Nextel knocked lower; Sprint shows some strength; Seabulk sinks; funds gain $157 million on week

By Paul Deckelman and Paul A. Harris

New York, Nov. 13 - A late stock market surge Thursday imparted some strength into a junk bond market which had been struggling; while there was no great rush to jump in, traders said, a selling trend seen for much of the session mostly evaporated.

But that didn't help Nortel Networks Corp.'s bonds, which moved down for a third consecutive session after an analyst said that there was "a distinct possibility" that the Canadian telecommunications equipment maker might have to file for bankruptcy.

But another telephone name may not be heading for Chapter 11 so quickly; an analyst dismissed speculation that Sprint Nextel Corp. is likely to seek protection from its creditors.

Among the larger losers on the session were Seabulk International Inc. and Unisys Corp., although neither company had news out that might explain its slide.

Funds rise by $157 million on week

And as trading was winding down for the day, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $157 million more came into the weekly-reporting funds than left them.

It was the second consecutive inflow, following as it did the $285.62 million cash infusion reported last week for the seven-day period ended Nov. 5 However, the latest inflow was only the third seen in the last nine weeks, along with the $72.3 million cash infusion seen in the week ended Oct. 22. Over that nine-week stretch - which included a streak of five consecutive outflows through the week ended Oct. 15 that totaled $1.706 billion, according to a Prospect News analysis of the AMG figures - net outflows have totaled $1.265 billion. That run of mostly outflows stands in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows were seen in seven of those eight weeks, according to the Prospect News analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 22 weeks, dating back to the week ended June 18, with 11 of each, the funds have still lost a net of $1.428 billion during that time, according to the analysis, mostly due to large cash losses last month - $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 - and the massive $651.2 million outflow seen in the week ended June 25, which was the biggest single cash loss of the year. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter now about half finished, inflows, after that slow start, remain ahead, with 26 inflows versus 20 outflows seen in the 46 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $485.8 million, up from $328.8 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Market indicators mostly lower

The widely followed CDX High Yield 11 index of junk bond performance, which had lost 1¼ points on Wednesday, rose by ¼ point on Thursday, a trader said, quoting it at 79¼ bid, 79¾ offered. The KDP High Yield Daily Index meantime plunged by 66 basis points to 52.66, while its yield widened out by 21 bps to 16.03%.

In the broader market, advancing issues trailed decliners by a nearly two-to-one margin. Overall market activity, reflected in dollar volumes, was about 31% below Wednesday's brisk post-holiday pace.

"The roller-coaster ride continues," a trader said, adding that "it's really tough to get on and off this ride." He noted the "incredible" swing of over 900 points in the bellwether Dow Jones Industrial Average, which battled back from a nearly 360 point deficit at one point to finish up 552.59 points, or 6.67%, at 8,835.25.

The trader said that he personally "did not see high yield rally significantly" on the dramatic swing in equities, "but I did see offerings and sellers disappear. Those that were anxious to get out this morning, when equities were down over 300 - they quickly left the country." But he reiterated that he "didn't necessarily see anything trade up points in response."

Cash bonds were soft on Thursday as they had been on Wednesday, said a trader working for a high-yield mutual fund, who does not look for high yield to rally on Friday either, as investors are likely to shun exposure to risk heading into the weekend.

"People are wary of hedge fund redemptions this time of year," the trader noted.

Another trader said that the market "felt very weak for most of the day," until the late turnaround in equities, which was seen also lifting some of the junk bond names that had been getting klopped around earlier in the session. "There was a big reversal.

"All of a sudden, the market runs like that, and people think they've got gold and nobody wants to sell anything anymore."

Nortel knock-around continues

However, there was selling all day in Nortel; a trader saw its floating-rate notes due 2011 having fallen to 30 bid from prior levels around 37, while its 10¾% notes due 2016 had dropped to 27.75 bid from 33 on Wednesday.

A market source saw Nortel's floaters fall to around the 30.5 level from the 36-37 neighborhood in which they were trading on Wednesday, with most of the movement coming on large-block trades.

The company's 103/4s, which on had fallen some 10 points on Monday to around the 40 bid level after the company released poor third-quarter numbers, and which then fell another 6 points Wednesday to around 33-34, opened around 29 on Thursday, and later came part of the way back up to around 32. But the bonds couldn't hold that level and slid back down to 27. Nortel's 10 1/8% notes due 2013, which had retreated some 8 points on Wednesday to 34, remained at that level on Thursday, with no trading activity seen.

While those bonds were unchanged to considerably lower, however, Nortel's New York Stock Exchange-traded shares, which had fallen more than 31% on Wednesday, were rebounding Thursday despite the company's problems, surging 19 cents, or 32.20%, to end at 78 cents, on volume of 7.8 million shares, about the usual turnover.

With Nortel's junk market momentum already negative as a result of the numbers put out on Monday - the company posted a third-quarter loss of $3.41 billion versus a year-ago $27 million profit, while revenue fell 14% to $2.32 billion - things got worse on Thursday after RBC Capital Markets warned that Nortel could go bankrupt unless it gets a cash injection from the Canadian government or from financial backers.

Given overall economic difficulties that have led to the large telecom companies which buy Nortel's equipment cutting back on their technology purchases, as well as concerns related to liquidity and debt "while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road," RBC Capital Markets analyst Mark Sue said in a research note. Nortel, he cautioned, is "overwhelmed with debt and burning cash."

Sue warned that the Toronto-based company could run out of money before 2011, when the $1 billion floater issue - Nortel's shortest bond - is scheduled to mature. He said Nortel will have to rely on asset sales to fund its battered operations.

Back in September, Nortel announced that it would explore the possible sale of its Metro Ethernet Networks business, which includes its optical and carrier ethernet technology - but those efforts have so far not yielded a buyer.

Sue wrote in his note that "(a)sset sales couldn't have come at a worse time, and due to Nortel's distressed situation, potential bidders for the company's Metro Ethernet assets may offer subsequently distressed prices."

Sprint gets support

A trader said that Sprint Nextel's bonds did okay as "some positive research" came out on the troubled Overland Park, Kan.-based wireless carrier. He saw its 6% notes due 2016 - which earlier in the session had fallen over 5 points to a low around 61 - come back from that nadir to end unchanged at 66.

Sprint's bonds - and its NYSE-traded shares, which jumped as much as 28% intraday before ending up 29 cents, or 14.78%, at $2.24, on nearly three times normal volume of 93.7 million - got a boost when Oppenheimer & Co. analyst Timothy Horan wrote in a research note Thursday that market speculation that Sprint may be driven into bankruptcy was "overblown."

Sprint on Thursday also moved to improve its financial situation via cost-cutting, offering a number of its employees buyouts to reduce overhead.

Seabulk, Unisys are big losers

One of the bigger losers on the session, according to a market source, was the split-rated (Ba1/BBB-) 9½% notes due 2013 of Seabulk International, a Fort Lauderdale, Fla.-based marine transportation company. Those bonds were seen down as much as 13 points on the session at 91 bid on several large-sized trades. The bonds had not been trading recently, with the previous activity seen back in August, around the 104 level.

There was no fresh news out that might explain the sudden activity in the bonds, or the change in levels.

Seabulk's corporate parent, Seacor Holdings Inc., said in September that it might buy back some of the unit's bonds, as well as its own debt issues, in open market or privately negotiated transactions.

Meanwhile, a trader saw Unisys Corp.'s 6 7/8% notes due 2010 plunge to 45.5 bid, down nearly 20 points from its last previous round-lot trade several days ago at 74 bid, calling it "quite a move in a week."

Another market source also saw those bonds nosedive, estimating them at 48 bid, calling that a 16-point fall.

Nobody saw any fresh negative news out on the Blue Bell, Pa.-based high-tech solutions provider that might explain the slide.

Autos mostly stay parked

In the automotive sphere, a trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2013 "pretty much unchanged" at 22 bid, 23 offered, while seeing its GMAC LLC 8% bonds due 2031 at 36 bid, 38 offered, which he said was unchanged to perhaps up a point, with "not a lot of trading going on in that one."

Another trader saw the GM benchmarks at that same 22 bid, 24 offered context but called them down 1½ points on the day, while Ford Motor Co.'s 7.45% bonds due 2031 were unchanged at 25.5 bid, 27.5 offered. Yet another trader, while seeing GM's long bonds not much changed, saw some movement in GMAC, with the 8s up 1¼ points from Wednesday at 34 bid.

However, GMAC's 7% notes due 2012 were down 5 points on a round-lot basis, at 43.5 bid.

He also saw the Ford '31s down a point at 26 bid.

Ratings changes produce trading activity

Elsewhere, a trader said that William Wrigley Jr. Co.'s bonds represent "a typical situation where a bond goes out of high-grade accounts once it gets downgraded, and goes into high yield." Wrigley's ratings changed in early October upon the closing of the $23 billion sale of the Chicago-based chewing gum and candy maker to sector peer Mars Inc.

He saw the company's 4.65% notes due 2015 rise to 69 bid at the start of this week from 64, "which isn't bad on a percentage [basis] in a week."

After starting the week in that 69-70ish context, the gum-maker' bonds have popped, gyrating around Thursday at mostly higher levels, with a few smaller trades even in the 80 vicinity.

He said that "that's what's going to happen to a lot of bonds."

On the other hand, he said, even with the large numbers of ratings downgrades or withdrawals recently which have turned formerly investment-grade credits like Wrigley into fallen angels, there are still some bonds which go the other way. One example of the latter, he said is Land O' Lakes Inc. "There's a switch," he said, "where a bond is actually going out of high yield and into high grade. Most have been going the other way."

He said the Arden Hills, Minn.-based agricultural cooperative and dairy products maker's bonds were recently upgraded on improved performance, with its 9% senior secured notes due 2010 at Baa/BBB-, trading around par, "which is a great buy, if you can buy and hold the coupon," and its 8¾% senior notes due 2011 at Ba2/BB+, trading around 96-97.

"Now, high yield people are looking for more yield, so that bond is going out of high yield accounts" - he said it's a situation "where high yield accounts can make more money selling those and buying something else." Land O' Lakes' bonds "have held their value very well - but high yield accounts are likely to get out so they can take advantage of other things, because they have X amount of money."

Wanted: credits 'which will make it'

The trader said that one of the bonds his shop has recently been following is Graphic Packaging International Corp. Those 9½% senior subordinated notes due 2013 had fallen from the 90s earlier in the year to as low as 68, but now are back up into the mid-high 70s, helped by the Marietta, Ga.-based packaging company's latest earnings data, which he called "a pleasant surprise."

Another name in that same category, he said, has been ArvinMeritor Inc., even though the Troy, Mich.-based automotive components manufacturer's 8¾% notes due 2012 and 8 1/8% notes due 2015 had slid from the 80s earlier in the year down to around 50, in line with the overall deterioration of the autos sector. The 83/4s have since bounced back to the mid-high 50s, including some round-lot trading in a 56-57 context.

He said that "people say they're going to make it, so I'm starting to see nibbling in both names." Investors, he continued, "are looking for names that are going to weather the storm, whether they have [available] bank lines, or cash or whatever, and that don't have to be refinanced automatically."

He also called Park-Ohio Holdings Corp.'s 8 3/8% senior subordinated notes due 2014 an interesting credit - although the Cleveland-based provider of supply chain logistics services and manufacturer of engineered products' bonds have lately been sliding, despite the fact that "they reported recently and the earnings were OK."

The bonds were seen languishing around 40 bid, well down from their most recent round-lot trading level of 59 bid, seen at the end of October.

Will the bonds follow?

Meanwhile the primary market remained quiet on Thursday.

With the Ashland Inc. bank deal winding down and the Precision Drilling bank deal in progress, some high-yield watchers have been expecting word on the junk bonds contained in both those acquisition financings.

Earlier in the week a source close to Ashland's $750 million offering of unsecured notes backing its acquisition of Hercules Inc. said that there could be news on the bond deal before Friday's close. However there was no news on the junk when Prospect News went to press on Thursday.

Banc of America Securities and Scotia Capital are leading both the bank and bond deals.

Meanwhile the Precision Drilling $1.2 billion bank deal, via RBC Capital Markets and Deutsche Bank, is going well, an informed source said, noting that the revolver and term loan A were wrapped up before the institutional piece launched.

Whether or not the $400 million debt securities - also part of the financing for Precision's acquisition of Grey Wolf Inc. - follow close on the heels of the loan syndication remains to be determined, the source said.

Eying BCE syndication

Meanwhile the likelihood that the $11.3 billion equivalent of junk bonds and the C$23.05 billion credit facility backing the mammoth BCE Inc. going-private deal will be syndicated before the LBO closes on Dec. 11 is diminishing, market sources said.

However, one added, at the Merrill Lynch 2008 Banking & Financial Services Conference a senior official from TD Securities said that when the deal closes TD will be standing by with check in hand, ready and willing to fund its portion of the bridge financing.

Citigroup, Deutsche Bank Securities and RBS Greenwich Capital are in the BCE syndicate as well.

A banker watching this massive deal, conceived in the scorching leverage markets of early 2007, told Prospect News that the BCE debt financing is cause for concern in the leveraged markets because, given its size, it has to potential to do some damage to the underwriters, and could contribute to the already negative tone of the market.

Shorting MGM Mirage

As to the negative tone of the market, the recently minted MGM Mirage 13% secured notes due November 2013 are scheduled to settle on Friday.

In the most recent deal to clear the new issue market, the MGM notes (Ba1/BB) priced at 93.132 to yield 15% on Oct. 30 in a restructured $750 million issue.

On Thursday the MGM 13% notes due 2013 were trading in a context of 90 bid, according to a high-yield syndicate official not in the deal.

Reiterating the Friday settlement, the source said that the word on the Street is that a lot of people are going to be shorting the paper.

PNM remarketing unsuccessful

Finally, PNM Resources, Inc. announced on Thursday that it was unsuccessful in the mandatory remarketing of its outstanding 5.1% senior notes initially due in August 2010.

The remarketing effort was first shopped in an interest rate context of 15%, according to an informed source.

Citigroup led the remarketing effort, which was run off its investment-grade syndicate desk. Others in the syndicate included Banc of America Securities LLC, Wedbush Morgan Securities Inc., RBC Capital Markets and UBS Investment Bank.

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