Troubled financials still dominate junk market, tone worsens; GM off on drawdown; Aventine rebounds

By Paul Deckelman and Paul A. Harris

New York, Sept. 22 - Troubled fallen financial names like Lehman Brothers Holdings Inc. and Washington Mutual Inc. continued to account for much of the trading in the junk bond market on Monday, although their activity levels were below the frenzied pace seen last week.

Overall, the market tone was seen to have weakened substantially, with bonds likely taking their cues from the equity markets, which were solidly lower.

General Motors Corp. bonds retreated on the news the giant marker had drawn the last availability on its credit revolver.

Paradoxically, there were some sharply higher upsiders, including Aventine Renewable Energy Holdings Inc., whose bonds had fallen badly on Friday, Six Flags Inc. and Las Vegas Sands Corp., all despite a lack of fresh news about the companies.

Market barometers lower

The widely followed CDX index of junk bond performance, after rising 1½ points on Friday, fell by ¾ point on Monday, with a trader quoting it finishing at 91½ bid, 92 offered. The KDP High Yield Daily Index fell by 10 basis points to end at 68.43, as its yield rose 2 bps to 11.19%.

In the broader market, advancing issues trailed decliners by a better-than five-to-four margin. Activity, represented by dollar volume, slid by 43% from the levels seen on Friday.

"There certainly was a downward bias, though on very limited volume," a trader said. Generally, across the board, there were, I think, more people on the sidelines again, trying to figure out - like the rest of the world - what's really going on here and what the ultimate outcome will be. Until there's a plan in place [for bailing out trouble financials and stabilizing the sector] I don't think anyone will be really able to analyze it."

Overall, Wall Street gave up most of the gains which it had notched on Friday at the tail of a powerful two-day surge, as investor nervousness about the details of the proposed giant government rescue plan for the financial markets, combined with a sharp rise in crude oil prices, battered the financial markets. The bellwether Dow Jones Industrial Average fell 372.75 points, or 3.27% percent, to 11,015.69. Broader indicators followed suit, with the Standard & Poor's 500 index down 47.99 points, or 3.82%, to 1,207.09, and the Nasdaq composite index off 94.92, or 4.17%, to 2,178.98.

Lehman leads the way

A trader said that "generically," Lehman Brothers' senior bonds were all around 19 bid, up from the 18-18.5 level seen Friday, and they were the most active bonds among purely junk issues. He saw the subordinated bonds between ½ and 1, and said they were "not as active as the seniors."

A market source at another desk saw Lehman's' 6 7/8% notes due 2018 as the most active bond, with almost $50 million changing hands. The notes were up ¼ point at 18.75.

Lehman's 4½% notes due 2010 were ahead by nearly a point at 19.25

More wham for WaMu

While the Lehman bonds were seen improving for the most part, Washington Mutual Inc.'s bonds were lower.

The Seattle-based thrift operator's 4% notes due 2009 were seen down more than 3½ points to just over 71 bid.

Some upsiders seen

The first trader said that "there were a couple of issues that were up, which surprised me." He said that "one of the more active names" was Dole Food Co.'s 8¾% notes due 2013. He saw the bonds hit a high of just under 95 before dropping back to 94, well up from Friday's close at 90.5.

H e said he had not seen any news on the Westlake Village, Calif.-based fruit and vegetable importer and processor that might explain the rise. "With that kind of upward move in a down market, it's not a coincidence."

Other gainers, on no news, included Las Vegas Sands, whose 6 3/8% notes due 2015 were seen up more than 7 points to 88.625 bid - even as the Nevada-based gaming company's New York Stock Exchange-traded shares fell $7.75, or 17.69%, to $36.05. Volume was only modestly higher than usual.

A market source saw Six Flags' 9 5/8% notes due 2014 up 4 points at 61 bid, also on no news, although another source cautioned that the rise probably included small odd-lot trades and was not representative.

Aventine Renewable Energy Holdings' 10% notes due 2012 gained more than 5 points to the 60 mark. The ethanol producer's bonds had slipped on Friday after S&P downgraded the credit.

GM, other autos lower

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 unchanged at 52 bid, 54 offered, while GMAC LLC's 8% bonds due 2031 were down 1 point to 48.

Another trader said that GM - which he said "got hurt by this downgrade from Fitch, while their stock got hurt because they drew down that credit line" - was 3 points lower at 50 bid, 51 offered, while rival Ford Motor Co.'s 7.45% bonds due 2031 were a point lower at 53 bid, 54 offered.

Yet another saw the GM long bonds at 50, and said "that's definitely got to be down 3½ points" from Friday's levels.

On Friday, GM said it was drawing down the last $3.5 billion of a $4.5 billion secured revolving credit facility to add liquidity during "uncertain times in the capital markets."

SunGard rises again

The primary market did not turn out any news during the Monday session.

However the new SunGard Data Systems Inc. 10 5/8% senior notes due 2015, which priced last Friday in the week's only deal, continued to firm in the secondary.

A source close to the deal who spoke to Prospect News after the Monday close said that the bonds were wrapped around 101, up ½ point on the day.

Earlier in the afternoon a hedge fund manager said the SunGard bonds were at 100 5/8 bid, 100 7/8 offered, up 1/8 to ¼ on the day.

Earlier still, another sell-sider said that the SunGard deal was an example of a well-known, on-the-run high-yield name accessing the market, and added that the success of the deal can be viewed as a positive development, although it may not have far-reaching implications for the health of the primary market.

With the start of the 2008 fourth quarter just over a week away the sell-sider said that there is an expectation that there will be business in the new issue market during the final quarter of the year.

However the vibrancy of that business remains to be determined, the sell-sider warned, adding that there are a number of deals out there that, the status of which might be characterized as "day-to-day, pending market conditions."

Fresenius may shift funds

The SunGard bond deal ultimately came at a face amount of $500 million, downsized from $700 million, with $200 million being shifted to the company's bank deal.

On Monday Prospect News heard from market sources the Fresenius Kabi financing, to fund the acquisition of APP Pharmaceuticals Inc., may undergo a similar transformation, with the bank loan upsizing and the bonds downsizing.

Fresenius, sources said, may be increasing the size of its term loan B by $500 million to $1.5 billion and decreasing the size of its high-yield bridge to $800 million from $1.3 billion.

A source said that the bank deal (Baa2/BBB-), which would upsize overall to $2.95 billion from $2.45 billion, was oversubscribed in both the institutional and pro rata tranches.

The high yield bridge has already been downsized once, to $1.3 billion from $1.65 billion.

Deutsche Bank, Credit Suisse and JPMorgan are the senior mandated lead arrangers on the credit facility, with Deutsche Bank the global coordinator.

Parsing the bailout

Also on Monday Prospect News asked market sources to comment on a government plan which could render it the bidder of last resort on hundreds of billions of dollars worth of bad debt.

A sell-sider replied that such a plan would likely be both good and bad: good in the sense that it will free up liquidity among the financials, and grease the wheels so that they can get back to lending; bad in that the government would conceivably be taking hundreds of billions of underperforming assets.

However a hedge fund manager said that the idea, if coupled with further easing of the Fed Funds rate, could serve to rein in the shorts.

"It puts a floor under the market," the source said.

"It puts a threatening bid out there so that people can't just sit and shoot against (the financials).

"I think there will be terms that won't be too appealing, but it will let the vultures know that they're not the only game in town.

"I think that it will accomplish something to help things get turned around. And I don't think it will cost as much money as people fear."

Consolidation

On Monday U.K.-based Barclays Capital plc announced that Lehman Brothers capital markets and trading businesses will resume operations shortly as Barclays entities - one of the latest developments in the fast-moving and apparently ongoing overhaul of Wall Street.

It trailed the weekend news that the Federal Reserve Bank has granted permission for Goldman Sachs and Morgan Stanley to become bank holding companies.

That announcement came just one week after the bankruptcy filing of Lehman Brothers Holdings Inc., and the acquisition of Merrill Lynch & Co. by Bank of America.

Factoring in JP Morgan's March acquisition of Bear Stearns, all told the five major securities firms on Wall Street have now either vanished or undergone dramatic transformations.

Prospect News asked the hedge fund manager for a reaction to this consolidation in the financial sector.

"The larger institutions are probably going to cut things back to the bone," the manager said.

"I don't think they're going to be near as service-oriented as they have been. They're probably going to be more wholesalers than retailers.

"The smaller institutions will probably help to fill in the void.

"However I don't think they will be very capital intensive.

"They will probably be inquiry driven. So the market is going to be more of a workout market."

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