trader said that he saw "better sellers across the board in everything," particularly in "the smaller-tranche, illiquid names."

Things, he said "were just drifting in, for the most part."

"It seems like everybody is liquidating," a hedge fund manager said. "Everything is for sale."

Another trader characterized the high-yield market as "ugly. It really is. Of course, it's just a phase - but today's tone, or psyche, was just everyone throwing in the towel. Even when stocks rebounded late in the afternoon, there was no bounce in high yield whatsoever."

The lack of junk response was even more pronounced given what happened in stocks; investors rushed back into the volatile market late in the session after the widely followed Standard & Poor's 500 index tested a 2003 low. That last-minute surge lifted the bellwether Dow Jones Industrial Average by 151.17 points, or 1.83%, to 8,424.75. The S&P index meantime rose 8.37 points, or 0.98%, to 859.12, after having earlier drifted toward its 2003 low of 818.69. The Nasdaq composite index rose 1.22 points, or 0.08%, to 1,483.27.

None of that helped junk, though, where "things just got crushed today," the trader said. "The market definitely cracked."

For instance, he saw the widely held Community Health Systems Inc. 8 7/8% notes due 2015, seen by some in Junkbondland as something of a bellwether because of its great liquid size and widespread distribution, as having fallen to 79.5 bid, from 83.75 on Monday, on volume of $15 million. Even when there is no specific negative news out on the big Franklin, Tenn.-based hospital operator, it is frequently one of the hardest-hit issues anytime the market falls, as accounts needing to raise cash can easily sell it - and on Tuesday, the trader said, there were all kinds of forced liquidations.

"There was zero confidence in the market, just no support. About the only bids you see are dealers who shorted the bonds and who now have to cover it, or accounts doing some bottom-fishing."

He compared the overall current market tone to the dark days of the early 1990s, when the junk world reeled in the wake of the collapse of Drexel Burnham Lambert and an account in The New York Times famously declared that as a result of the Drexel debacle, the junk market was now "over."

Auto bonds continue decline

Among specific credits, automotive bonds continued to drive to ever-lower levels, as the fate of the proposed Big Three bailout is by no means assured. Lawmakers could begin voting on the $25 billion bailout measure being pushed by Democratic leaders on Wednesday - but should the measure fail to gain traction in the current lame-duck session, it will likely be left to the incoming Congress to do something after it takes office in January. The carmakers, meantime, have cited their heavy-rate of cash burn - believed over $2 billion a month for both Ford and GM - as a reason why the aid to stabilize their finances is needed sooner, rather than later.

A trader saw General Motors's 8 3/8% bonds due 2033 drop to 19 bid from prior levels in the mid-20s. while its 7.20% notes due 2011 retreated to 25.5 bid from 29.75.

He saw GM's 49% -owned auto financing arm, GMAC LLC's 8% bonds due 2031 down 1¼ points at 331/2, while GMAC's most active bond, its 7¾% notes due 2010, was down about the same amount, at 58.875, on $18 million traded.

A market source saw Ford's 7.45% bonds due 2031 among the most actively traded issues on the day, although seeing them in a different light than most other auto credits, up a point at 26. But Dearborn, Mich.-based Ford's financing arm, Ford Motor Credit Co., was lower, its 5.80% notes coming due in January down around a point to the 89 area. Ford Credit's 7.25% notes due 2011 were 4-point losers on the session, finishing at 51.

As for the bonds of the suppliers - who count the Big Three among their major customers and whose finances could be disrupted should any of the Detroit giants go under - "everyone is watching GM and Ford and all that," a trader said, "and if the big autos go down, obviously, the auto parts are going to follow."

He saw the supplier bonds following the OEMs lower, seeing Tenneco Inc.'s bonds in the mid-40s and Lear Corp.'s in the mid-30s and American Axle & Manufacturing Holdings Inc.'s paper in the 20s. Visteon Corp.'s 8¼% notes due 2010 were down early 5 points to the 40 mark. Goodyear Tire & Rubber Co.'s bonds, apart from the issues coming due in 2009, were bouncing around the 81-82 level.

He quoted ArvinMeritor's 2012 bonds at 53 bid, 55 offered and its 2015 issue at 46 bid, 48 offered, both in by several points after the Troy, Mich.-based components manufacturer reported a wider fiscal fourth-quarter loss and issued lower-than-expected guidance for 2009. "Everyone is guiding downward," he said.

Arvin Meritor warned that said it expects to post an adjusted 2009 profit of between 80 cents and $1 per share, well under the roughly $1.35 per share Wall Street had been anticipating, and said that sales will come in between $4.9 billion and $5.2 billion, a sharp drop from the almost $7 billion that the analysts had forecast.

The company expects North American commercial truck production to be not much changed from last year's levels, but Western European heavy and medium truck output will slide some 25% year-on-year.

Gold miner Freeport's bonds tarnished

A trader said Freeport McMoRan was "probably the biggest" name on Tuesday, its bonds falling in line with a drop in its shares after equity analysts downgraded it.

He noted that after J.P. Morgan Chase & Co. and Morgan Stanley gave their negative assessments, the paper was off around 3 to 4 points "or maybe more."

He quoted its 8 3/8% notes due 2017 falling as low as 73, off 3½ to 4 points, with paper left offered, and its 8¼% notes due 2015 "just offered" at 77, down 2½ points.

Another trader saw the 81/4s last hit a round-lot level of 74 bid, down 3 points, while the 8 3/8s were at 72.5 bid, a 2-point drop.

Freeport's New York Stock Exchange-traded shares finished down $1.46, or 6.31%, at $21.68 on volume of 25.2 million, about 18% more than usual.

The company meantime announced on Tuesday that it is cutting more than 600 jobs at its U.S. mining operations to lower costs. That belt-tightening comes in the wake of a recent slide in the prices of copper and other metals that Freeport mines.

Gaming bonds a bad bet

In the gaming sector, a trader was surprised to see MGM Mirage's 6½% notes coming due next July trading at a round-lot price of 90.5 - up from Monday's final round-lot level at 88, although it was down from the 91.75 context at which those bonds had traded for most of the session Monday.

He saw the company's most active issue, the 8½% notes due 2010 - of which $19 million traded, versus about $5 million for the '09 bonds - as "more indicative of the capital structure today," since they were down nearly 4 points at 62.75.

But another source saw MGM's 7½% notes due 2016 edge up to the 57 level.

A market source meantime saw Harrah's Entertainment Inc.'s 5½% notes due 2010 drop 6 points to 51 bid, after having risen Monday on news the company will offer new debt in exchange for existing bonds, with the 51/2s at the top of the priority ladder for repurchase. The bonds fell after S&P cut Harrah's corporate credit rating to CC from B previously and lowered its secured loan to B+ from BB-, with all ratings remaining on CreditWatch with negative implications; the agency cited the structure of the Las Vegas-based casino giant's modified Dutch Auction tender for its bonds announced Monday.

Isle of Capri Casinos Inc.'s 7% notes due 2014 lost 1½ points to end at the 46 level. Station Casinos Inc.'s 6% notes due 2012 were likewise down 1½ points around 31.

Wynn Las Vegas LLC 's actively traded 6 5/8% notes due 2014 "got smacked today," a trader said, seeing them at 71, down from 73.5 on Monday, on volume of $29 million.

Retailing names mixed

The hard-hit retailing industry's bonds mostly continued to take a pounding in the wake of recent numbers showing deteriorating same-store sales, the key industry metric, at most large chains, and a loss of consumer confidence, in the wake of the current economic troubles, massive layoffs at many companies and a continuing slide in house prices and a drying up of home-equity credit, a major funding support for consumer spending.

A market source saw pricy department store operator Neiman Marcus' 9% notes due 2015 slide some 8 points on the day to 44 bid, while drugstore giant Rite Aid's 10 3/8% notes due 2016 lost 6 points to end at 65 and its 8 5/8% notes due 2015 finished at 28, also down a half-dozen points.

But here and there were surprising exceptions, surprising because those retailers have struggled. One was Bon-Ton Stores; a market source pegged the York, Pa.-based department store operator's 10¼% notes due 2014 up some 3½ points to around the 11 area. And Finlay Fine Jewelry's 8 3/8% notes due 2012 bucked the overall downside trend and rose more than 3 points to around the 16 level.

At another desk, a source also saw the latter bonds up 2 or 3 points, but said they had moved up to close at 18, versus levels around 16 last week.

Chiquita hangs in

Another surprising show of strength came from Chiquita Brands, whose 7½% notes due 2014 gained ½ point on the day to 68.5, and whose 8 7/8% notes due 2015 lost perhaps 1 point to finish just under 73; given the overall negative tone in the market, with many issues getting pounded down points, just because - a trader called it "an incredibly impressive showing."

He noted that the Cincinnati-based banana and other produce importer and marketer's NYSE-traded shares rose $1.83, or 19.83% on the day, to $11.06, on volume of 1.9 million, over twice the usual turnover, and "a very good move."

Chiquita's shares gained after BB&T Capital Markets upgraded them to a "buy" from a "hold previously"; analyst Heather Jones wrote in a research note to clients that the company is well positioned, even with softening global economies, since banana demand has been strong and "remains the best value in the produce aisle."

Exchanges instead of new issues

The high-yield sell-side's attention remained focused on a trio of exchange deals that have surfaced during the past five sessions - deals from Harrah's Entertainment, Inc. and Neff Corp., which were announced Monday, and Realogy Corp., which announced its exchange late last week.

These deals, at least in part, seek dramatic price concessions from bondholders in exchange for a more favorable position on the capital structure, sources say.

They also allow issuers to "monetize" dramatic - and in some cases, recent - price depreciations in their securities and address looming maturities.

"Wall Street has become a huge restructuring operation," one investment banker said on Tuesday.

Another banker said that the structures of the exchange deals are complex, and bondholders are still working on them.

Harrah's bonds have dropped since the exchange has come to market, but it is difficult to say how much of that can be attributed to the market as a whole, the banker said, adding that nevertheless news of the exchange appears to have been greeted with a negative tone.

"In the end, however, if investors don't get on board with these exchanges, the companies could go out of business, and [bondholders] will still take losses," the banker said.

Reordering Realogy capital structure

The Harrah's, Neff and Realogy deals are "opportunistic" deals, as opposed to 11th hour emergencies, one banker contended on Tuesday.

"They are actually rearranging the tiers in the capital structures," the banker added.

For example, in the Realogy exchange, which invites bondholders to exchange their notes for new second lien incremental term loans, first priority goes to holders of $850 million of Realogy's 12 3/8% senior subordinated notes due 2015.

"That would change the subordinated holders into second-lien holders, hopping around the holders of the senior notes," the source said, referring to Realogy's $1.7 billion of 10½% senior cash pay notes due 2014, which receive second priority in the exchange.

"Those [12 3/8% subordinated] bonds always traded rich," the source said, adding that Apollo Management LP, which acquired Realogy in an $8.5 billion LBO that closed in April 2007, owns $70 million of the Realogy 12 3/8% subordinated paper.

"Those bonds always traded very close to the senior notes, making you wonder if they had some technical support," the banker said.

Eying the high-grades

High-yield watchers tuned into to at least some of Tuesday's action in the investment grade primary market, in part as a possible harbinger of sentiment elsewhere in the credit markets, sources said.

In the high-grade bazaar, Verizon Wireless priced $3.5 billion of notes (A2/A) in two tranches: $1.25 billion of 7 3/8% five-year paper which came at a 537.5 basis points spread, tight to price talk of 537.5 to 550 bps, and $2.25 billion of 8½% 10-year notes which priced at 512.5 bps, again tight to talk of 512.5 to 525 bps.

Elsewhere Kroger Co. priced and upsized $600 million of 7½% five-year senior notes (Baa2/BBB-/BBB) at Treasuries plus 535 bps, on top of price talk. The deal was upsized from $500 million.

The actual high-yield primary market remained dormant.

In junk deal-related news, Precision Drilling Trust set the original issue discount on its $400 million Libor plus 500 bps 53/4-year term loan B at the 86 area on Monday.

Informed sources say that the overall $1.2 billion bank deal getting over the hump is a prerequisite to the company launching its $400 million offering of debt securities, via RBC Capital Markets and Deutsche Bank Securities, part of the financing for Precision's acquisition of Grey Wolf Inc.

Finally, ION Geophysical Corp.'s $175 million offering of five-year senior notes (BB-), announced last Friday in a press release, is likely to be post-Thanksgiving business, a market source said Tuesday.

Jefferies is leading the Rule 144A deal which is being quietly marketed, sources say.

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