Junk slogs along with many issues again lower; Hawker Beechcraft hurt badly; primary stilled

By Paul Deckelman and Paul A. Harris

New York, Aug. 3 - The high-yield market continued to struggle on Wednesday with traders seeing another day - like Tuesday - when many more issues were down than were on the upside. Some of these were by multiple points, with disappointing earnings a major catalyst. Statistical market measures remained on the slide.

That was certainly the case for Hawker Beechcraft Acquisition Co. LLC, whose bonds nosedived after the maker of general aviation and military training aircraft put out second-quarter results that fell short of analyst expectations in several areas.

However, another aviation-related company, Canada's CHC Helicopter Corp., whose bonds plunged on Tuesday, regained some of those losses on Wednesday, helped by a clarification it issued on some leasing concerns.

A few of the other names hard hit by Tuesday's downturn, like Caesars Entertainment Inc. and Eastman Kodak Co., were also better on Wednesday.

But marine transportation name General Maritime Corp.'s bonds continued to sail in troubled waters, losing more points amid investor angst over weakness in the oil tanker market.

The primary market was becalmed, with the only activity seen all day being the pricing of a split-rated offering from real estate operator SL Green Realty Corp.

Volatility continued to rock the capital markets, and junk spent most of the session lower. However, as stock indexes clawed their ways back into positive territory late in the day, junk turned positive as well, according to a syndicate source.

There are no surprises with respect to high-yield returns, according to a fund manager whose portfolio includes stocks as well as high-yield bonds.

Characterizing the Wednesday session as an extremely quiet one in the secondary market, the buysider allowed there is some selling taking place "because there have been redemptions, here and there.

"People are out there attempting to get yesterday's prices, which is not unusual in these circumstances," the source added.

Calendar to remain thin

The active forward calendar finished the Wednesday session unchanged from Tuesday, with three deals in the market.

M&G Finance Corp. is marketing a $500 million offering of seven-year senior notes (expected ratings B3//BB) via bookrunner J.P. Morgan.

Pro forma on that deal was 10% area, according to a trader from a high-yield mutual fund, who added that no updates or official price talk have been heard.

Also, two deals launched on Tuesday.

Jeld-Wen, Inc. launched a $575 million offering of seven-year senior secured notes (B3/CCC+), which are expected to price early in the week ahead.

Bank of America Merrill Lynch, Wells Fargo Million ofes LLC, Barclays Capital Inc. and KeyBanc Capital Markets Inc. are the joint bookrunners.

Preliminary guidance on that deal is 9½% to 9¾%, the trader said.

And Rock Ohio Caesars LLC began a roadshow on Tuesday for its $380 million offering of seven-year second-lien notes, which are also set to price during the week ahead.

Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. are the joint bookrunners.

The whisper on that deal has the yield coming in the high 9% to low 10% range, the trader said.

Canvassing the dealers about planned new issue activity turned up non-committal responses.

"You don't like to launch a deal in a market like this," one high-yield syndicate official said.

Also, fund flow news has been negative, added the official who tracks daily flow numbers reported by EPFR Global.

"Flows have been negative for the past five days in a row," the syndicate source said, adding that the most conspicuous daily outflow occurred last Friday when EPFR reported a $450 million outflow on the day.

Asked whether there was any visibility on pending new issue announcements, syndicate bankers said that deal news is unlikely during the remainder of the present week, but possible for the week ahead, given a bit more stability in the capital markets.

HCAs edge up, Ford steady

Among recently priced new deals, a market source said that HCA Inc.'s $3 billion of 6½% senior secured first-lien notes due 2020, which had fallen by 1 point on Tuesday to par bid, firmed by perhaps one-quarter of a point to finish at 100¼ bid. Volume of $17 million was well down from Tuesday's $40 million tally - but with overall junk market volume lower, the bonds remained among the most active of junk bond issues.

Those bonds, which priced on July 26 at par in a massively upsized drive-by deal, had firmed to 101½ bid, 101¾ offered by Friday, only to give up those gains on Tuesday.

The Nashville-based hospital operator's $2 billion issue of 7½% senior unsecured notes due 2022 was seen at 99¾ bid on Wednesday, up three-eighths of a point from the levels to which they had fallen on Tuesday. That was when they swooned by 1½ points to 99 3/8. Wednesday's volume of $11 million was less than half of Tuesday's turnover, but still among the more active junk issues.

Those bonds had priced on July 26 at par then had moved up to straddle 101 by Friday, only to gave it all back on Tuesday, before Wednesday's slight rebound.

One of last week's other big deals, Ford Motor Credit Co.'s $1 billion offering of 5 7/8% notes due 2020, traded at 101 bid on Wednesday, about unchanged from Tuesday, when it had been one of the few notable issues on the upside, though only by around one-eight of a point.

The Dearborn, Mich.-based automotive financing arm of Number-Two domestic carmaker Ford Motor Co. had surprised the market with its quickly shopped $1 billion deal, which priced at par on July 27, and then gradually crept up over the next few sessions to 101. But Wednesday's volume of just over $1 million traded was but a pale shadow of Tuesday's $17 million traded.

Volume slackens off

A trader said, "I'm going to say that we had, easily, 30 or 40 names that were down a point [or more] today in the secondary market - but not on heavy volume."

He said that "volume overall was lighter than [Tuesday]," attributing the drop to a slowdown in crossover activity by high-grade investors reaching down into the upper reaches of Junkbondland to get themselves a little bit of extra yield, which has been a key volume driver in the junk market - particularly the BB segment.

But on Wednesday, he said, "there was a calendar in high-grade," noting the new deals priced from the likes of Coca-Cola Co., J.P. Morgan Chase & Co., Kinder Morgan Energy Partners LP and MF Global Holdings Ltd.

"The high-grade guys were occupied with the calendar, so that kept the lid on crossover activity" and held down overall junk market volume.

Market measures see pressure

Even though stocks managed to overcome their early weakness and break their eight-session losing streak - the bellwether Dow Jones Industrial Average put on a late push to end up 29.82 points, or 0.25%, at 11,896.44 and other broader indexes followed suit - statistical measures of junk bond market performance mostly stayed in negative territory.

A trader saw the CDX North American Series 16 HY Index unchanged on Wednesday at 99 bid, 99 1/8 offered, after Tuesday's 7/8 of a point retreat.

The KDP High Yield Daily Index plummeted by 33 basis points on Wednesday to end at 74.80 - the first finish under the psychologically potent 75 mark since June 30. That followed Tuesday's 31-bps plunge.

Its yield widened out by 12 bps to 6.93%, on top of Tuesday's 11 bps rise.

And the Merrill Lynch High Yield Master II Index lost a sizable 0.29% on Wednesday, its second consecutive loss and fifth downturn in the last six sessions, including Tuesday's 0.254% retreat.

That left the index's year-to-date return at 5.68%, down from Tuesday's 5.987% and down as well from its 2011 peak level of 6.362%, set the previous Tuesday.

"All in all, it was a slugfest today," a trader opined. "There are still a lot of issues you can't buy, regardless of what you do with your bid, and other issues are getting decimated."

The BofA Merrill Lynch index saw its double B component return 6.58%. The single B component returned 5.56%. And the triple C returned 5¼%.

"Up until a couple of months ago triple Cs were leading, but weaker equities pull down the bottom tier of high yield," an investor said.

Hawker falls to earth

Out of all of the numerous names in the junk market, none was decimated more on Wednesday than Hawker Beechcraft Acquisition, whose bonds, a trader declared, "got crushed" after the Wichta, Kan.-based manufacturer of business jets and military trainer aircraft announced second-quarter results that fell short of Wall Street's expectations.

He saw the company's 9¾% notes due 2017 down as much as 18 points, closing at 51½ bid.

"They were down a lot," a second trader agreed, noting, "When I first checked them, they were down in the low 60s, off about 10 points - and they just kept going."

He said that company bonds, like the 8 7/8% PIK notes due 2015 and 8½% cash-pay notes also due 2015, were ending in a 59-61 context, pegging the down about 15 or 16 points.

"There was a lot of activity in the name, after the numbers, as you can imagine. And ugly - down and ugly."

He further called Hawker "the surprise name of the day."

A market source at another desk said that the 93/4s fell more than 19 points, just counting round-lot trades, closing at 48 bid with over $12 million having changed hands.

He saw the 2015 cash-pay bonds ending down 18 points, at just over 60, on volume of more than $16 million.

And the 2015 PIK notes were seen having lost 15 bps, also closing just above 60, with $5 million traded.

The bonds collapsed after Hawker reported that for the three months ending June 30, it had net sales of $581.7 million, which was down $57.6 million, or 9%, from the year before.

Operating income was slightly better with a loss of $19.6 million, compared to a loss of $20.7 million for the second quarter of 2010.

Liquidity, however, was much lower, with $382.4 million available as of June 30. On March 31, liquidity was at $546 million - a 29% difference.

"The decrease was due to a variety of factors, including temporary supply disruptions that have contributed to an otherwise anticipated seasonal inventory increase in preparation for deliveries during the third and fourth quarters of 2011," the company said in its earnings statement.

Additionally, Hawker said it had drawn $25 million from its revolving credit facility "in order to keep a prudent amount of cash on hand as it works through the supply issues, seasonal slowdown and working capital swings driven by transformative projects. The company anticipates making additional draws on the revolver, which currently has $214 million of availability, in order to maintain an appropriate supply of cash."

On the positive side, Hawker noted that cancellations in the quarter were surpassed by new orders. New orders totaled $487 million, while cancellations came to $80 million.

Gross margins also improved, rising to $79.4 million from $72.5 million the year before.

CFC Helicopter lifts off

While Hawker Beechcraft was taking its lumps, a trader said that CHC Helicopter's bonds improved, after having plunged nearly 10 points during Tuesday's dealings.

He saw those 9¼% senior secured notes due 2020 having regained 3 or 4 points, after the Vancouver-based helicopter services company "clarified some lease issues."

CFR - a transportation provider by chopper to offshore energy-drilling platforms and other sea-based installations - said that it has completed agreements with all of its aircraft lessors to successfully reset the financial covenants on the company's operating leases.

President and chief executive officer William Amelio said that CCHC is "very pleased with the overall outcome of the negotiations and the support we received from our lessors. We are confident with our ability to operate within the agreed covenant cushion and with our capacity to re-lease aircraft with lease providers as existing leases expire."

On Tuesday, those bonds had lost altitude all the way down to 80 bid, 82 offered versus their closing level Monday of 89½ bid, 90½ offered.

A trader linked Tuesday's sharp drop to the unexpected announcement of the chief financial officer's imminent departure from the company.

CHC announced on Tuesday that its executive vice president and chief financial officer, Rick Davis, will step down from those posts immediately. No explanation was given for his departure, although the announcement said that he will assist with the transition.

Doug Yakola, a senior advisor at McKinsey & Co., will assume Davis' finance responsibilities on an interim basis while the company looks for a permanent replacement.

Gyrations for General Maritime

A trader said that General Maritime's 12% notes due 2017 "looked like they stopped going down this morning," but by the end of the session, the troubled New York-based oil tanker operator's bonds had resumed their slide and had fallen down into the upper 50s from Tuesday's closing levels in the 60-61 bid area.

General Maritime, a second trader said, "just keep getting killed."

He saw a trade in the 57-bid area, although the transaction was not round-lot, instead involving 500-odd bonds, or a little over $500,000. He noted that as recently as of July 21, the 12s had been trading around 72 bid, while at the end of June, they were in the 80s and had traded as high as 87¼ bid back on June 9.

He said the bonds have "gotten beat up pretty good," falling because "a big supply of oil tankers came on the market, and there's a little less oil being moved around, the rates have gotten killed, and the bonds are following suit."

Another market source saw the 12% notes ending at 58 3/8 bid, down 2 5/8 points on the day, and also saw several sector peers sailing on rough seas, including Teekay Corp.'s 8½% notes due 2020, down 2 points at 102 bid, and Overseas Shipholding's 8 1/8% notes due 2018, also down a deuce at 89 bid.

Some names firmer

While the vast majority of the junk names were getting clocked pretty much across the board for a second straight day, here and there were a few exceptions.

One such name was Eastman Kodak. While a trader said that the Rochester, N.Y.-based photographic products and digital imaging technology company's more widely quoted issue, its 7¼% notes due 2013, was looking about unchanged at 81 bid, 83 offered, other Kodak paper was better.

He said that its 10 5/8% notes due 2019 were ending at 85 bid, 86 offered, which he called up 1½ points.

"I'd say the activity was in that issue," he asserted, rather than in the 71/4s. "But it's definitely higher than where it started today."

The 71/4s "saw mainly a lot of small trades," he continued, "while the 10 5/8 are more representative of what happened in the credit."

A trader said that Caesars Entertainment's 10% notes due 2018 - originally issued by Harrah's Entertainment - as usual were "one of the bigger traders ."

He saw the Las Vegas-based gaming giant's bonds at the 86¼ bid level, up from 84¾ earlier in the day.

On Tuesday, he said, the bonds had traded 'all over the lot," from highs around 87 early on, before going home around 85 bid.

On Wednesday, he saw the bonds open higher at 86, fall to 84¾ during the morning, but then come on back up to 86.

He said he saw no fresh news out about the credit; instead "it's just one of the more volatile names in the market - a high-beta name that follows the stock market."

Stephanie N. Rotondo contributed to this report

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