GM bonds head lower on loss, but bounce back; Sirius deal seen coming back

By Paul Deckelman and Paul A. Harris

New York, July 20 - General Motors Corp. bonds were seen having initially moved lower Wednesday as the giant carmaker reported a giant-sized second-quarter loss - but by the end of the day, those bonds had pretty much recovered their losses and stood little changed on the day, traders said.

Out of the supermarket sector, the bonds of both the venerable Great Atlantic & Pacific Tea Co. Inc. and the bankrupt Winn-Dixie Stores Inc. were seen higher on the news of asset-sale deals announced by each company late Tuesday.

And airline bonds were generally given a lift by the big profits reported by AMR Corp. and Continental Airlines Inc. - although Northwest Airlines Corp. struggled in the wake of the latest news about the Eagan, Minn.-based carrier's deteriorating labor situation.

Overall sources marked high yield flat to tighter on Wednesday as Treasuries rallied.

One source, citing negative news in the auto sector, a promise from Fed Chairman Alan Greenspan to the U.S. Congress that interest rates will continue to rise, and news of reduced crude oil inventories, marveled that in the face of it all junk appeared to hang in.

In the primary arena, no new deals were seen to have priced. However, participants noted that Sirius Satellite Radio was returning with a restructured secured deal that investors were likely to like, and Game Stop was expected to announce a nearly $1 billion deal before the week was out.

GM's benchmark 8 3/8% notes due 2033 "seemed to widen out in the morning," a trader said, after the Detroit-based world's largest carmaker was wallowing in red ink during the second quarter, dragged down by a staggering $1.2 billion loss suffered by its core North American automotive operations.

He saw those bonds - which had closed on Tuesday at 86.5 bid, 87.5 offered - retreat to 84.5 bid, 85.5 offered in the morning as market participants digested the details of the larger-than-expected loss.

But by the end of the session, he said, "the two points that they lost earlier, they got back," to go home at the same 86.5 bid, 87.5 offered level at which they had begun.

At another desk, GM's 7 1/8% notes due 2013 were seen ending the day a quarter point lower at 91.5 bid.

GM had a net loss of $286 million (51 cents a share) - a radical deterioration from its year-earlier profits of $1.4 billion ($2.42 per share). The poor performance of the North American unit overshadowed gains posted by GM operations abroad, as well as by its GMAC financing unit. While the "employee discount for everyone" promotional gimmick boosted June sales an eye-popping 41% and got rid of a lot of the inventory clogging up dealers' lots, it did little for the carmaker's margins and bottom line, since the models sold under the program were heavily discounted.

Other auto names steady to lower

Elsewhere in the automotive sector, rival Ford Motor Co. - which announced a profit Tuesday, in contrast to its larger competitor - "hung in," the trader said, its flagship 7.45% notes due 2031 down perhaps half a point at 81.5 bid, 82.5 offered.

Among other automotive names, former GM unit Delphi Corp.'s bonds were a bit lower, a market source said, quoting the Troy, Mich.-based automotive components maker's 6½% notes due 2009 down two points at 86 bid, its 6½% notes due 2013 down 1¼ points at 76.75, and its 6.55% notes due 2006 off 1/8 at 97.125. Another source saw those 61/2s at 86 bid,87 offered, but said they were only half a point down on the day.

Former Ford unit Visteon Corp.'s 8¼% notes due 2010 were unchanged at 93 bid, 94 offered, while Dana Corp.'s 6½% notes due 2009 were likewise steady at 99 bid, 99.75 offered.

However, ArvinMeritor Corp.'s 8¾% notes due 2012 were a point lower at 105.

A&P jumps on sale

Apart from the automotive area, Montvale, N.J.-based supermarket operator Great Atlantic & Pacific's 9 1/8% notes due 2011 were seen at 109 bid, up three points from their previous levels, given a sharp boost by the news that A&P had agreed to sell its lucrative Canadian operation to Montreal-based retailer Metro Inc. for C$1.78 billion (US$1.46 billion), with proceeds slated to be used for debt reduction. However, a source quoted the company's 7¾% notes due 2007 a quarter-point lower at 104.

Another trader said that actually, those gains had been notched late Tuesday, after the news about the asset sale hit the tape, and caused the 9 1/8s to run up to their likely takeout level at 108.5 bid, 109.5 offered from 106 bid, 107 offered earlier, while the 73/4s firmed to 103.75 bid,104.75 offered from pre-news levels at 102.25 bid,103.25 offered. After having done all that late Tuesday, Wednesday he said "was pretty much status quo."

Winn-Dixie better

The trader also saw Winn-Dixie's notes "trading stronger" on the announcement late Tuesday that the Jacksonville, Fla.-based supermarket operator had managed to sell 102 of its stores at a bankruptcy auction - a gain of 23 stores above the 79 announced earlier in the month. With more stores being sold, proceeds are also greater - $45.6 million, versus the $38 million initially announced.

He saw the company's 8 7/8% notes due 2008 having moved up to 71.5 bid, 72.5 offered at the opening, up from 70.5 bid, 72.5 offered going home Tuesday. By the time Wednesday's trading ended, those bonds had firmed a bit more, to 72 bid, 74 offered.

At another desk, a trader saw those bonds having improved to 72.5 bid, 74.5 offered from earlier levels 71 bid, 73 offered.

AMR rises on earnings

News that AMR Corp. had posted a second-quarter profit and that Continental Airlines had cruised to a larger than expected second-quarter earnings gain were seen having pushed AMR's 8% notes due 2012 to 80 bid, 82 offered from prior levels at 78 bid, 80 offered, "where they had been for the longest time," a trader said. He saw the Fort Worth, Tex.-based carrier's 9% notes due 2016 also two points up, at 79 bid, 81 offered on the news. Continental - whose 8% notes are slated to mature on Dec. 15 - was seen holding steady just a tad below par.

In the second quarter ended June 30, AMR posted a net profit of $58 million (30 cents per fully diluted share) - well up from its year-earlier earnings of $6 million (three cents per share), which included a $31 million benefit from special items). The latest quarter was AMR's first profitable quarter, without the benefit of special items, since the fourth quarter of 2000.

Continental, meantime, reported that second-quarter net income hit $100 million ($1.26 per diluted share), although this included a $47 million gain related to the contribution of ExpressJet shares to Continental's defined-benefit pension plan during the quarter. Excluding that unusual gain, Continental recorded net income of $53 million (69 cents per share) - a sharp turnaround from its year-ago loss of $28 million (43 cents per share). The latest per-share earnings easily topped the 20 cents consensus of a number of Wall Street analysts.

While both airlines claimed to have made progress in cutting their costs, they acknowledged that these belt-tightening efforts were dwarfed by continually rising fuel costs. However, both have ample cash cushions to see them over the rough spots (see related article elsewhere in this issue).

Northwest down on strike fears

Northwest's notes were meantime seen "a little lower with a strike looming in August," after federal mediators truing to work out an agreement between Northwest and the Aircraft Mechanics Fraternal Association formally released the two sides from their talks. That starts the clock on a 30-day window that could be followed by a strike. The union said late Tuesday that 92% of its members had voted to give their union leaders the authority to call a strike.

That pushed Northwest's 8 7/8% notes due 2006 down a bit to 63.5 bid, 65.5 offered, while its 7 7/8% notes due 2008 eased to 40 bid, 42 offered. However, another market source, who saw those bonds around the same level - said they were essentially unchanged.

Maytag unchanged

Also unchanged to perhaps even slightly higher, despite the presence of news - was Maytag Corp., whose 5% notes due 2015 were seen around 89 bid. Overnight, Chinese appliance maker Haier announced that it was withdrawing its informal $16 per share offer for the Newton, Iowa-based appliance manufacturer. That leaves just Whirlpool Corp., which earlier in the week made a $17 per share bid for Maytag, and Ripplewood Associates, which put forward the original $14 per share bid for Maytag, which agreed to that deal. Maytag shareholders are scheduled to vote on the proposal at a special meeting next month.

Rich bonds, hot market

A high yield portfolio manager, who spoke to Prospect News on background Wednesday, also remarked that Treasury yields were down on the session.

The source added that new high yield issues are once again looking "rich," and the market is behaving like a "hot" one.

"There is a lot of cash out there," the investor asserted.

"Meanwhile there is really no direction to the economy. Equities are giving you a positive direction from a credit standpoint. Treasuries are giving you a positive reaction.

"So we should be flat to up.

"But if you look out six to nine months, if the Fed does raise interest rates 75 more basis points you are going to see a crack. Either that or we're really going to have an inverted curve."

The "clipping" sound

When pressed about the source of the cash, the investor said that the high yield market has gotten so big that coupon payments, such as those received on June 30 just before the Independence Day break, tend to pile up notably.

"It puts so much money in your pockets you can't sit there very long and not invest it," the portfolio manager said.

Southern Peru Copper goes well

Only one deal priced Wednesday in the primary market.

Southern Peru Copper Corp. priced an upsized split-rated $800 million issue of senior notes (Ba1/BBB-/BB+) in two tranches, one of which came tight to talk, and the other inside of talk.

The company, which is registered in Delaware and headquartered in Phoenix, Ariz., sold $200 million 10-year notes at 99.475 to yield 6.447%, at a 225 bps spread to Treasuries, inside of the 240 basis points area price talk.

The copper miner and smelter also priced an upsized $600 million issue of 30-year notes at 99.116 to yield 7.575%, at a spread of 315 bps, which brought it tight to the 325 bps area talk. The tranche was increased from $400 million.

Citigroup and UBS Investment Bank were bookrunners for the debt refinancing issue.

In the shadows

Although no roadshow starts were announced Wednesday, sources said that the new deal pipeline is filling conspicuously, especially given the fact that high summer is upon the high-yield market.

Grapevine, Texas -based electronic gaming firm, GameStop Corp., is expected to announce its $950 million two-part offering of senior unsecured guaranteed notes (Ba3/B+) by the end of the present week.

Banc of America Securities, Citigroup and Merrill Lynch & Co. are expected to play prominent roles in the LBO transaction.

Meanwhile UPC Holding BV, a wholly owned subsidiary of Denver-based Liberty Global, Inc., plans to price €300 million of nine-year senior notes on Friday via Credit Suisse First Boston.

The company, which owns interests in broadband distribution and content companies operating outside the continental United States, principally in Europe, Asia and the Americas, will use the proceeds it raises for general corporate purposes.

Finally, Sirius Satellite Radio Inc. is heading back to the high-yield primary market with a restructured $250 million offering of 10-year senior secured notes. The company pulled a senior unsecured deal in the chop that hit high yield in the spring.

JP Morgan is pre-marketing the deal, according to the buy-sider who added that investors are already "fighting over the book."

Digicel upsizes, tightens talk

On tap for Thursday is Jamaican wireless operator Digicel Ltd. which revised talk on its upsized $300 million (from $250 million) seven-year senior notes (B3//B) offering to 9¼% area from 9½% area.

JP Morgan and Citigroup are running the books.

Skip the August lull?

Finally Prospect News asked the above-quoted portfolio manager whether a building calendar, which is being suited up for a buy-side that is regarded to be flush with cash, might translate into an uncharacteristically busy late summer in junk land.

But the investor would not buy it.

"You're already seeing a lull," the portfolio manager asserted.

"We're already down to a three-day week in this market. Nobody wants to do anything on Monday because they're all trying to figure out what happened on Friday when they were gone."

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