Weaker junk market mirrors equities; GM off on 'icky' forecast; MBIA jumps on equity-sale news

By Paul Deckelman and Paul A. Harris

New York, Feb. 6 - The junk bond market had another "ugly" day Wednesday, in the words of one trader, moving lower in line with a late slide in stocks, which gave up hefty early gains to end the day modestly in the red.

One of the major culprits on the junk side was automotive bellwether General Motors Corp., whose bonds moved lower across the board and whose credit-protection costs widened out, in apparent response to a GM executive's prediction at an auto show that the next few quarters would look "kind of icky" for the beleaguered domestic auto makers.

Elsewhere, MBIA Inc.'s recently priced surplus notes - which have been actively trading off the junk desks at a number of shops despite their nominally investment-grade rating - were seen to have shot up by several points late in the session on the news that the embattled bond-insurance giant was raising $750 million of fresh capital by means of a stock sale.

Standard Pacific Corp.'s bonds continued to firm, helped by the Irvine, Calif.-based homebuilder's hopeful cash-flow and debt-retirement projections delivered during Tuesday's quarterly conference call.

Directory publishers turned out to be a wrong number for investors on Wednesday, with rivals Idearc Media and R.H. Donnelley Corp. both seen lower, along with the latter's Dex Media unit.

Primary market activity meantime remained on the back-burner.

Market barometers indicate decline

A trader saw the widely followed CDX junk bond performance index down ¾ point at 89 1/8 bid, 89 3/8 offered. The KDP High Yield Daily Index fell 0.29 to 75.64, while its yield widened 8 basis points to 9.24%.

Declining issues led advancers by a five-to-four ratio, while overall activity, reflected in dollar volumes, was off about 28% from Tuesday's level.

A trader called Wednesday's session "pretty ugly," and said that "all in all, it was a pretty lousy day for credit."

Things were "pretty quiet," another trader said. "There was not much going on from 11 o'clock (ET) in the morning until about 3 o'clock in the afternoon - it was just dead."

He noted that the market took its cue from equities, which saw the iconic Dow Jones Industrial Average at first move up by just under 100 points, before reversing course later in the afternoon but closing down some 65 points. "I think that was similar to what happened with the general [junk] market tone today. There were some early gains in the morning, and then things dropped off."

GM leads autos lower

A trader said "the autos were down on the day," led by GM's benchmark 8 3/8% bonds due 2033, which he quoted down about a point at 81 bid, 82. He also saw GM's domestic arch-rival, Ford Motor Co.'s 7.45% bonds due 2031 also a point lower, at 72 bid, 73 offered.

A market source saw the 8 3/8% bonds off nearly 2 points on the day, at 81.25, in active trading. GM's 7 1/8% notes due 2013 were down ½ point at 86.5.

Another trader said that while he had not seen the movement in those cash bonds, "there were a lot of automotive CDS [credit-default swaps] contracts trading," with GM and its 49%-owned GMAC LLC financing arm widening out. He quoted the latter's debt-protection cost as having ballooned out to 820 basis points bid, 830 bps offered from prior levels around 800 bps bid, 810 bps offered.

Another source saw GMAC's 8% bonds due 2031 about a point lower at 81 bid, 82 offered, while its 6 7/8% notes due 2012 were ½ point down at 85.5 bid.

The GM bonds were probably not helped by reported comments from the head of its North American operations, Troy Clarke, who warned at the Chicago Auto Show that the next several quarters would "look kind of icky, to be honest" for the domestic automakers, with the slowing economy and consumer spending under pressure.

The auto executive did say, however, that sales could pick up in the second half of the year, if pent-up demand is unleashed and the recent Federal Reserve interest rate cuts ease pressure on the consumer.

MBIA notes turn upward

A trader saw a late surge - well after 4 p.m. ET - in MBIA's 14% surplus notes due 2033. That lifted those bonds by about 3 points to the 93 bid, 94 level, from prior levels in the upper 80s.

He attributed the sharp rise to the news that the New York-based bond-insurance company plans to raise $750 million via an equity sale, thus shoring up its capital balance and protecting its AAA top rating.

Ratings agencies had recently said they might have to lower the ratings of MBIA, Ambac Financial Group and other monoline insurers unless they could beef up their capital balances to prepare for what are expected to be more bond defaults in the wake of the ongoing credit crunch touched off last year by the subprime mortgage meltdown.

Standard Pacific builds on Tuesday's gains

A trader said that Standard Pacific's bonds "moved higher," seeing its longer issues like the 7% notes due 2015 at 71 bid, "up a little."

Another market source said they continued to move up, on top of the gains of several points posted on Tuesday in response to bullish projections by company executives on the conference call following release of its quarterly numbers.

Although continued weak conditions in the housing market led Standard Pacific to report a fourth-quarter net loss of $440.9 million versus a $98.4 million deficit a year earlier, the executives also said they anticipate that the builder will generate positive cash flow in 2008 while also paying off the balance of its 6½% senior notes slated to come due in October.

They further noted Standard Pacific's $251.1 million fourth-quarter reduction of homebuilding debt, which included buying back some $24 million of the bonds.

In other builder names Wednesday, Beazer Homes USA Inc.'s longer-dated bonds like its 6 7/8% notes due 2015 and 8 1/8% notes due 2016 were unchanged around 72 bid, while Hovnanian Enterprises Inc.'s long notes, like its 7½% paper due 2016, were down a point at 68 bid, 70 offered.

So, a trader said, "Standard Pacific was up, Hovnanian was down and Beazer unchanged," with "homebuilders all trading on pretty good size."

Retailers retreat on Macy news

Referring to investment-grade retailing giant Macy's Inc.'s announcement that it would cut 2,300 jobs, and that it had a steeper-than-expected drop in sales in January at established stores, while earnings in its fiscal year would be below Wall Street estimates, a trader said that "with the Macy's news out, [junk-rated] retailers got hit," among them Toys 'R' Us, whose 7 7/8% notes due 2013 dropped a point to 74 bid, while Neiman Marcus' 9% notes due 2015 and Rite Aid Corp.'s 8 5/8% notes due 2015 were each off ½ point, at 99 bid and 75 bid, respectively.

A trader said Bon-Ton Stores Inc.'s 10¼% notes due 2014 lost 2 points to 65 bid, 66 offered, and said Burlington Coat Factory's 11 1/8% notes due 2014 staying in a 76-77 context.

Bon-Ton, another trader said, was bouncing around all session. It started the day at 67.5 bid, 68.5 offered, actually firmed a bit to 68 bid, 69 offered - but by the end of the day had surrendered that gain and then some, dropping to 65 bid, 66 offered before coming off the low to finish at 65.5 bid, 66.5 offered.

Solutia bonds

Meanwhile the primary market remained quiet.

Against the backdrop of a Wednesday press release announcing that Solutia Inc. has filed a complaint in the U.S. Bankruptcy Court for the Southern District of New York seeking a court order requiring underwriters Citigroup, Goldman Sachs and Deutsche Bank to fund a $2 billion Chapter 11 exit financing package for Solutia, Prospect News learned that the underwriters are continuing to attempt to place high yield notes which are part of that financing.

On Monday Susannah Livingston, Solutia's director of investor relations, said that the bond deal is comprised of $430 million face amount of 12½% eight-year senior notes (B2/B-) discounted to 93% of par.

Livingston added that the discount was deeper than that which the company had contemplated when it first launched the bonds on Jan. 10. However she did not specify the amount by which the original issue discount had been increased.

On Wednesday a buy-side source said that even so-discounted, the chances that the bonds will be placed, given present market conditions, are not good.

In an SEC filing the company stated that on Jan. 29 it made a formal demand to the underwriters to close and fund their respective commitments on Feb. 6.

The following day, Jan. 30, the underwriters reiterated their position that there has been an adverse change in the markets since the date of the commitment letter (Oct. 25, 2007) materially impairing syndication.

If priced at the contemplated discount the notes would yield 13.97%, and would generate approximately $400 million of proceeds, according to a market source.

The interest rate on the bridge loan backing the bonds is three-month Libor plus 650 basis points, with the spread set up to increase by 50 basis points at the end of each three-month period following the closing date until, but excluding, the initial maturity date.

Solutia filed for bankruptcy protection in December 2003.

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