Countrywide carnage continues; most junk gyrates in line with stocks; Solutia ready to hit the road

By Paul Deckelman and Paul A. Harris

New York, Jan. 9 - The junk bond market went on a wild ride Wednesday, participants said, first falling in continuation of the generally negative tone seen Tuesday, but then reversing that trend toward the end of the day, encouraged by a late-session bounceback in the equity markets.

However, that stock-influenced late surge was not strong enough for junk to follow completely in equity's footsteps and post gains for the day; the best that could be said for most issues was that they were able to cut their losses.

A major loser, once again, was Countrywide Financial Corp., whose bonds continued to take a pounding for a second straight day. Adding fuel to the fire Wednesday was the Calabasas, Calif.-based mortgage lending giant's disclosure of higher rates of foreclosure and late payment by borrowers in November.

Quebecor World Inc. was also pushed lower on continued financing questions.

Retailing names were also getting cracked, like Bon-Ton Stores Inc., which fell victim to the continued market agonizing over whether the economy is about to slide into a recession - or has already slid into it.

In the primary market, Solutia Inc., emerging from Chapter 11, is expected to go on the road beginning Thursday to market a $400 million bond issue, part of its exit financing package.

Indicators continue to point lower

A trader saw the widely followed CDX index of junk bond performance ending down about ½ point at 92 7/16 bid, 92 13/16 offered. Meanwhile, the KDP High Yield Daily Index fell another 0.53 to 75.65, while its yield widened out 14 basis points to 9.18%.

In the broader market, declining issues outpaced advancers by a nearly three-to-one margin. Overall market activity, as indicated by dollar volume, was up about 21% from Wednesday's levels.

A market source said that generally, Wednesday "started off right where we ended [Tuesday] night with a negative tone hovering thought the market. That feeling was evident right up until lunch - then things began to turn." At that point, he said, "credits began to catch a bid" and came off their lows to mostly end only a couple of points lower, if even that.

A trader characterized the session as "a roller-coaster of a day," as the junk market took its cues from equities, which began the day lower on renewed recession fears, but which pushed higher in the final hour of activity on a feeling that recent selling had been overdone.

"Things opened up weaker and we kind of flashed back to the summer." the trader said, "with people just hitting bids left and right, offering things lower."

For instance, he said Tenet Healthcare Corp.'s 9 7/8% notes due 2014 had finished Tuesday's session bid at 93.25, but "when we walked in today [Wednesday], they were 91.5-92.5."

The junk market "caught a little bit of a bid when the stock market opened. We saw what looked like some short covering in the Street, but then it kind of stalled."

Later on, however, "when the equity markets took off late in the day, our market caught a pretty nice bid and we saw some real account buying. It was a whipsaw all day. You really had to stay on top of the market."

The trader opined that "we still had a little bit of the [prospective] new-issue calendar was kind of hanging over the market in the morning, but we still haven't seen any new issuance actually come, so people are dipping their toe in the pool and trying to take advantage of the sell off [Wednesday] morning to do some opportunistic buying."

Quebecor volatile as financing questions continue

Quebecor World's bonds, a trader said, were "all over the place. The bonds were probably down 10 to 15 points at the start of the day, but then bounced about 10 points off their lows at the close."

He saw the Montreal-based commercial printing company's 6 1/8% notes due 2013 at one point got as low as a wide 60 bid, 64 offered, but by the end of the day, he saw a Trace print at 73.

"And there were no [in-between] stops. They went straight from 60-64, then the next trade was 70, then 73. It gapped up."

However, a market source at another shop saw Quebecor's 4 7/8% notes due 2008 finish down 7 points at 74.5, in busy dealings.

Quebecor's bonds have slid in tandem with its nearly worthless penny-stock shares, which dropped 16 cents on the New York Stock Exchange, or 14.68%, to finish at 94.7 cents. Volume of 988,000 was more than double the norm.

Quebecor - which in November pulled out of a $750 million refinancing plan and which last month failed to complete the $341 million sale of its European operations - is under pressure from investors due to the rapidly approaching deadline by which it must line up some new financing. Its senior bank lenders have given the company until next Tuesday to raise $125 million. Beyond that, the banks have demanded that the embattled company pay back in full its credit facility and terminate its North American securitization program - which will take about $1 billion of capital - by the end of June.

Countrywide crush continues

Bad as Quebecor's situation is, Countrywide Financial is the name attracting most of the attention these days in the junk bond and equity markets which have continued to drive its bonds and shares down to almost unprecedented lows.

A trader saw Countrywide's 6¼% notes due 2016 fall 4 points to 40 bid, 42 offered, and the 3¼% notes due coming due in May of this year at 80 bid, 82 offered, off more than 3 points.

Another trader saw the Countrywide 31/4s down 1½ points at 80 bid, 81.5 offered, the 5 5/8% notes due 2009 down a point at 61.5 bid, 63.5 offered, "and the big mover to end it off," the 61/4s down 6 points at 39 bid, 41 offered.

Countrywide's bonds were among the most actively traded on the day, a market source indicated, seeing the 4% notes due 2011 at 55, down 1½ points, although its battered 5/8% notes due 2012 were actually pegged up nearly 2 points at 61. The 61/4s were down 5 points at 40.5.

Countrywide's NYSE-traded shares fell 35 cents, or 6.40%, to close at $5.12. Volume of 164 million shares was more than triple the norm.

A junk market source said that it was more of the same for Countrywide on Wednesday, with the subordinated bonds down 4 to 5 points, and "the short notes [coming due later this year] trading at about a 75% yield, on a 4-month piece of paper. That's a little crazy," he said - and is "very telling" in what it says about the weakness in the company's bonds.

"The whole complex continues to weaken."

He noted the latest obstacle that must be overcome - the warning from Egan-Jones ratings agency that Countrywide must raise $3 or $4 billion over the next couple of week.

But "the really interesting thing," he said is that the larger agencies - Moody's Investors Service, Standard & Poor's and Fitch Ratings - "which got raked over the coals for all of this asset-backed stuff" as they continued to give high ratings to ABS paper partly collateralized by subprime mortgages, "still rate this [Countrywide] paper investment grade." Moody's rates Countrywide's bonds at Baa3, while S&P and Fitch rate most of its debt at either A or at BBB+

"The four-month paper is trading at 75% [yield] - how can they not address it?" He answered his own question a breath later. "They can't address it because if they downgrade them, Countrywide is put out of business.

"It seems like a major conflict to me." He agreed with the notion that the situation was like that in the fable about the emperor's "new clothes" - with no one wanting to step forward and state the truth. "That's exactly it. You can't pretend that a piece of paper trading at 75% is investment grade, right? But yet - we are."

Countrywide on Wednesday said that foreclosures and late payments had risen to their highest levels on record last month. The foreclosure rate on its mortgages doubled to 1.44% versus 0.7% a year before. The December foreclosure rate was also higher than November's 1.28%.

In the same sector, a trader saw Residential Capital LLC's 6½% notes due 2015 open at 54 bid, 56 offered, fall as low at 53 bid, 55 offered, "and then they came back at the end of the day" to finish "basically unchanged."

Another source saw ResCap's 8 3/8% notes due 2015 down 1¼ points at 54.5.

Retail rout continues

Apart from the mortgage names, Bon-Ton Stores Inc.'s bonds were among the most actively traded issues on the day. A trader saw its 10¼% notes due 2014 fall 5 points to 65.5 bid, 66.5 offered.

Also among the retailers, Claire's Stores Inc.'s 9¼% notes due 2015 were unchanged at 61 bid, 63 offered.

MGM leads gamers lower

In the gaming sector, a trader saw MGM Mirage's bonds, like its 7 5/8% notes due 2017, open bid down about 3 points on the news that the Las Vegas-based casino resort giant will buy back 10 million shares, but "it bounced back. The offered side never really followed the bids down," with the notes ending the day down ½ point to a point. He saw the bonds going out at 96.25 bid, 97.25 offered.

Other movers in that sector included Tropicana Entertainment, whose 9 5/8% notes due 2014 closed down more than 1½ points on the day at about the 60 level. Another trader saw Harrah's Operating's 6½% notes due 2016 off 1 point at 71.5 bid, 72.5 offered, while its 5¾% notes due 2017 closed down nearly 2 points at 66. The old Caesars Entertainment 8 1/8% notes due 2011 - the bonds are now paid by Harrah's, which absorbed Caesars several years ago - were seen up ¼ point at nearly 92. Station Casinos Inc.'s bonds, and those of Isle of Capri were down about a point, with the former's 6% notes due 2012 at 88 bid, and the latter's 7% notes due 2014 at 78.

Young retreats a little more

Young Broadcasting Inc.'s 10% notes due 2011 - which on Tuesday were trading down around 10 points from their recent levels, even without there being any fresh news out on the New York-based television station ownership group - lost another point on Wednesday to finish at 67, not far off from the 64 level to which its 8¾% notes due 2014 dropped last week.

At the Gimme Credit investment research service, analyst Shelly Lombard wrote Wednesday that Young likely has enough liquidity to last until the middle of next year - but that if worst came to worst and it filed for Chapter 11, its 10 TV stations have enough value to cover its bonds at par in a recovery scenario

However, Lombard acknowledged that Young were to file now, "it may not receive top dollar for its stations. Station multiples have dropped recently - partly due to concerns about the long-term outlook for broadcasting but also due to the weak credit markets which will make it harder for a buyer to finance a purchase." A sale of the stations might be delayed till 2009, when the credit markets would have presumably recovered.

That having been said, the analyst still recommends Young's bonds, even as a possible bankruptcy scenario recovery play - but allows that "investors who are not inclined to take valuation risk may want to consider the bank debt."

Solutia launches

From the primary perspective, an investment banker asserted that the new issue market presently finds itself in challenging circumstances. And the light at the end of the tunnel has yet to come into view, this source added.

To underscore the primary market's "challenging" circumstances, at Wednesday's close the new year still had not produced any new high yield issuance.

However the torrid issuance years of 2007 and 2006 also started slowly.

The first nine sessions of 2007 saw a single $400 million trance of six-month of Libor plus 350 basis points senior floating-rate notes due January 2015, from Intelsat (Bermuda) Ltd., while the first nine sessions of the record-setting year of 2006, like the present year, produced a goose egg.

However there was one scrap of primary market news on Wednesday.

In keeping with a plan the company shared with Prospect News a week ago, Solutia Inc. announced it will begin a roadshow on Thursday for its $400 million offering of eight-year senior notes (B2/B-).

Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities are leading the Chapter 11 exit financing deal from the St. Louis-based chemical manufacturer, which filed for bankruptcy protection in December 2003.

Three times $400 million

Solutia is the third company to commence marketing a new junk bond deal thus far in the new year.

Coincidentally, all three deals are sized at $400 million.

Atlas Energy Operating Co./Atlas Energy Finance began a roadshow on Tuesday for a $400 million offering of 10-year senior notes (B3/B), a debt refinancing deal via JP Morgan and Wachovia Securities.

Like the above-mentioned Solutia deal, Atlas Energy is expected to price next week.

Meanwhile Southwestern Energy Co. could price its $400 million offering of 10-year senior bullet notes (expected Ba2/confirmed BB+), led by JPMorgan, Banc of America Securities LLC and RBS Greenwich Capital, by the end of the present week.

Sell-side sources, some in the Atlas and Southwestern Energy deals and some not, point to the fact that both are debt refinancings emanating from the "natural resources" sector. They assert that, present capital markets volatility notwithstanding, these two deals should receive good executions.

And if they do, investment bankers say, it will help to raise the shutters on the high yield primary market.

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