Junk slide continues amid more stock carnage; primary grinds to halt as Penske pulls out

By Paul Deckelman and Paul A. Harris

New York, May 7 - The junk bond market closed on a down note on Friday, closing out a hellish week which saw many well-known names trade off by multiple points in busy, volatile dealings, while statistical indexes showed a clear downturn.

Meantime, the primary arena - which was a red-hot seller's market not so very long ago - continued its abrupt descent into the deep-freeze, with no new deals pricing on Friday, none being announced, no price talk emerging on any offerings currently being shopped around - and one such deal, the $200 million offering of 10-year notes from vehicle retailer Penske Automotive Group Inc. announced just Thursday, being withdrawn by the would-be borrower, the latest of several prospective deals to be shelved because of suddenly deteriorating market conditions.

For yet another day, junk was following the downward lead of equities, which on Friday recovered only partially from the wild session seen Thursday - which at one point included a nearly 1,000-point freefall in the bellwether Dow Jones Industrial Average, based on an erroneous trade that touched off a cascade of program selling in a market already jittery on investor fears about the festering Greek debt crisis, the still-fragile U.S. economic recovery and the prospect of higher taxes and more government regulation of Wall Street.

Against that somber backdrop, such junk names as General Motors Corp., Clear Channel Communications, Harrah's Operating Co. and HCA Inc. were seen down by multiple points.

Relieved that the bizarre week was finally over, some traders expressed cautious hope that the weekend would give the nervousness in junk and, especially, the panicky tone in equities a chance to subside and that cooler heads would prevail on Monday, with some investors perhaps even seeing an opportunity to do a little buying at suddenly bargain-price levels.

A fund manager saw everything offered heading into Friday afternoon.

"A lot of people got caught on the wrong side of this," the manager said, referring to the high-yield market's precipitous slide during the final two sessions of the May 3 week.

With respect to cash bonds, higher-quality paper has sustained less damage than riskier bonds.

"The good stuff is down around a point over the past week," a mutual fund manager said Friday. "Other names are down five points, as you go down in quality."

Penske pulls deal

Primary market news was in scarce supply on Friday.

The information which did circulate was negative.

Penske Automotive Group, Inc. withdrew its $200 million offering of 10-year senior subordinated notes (Caa1/B-) due to market conditions, according to a company press release.

The deal, which was rolled out as a drive-by on Thursday and was expected to price on Friday, had been talked at the 8¾% area.

J.P. Morgan Securities Inc. and Bank of America Merrill Lynch were the joint bookrunners.

Penske also terminated its cash tender offer for its $235.2 million of 3½% senior subordinated convertible notes due 2026.

The Bloomfield Hills, Mich.-based automotive retailer had intended to use the proceeds, together with cash flow from operations, working capital and availability under its U.S. credit agreement, to purchase those convertible notes.

Completion of the tender was conditioned upon the successful placement of the $200 million offering of new senior subordinated notes.

Regal day-to-day

The market was watching for one other deal to possibly price on Friday.

Regal Cinemas Corp. was expected to price a $250 million add-on to its 8 5/8% senior unsecured notes due on July 15, 2019.

That deal is now day-to-day, an informed source said near the close.

Credit Suisse, Barclays Capital, Bank of America Merrill Lynch and Deutsche Bank Securities are joint bookrunners.

Although no official price talk has surfaced, the deal was discussed in the context of a 102.0 reoffer price, according to a high-yield mutual fund manager.

$1.72 billion week

With no issues pricing on Friday, the May 3 week concluded having seen six issuers raise slightly more than $1.72 billion by selling junk-rated dollar-denominated bonds.

That extended year-to-date issuance to $105 billion in 247 dollar-denominated tranches.

More outflows expected

The subject of "redemptions" came up repeatedly throughout the Thursday and Friday sessions with sources from both the buy-side and the sell-side.

Noting that on Thursday AMG Data Services reported that the high-yield mutual funds had sustained $127 million of outflows for the week to Wednesday - the first negative flow in 11 weeks - market sources pointed out that AMG's Wednesday-to-Wednesday reporting period ended before Thursday's major sell-off.

Had the AMG number included Thursday, the outflow would have been significantly more substantial than the negative $127 million which was reported, sources said.

"The faster money seems to have disappeared," one fund manager commented, and added that in a market where asset prices are declining, investors can never have enough cash - a factor that is apt to lead to more selling and more redemptions.

Wait and see

As with the Regal Cinemas deal, much of the $2.325 billion active forward calendar is on hold, at least temporarily, as the primary market awaits some stability in the wider capital markets.

"Hopefully this will be like the slowdown we saw in February, and activity in the new issue market can resume shortly" one debt capital markets banker said Friday.

However, apart from the postponed Penske Automotive deal and Jones Apparel Group, Inc.'s $250 million deal which was postponed on Thursday, both due to market conditions, offering announcements that were expected to be made on Thursday and Friday were pushed back because of market volatility, syndicate officials conceded.

Four prospective U.S.-based issuers are on the high-yield road, heading into the May 10 week.

One investor mentioned Mylan Inc.'s $1 billion two-part offering of senior notes.

Goldman Sachs & Co. is leading the deal, which features tranches of seven- and 10-year notes.

The roadshow is expected to continue into the middle part of the week ahead.

Initial discussions about pricing took place in the low to mid 7% range, the investor said, but added that the bonds will obviously have to be priced to sell.

Apart from Mylan, however, one sell-sider said that attendance at some investor presentations during the last two days of the May 3 week was conspicuously low.

The high-yield market, like most of the global capital markets, must wait to see what steps the eurozone countries will take to address the Greek debt crisis, sources said on Friday.

Sources also mentioned renewed nervousness surrounding interbank lending, in Europe and beyond, because of the eurozone debt crisis, and renewed concerns about the quality of collateral.

"People are apprehensive about the resolve of distressed European countries to take serious steps to address their sovereign debts," a fund manager summarized.

New deals trade below issue

A trader said that Beazer Homes USA Inc.'s 9 1/8% notes due 2018 were trading in a 96-97 range, finally finishing around 96 bid.

The Atlanta-based homebuilder's $300 million of notes had priced this past Tuesday at par to yield 9 1/8%.

He said that the new Lantheus Medical Imaging, Inc. 9¾% notes due 2017 were being offered at 981/4. The $250 million offering of bonds, upsized from the original $225 million, priced at par, also on May 4.

A trader suggested that "it probably wasn't the best week for new deals - although no one knew any of this at the start of the week.

A trader saw ATP Oil & Gas Corp.'s 11 7/8% second-lien senior secured notes due 2015 trading below 90 bid, down from Thursday's level at 92 bid, 94 offered.

He noted that the Houston-based energy exploration and production company's $1.5 billion offering had priced at 99.531 to yield 12%. That issue priced on April 19 - the day before the disastrous oil drilling rig explosion in the Gulf of Mexico which left 11 workers dead and touched off a massive oil leak into the Gulf, threatening the coastline of Louisiana and other states in the region.

Market indicators keep falling

Among bonds not connected with the new-deal market, a trader saw the CDX Series 14 index end down ¼ point Friday at 94½ bid, 95 offered, after having swooned by a full 3 points on Thursday. The index finished out the week having slipped badly from 99 7/8 bid, 100 3/8 offered at the close the previous Friday, April 30.

The KDP High Yield Daily Index plunged another 61 basis points on Friday to end at 70.77 - continuing a massive slide which had seen the index drop by 91 bps on Thursday, by 62 bps on Wednesday and by 20 bps on Tuesday. It thus ended the week several full points down from the previous Friday's 73.10 finish. The index's yield meantime widened by 18 bps on Friday to end at 8.60%, after having gapped out by 34 bps on Thursday and by 22 bps on Wednesday. On the week, the yield ballooned out by 79 bps from 7.81% at the close the previous Friday.

Another widely followed junk market measure, the Merrill Lynch High Yield Master II Index, closed the week showing a year-to-date gain of 4.497% - well down from the 7.167% mark at which the Index had finished out the previous week. The index value declined to a reading of 715.784 from 734.076 a week ago, while its yield-to-worst jumped to 8.743% from 8.044%, and its spread-to-worst versus Treasuries likewise expanded to 655 bps from 576 bps the previous Friday.

Advancing issues trailed decliners for a fourth straight session on Friday, as the latter continued to lead by a better than two-to-one ratio.

Overall market activity, represented by dollar-volume levels, was about even on Friday from the levels seen the previous session.

A trader characterized Friday's session as "still kind of ugly." While he saw "things kind of bouncing off their lows at some point during the day, you just get a feeling that it's pretty sloppy out there. Some folks are just taking a seat to the side until they see how everything falls out."

However, another trader said that the mood that he saw was "let's sell everything."

The first trader said that "you'd see something offered, about $5 million, then the bid would get hit for $1 million or $2 million. That bid would be a point lower than they were offered and now that would become the offering side, with $3 million left to go." The next time that offer would be thrown out there, "a bid a point lower would show up and would get hit."

People, he said, "were just trying to get out of things. That seemed to be the theme this morning."

More junk issues get clobbered

Like the situation on Thursday, when the bonds of some well-known junk issuers like GM, Harrah's and Rite Aid Corp. were being hammered down by multiple points in heavy trading - between 10 and 12 points on the session for some of the Harrah's and Rite Aid bonds - during Friday's session, "you still had things down multiple points," a trader said, although he held out the possibility that some names got pushed down Friday "just because they didn't trade [Thursday] or earlier in the week."

Among the big names that were big losers on Friday, he said, Nashville-based hospital operator HCA's 9 5/8% notes due 2016 were down 11 points on the day to end at 943/4, well down from prior levels in a 105-106 context.

GM gyrates around

A trader said that General Motors' 8 3/8% benchmark bonds due 2033 saw "huge volume," of over $100 million, although with little real price movement; the Detroit-based largest U.S. car manufacturer's paper jumped around all day between 31 on the low end and 33 on the high, finally finishing around 32 bid, which he called down a point.

Another trader said that the GM benchmarks "came marching back later in the day" from their early lows which he saw as below 30, to end at 32¼ 32¾ offered.

"I don't want to say they were bouncing back - they just were slowly moving back up."

Also in the automotive arena, the second trader saw brisk activity in short Ford Motor Co. paper, with its 7½% notes due 2012 going out around 99¼ bid, which he said was down by "a couple" of points on volume of over $20 million.

NewPage a loser, Smurfit active

A trader saw NewPage Corp.'s 10% notes due 2012 fall by a half-dozen points.

At another shop, a trader saw the Miamisburg, Ohio-based coated paper manufacturer's bonds as having fallen as low as 58 bid , versus its levels in the mid-60s on Thursday, when the company put out its first-quarter earnings numbers. After touching that low, the trader said, the bonds crept back up to around 60, which he said was down 4 or 5 points on the say, although he added that "there was not a lot of volume."

Elsewhere in the paper and packaging space, a trader saw Catalyst Paper Corp.'s 8 5/8% notes due 2011 in a low 90s context, around 91-93, but said that there was "not a lot of activity" in the Richmond, B.C.-based paper manufacturer's bonds.

The really active name in paper and packaging, he said, was Smurfit-Stone Container Corp., whose unsecured short paper, like its 8¼% notes due 2012 were unchanged to down ½ point, also in a 91-93 neighborhood, though on "a lot of volume."

At another shop, though the Chicago-based maker of paperboard packaging's 81/4s were seen down more than 2 points at just over 91 bid. A source there also saw the NewPage 10s at 60 bid, down 6 points.

Blockbuster bucks the trend

A trader saw "huge volume" in Blockbuster Inc.'s bonds "not so much the 9s [due 2012] as the 11¾% notes. He saw the Dallas-based movie-rental company's paper "trading all day long" around 67, producing "pages and pages" of trades on Trace.

He said that the bonds had started at 64-65, before ending "up a few" on the day at 67.

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