Junk continues rise, though off session highs; builders better, ResCap pushes upward, First Data gains

By Paul Deckelman and Paul A. Harris

New York, Jan. 25 - The junk bond market continued to push upward on Friday, its third straight gain, finishing off what is likely to be its first positive week of a new year that so far has seen everything happening on the downside. However, unlike the two previous sessions, particularly Thursday's solid rise, traders said that most of the activity happened in the early part of the day, and then things died down, with issues coming off the earlier highs they had initially hit to end only modestly higher, perhaps at least partially in tandem with equities, which completely surrendered their early gains and ended the day lower.

Homebuilder names like Hovnanian Enterprises Inc. and Standard Pacific Corp. were better, continuing a firming trend in the recently hard-hit sector that began at mid-week, a day after the Federal Reserve unexpectedly lowered key interest rates by 75 basis points a week before a scheduled policy meeting at which the central bank is widely expected to ease by another 50 bps.

Mortgage providers, whose fortunes are inextricably linked with those of the builders, were also seen better, particularly the bonds of Residential Capital LLC, quoted up by multiple points pretty much across the board.

Outside of the homebuilder/mortgage sphere, traders saw Trump Entertainment Resorts Inc.'s bonds continuing to firm, although there was little definitive news out on the Atlantic City, N.J.-based hotel/casino operator. In that same sector, traders said there seemed to be little real movement in MGM Mirage's bonds despite the spectacular still pictures and news footage, widely distributed, showing a big fire raging for most of the day on the top floors of one of the company's Las Vegas casino hotels.

A name seen gaining was First Data Corp., although there was no ready explanation for its rise this week.

Primary activity, meantime, remained muted.

Market gauges mostly keep pointing upward

A trader said that the widely followed CDX index of junk market performance was essentially unchanged Friday, ending at 91½ bid, 92 offered, It had risen about ¼ point on Thursday. The KDP High Yield Daily Index - which moved up 0.42 on Thursday - rose again by the same amount Friday to finish at 75.61, while its yield tightened by 12 basis points to 9.18%.

In the broader market, advancing issues continued to outnumber decliners by a better than two-to-one ratio. Overall activity, reflected in dollar volume, was up nearly 20% from Thursday's levels.

A trader said that things were "fairly active" in the morning "but it just died" around 11 a.m. ET and the market retreated from its highs as equities sold off.

"The market opened firmer," another trader said, equities were [initially] up and everyone was feeling good about it." He saw the CDX "up about a point or so at one point" early on, although later, he said, "we've given up a little bit toward the end of the closing," led downward by equities, which lost their early gains on investor wariness about staying long many issues heading into the weekend, as well as a desire to take some profits from the strong gains seen in the prior three stock sessions. The bellwether Dow Jones Industrial Average ended up falling 171 points and other, broader market indexes were also lower.

"I'm guessing that we're off [at least] a half [point] off the highs," he continued, "but it's very thin, very illiquid. Very few people seem to even be playing." He said that "some of the stuff that had really been beaten up," such as retailing names, was pushing higher.

"It was not very busy today," yet another trader said, adding that at his shop, "all the [other] traders left early."

Builder bonds continue to boom

A trader said that homebuilder bonds continued to feel their new-found strength; although the credits did not initially rise when the Fed surprised the financial markets with its 75 bps cut in key rates on Tuesday - homebuilder stocks, though, most certainly did - by Wednesday, those bonds were moving up, a rise that continued Thursday and then Friday.

The trader saw Hovnanian's 6½% notes due 2014 up 3 points to 68 bid, 70 offered. Another market source had the Red Bank, N.J.-based builder's 6 3/8% notes due 2014 up more than 2 points at 68.

A trader saw Standard Pacific's 6½% notes slated to come due on Oct. 1 up 3 points at 87 bid, 88 offered, while another saw its 7% notes due 2015 unchanged at 66 bid, 68 offered.

Looking at other builder names, Meritage Homes Corp.'s 6¼% notes due 2016 rose 3 points to 68 bid. Beazer Homes USA Inc.'s 8 5/8% notes due 2011 rose 1½ points to 73.5 bid, 75.5 offered. Its 8 1/8% notes due 2016 were seen up nearly 3 points to 72 bid.

WCI Communities Inc.'s 9 1/8% notes due 2012 were unchanged at 54 bid, 56 offered.

Among construction equipment rental names which lease bulldozers and other heavy equipment to the builders, Neff Corp.'s 10% notes due 2015 jumped 6 points to 47 bid, 49 offered, a trader said.

Mortgage names keep gaining

Another sector which has moved more or less in tandem with the builders is the mortgage providers; shares of these companies, like those of the builders, began pushing higher on Tuesday with the interest rate cut, and the bonds jumped on the bandwagon on Wednesday and stayed aboard during subsequent sessions, investors seeming to buy into the improved market psychology generated by the rate cut and Thursday's news of a $150 billion government stimulus package for the economy aimed at heading off any incipient recession.

The big mover in the group on Friday was ResCap, although traders had not seen any fresh news out on the Minneapolis-based unit of GMAC LLC which might explain the upturn.

ResCap's bonds were "up 5 points throughout the day, but then came in towards the close to end up 1 or 2 points," a trader said. He saw its 6 1/8% notes coming due this November at 77 bid, 78.5 offered, while its 6 7/8% notes due 2015 ended at 61 bid, 63 offered.

Another trader said that its 6½% notes due 2013 were 5 points better at 61 bid, 63 offered. Its 8 3/8% notes due 2015, seen up as much as 7 points earlier in the session, finished up 5 points at 62.

Parent GMAC's 8% bonds due 2031 were meantime seen 2½ points higher at 82.5.

Among other mortgage originators, Countrywide Financial Corp.'s 6¼% notes due 2016 were 1½ points better at 82.5 bid, 84.5 offered, while its 3¼% notes coming due on May 15 were a point better at 96.5 bid, 97.5 offered.

The Calabasas, Calif.-based top mortgage originator's bonds - after having soared mightily to near-par levels on the Jan. 10 speculation that it would be bought by Bank of America, and on the next session's official announcement concerning that market scuttlebutt - had been coming down from those peak levels in subsequent days, reflecting market concerns that the $4 billion-plus B of A buyout might not take place. However, after that downside momentum had run its course - the 61/4s retreated as far as 76 bid from levels around 90 immediately after the B of A news was officially announced - the bonds have been moving back up to current levels over the last few sessions.

E*Trade Financial Corp.'s 7 3/8% notes due 2013 were quoted 2½ points better at the 76.5 bid level, while Thornburg Mortgage Inc.'s 8% notes due 2013 improved by 1½ points to 85.5 bid, 87.5 offered.

Also among the financials, bond insurer MBIA Inc.'s 14% surplus notes due 2032 rose a point to 94. That extended an amazing comeback which had seen the New York-based company's paper bounce back upward after having begun the week with the bonds around 70 on the recent problems of the bond-insurer industry, which has come under intense ratings agency scrutiny.

Gaming bonds still good

Outside of the financials and the builders, gaming bonds - which had been getting crushed since the start of the year on investor worry that any economic downturn might badly hurt their most discretionary of consumer spending businesses - also continued to move back upward, buoyed by market optimism that the federal stimulus plan being worked on will put more funds in consumers' pockets, some of which will find its way to the gamers.

Trump Entertainment Resorts' 8½% notes due 2015 led the way, a trader seeing them at 72 bid, 73 offered, up 2 more points on the session and well up from the bonds' recent levels in the mid-60s. He saw no news to explain the rise other than "they just continue to trade up."

Among other names in the sector, Isle of Capri Casinos' 7% notes due 2014 were seen up 1½ points at 78.

Vegas casino fire has no impact on trading

And traders saw no adverse impact on MGM Mirage's bonds from the widely publicized fire at its Monte Carlo casino/hotel on the Las Vegas strip. There were no serious injuries from the blaze, which tore through some of the rooms on the top floors of the 3,000-room hotel. Several thousand guests were evacuated to other nearby MGM Mirage properties.

The company's 6 5/8% notes due 2015 were seen ending around 92.75, actually up slightly from Thursday's close. The same pattern was seen for its 5 7/8% notes due 2014, which edged up to around the 90 level from 89.5.

A trader saw some of the company's issues down ½ point - but declared that the fire "didn't have anything to do with" the slight downturn. "That ½ point drop was more from the activity of the week, which saw the bonds run up by several points, rather than the fire today."

He noted that the Monte Carlo "contributes about 5% of the company's total revenues. So even if the whole building were to burn down, they would only lose 5%. It's not that big a deal as everyone thinks."

First Data bonds gain

Elsewhere, a trader saw First Data Corp.'s 9 7/8% bonds "up quite a bit" over the past few days. He quoted them at 87.25 bid, 87.75 offered, a little bit below the day's highs heading into the close. Even with that dip, he said, "they're still up 3 or 4 points versus the beginning of the week," when the bonds had been at 83 bid, 83.5 offered.

2008 crawling along

With no issues pricing Friday, the four-day week trailing the Martin Luther King Day holiday turned up a goose egg.

No deals were priced.

The last issue to clear came on Jan. 17 when Atlas Energy Operating Co. and Atlas Energy Finance priced a downsized $250 million issue of senior notes due Feb. 1, 2018 (B3/B) at par to yield 10¾%.

The year's only other deal came on Jan. 11 when Southwestern Energy Co. priced $600 million of 7½% senior notes due Feb. 1, 2018 at par.

Hence 2008 issuance to Friday's close totaled $850 million, as January 2008 continues to be the slowest January going back at least as far as 2001.

By way of contrast, by the Jan. 25, 2007 close, the primary market had turned out nearly $9.7 billion of issuance in 29 dollar-denominated tranches.

The previous year, which generated a record amount of high yield issuance, saw more than $8.5 billion clear the new issue market in 21 tranches by the Jan. 25 close.

Slow ahead

Sources around high yield remain in broad agreement that presently there are only two deals "in the market," although some of those sources add that there has been no fresh evidence for days that either of the two actually remain in play.

Harrah's Entertainment Inc. has been marketing a to-be-determined portion of its $5.275 billion of senior unsecured cash-pay notes via a syndicate of banks led by Citigroup.

Harrah's is also marketing a $3 billion Libor plus 300 basis points term loan tranche, which is being offered at a discount of 96.50.

On Friday a money manager who focuses on the leveraged markets told Prospect News that the term loan remains in the market, but added that there has been no news on the deal for the past couple of days.

"They're out on the road talking to people," said the money manager, who has seen the offering.

"There's a lot to like about the company, but the market is tough right now."

The money manager added that early on high yield bond accounts took an interest in the loan. However, the source added, there were far fewer of these than would be required to get the deal done.

Also believed to still be in the new issue market is Petroleum Development Corp.'s $250 million offering of 10-year senior notes (B3) via Morgan Stanley.

Six straight outflows

When it rains it pours.

Along with the news that the 2008 primary market has slowed to a glacial pace, recent reports from the liquidity front are unlikely to generate a thaw.

Late Thursday sources told Prospect News that AMG Data Services reported a $231.9 million outflow from high yield mutual funds for the week to Jan. 23.

Over that six-week period the funds which report on a weekly basis to AMG have seen $1.1 billion of redemptions, this source said.

However on Friday a source from the buy-side asserted that, all the bad news notwithstanding, the new issue market will continue to see a modest deal flow.

"The big oil companies can do drive-bys for a few hundred million dollars," the buy-sider said.

"People have coupon payments that they have to put to work.

"Over the last few weeks the highest quality deals have come with fair-ish yields.

"The buy-side is fine with that because it's the kind of thing they would want to hold if the whole world blew up.

"But you haven't seen anything with a bunch of hair on it, lately."

Overdone

The buy-sider went on to tell Prospect News that the recent "disaster in the financial markets" headlines are being way overplayed.

"I saw a Merrill Lynch strategy piece with a headline that read 'Nuclear Winter,' the institutional investor complained.

"This seems like a normal slowdown-slash-recession to me.

"If this is nuclear winter I pity us when something really bad happens."

The money manager added that the U.S. economy has been so good for so long that people are simply over-reacting, in part due to fear of the unknown.

"It seems like fears of a major economic meltdown, due to monolines, or whatever the fear-of-the-day is, are just all wet," the source said.

This investor went so far as to imply that the Federal Reserve Bank may have gotten caught up in the drama.

The source recounted a story that coursed through the markets throughout the week - that the Fed made its dramatic 75 basis points cut to the Fed Funds rate in response to mega-selloffs in the world stock markets following news that a futures trader at France's Societe Generale lost over $7 billion on unauthorized trades.

"I would be surprised if that story is completely wrong, given how far it has traveled," the money manager said, adding: "Strategists have started to cut their expectations for a rate cut at next week's FOMC meeting to 25 basis points from 50 basis points, based solely on this rumor.

"So there must be something there."

This money manager went on to assert that such a scenario is far from implausible, given that stock investors are "over-assuming that price means something.

"That's a major change in the world over the past few years," the investor bristled.

"There are a lot more people who look at price and, assuming that markets are efficient, conclude that the price is telling them something.

"They're not necessarily doing their own work.

"When more and more of the market behaves that way it starts to look like a self-fulfilling prophecy.

"If Soc Gen started dumping equities, and all the people who just look at price and react saw that, you get the kind of action that you saw on Monday.

"And maybe the Fed saw the way stock markets around the world were reacting and concluded it had to restore order around the world."

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