Junk market tailspin deepens as various issues slide multiple points; Kodak comes back

By Paul Deckelman and Paul A. Harris

New York, Oct. 3 - The high-yield market got off on the wrong foot on Monday as it kicked off the month of October and, more importantly, the final quarter of the year.

Junk names were seen lower pretty much across the board, extending for a fourth consecutive session the market slide that began in the middle of last week. Junkbondland fell in tandem with yet another terrible day on Wall Street, where investors continued to worry about Europe's debt woes.

Many high-yield names were down by multiple points, including such familiar credits as Caesars Entertainment Corp. - the old Harrah's Entertainment - as well as benchmark issues from the likes of Community Health Systems Inc. and Ford Motor Co.

Another big loser was ATP Oil & Gas Corp.'s bonds.

Recently priced issues did not escape the carnage, with lower levels seen for such new names as Newfield Exploration Co., HCA Inc. and Avis Budget Car Rental, LLC.

One of the very few names seen on the upside on Monday was Eastman Kodak Co., whose bonds were killed all last week on the news that the company had largely drawn down its available credit line and will seek restructuring advice from a law firm known for its prominence on bankruptcy cases. Its main unsecured bond issue came roaring back from that abyss, posting a more than 10-point gain while its secured issues were pretty much steady.

Statistical measures of market performance were uniformly lower.

American Tower's split deal

No straight high-yield issues priced during the first market session of 2011's fourth quarter, sources said on Monday.

In the crossover market, American Tower Corp. priced a $500 million issue of 5.9% notes due 2021 (Baa3/BB+/BBB-) at a 412.5 basis points spread to Treasuries, which was the wide end of the 400 bps to 412.5 bps spread talk.

However the initial guidance on the deal came in the high 300 bps context, according to an informed source, who added that prior to the announcement American Tower's existing 5.05% notes due 2020 were quoted at Treasuries plus 335 bps.

As talk widened the company's new $500 million issue played to ever-increasing demand, the source added.

Bank of America Merrill Lynch, Barclays, Credit Agricole, RBC and RBS were the bookrunners for the deal, which was priced on the investment-grade desks.

Meanwhile in the high-yield primary market activity remained concentrated behind the scenes as the dealers attempt to syndicate bridge loans backing two big LBO deals, sources say.

Those dealers are also attempting to discover where, amid cascading asset prices and accompanying redemption scares, the buy-side accounts might agree to become involved in the bridges and subsequent bond deals.

Kinetic aims for mid-October

The dealers have set a Wednesday launch for Kinetic Concepts Inc.'s $2.6 billion term loan and could bring $2.15 billion of bonds as early as the middle part of the Oct. 10 week, according to a source close to the deal.

The syndication of the bridge loan backing the bonds - $1.25 billion of second-lien notes and $900 million of senior unsecured notes - is currently underway, with commitments due by Friday.

Morgan Stanley, Bank of America Merrill Lynch and Credit Suisse are the leads.

The bond and bank deals are part of the financing for the LBO of Kinetic Concepts by Apax Partners, Canada Pension Plan Investment Board and the Public Sector Pension Investment Board.

Emdeon planned club-style

The other sizable LBO deal perched at the threshold of the market is Emdeon Inc.'s $750 million of Rule 144A senior notes to help fund the buyout of the company by Blackstone Capital Partners.

With Emdeon, the dealers will refrain from the customary "public" process of launching the deal, and subsequently setting price talk and timing, sources say.

Instead, the Emdeon bond deal is going to come club style.

The dealers intend to concentrate on the accounts that demonstrate a willingness to do the credit work necessary to come to a fair price, especially given the dramatic price drops seen in the junk market over the past week, according to a high-yield mutual fund manager.

In return for doing that credit work, those accounts will be rewarded with full allocations, but they are going to have to stick their necks out in terms of yield, the manager added.

They must identify the level at which the Emdeon bonds are likely to maintain their value at pricing.

Barclays Capital Inc., Bank of America Merrill Lynch, Citigroup Global Markets Inc. and Goldman Sachs & Co. are the leads.

Double-decker?

"Right now it's a terrible time to be in the primary market because everything is a moving target," a mutual fund manager said just after the Monday close.

Junk is being beaten up for purely technical reasons which, in some cases, are counterintuitive, the source added.

For example, in spite of the generally positive news emanating from U.S. auto manufacturers, Chrysler Group LLC's 8¼% secured senior notes due June 15, 2021, which priced at par on May 19 in a $1.7 billion tranche, were at 75¼ bid 76¼ offered at the Monday close.

One of the principal reasons for such price depreciations - which are hitting just about all of the big liquid issues in the asset class, the investor claimed - is the so-called "Japanese double-decker," aka "the unwinding of the Japanese carry trade."

Earlier this year Japanese investors plowed into a trade designed to maximize yields by coupling positions in junk with swaps on currencies including the Brazilian real.

A dramatic drop in the relative value of the real sent those investors - some of them believed to be Japanese mutual funds seeing dramatic redemptions - scurrying for the exit signs, the buy-sider said.

"In such a case the only thing you can sell is your big liquid issues," the buy-sider said.

"This could not have come at a worse time," the investor added, noting that equity prices are plunging, the European credit situation remains opaque and dire, recession fears continue to gain traction and the markets are digesting a fresh set of conspicuous bankruptcy scares.

Where do you care?

What makes the storm more perfect is the pressure on the some of the big financial institutions, the mutual fund manager said.

The last thing the dealers want, at a time like this, is for committed financings such as the above-mentioned Kinetic Concepts and Emdeon deals to get hung up on their balance sheets because market conditions prohibit the rational syndication of the debt.

The fund manager recounted that the stock of Morgan Stanley dropped 7.7% on Monday, while the stock of Bank of America fell by 9.64%.

These circumstances are giving rise to a round of price discovery in the high-yield primary market, the fund manager said.

Typically dealers employ credit metrics and market conditions to price a deal, and then canvas the accounts to see who will get on board at the price in question.

Not now, the fund manager said.

"Now, with the market selling off, with every day being worse than the day before, they're calling to ask where you care."

Volatility notwithstanding, it behooves an asset manager to name a number which, from the perspective of the asset manager, factors in a market that is seeing dramatic ongoing price deterioration.

It's an invitation to name your price, the buy-sider said.

"You call them and tell them where you care.

"They yell down the phone 'What are you smoking?'

"But the next day or the day after that they call you back and tell you they might be able to work something out in the vicinity of the price you named.

"Of course in this situation you're looking at a dramatic upside, because a bond that is deeply discounted as a concession to bad market conditions rather than specific credit issues is going to be the first one to outperform when things turn around.

"But in the meantime, who can tell you what kind of redemptions you are going to face?"

Parsing what's in the market

Given the above-described maelstrom, the new deal calendar ended the Monday session every bit as thin as it began.

There is one Rule 144A deal presently in the market.

Biotech firm MannKind Corp. intends to raise $370 million via the placement of six-year senior discount notes.

A roadshow is underway.

Price talk could come out on Wednesday, an informed source said.

Global Hunter and Knight Capital are the bookrunners.

Elsewhere, a best efforts deal could surface as early as Tuesday, in the form of a drive-by, according to a syndicate banker who declined to furnish either an issuer name or an industry sector.

The color on the best-efforts deal came just ahead of mid-day, New York time, with equities trading about 1% lower relative to the Monday open.

Thus, with the steep declines which ensued, it may have been overtaken by events.

An ugly day

A trader declared that "it got pretty ugly today. Everything seems to be down a point, 2 points, maybe 3 points, depending on what the name is."

And "some stuff was down 4 or 5 points."

"It was a beat up sort of a day," a second trader said.

"Everything was down at least 1, 2, 3, even 4 points."

He continued that "people are so beat up that they don't want to do anything - they think they're catching falling knives."

At another desk, a trader tried to take a more hopeful view of the situation: "We've got nowhere to go but up, right?"

He corrected himself a moment later: "Actually, that's probably not true either, unfortunately."

It was, he added, "definitely a rough day, no question about it. I don't even know where to begin."

Yet another trader opined that "I don't know of anything that went up" - at least outside of Eastman Kodak.

Kodak comes back

A trader said that Kodak's badly battered 7¼% notes due 2013 "actually" were up 11 points on Monday to end at 37 bid, helped by a company denial of any plans to go bankrupt and the payment of the coupon on another one of its bond issues.

A second trader saw "a lot of volume" on the 71/4s. He said there were "a couple of big pieces, but a lot of little pieces" trading between a low of 30 bid and a high of 40 bid - "small amounts" at the latter level - before going out trading between 36 and 39, which he called up 10 points on the day from the low levels in the 20s from where they had been during Friday's selloff.

Yet another market source located the bonds at 38¾ bid, seeing them up more than 12 points, on volume of almost $14 million, making those bonds among the most heavily traded junk issues on the day.

One of the traders said that the company's secured bonds, like its 9¾% notes due 2018 and its 10¾% notes due 2019 were "understandably" unchanged, given that they are considered to have at least some value in any kind of restructuring scenario. He pegged those bonds in the same 71-73 context in which they had been trading on Friday.

The first trader said that "it looks like [Kodak] just got oversold on Friday, when those news headlines came out" indicating that the Rochester, N.Y.-based photographic products and imaging technology pioneer had retained Jones Day, a law firm known as bankruptcy and restructuring experts. That sparked market speculation that the troubled company might be planning a Chapter 11 filing, sending the 7¼% bonds spiraling downward 10 points or more on the day.

Kodak denied such intentions, helping push up the 71/4s as well as its New York Stock Exchange-traded shares, which had surrendered more than half of their value on Friday on the Jones Day news. In Monday's dealings, the shares zoomed 56 cents, or 71.77%, to $1.34, on volume of 62 million, more than four times the norm.

In a late-Friday statement saying it has no plans to seek protection from its bondholders and other creditors, Kodak proclaimed that it is "committed to meeting all of its obligations," and the company indicated on Monday that it had made the scheduled Oct. 1 interest payment of $14 million on its $400 million of 7% convertible notes due 2017.

Kodak also said that it "continues to actively pursue its previously announced strategy to monetize its digital imaging patent portfolio. Kodak remains focused on meeting its commitments to customers and suppliers, and on delivering on its strategy to become a profitable, sustainable digital company.

"It is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers. Jones Day is one of a number of advisers that Kodak is working with in that regard."

ATP trades off

Apart from Kodak, though, things were mostly gloom and doom.

For instance, a trader said that ATP Oil & Gas' 11 7/8% senior secured second-lien notes due 2015 were among the "oil and gas names that got hit" amid falling energy prices.

He saw those bonds mostly trading around 65½ bid, 66½ offered, although at the end of the day, they had dropped to around a 62-63 context, with 63 being down 6 points on the day from Friday's close.

He saw "good volume," with an estimated $19 million having traded by the end of the day.

A second trader, also seeing the Houston-based offshore oil and gas exploration and production company's issue trading at 62-63, said that it "continues to crater."

ATP's bonds, as well as its Nasdaq-traded shares, which tumbled by $1.06, or 13.75%, to end at $6.65 on above-average volume, got hammered against a backdrop of sliding energy prices, which have been pushed downward amid investor fears of a renewed global recession that would slash demand for energy.

The benchmark West Texas Intermediate light, sweet crude oil on Monday fell $1.59, or 2%, to finish the day at $77.61 per barrel on the New York Mercantile Exchange, and had hit an intra-day low of $76.85 earlier in the session - price levels not seen since September 2010. In London, Brent crude dropped $1.05 to end at $101.71 a barrel.

Also in the energy sphere, a trader said that Arch Coal Inc. "got hit hard today," after the St. Louis-based coal operator cut its full-year earnings guidance.

"That's had some impact there," he said, seeing Arch's 7¼% notes due 2020 ending at 90 bid, 91 offered. "They clearly got leaned on pretty good."

A second trader saw the notes going out at 92½ bid, down about 4 points on the day.

The notes fell after Arch cut its full-year guidance to $1 to $1.40 per share from its previous projection of $1.75 to $2.15 per share, citing production problems at its Mount Laurel mines in West Virginia.

American Air loses altitude

A trader said that American Airlines' new 8 5/8% pass-through certificates due 2021 "are clearly one that's topical today, even though it's got an investment-grade rating (Baa3/A-) on it."

He said that the Fort Worth-based airline giant's certificates "really took it on the chin" amid investor worries that the airline's parent, AMR Corp., might heed the advice of several analysts that it resort to a bankruptcy filing to cut costs. That speculation drove its NYSE-traded shares down 98 cents, or fully 33%, to $1.98.

The pass-through certificates, which priced at par last Tuesday, were trading at 95-96, "and other AMR paper was under pressure as well."

Recent junk issues lower

Back among the purely junk names, recent new deals were also lower.

A trader saw Newfield Exploration's 5 ¾% notes due 2022 down "by almost 2 points," going out at 97 bid.

The Houston-based energy company's upsized $750 million drive-by issue of those bonds priced last Tuesday at 99.956 to yield 5¾%, and then traded around that issue price for the next several sessions before easing to around 98¾ bid, 99½ offered on Friday, and then falling further on Monday.

A trader saw HCA's 8% notes due 2018 trading "down 1 or 2 points" at 96 bid, 97 offered.

The Nashville-based hospital operator's quickly shopped $500 million issue priced at par last Tuesday but then began coming down to around the 98 level last Wednesday, and eroding further from there.

A trader saw Parsippany, N.J.-based car-rental giant Avis Budget's 9¾% notes due 2020 "down dramatically," quoting those bonds at 94 bid, 95 offered versus 96 on Friday.

The $250 million deal priced at par on Sept. 21, but after a very short flurry to the upside, fell below issue and continued to skid lower and lower, leading the trader to observe "that's one rental car, that investors would probably want to return."

Junk indicators fall off

Junk market statistical performance indicators, sliding for the past several sessions, continued downward on Monday.

A market source said that the CDX North American Series 17 High Yield index ended the day down 2 points at 85 3/16 bid, 85 9/16 offered, after falling 1 3/16 on Friday.

The KDP High Yield Daily index nosedived by 45 bps for a second straight session on Monday to end at 69.37. Its yield was up by 15 bps on Monday to 8.68%, on top of the 13 bps gain on Friday.

And the Merrill Lynch U.S. High Yield Master II index fell by 0.791 on Monday, its fourth straight downturn. On Friday the index lost 0.771%.

The new loss widened the index's year-to-date deficit to 2.471%, a new low for the year, from Friday's 1.693%. The cumulative losses stood in stark contrast to the peak level for the year of 6.362%, set on July 26.

Benchmarks off

Among the widely traded benchmark issues, a trader said that Caesars Entertainment's 10% notes due 2018 were down 2¼ points at 57 bid.

A market source at another desk said that those bonds from the Las Vegas-based gaming giant formerly known as Harrah's Operating Co. Inc., were ending at 57.5 bid, with some $23 million having changed hands, making it probably the busiest purely junk-rated issue on the Trace system.

Elsewhere, Ford Motor's 7.45% bonds due 2031 were down a deuce on the day at 108½ bid, 109½ offered.

And Franklin, Tenn.-based hospital operator Community Health Systems' 8 7/8% notes due 2015 were down 1½ to 2 points at 96¾ bid, 97¼ offered, leading a trader to quip that on Monday at least, the company's stock ticker symbol - CYH - "stood for 'cover your head.'"

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