Homebuilders gain as junk mirrors stocks; rescue buzz lifts MBIA; Freescale off on bad Motorola numbers

By Paul Deckelman and Paul A. Harris

New York, Jan. 23 - As if it were waiting to see whether the large and unexpected Federal Reserve rate cut announced Tuesday was for real, or just a mirage, the junk bond market cautiously allowed itself to believe the former on Wednesday, moving solidly higher in tandem with a surging stock market that was powered by the rate cut and reports that a rescue plan for beleaguered bond insurers like MBIA Inc. may be worked out. The latter's 14% surplus notes - recently on a volatile roller-coaster ride - firmed handsomely.

Also pushing upward were such homebuilder credits as Hovnanian Enterprises Inc., Standard Pacific Corp. and WCI Communities Inc.

Also higher - perhaps on the hope that the rate cut may put a little more money in consumers' wallets down the line - were some recently hard-hit consumer-oriented sectors like retailers, restaurants and even casino operators like MGM Mirage and Trump Entertainment Resorts Inc.

But another such name, theme-park operator Six Flags Inc.'s bonds, went on a downward ride, although there was no fresh news out on the company.

Another downsider was Freescale Semiconductor Inc., whose bonds dropped badly on poor quarterly numbers from the Austin, Tex.-based computer chip maker's former corporate parent - and still its largest customer - electronics giant Motorola Inc.

While the secondary market tempered the initial wariness it showed on Tuesday with a little bit of optimism, allowing itself to be carried higher, the primaryside remained skeptical, with no sudden rush of companies looking to start shopping deals on the assumption that credit conditions may ease.

Market barometers mostly reading positive

A trader said that the widely-followed CDX index of junk market performance jumped a point on the session, ending at 91 1/8 bid, 91 3/8 offered. It had been markedly down on Tuesday. The KDP High Yield Daily Index - which also had fallen badly on Tuesday - was up 0.03 to finish at 74.77 while its yield tightened by 2 basis points to 9.41%.

In the broader market, declining issues and advancers were almost even, an improvement over Tuesday when losers led gainers by a better-than two-to-one margin. Overall activity levels, reflected in the dollar volume, jumped some 65% from Tuesday's session.

A trader said described Wednesday's session as "a whipsaw kind of a day," but said that when all was said and done, the high yield market "had a decent tone to it [Wednesday] morning, aside from Freescale on Motorola's earnings.

"Aside from that, the market really didn't feel the initial downdraft from stocks," which began the day on the downside but which later turned sharply higher, with the bellwether Dow Jones Industrial Average finishing up nearly 300 points and other, broader market indexes also racking up big gains. When that happened, he said, "we definitely caught the updraft once equities made a run for positive and ran right through it.

Junk, another trader said, "had a big rally on better stocks and the news that they're devising a rescue plan for the bond insurers," whose troubles in the wake of the ongoing credit crunch have moved front and center. It was "pretty wild."

"Ya gotta love it," said another trader - "the volatility."

One investment banker said that junk opened weak, then traded down by as much as a point by mid-day.

Later a syndicate official said that the high yield index rallied along with stock prices, heading into the Wednesday close.

A source from the buy-side, meanwhile, said that volume in cash bonds remains extremely light.

"The market rallied back a hair, late in the day, but there was not much trading," the buy-sider said shortly after Wednesday's close.

Builders get a boost

A trader said that there was "much better buying in the homebuilders for most of the day" on Wednesday, attributing the battered sector's revival to a belated embrace by investors of the 75 basis point cut in the Fed's key rates, with the all-important federal funds target falling to 3.5%, its lowest level since late 2005, when rates were gradually heading upward. He also credited positive earnings data from Ryland Homes. "Pretty much across the board there were better buyers today."

Noting the fact that the initial news of the rate cut on Tuesday failed to help the builders' bonds at the time - unlike the companion stocks, which were up pretty much across the board - the trader suggested that "cash [dealings for bonds] kind of lagged [Tuesday]. I think we've been seeing a lot of [credit default swaps trading] kind of leading things. The CDS market, with its liquidity, seems to react [to a rate cut or other development] quicker in either direction while cash always seems to lag a day, or sometimes even longer, depending on how [crazy] things really get. It almost seems like it's an afterthought for a lot of shops out there."

Among specific issues, Hovnanian's 6 3/8% notes due 2015 were seen 2 points better at around the 65 level. A trader said that Standard Pacific's bonds "look like they've come back pretty good," with its 7% notes due 2015 as having moved up to 63 bid, 65 offered from prior levels at 59 bid, 61 offered.

Another trader called the bonds up 2½ points at 62.5 bid, 64.5 offered.

WCI Communities' 9 1/8% notes due 2012 were up 5 points on the session at 52 bid, 54 offered, "a good move for anyone," a trader noted.

In other sector names, a trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 up a point at 70 bid, 72 offered, and saw Tousa Inc.'s 8¼% notes due 2011 unchanged at 38 bid, 40 offered.

Among the construction equipment rental companies, whose fortunes are closely tied to those of the homebuilders, United Rentals Inc.'s 7¾% notes due 2013 were 1½ points better at 78 bid, 80 offered. Neff Corp.'s 10% notes due 2015 were up 1½ points to 42 bid, 44 offered.

Mortgage names turn upward

Another area seen getting a direct boost from the Federal Reserve news was the mortgage sector, which has borne the brunt of the credit crunch. A market source saw Countrywide Financial's 6¼% notes due 2016 move up about 4 points to a close of 80 in brisk trading.

However, another trader said the bonds had actually dipped to 78.5 bid, 80.5 offered, down 1½ points on the day, while its 3¼% notes slated to come due later this year were unchanged at 94 bid, 96 offered.

Sector peer Residential Capital LLC's 6½% notes due 2013 rose 1½ points to 54.5 bid, 56.5 offered. A market source saw its 8 3/8% notes due 2015 up 3 points to the 57 level.

Bond insurers catch a bid

A trader said that MBIA's 14% notes due 2032 - which are now trading around at the junk desks at many firms despite their nominally investment-grade rating, were up as spectacularly as their recent fall. The bonds priced at par on Jan. 11 - but swooned as low as the 70 level last week, dragged down by investor angst about the viability of the sector after MBIA's closest rival, the smaller Ambac Financial Group, was threatened with a ratings downgrade by Fitch Ratings, which eventually did lower its financial strength ratings to AA from AAA, a body blow to the bond insurer, which must have AAA ratings if it expects to win any new business.

The larger Moody' Investors Service also put the company - and sector peer MBIA as well - under scrutiny for a possible downgrade. The ratings agencies worry whether the bond insurers have the financial resources to handle an anticipated flood of claims in the event that mortgage-backed securities, collateralized debt obligations and other instruments based at least in part on securitized subprime mortgage loans ever default - a rising possibility, given the number of subprime mortgages whose holders have defaulted or even slid into foreclosure. Ambac earlier this month posted large losses related to subprime loans, and scrubbed plans to raise $1 billion of new financing through an equity sale.

But the sector got a boost Wednesday on news reports that New York State's insurance regulators met with unidentified U.S. banks to discuss raising new capital for the bond insurers. One report said that the cash infusion could be as much as $15 billion, and would be aimed at preserving the bond guarantors' top credit ratings.

A trader saw the MBIA notes "really bounce" to around the 90 level from the recent lower 70s, noting that the company's equity was also trading at around double the $8 area at which it was trading as recently as Friday.

MBIA "was up big time," another trader said, seeing the bonds go out at 90 bid, 95 offered, up some 10 points from Tuesday's levels and some 20 points above where they had traded on Friday.

Consumer-oriented names mostly better

Apart from the homebuilders, mortgage names and other financials suffering the effects of the credit crunch, traders said retail, restaurant and other consumer-oriented sectors were bouncing back Wednesday after their previous drubbings, on the apparent hope that easier interest rates could put more capital in the hands of consumers who support such businesses.

Among the retailers, Rite Aid Corp.'s 9½% notes due 2017 were up 2½ points around the 71 level. Burlington Coat Factory's 11 1/8% notes due 2014 were up 2½ points to 74 bid, 75 offered; a trader cited better-than-expected quarterly numbers.

Fellow retailer Claire's Stores' 9¼% notes due 2015 were down a point at 62 bid, 64 offered.

Among the restaurateurs, a trader quoted Denny's Corp.'s 10% notes due 2012 up 3½ points at 91.5 bid, 93 offered, while even some casino names - recently hard hit by recessionary fears and the prospect of a fall in discretionary consumer spending - were better; the trader saw Trump's 8½% notes due 2015 up 3 points at 69 bid, 71 offered, while Harrah's Entertainment Inc.'s 5¾% notes due 2017 were a point better at 60.5 bid, 61.5 offered. MGM Mirage's 6 5/8% notes due 2015 were a point better at 91.

Among the pure lodging plays Starwood Hotels' 7 7/8% notes due 2012 rose more than a point to 109.

However, the trader saw amusement park operator Six Flags' 9¾% notes due 2013 fall 3 points to 60 bid, 63 offered, while another market source pegged its 8 7/8% notes due 2010 down 2 points at 70 bid.

Freescale in freefall

Another major loser on the day was Freescale Semiconductor; a trader saw its 10 1/8% notes due 2016 plummet 4 points, blaming the poor numbers of former Freescale corporate parent and major customer Motorola.

A market source at another desk saw Freescale's 8 7/8% notes due 2014 down more than 2 points at 78, while yet another source called the company's 9 1/8% notes due 2014 full 5 point losers on the day at 70.5.

Solutia in Limbo

The primary market remained practically motionless during the midweek session.

Solutia Inc., which has been attempting to place $400 million of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities, announced that its emergence from Chapter 11 will be delayed from the previously anticipated Jan. 25 date.

The filing went on to state that the underwriters informed Solutia on Tuesday that, in their view, "due to continuing conditions in the credit markets," the underwriters have not been able to complete the exit financing they committed to on Oct. 25, 2007.

In addition to the $400 million of junk, the financing consists of a $1.2 billion term loan and a $400 million asset-based revolver.

The company stated that the underwriters are asserting that the market deterioration since the Oct. 25, 2007 commitment date satisfies a material adverse conditions clause in the financing agreement.

However Solutia counters that "conditions in the credit markets began long before Oct. 25, 2007," and adds that Solutia believes the underwriters are required to fund their commitments on or before Feb. 29, when the financing commitment is scheduled to expire.

Susannah Livingston, Solutia's director of investor relations, told Prospect News on Wednesday afternoon that the roadshow for the bond deal ended on Friday.

"We intended to close this week," Livingston said.

"Citigroup told us the deal wasn't fully syndicated, and added that [Citigroup] would not fund the balance because of the material adverse conditions clause.

"However Citigroup did not back away from the commitment," Livingston added.

"They still have this commitment until the end of February.

"So the best thing is that the markets turn, and they go back out and fill up the books."

The initial interest rate for the bridge loan backing the Solutia bonds is three-month Libor plus 650 basis points. The rate steps up by 50 basis points every three months.

Buy-side behind the wheel

Against the backdrop of an extremely quiet primary market, sources have been closely watching the Solutia exit financing.

They began telling Prospect News last week that underwriters were marketing the deal with a yield of between 11½% and 12%.

However investors, who have been more or less pulling the strings in the junk market since the crisis erupted in the credit markets during the middle of last summer, seem uninterested in the deal at any rate less than 13%, the sources add.

On Wednesday one sell-sider, not in the deal, said that in order to get it done the bonds would likely have to come with a yield of between 13% and 14%, possibly at a discount.

"The buy-side is seeing this as a risky financing so they need to be paid well," the source said.

"They are worried about a chemical company with exposure to the automotive sector, and to construction, a percentage of which is residential, which could leave it in a difficult situation should the U.S. economy actually go into recession."

This source said that 32% of Solutia's business is in the automotive sector where the company serves both original equipment manufacturers and replacement markets.

Construction accounts for 27% of Solutia's sales. The company serves both commercial and residential construction markets, however less than 10% of its total sales are to the U.S. residential real estate market.

In this market

Late Wednesday a buy-side source who focuses on both junk bonds and leveraged loans told Prospect News: "I can't imagine that anyone is going to get anything done in this market."

This buy-sider said that Harrah's Entertainment Inc. is "still out there working the loan, but the bond side has been kind of quiet."

Last week Harrah's launched a to-be-determined portion of its $5.275 billion of senior unsecured cash-pay notes.

They are part of the overall $6.775 billion of proposed bond financing which was upsized from $6.025 billion, and includes $1.5 billion of senior unsecured PIK toggle notes.

Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch are leading the bond portion of the LBO financing.

The notes are slated to price on Friday.

Harrah's is also marketing a $3 billion Libor plus 300 basis points tranche of its overall $7.25 billion three-tranche term loan. The loan tranche currently in the market is being offered at a discount of 96.50.

Also slated to price by the end of the week is Petroleum Development Corp.'s $250 million offering of 10-year senior notes (B3), via Morgan Stanley.

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