Casino bonds ignore stock drop, Spectrum also; autos skid while GM turns to 'employee' price incentives

By Paul Deckelman and Paul A. Harris

New York, Aug. 19 - Bonds of casino operators MGM Mirage, Las Vegas Sands Corp. and Wynn Resorts Ltd. were seen generally not much changed on Tuesday, despite a slide in the stocks of those three gaming companies, triggered by news reports indicating that China may toughen travel restrictions on its citizens visiting the enclave of Macau, where all three U.S. companies have lavish casinos.

Spectrum Brands Inc.'s bonds were also seen largely unaffected by a sharp drop in that company's shares.

Elsewhere, General Motors Corp. and Ford Motor Co. bonds, and those of the two auto giants' respective car-financing subsidiaries, GMAC LLC and Ford Motor Credit Co., were seen lower, even as GM announced plans to spur sales over the next two weeks by offering most of this year's models, and some of next year's, at the same lower prices that its own employees can buy cars at - just one more sign of the severity of the current auto slump.

Also on the downside, Energy XXI Gulf Coast Inc.'s bonds were seen sharply lower in very active large-block trading, although there didn't seem to be fresh negative news out about the Houston-based energy company.

Primary market activity meantime remained nil.

Market indicators move lower

The widely followed CDX index of junk bond performance was down ½ point on the day, a trader said, quoting it at 92 1/8 bid, 92 5/8 offered. The KDP High Yield Daily Index meantime dropped by 31 basis points to end at 70.36, while its yield widened by 9 bps to 10.63%.

In the broader market, advancing issues trailed decliners by a margin of about four to three. Activity, represented by dollar volume, jumped by 86%from the anemic levels seen on Monday.

Despite the nominal rise in the activity level, however, traders said generally that the session was pretty boring, or as one put it, "blah."

It was "a lot of nothing," another lamented. "It's been a lackluster week so far, and it will probably get even worse."

"We had a very quiet day," yet another one said, "and it could be this way till the end of the summer. I wouldn't be at all surprised if it was."

The trader noted "the lack of bond players that are in the market" - exemplified by the fact that there were a number of names whose equity moved quite notably, but the bonds didn't really go anywhere. High yield, he said, is nothing more than "equity with a coupon, so when there is a move like that in the equity, typically, the bonds move as well." But right now, "there's no one around - it's a huge vacation week, as next week will be as well."

Casino bonds snooze while stockholders lose

A case in point is the lack of much movement in the gaming bonds, even as a trio of gaming stocks - MGM, Wynn and Las Vegas sands - were getting hit on news stories indicating that China wants to discourage its citizens from going to Macau, a special administrative district that is to China what Nevada used to be to the United States in the decades prior to the rise of Atlantic City, Mississippi and other gaming jurisdictions - the only place in the entire country where someone could go to gamble legally. The stories say China, which recently limited mainland visas to Macau to one visit every two months, may stretch that out to no more than one visit every six months. Such tougher rules, should they be imposed, could play havoc with the revenues of the 29 casinos in Macau, including the two owned by Las Vegas Sands and the one apiece owned by MGM Mirage and Wynn.

But while Las Vegas Sands' New York Stock Exchange-traded shares fell $5.40, or 10.60%, to end at $45.53 on volume of 8.4 million, nearly double the norm, the trader saw no round-lot trading in the company's 6 3/8% notes due 2015, which have most recently been trading around the 80 level, "nothing."

Another market source did see the bonds drop 4 points on the day to about 78.5 - but on just one very small trade which is probably not representative of anything except the paucity of real trading activity.

The trader saw Wynn's 6 5/8% notes due 2014 inch up to 91.125 from 91 bid on Monday, while another quoted the bonds up perhaps ½ point at 90.5 bid, 92 offered, while seeing MGM Mirage's 7½% notes due 2016 unchanged at 80 bid, 82 offered.

In the meantime, MGM Mirage's NYSE-traded shares slid by $2.94, or 9.39%, to $28.36 on volume of 7.8 million, almost double the usual handle. Wynn's NYSE-traded shares fell $4.34, or 4.32%, to $96.05, on volume of 3.8 million shares, a third above the usual activity level.

The first trader said that the lack of much corresponding bond movement was "quite surprising" - and quite indicative of the empty state of the junk market.

Still another trader said he "didn't see much in the sector." As far as other non-Macau sector names went, he saw Trump Entertainment Resorts Inc.'s 8½% notes due 2015 down ½ point at 45.25 bid, 46.25 offered.

Isle of Capri Casinos Inc.'s 7% notes due 2014 were unchanged at 71.25.

Spectrum bonds chill, while the stock gets killed

The lack of much bond market response to big market moves over on the equity side of the fence was even more pronounced with Spectrum Brands, whose bonds were seen steady and little traded, despite the sharp fall in the Atlanta-based consumer product company's shares.

A trader saw Spectrum's 11% notes due 2013 down 1 point at 71.75 while its 7 3/8% notes due 2015 were at 55.25 bid, up ¼ point from the last previous trading levels, which had been recorded almost a week ago.

A second trader said the 11s were "a little weaker, but not crazy" like the sharply lower shares, quoting the bonds "maybe down a point" at 71 bid, 72 offered.

Yet another trader said there was "not much change in Spectrum on the bond side," seeing the 7 3/8s staying at 55 and the 11s at 71 bid, 72 offered, "where they had been," on "a little more activity" than the 7 3/8s saw. "The stock got crushed but the bonds were unchanged," he said.

A market source saw the 7 3/8s up slightly at 55.25, but with only one large trade having been seen.

In contrast, Spectrum's NYSE-traded shares plunged by 51 cents, or 19.92%, to end at $2.05. Volume of 2.1 million shares was almost five times the average daily turnover.

But even as the stock turned into one of the biggest disasters of the day on Wall Street, there was no fresh news out about the company, which makes consumer products ranging from Rayovac batteries to Remington electric shavers, that would explain the steep drop.

Little heat from coal bonds

In that same vein, shares of coal producers were generally up smartly Tuesday, helped by resurgent oil prices - but you wouldn't know it by watching the behavior of the same companies' bonds. A trader saw Peabody Energy Corp.'s bonds steady, with its 6 7/8% notes due 2013 at 101.75 bid, 102.5 offered, and its 7 3/8% notes due 2016 at 102.75 bid. The St. Louis-based coal company's bonds, he said, " have been firm but not really racing higher. They've been trading pretty rich already."

Peabody's NYSE-traded shares were meanwhile up $4.36, or 7.64% on the day, at $61.45, on volume of 8 million, about the usual activity level. Peabody was also helped by Fitch Ratings calling its outlook stable, citing the company's "well-diversified operations, good control of low-cost production, strong liquidity and moderate leverage."

The trader also said that he had seen "not much activity at all" in the bonds of Richmond, Va.-based coal operator Massey Energy Co. Another market source even saw Massey's 6 7/8% notes due 2013 down ½ point at around the 97 level. In contrast, its NYSE-traded shares rose $4.51 on the session, or 7.58%, to close at $63.97 on volume of 5.4 million, also around the usual turnover.

Energy XXI sharply lower

One energy name whose bonds did move actively was Energy XXI Gulf Coast, whose 10% notes due 2013 were seen by a market source to have slid by some 7 points to close at 80 in busy round-lot dealings.

However, there was no fresh news out on the oil and gas exploration and production operator that might explain the sudden slide.

GM shifts gears on incentives,

Elsewhere, a trader saw General Motors's benchmark 8 3/8% bonds due 2033 down 2¼ points in round-lot trading to 51.75 bid, and saw domestic competitor Ford's 7.45% bonds due 2031 down 1¼ points, also in round-lot dealings.

Another trader saw the GM bonds down 1 point on the day at 52 bid, 53 offered, and said the Ford bonds were at that same level, though down 2 points on the day

Another trader saw GM'S 7.20% notes due 2011 dip to just under 65 bid from prior levels at 65 bid, 66 offered, pronouncing the carmaker's bonds were down ¼ point "across the board,"

At another desk, the 8 3/8s were seen down as much as 5 points on the day at 51, in active trading, while the 7.20s dropped more than a point to just above the 65 level. The market source saw GMAC's 6 7/8% notes due 2011 down 1½ points at 62, and its 6 7/8% 2012 notes likewise down 2 points at 60, although GMAC's 8% bonds due 2031 were seen unchanged at 56 bid, 57 offered.

A market source saw Ford Credit's 7% notes due 2013 off ½ point at 74, its 7¼% notes due 2011 down nearly 2 points at 76.5 and its 7.375% notes due 20009 also down nearly 2 points at 92 bid.

The whole automotive sector - which had recently shown signs of strength as it rebounded from previous lows - seemed to be on the downside as investors contemplated its serious situation. The sector's plight hit home as industry leader GM - which had tried to avoid offering wide-scale price incentives in order to move cars - took the extraordinary step of throwing its strategy into reverse, announcing that starting Wednesday and continuing through Sept. 2, it will offer "employee pricing" discounts on almost all its 2008 models and on some 2009s in hopes of clearing dealer lots of the leftover '08s and introducing drivers to the '09 models of its smaller, more fuel-efficient vehicles.

Those incentives, customarily offered only to GM employees, knock between 10% and 12% off the sticker price of a vehicle.

GM had last used that sales promotion in June and July of 2005, but had resisted the artificial stimulus since then, since incentives boost sales at the expense of overall sales revenue, and also lower the resale value of cars sold that way. Once the incentives have run their course and expire, many consumers typically avoid the showrooms, expecting another round of incentives soon and waiting for such gimmicks before coming back.

But the Detroit giant, faced with a terrible selling environment which saw its July sales plummet 26% from year-earlier levels, with analysts predicting further sales declines for this month and next, did a U-turn and brought the incentives back. They will cover all 2008 vehicles except mid-sized trucks, and will also be offered on the 2009 Chevy Cobalt and HHR, Pontiac Vibe and G5, and the Cadillac CTS, hoping to lure drivers into those smaller GM cars.

GM's incentives are expected to be matched by domestic arch-rivals Ford and Chrysler LLC.

Portola takes a plunge

From deep in the distressed-debt market, a trader saw Portola Packaging Inc.'s 8¼% senior notes due 2012 having slid to 30.5 bid from prior levels at 42, calling it a 12 point drop on the day. He said the notes were trading flat, or without their accrued interest. He suggested that "they're getting down towards the end of the [30-day] grace period" after having missed the $7.425 million Aug. 1 coupon payment on the $180 million of outstanding bonds, "and may file for bankruptcy."

However, another market source noted that the bonds had last previously traded around mid-July, at that previous 42.5 level, but then disappeared from the market till Tuesday, first dropping as low as 10 bid on several small trades before roaring back from those lows to the 30 area, on several big-block trades.

The source noted that Batavia, Ill.-based Portola had already announced at the end of July that it had reached agreement with its lenders and bondholders on restructuring the company's debt via a pre-packaged Chapter 11 filing.

Portola said that the holders of more than 80% of the bonds had agreed to the restructuring, with the Chapter 11 filing expected to take place early next month. The noteholders are to receive 100% of the stock in the reorganized company. Portola earlier this month released the disclosure statement for the proposed bankruptcy filing, providing further details on the restructuring.

Six Flags' ride continues

One of the few upsiders seen Tuesday was Six Flags Inc., continuing to ride the momentum the New York-based theme park operators' bonds began generating last week when it released preliminary attendance, revenue and customer spending data at the third-quarter's half-way point - statistics which seemed to bode well for the historically struggling company.

A trader saw Six Flags' 9 5/8% notes due 2014 as "firm but not really moving," up perhaps another ½ point at 56 bid, 57 offered.

He also saw the new 12¼% notes due 2016 - issued several weeks ago as part of the company's successful effort to swap new debt for a portion of its existing bonds - also up ½ point at 94.5 bid, 95 offered.

No new deals until September?

Meanwhile in the primary there was once again no news to report amid a building consensus that the new issue market is now closed until September.

Whether the primary will reactivate in September, and how vigorous that reactivation might be, depends upon who fields the questions.

Some syndicate sources profess visibility on September business while others specify that deals could come if there is some abatement in the negative news flow from the credit markets and the stock market stabilizes somewhat.

Looking to the auto sector

One money manager from a high-yield mutual fund, who has lately been paying attention to the bank loan market, said that conditions in the credit markets, and particularly in the financial sector, have made it more challenging to get anything done.

"You can't get any size in anything because it's all so illiquid," the money manager said.

"That's partly because it's summer and partly because of the credit markets.

"Banks don't have any capital to go long or short bonds in order to help you out."

This source is looking for the leveraged markets to come to life in September, and added that the deal that could get things rolling could come from the automotive sector.

"People are talking about GM doing an $8.5 billion loan," the money manager said, adding that the buyside knows GM needs the money, and has collateral to use to get it done.

"The question is - how expensive would it be?" the money manager said.

"It probably won't be cheap because that's a lot of paper."

Cash building, and no supply

This money manager more or less signed off on a perception that has lately been taking hold in the junk market that cash balances are building by dint of coupon payments and inflows - this source gave more credence to the former - and those balances are building in the face of an extremely limited amount of new issue supply.

The buysider believes that this technical force might be sufficient to pry open a window of opportunity for issuers to tap the junk market in the month ahead.

"They would have to be good credits, though," the investor insisted.

"People are not wanting to take on dicey names."

Shortly after the money manager rang off an investment banker elaborated on the dearth of deals.

"Issuance has been so sparse over the past seven weeks - and will probably be nil between now and Labor Day - that cash positions are bound to be going up," the banker commented.

"There has been perhaps $3 billion of distributed paper in July and August; new dollars aren't really rolling into the [LBO] bridge conversion deals.

"I doubt that it will translate into a flood of issuance, though," the banker warned, conceding visibility on a couple of probable September deals.

"People will be looking to opportunistically put money to work, however."

No squeeze from high-grade financial paper

Prospect News asked the banker whether an onslaught of high-yielding issuance from investment grade-rated names in the financial sector might put the squeeze on traditional corporate high-yield issuers in the run up to 2009.

Market sources have pointed to, among others, Citigroup Inc.'s new 6½% senior notes, which came at a 337.5 basis points spread to Treasuries, and American International Group, Inc.'s 8¼% notes, which came at a 433 basis points spread, and conceded that the spreads are akin to those that were representative of the middle-to-upper credit range of the junk market a mere 15 to 16 months ago.

However the banker seemed to share the opinion of most sell-side sources who have lately discussed this burst of issuance from the high-grade financial sector with Prospect News: despite the big yields and spreads it is unlikely to squeeze out the traditional junk issuers.

"Financials aren't really a big portion of high-yield," said the banker.

"There are only a handful of credits.

"So it's almost a new sector, and I don't think that it's backing up too much of high-yield."

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