GM, GMAC move lower as bailout talks stall; Freeport McMoRan up again; funds see $127 million inflow

By Paul Deckelman and Paul A. Harris

New York, Dec. 11 - Bonds of General Motors Corp. and its GMAC LLC auto financing subsidiary were lower Thursday as efforts to get a $14 billion temporary bailout measure passed stalled in the Senate. However, after the markets had closed for the day, there were signs that the bailout has not crashed and burned completely, as senators negotiated late into the night over amendments to the measure passed on Wednesday by the House, aimed at toughening the conditions of the bailout to overcome Republican objections.

Freeport McMoRan Copper & Gold Inc.'s bonds continued to regain ground that they lost last week, helped by a rise in gold prices.

El Paso Corp.'s new five-year notes continued to trade around at sharply higher levels versus the steeply discounted price the bonds had when the issue came to market on Tuesday.

Funds up by $127 million on week

And as trading was wrapping up 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, $127.1 million more came into the weekly-reporting funds than left them.

It was the second consecutive inflow, following the $185.3 million cash infusion seen the previous week, ended Dec. 3. However, the recent trend of junk fund flows remains negative; in the last 13 weeks, including the latest results, there have now been eight outflows versus just five inflows in that time, and at one point there was a skid of five straight outflows through the week ended Oct. 15 that totaled $1.706 billion, according to a Prospect News analysis of the AMG figures.

Net outflows in that 13-week period have totaled $1.135 billion, according to that analysis. That recent 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, when inflows were seen in seven of those eight weeks, according to the analysis, totaling approximately $632.366 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 26 weeks, dating back to the week ended June 18, with 13 inflows and 13 outflows seen, the funds have still lost a net of $1.298 billion during that time, according to the analysis, mostly due to large cash losses in October -- $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 hemorrhage of the year.

With the calendar fourth quarter and the year itself now in its final weeks, inflows, after that slow start, remain ahead, with 28 inflows versus 22 outflows seen in the 50 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 $616.8 million, up from $489.7 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 aforementioned 11-week run of straight inflows.

A market source meantime said that the funds which report on a monthly basis rather than reporting weekly saw an inflow of $154.2 million, versus the previous week's $5.9 million outflow. That brought the net inflow for such funds up to $2.726 billion from $2.572 billion the previous week.

Year-to-date aggregate flows - consolidating the cumulative net inflows of the weekly- and monthly-reporting funds - stood at a net inflow of $3.343 billion, versus $3.062 billion the week before.

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 move lower

The widely followed CDX High Yield 11 index of junk bond performance, which lost 3/8 point on Wednesday, was seen to have also declined by 3/8 point on Thursday, with a trader quoting it at 73 bid, 73½ offered. The KDP High Yield Daily Index meantime eased by 3 basis points to 47.55, while its yield rose by 1 bp to 17.50%.

In the broader market, advancing issues trailed decliners by a margin of almost three to two. Overall market activity, reflected in dollar volumes, was down 15% from the pace seen in Wednesday's session.

A trader said that market activity at this point is "a lot of year-end closing books, flattening positions."

He said that over the past few sessions, the market had seen "a decent tone," although this was blunted somewhat on Thursday, as equities took a tumble on investor fears that the auto bailout drive might have run out of gas on Capitol Hill. The bellwether Dow Jones Industrial Average, after having risen 70.09 points on Wednesday, spent most of Thursday deeply in the red on the renewed investor angst, finishing down 196.33 points, or 2.24%, at 8,565.09. The broader market measures were also lower, with the Standard & Poor's 500 index down 2.85% and the Nasdaq composite off by 3.68%.

Another trader noted that GMAC, particularly its shorter-dated paper, was the main trouble spot on Thursday. "Other than that, it's pretty much the same story," with the market focused on Nortel Networks Corp., whose bonds had taken a pounding Wednesday on news reports that the big Toronto-based telecommunications equipment maker was looking at a possible bankruptcy scenario as its sales fall - even though it's nearest maturity is not until 2011 - and on the rebound in Freeport McMoRan, the two names which he said remained the most active in Junkbondland.

"All in all," he opined, things felt about ½ point softer "across the board. I think people are just taking advantage of some of the recent strength and selling into that strength ahead of the next week or two, when things really start to get illiquid."

GM, GMAC struggle as bailout deal falters

The key to the stock slide, and to junk's gyrations at mostly lower levels was the continuing game of chicken being played in the halls of Congress.

With both GM and rival Chrysler LLC warning that they are rapidly running out of cash, efforts to craft a $14 billion temporary loan package to those two companies and to Ford Motor Co., which is in slightly less precarious shape, took a wrong turn on Thursday as a group of Senate Republicans said that they would not support the bailout bill passed Wednesday night by the House and sent on to the Senate, and threatened to use procedural tactics up to and including a filibuster to stop the bill, which they called a rip-off of the U.S. taxpayer. Their efforts gathered momentum as the Senate's top Republican, minority leader Mitch McConnell, announced his opposition to the bill.

Supporters of the measure, including the White House and the Democratic leadership of both houses, argued that failure to pass the bailout would doom the traditional Big Three, raising the specter of hundreds of thousands of jobs lost and billions of dollars of bonds and other obligations losing most of their slim remaining value if GM or any of the others were forced into bankruptcy by lack of a federal bailout.

Against that somber backdrop, a trader said GMAC "took it on the chin on the front end" on the problems the auto bailout has run into in Washington and GMAC's own problems in getting debtholders to participate in its preferred-for-debt exchange; GM's 49% owned automotive financing arm had warned on Wednesday that its $38 billion debt exchange was falling far short of the 75% bondholder participation level needed to raise sufficient capital to allow GMAC to convert into a bank holding company. So it could access federal bank bailout cash. Without such a participation level achieved by the new deadline of Friday, GMAC said it would have to drop the plan, causing some market-watchers to predict that it might have to then go into bankruptcy to restructure its finances.

GMAC's 5.85% notes coming due in January were down 4 points on the session, in active trading, to 76 bid, although its 6¾% notes due 2014 actually gained 2 points to settle in at 35.

Another trader saw GMAC's flagship 8% bonds due 2031 at 28 bid, 29 offered.

A trader saw those 8s "pretty much unchanged" at 27 bid, 28 offered. He saw the "shorter stuff lower," with the floating-rate notes coming due next year at 58 bid, 60 offered, adding that "it seems like it had a little more activity - but it was not down that much." He saw the 5 5/8s coming due in May at 60 bid, 61 offered.

A trader meantime said GM's 8 3/8% benchmark bonds due 2033 were "definitely lower," quoting them at 15 bid, 19 offered, versus around 20 on Wednesday and also saw Ford's 7.45% bonds due 2031 lower at 24 bid, 24.5 offered, versus around 28.

Another trader called the GM benchmarks unchanged at 17 bid, 19 offered and saw the Ford bonds 1½ points lower at 24 bid, 26 offered.

At another desk, a trader said the GM bonds "weakened down to 16-17", which he called down two or three points on the day, while the Ford 7.45s were "pretty much unchanged" at 24 bid, 25 offered, since Ford, he observed "is not in as much of a pickle as the other [carmakers]." Unlike GM and Chrysler, which could run out of cash by the end of this month or next, Ford said it needs no funds from the government at this time, although it has asked for a $9 billion standby credit line for use if its situation deteriorates.

But Ford Motor Credit Co.'s 7.375% notes due next October meanwhile were seen down as much as 4 points at the 68 level, while its 7¼% notes due 2011 lost ½ point to finish at 48.5 bid.

The Republican lawmakers who lined up in opposition to the plan said that the bailout terms in the House-passed bill were not tough enough to protect the interests of the taxpayers, particularly when it came to the ability of the so-called "car czar" who would be appointed to oversee the out-of-court restructuring to force major changes in the carmakers' labor contract structures, which the legislators claimed are responsible for much of the carmakers' financial distress. McConnell said the bill would "subsidize failure."

Late Thursday, they submitted an amendment to the House-passed bill, authored by Sen. Bob Corker of Tennessee, which would, among other things, require the companies to immediately bring unionized wages in line with the pay and benefit scales at the "transplant" factories that foreign competitors, mainly Japanese carmakers like Toyota and Honda, operate in the United States, including in Corker's home state. It would also give the "car czar" the power to force the carmakers into bankruptcy if they did not meet other cost-cutting goals. Corker's bill further aimed at forcing the carmakers to cut their massive debt loads by would require automakers to offering their bondholders 30 cents on the dollar for their outstanding paper.

While Senate leaders said the two sides had come to a tentative agreement on Thursday night, which reportedly would include some of Corker's language in the bill, details remained to be worked out. While such a compromise might satisfy Republicans critical of the original bill, others likely would remain opposed, and some Democrats with strong labor support said indicated that they would not support any measure that penalizes the United Auto Workers union too much. Should a compromise bill be passed in the Senate, it would have to then go back to the House for consideration, since both houses must agree on all details of legislation before it can be sent to the White House for the president's signature.

Freeport McMo Ran runs up again

Outside the autosphere, traders said the most actively traded credits on the day were Freeport McMoRan bonds. The Phoenix-based metals mining company's 8 3/8% notes due 2017 were at 71 bid, 72 offered, one said, which he said was up from prior levels in the high 60s. "There was a lot of volume in this name," he said, "real size."

He also saw its 8¼% notes due 2015 up 1½ points at 72 bid, 73 offered, on "good-sized trading."

The company's bonds, along with its shares, had gotten hammered last week after the big mining operator said that slowing industrial demand for copper and rising costs would force it to cut its output of the metal in 2009 and by an even larger amount in 2010.

However, Freeport's bonds and shares had bounced back this week, helped in part by Wall Street's favorable reaction to president-elect Obama's plans to the biggest infrastructure spending program since the 1950s - a program expected to lead to increased demand for things like wiring and pipes, made from the copper and other metals that companies like Freeport McMoRan produce. Also helping was a rise in the price of gold, another key Freeport product, as the U.S. dollar weakened; on Thursday, gold rose $17.80 per ounce in New York trading to close at $826.60, its highest level in almost eight weeks.

Rouse bonds run up; Nortel languishes

Rouse Co.'s 5 3/8% notes due 2013 gained more than 2 points to end at 31, although there was no fresh news out on the company; earlier this week, Pershing Square Capital Management LP, the hedge fund run by William Ackman, said it owns shares and swaps giving it a 25.6% stake Rouse corporate parent' shopping-mall owner General Growth Properties Inc.

Elsewhere, a market source saw Six Flags Inc.'s 9 5/8% notes due 2014 up 3 points, at 18 bid, though there was no fresh news out on the New York-based amusement park operator to explain the rise.

Another also saw the bonds up 3 points, at that same level.

Its nearly worthless penny shares meantime fell 6 cents, or 17.65%, to 28 cents. Volume of 1.25 million shares was almost twice the norm.

A trader saw Nortel Networks' 10¾% notes due 2016 at 20.5 bid, 22 offered and its floating-rate notes due 2011 in the "high teens," around an 18.5-19.5 range, which he said was unchanged to "maybe down 1/2" point; those bonds had swooned around 10 points Wednesday on investor bankruptcy worries.

A trader saw Hovnanian Enterprises Inc.'s bonds lower, with the 7½% notes due 2016 at 23 bid, which he called down a point versus levels earlier in the week.

Another market source pegged the Red Bank, N.J.-based builder's 6 3/8s due 2014 down 3 points at 23 bid.

El Paso deal hangs onto gains

A trader said that "our sole [recent new] deal, El Paso, keeps pushing higher," pegging the 12% notes due 2013 at 93 bid, 94 offered, which was unchanged to perhaps slightly higher than the levels at which the deal traded on Wednesday. "It keeps creeping up in the face of other stuff that's a touch softer."

Another trader also agreed with that 93 bid, 94 quote.

The Houston-based energy exploration, production and transportation company brought $500 million of the bonds to market on Tuesday at a deeply discounted price of 88.909, giving investors a 15.25% yield to convince them to jump back into the first new junk deal in nearly a month. After pricing, the new bonds immediately pushed up to around the 91 bid area later Tuesday, and had firmed to bid levels around 92.5-93 on Wednesday, traders said.

Kansas City expected

Although there was no announced primary activity, Kansas City Southern is supposed to be coming with a deal soon, the fund manager added.

"The more El Paso trades up the cheaper it is for KSU [Kansas City Southern] to do a deal," the source added.

Kansas City Southern has a $200 million maturity coming up in June, the buy-sider said, adding that the railroad company is apt to steal a page from El Paso and decide that sooner is better than later, no matter how expensive sooner might turn out to be.

As to El Paso, which is facing maturities in the second quarter of 2009, the decision to come sooner than later appears to be the correct one, the investor said.

"But it certainly was an expensive one," the source added, pointing to the 15¼% yield on El Paso's new five-year paper.

As to a potential Kansas City Southern deal, so far there is nothing concrete, according to the source.

However Morgan Stanley, which ran Tuesday's El Paso deal, might turn up with the books, the investor said.

Kansas City Southern most recently visited the high-yield new issue market in late May of this year, pricing $275 million of senior notes due 2015 (B2/BB-) at par to yield 8%, via Morgan Stanley.

GMAC: not looking promising

On the restructuring front, the GMAC deal turned out to be Thursday's topic-du-jour among sources from both the buy-side and sell-side, none of whom liked the company's chances of raising the capital necessary to qualify for bank holding company status, and thus gaining access to Troubled Asset Relief Program (TARP) funds.

GMAC, which is controlled by Cerberus Capital Management, announced earlier in the week that it is not seeing sufficient participation in its massive $38 billion bond exchange, which was extended to Friday.

GMAC said that it needs $30 billion of total regulatory capital in order to meet the Federal Reserve's requirements for GMAC to become a bank holding company, and it needs roughly 75% participation in the exchange to get there.

"There is no infusion by Cerberus Capital so they're not going to get there," said a high-yield portfolio manager not long after Thursday's close.

Elsewhere in restructuring, the chances of Simmons Bedding Co. don't appear too rosy, either, said the portfolio manager - even though a forbearance agreement with the senior secured lenders was extended to March 31, 2009.

"The bank loan lenders say they won't accept anything except the sponsors putting in equity," the buy-sider said.

Thomas H. Lee Partners acquired Simmons for $1.1 billion in 2003.

Word is the lenders turned down an amendment deal for Libor plus 800 basis points, with 200 bps up front, the buy-sider said.

"So far the bank loan lenders are saying 'No.'

"You're going to see a lot more of this kind of thing as we move into next year."

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