Sealy lower in sleepy session; Countrywide slide continues; MBIA notes still struggling

By Paul Deckelman and Paul A. Harris

New York, Jan. 18 - High yield prices moved up from the opening bell Friday - but just as quickly came back down as an early stock market rally faded, with many issues ending the abbreviated pre-holiday session on Friday not much changed from where they had gone home at the end of Thursday's trading.

One credit which did see a fair amount of price movement despite the generally sleepy session was Sealy Corp., whose bonds lost several points, although traders had not a clue what might be behind the market's sudden negative interest in the Trinity, N.C.-based mattress maker.

Elsewhere, traders saw Countrywide Financial Corp.'s bonds continuing to head downward, squandering some of the powerful gains notched earlier in the month on the announcement that 16% owner Bank of America would acquire the remainder of the troubled Calabasas, Calif.-based mortgage originator.

Also in the financial sphere, junk traders continued to avidly follow the struggle of MBIA Insurance Corp.'s recently priced 14% surplus notes due 2033 - nominally investment-grade instruments but now trading at levels more appropriate for distressed junk bonds on the ongoing troubles of the unit's corporate parent, bond-insurance industry leader MBIA Inc.

A high yield syndicate source said that there had been "a little bit of a pop" in junk bond prices early Friday morning. However, later in the session, as the early close ahead of a three-day holiday weekend approached, cash bonds were unchanged to perhaps slightly softer.

Meanwhile the sentiment in the market remains negative, the official said, reckoning that junk is down 2 points, on a price basis, since the beginning of the year, with lower rated bonds down more still.

"Retail and gaming have been getting hit," the syndicate official added.

Primary activity was seen as essentially non-existent, junk new-dealers reported.

Market measures point lower

A trader saw the widely followed CDX index of junk bond performance down 5/8 point on the day at 90 ½ bid, 90 7/8 offered. The KDP High Yield Daily Index fell 0.10 to 75.25, while its yield widened by 3 basis points to 9.28%.

In the broader market, advancing issues slightly outpaced decliners. Overall activity, as reflected in dollar volume, fell by nearly 36% from Thursday's already reduced levels.

A trader referred to the session as "a pretty ugly day." He noted that there was "a lot of volatility in equities, and some movement in some stuff" in junk bond land.

With the market officially closing at 2 p.m. ET ahead of the upcoming Martin Luther King Day federal holiday, which shuttered the U.S. financial markets completely on Monday, participants noted that as is usually the case in an abbreviated pre-holiday session, many people were out the door by around mid-morning, with nothing much having really been done.

There was "not so much" going on, a trader said, noting that while the stock market initially opened strongly higher, with the bellwether Dow Jones Industrial Average up some 130 points at the start, that rally soon fizzled and stocks turned lower, the Dow dropping more than 100 points intraday before going out at 12,099, off nearly 60 points on the session, with broader market indexes also lower on the day.

That in turn quickly threw a wet blanket over whatever strength the junk market was showing in the early going.

"Things basically opened on a bounce, up a point to 11/2." He said that with equities fading even then, "we could see a late-session meltdown here - but it's Friday [around 12 noon ET], it's a half day. So what probably would be a serious meltdown will be halted by the clock. We'll be saved by the bell" - and that's pretty much how things turned out.

No soft landing for Sealy

Although the session was basically a snoozefest, there was a fair amount of activity, ironically enough, in Number 1 mattress maker Sealy, whose bondholders were wide awake enough to take the credit down several points.

A market source saw the company's 8¼% notes due 2014 down as much as 4½ points on the session, before going down 4 points lower, at 86, while another called them 3 point losers at 85.

At another desk, a trader said that the bonds had been trading as high as 88 bid, 90 offered just two days earlier, but on Friday were being offered at 85.

"Something is up with them," he said, in quoting the bonds "about 3 or 4 points lower. We're not even seeing a bid side."

Yet another trader, queried later in the day, estimated the bonds took a 2 point loss on the session to finish at 84.5 bid, 86.5 offered. He claimed "no insight" as to the reason for the slide.

No fresh news was seen out about the company, which makes the well-known Sealy Posturepedic and other leading brands of mattresses.

However, in a 13-D filing with the Securities and Exchange Commission on Friday, ValueAct Capital Partners LP, a San Francisco-based investment company, disclosed that it had acquired 4.517 million Sealy shares, constituting a 5% stake in the Sealy.

The Hoover's on-line investment research service, in describing the investment firm, said that when ValueAct "sees untapped value, it acts." Hoover's characterized ValueAct as being "known for its activist slant," saying it typically "buys large stakes in undervalued companies and works with their management to boost performance."

That is the kind of language that perhaps signals noteholders that Sealy management - either acting in concert with ValueAct or else goaded into a defensive action by the investment fund in order to head it off - may seek to enhance shareholder value via a debt-funded stock buyback, special dividend or some other manner not necessarily favorable from a bondholder perspective.

Countrywide carnage continuing

Elsewhere, a trader saw Countrywide Financial's bonds continuing to fall with its 3¼% notes coming due this May down 2 points at 94 bid, 95 offered and its 6¼% notes due 2016 off 3½ points at 78 bid, 80 offered.

He said there was no specific reason for the latest decline except that "in general, they went up in a big burst, but ever since the news came down that they were going to be bought, they've been losing 2 or 3 points a day."

He noted that the 61/4s began the week at 93 bid, 94 offered "and they dropped throughout the week."

Another trader saw "a little bit of weakness" in the Countrywide issues, with the 61/4s at 80 bid, 82 offered, down from recent levels around 84 bid, 86 offered, while the 3 ¼% notes fell to 94 bid, 96 offered, off 2 points.

Its 5.80% notes due 2012 ended down 1½ points at 88.5 bid, while a market source called the 16s at 79, down nearly 4 points on the session.

The bond downturn has been replicated by the behavior of Countrywide's stock over the last few sessions - which have seen the company's New York Stock Exchange-traded shares give up all of the gains which those battered shares had notched on the initial good news more than a week ago that struggling Countrywide, the nation's largest independent mortgage originator, would be rescued from possible oblivion by banking giant Bank of America in a $4 billion-plus buyout deal estimated to be worth about $6.47 of B of A stock per Countrywide share.

The shares closed Friday down 52 cents, or 9.49%, at $4.96 - well below the $5.12 at which they traded before news of the deal first surfaced on Jan. 10.

That drop led some observers, such as the online Wall Street Journal's M&A-oriented DealJournal blog, to declare, in a clever turn of phrase, that Countrywide's investors have "foreclosed" on the deal. The fall in the stock, DealJournal said, and the squandering of the roughly 27% premium B of A is willing to pay over where Countrywide's stock trades now "indicates a healthy dose of market skepticism that the deal, scheduled for third-quarter completion, will get done."

ResCap, GMAC are mixed

While Countrywide's bonds and shares continued to get clobbered, other mortgage names were seen mixed, with Thornburg Mortgage Inc.'s 8% notes due 2013 down 1½ points at 81 bid, 83 offered, while Residential Capital LLC's 6½% notes due 2013 gained 2 points to 55 bid, 57 offered.

ResCap corporate parent GMAC LLC's 8% notes due 2031 were seen by one trader unchanged at 78 bid, 79 offered, while its 6 7/8% notes due 2012 were ½ point down at 81. Another trader, though, saw the 8s off a point at 76.5 bid, 78.5 offered.

The trader meantime saw 49% GMAC owner General Motors Corp.'s benchmark 8 3/8% notes due 2033 off a point at 76 bid, 77.5 offered, while domestic arch-rival Ford Motor Co.'s 7.45% notes due 2031 were also off a point at 69 bid, 70 offered. Another trader, however, said that the GM and Ford bonds were unchanged on the session.

Another market source saw GM's 8 3/8s actually up more than a point at 77-plus, while its 7 1/8% notes due 2013 were better than 1½ points higher at around 83.5.

Retailers recovering?

Retailing names, recently hard-hit amid an escalation of recession fears, seemed to mostly be recovering Friday, whether they were helped by the unexpected news consumer confidence was up in the first half of January from its sunken December levels - a burst of optimism that flies in the face of other, gloomier economic statistics and predictions seen lately - or just on short covering.

Drugstore operator Rite Aid Corp.'s 8 7/8% notes due 2015 were seen up 1 point at 72 bid, while art-supply retailer Michaels Stores Inc.'s 10% notes due 2014 were 1½ points better at 85.5 bid. Apparel merchant Burlington Coat Factory's 11 1/8% notes due 2014 were up more than a point, to around the 74 level, while beauty aids retailer Sally Beauty Holdings' 10½% notes due 2016 were seen by a source up some 2 points at 89. But Dillard Inc.'s 7 1/8% notes due 2018 were down ½ point at 78.75.

Casinos get clocked

But while the consumer-oriented retailing sector seemed to catch a bid on Friday - for whatever reason - no such reprieve was given to gaming, another sector which is expected to suffer as wary consumers tighten their belts and hang onto their wallets in the face of tougher economic times.

Majestic Star Casino's 9½% notes due 2010 were among the day's most actively traded bonds, seen off 3½ points to the 89 level. Other losing bets in the sector Friday included Station Casinos Inc.'s 6% notes due 2012, down a point at 87, and Boyd Gaming Corp.'s 7¾% notes due 2012, down almost 2 points to the 94 level.

MBIA bonds continue to languish

The recently sold MBIA Insurance 14% surplus notes due 2032 - which priced at par a week earlier - continued to languish in the lower 70s Friday, traders said, after several straight sessions in which the bond insurer's paper got hammered down as much as 8 to 10 points on the continued problems of its parent, MBIA Inc.

A junk trader saw those nominally investment-grade-rated bonds at a wide 70 bid, 75 offered, about where they had gone home Thursday after swooning badly. Another estimated them at 71 bid, 74 offered.

While nothing specifically happened to MBIA itself on Friday - Thursday was bad enough, with the threat from Moody's Investors Service to possibly downgrade its Aaa financial strength ratings - there was bad sentiment in the sector as smaller peer Ambac Financial Group Inc. became the first bond-insurer to actually lose one of its vaunted AAA ratings, which could force the company to ultimately quit the business or sell itself. Fitch Ratings cut Ambac's debt by two notches after the Number-Two bond insurer scrapped its previously announced plans to raise $1 billion in capital, given the 70% plunge in its shares over the past two days.

New Atlas bonds little changed

Apart from the established bonds, traders saw the new Atlas Energy 10¾% notes due 2018 little changed as the bonds began secondary dealings. They pegged the paper at par bid, 101 offered, versus their par issue price on Thursday.

Primary market dead quiet

No new issues were priced on Friday during a session that generated no primary market news whatsoever.

Earlier in the week Solutia Inc.'s $400 million offering of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities, had been expected to price before Friday's close, according to some market observers.

However the market heard no news Friday on Solutia.

Running low

With no deals pricing Friday, the Jan. 14 to Jan. 18 week came to a close having seen only one new issue.

On Thursday Atlas Energy Operating Co. and Atlas Energy Finance priced a downsized $250 million issue of senior notes due Feb. 1, 2018 (B3/B) at par to yield 10¾%.

Atlas Energy was only the second company to price bonds thus far in 2008. Both successful issuers emerged from the energy/natural resources space.

On Jan. 11 Southwestern Energy Co. priced an upsized $600 million issue of senior notes due Feb. 1, 2018 (Ba2/BB+) at par to yield 7½%.

Hence at Friday's close year-to-date issuance stood at $850 million in two dollar-denominated tranches.

That's the lowest amount of issuance for the first 18 days of January going back to 2001, when Prospect News' records begin.

By way of comparison, 2007 to Jan. 18 saw $4.5 billion of issuance in 11 tranches. The year 2006, which generated a record-setting amount of issuance, saw well over $4.7 billion of bonds price in 12 tranches.

The largest dollar-amount of issuance for the first 18 days of January came in 2004, which saw over $7 billion price in 27 tranches.

Prior to the present year, the lowest amount of issuance during the first 18 days of January in recent years came in 2003, which saw just over $900 million of bonds price in five tranches.

The week ahead

The primary market heads into the holiday-abbreviated week which begins Tuesday with optimism in short supply, according to sources who spoke to Prospect News on Thursday and Friday.

There are three deals on the calendar as business which, at the times the respective deals were launched, were expected to price before the Jan. 25 close.

In addition to Solutia, Harrah's Entertainment Inc. is on the road with a to-be-determined portion of its upsized $5.275 billion of senior unsecured cash-pay notes.

The tranche is a part of the overall $6.775 billion of proposed bond financing which was upsized earlier this week from $6.025 billion.

The proposed bond financing also includes $1.5 billion of senior unsecured PIK toggle notes.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch are leading the bond portion of the LBO financing.

The senior unsecured cash-pay notes are expected to price on Jan. 25.

Harrah's is also marketing a $3 billion Libor plus 300 basis points tranche of its overall $7.25 billion three-tranche term loan. The loan is being offered at a discount of 96.50.

Also expected during the week ahead is Petroleum Development Corp., with a $250 million offering of 10-year senior notes (B3) via Morgan Stanley.

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