Junk gyrates, ends unchanged; autos, coal issues under pressure; primary quiet

By Paul Deckelman and Paul A. Harris

New York, July 24 - The junk bond market - taking its cue from the sharp stock market retreat Tuesday amid continued investor jitters about just how far reaching the subprime lending industry meltdown may yet prove to be - gyrated around at mostly lower levels for a good part of the day before ending about unchanged, traders said.

Automotive issues like bellwethers General Motors Corp. and Ford Motor Co. dominated much of the activity, ending mostly on the downside. Also under pressure were such coal names as Peabody Energy Corp., which reported a sharp decline in second-quarter earnings, and Massey Energy Co. Paper names like Abitibi-Consolidated Inc. and Tembec Inc. were also on the downside after Abitibi's disappointing results.

A mutual fund money manager told Prospect News that the broad high yield market had been down ¼ to ½ point Tuesday morning, but estimated that towards the end of the day, with the stock market in the U.S. selling off dramatically, junk made a more substantial plunge.

In line with what other sources, mostly traders, have reported, the money manager saw some "real offerings of better quality bonds," during the past week, and has concluded that there is some liquidation taking place.

The source added that word was traveling around the market on Tuesday that at least one hedge fund had been told to cut its leverage.

Negative sentiment was widespread during the session.

Sources said that the struggling Chrysler Corp. LLC $12 billion leveraged loan - earmarked to help fund buyout of the company by Cerberus from DaimlerChrysler - appears to genuinely be in danger of not getting done. The money manager said that it seems to be silently unraveling.

Another source from the buy-side said that the First Data Corp. LBO financing, an expected $8 billion of new high-yield bonds and $16 billion of bank debt, is also said to be struggling.

In the primary market, meanwhile, Tuesday produced no news.

Market observers had been anticipating hearing terms on two deals, Silverton Casino Hotel & Resort's $215 million offering and DAE Aviation Holdings Inc.'s $325 million deal.

However as Prospect News went to press on Tuesday no terms had been heard.

A correction with a difference

The money manager who spoke to Prospect News on Tuesday is a veteran of past corrections in the junk bond market.

What makes the present one different, the source said, is that this time around hedge funds are such a huge part of the market.

Rather than the market going into correction because of fundamental news, such as interest rate hikes from the Federal Reserve or rising defaults, this correction is largely a function of hedge funds having to de-leverage because of investments in the once lucrative subprime mortgage sector - investments which recently went bad.

That is the reason that there are currently offerings of higher quality junk bonds in the secondary market, the buy-sider asserted.

"If you can't sell your mortgage product because your price is way below your mark, then you are going to sell anything else you own."

That cheapening up of the mortgage area is helping to pull out the spreads on high yield, the source said, noting that triple-A mortgage product had lately been seeing yielding in the vicinity of 8½%.

The investor added that because of the extent to which the hedge funds are leveraged, three virtual dollars are presently being pulled out of the high yield market for every real dollar that leaves.

This investor insisted, however, that in the face of this crisis in liquidity, primarily resulting from the subprime mortgage mess, the overall economy looks fundamentally healthy.

The market will reprice, the source said, adding that it is high time it did so, from the buy-side's point of view.

Wednesday's possibles

Primary market news was scarcer than those proverbial hens' teeth on Tuesday.

One buy-side source reported sitting in on the Los Angeles roadshow for Aeroflex Inc.'s $370 million offering of 10-year senior notes, via Goldman Sachs & Co.

The source said that the deal is scheduled to price later in the week, but did not give the price talk.

A high yield syndicate official said that Aeroflex and DAE Aviation Holdings were good comparables, and added that it would be reasonable to assume that those running the Aeroflex deal might wait to see how DAE did before setting final structure and price talk.

As mentioned above, DAE Aviation did not price on its bonds on Tuesday, although market observers were expecting it to.

On Monday DAE Aviation set price talk at 11% to 11¼%.

Barclays Capital and Lehman Brothers are joint bookrunners.

Nor did Silverton Casino Hotel & Resort price its $215 million offering of eight-year second mortgage notes (Caa1/B-), although observers expected that the Las Vegas-based company would complete the deal on Tuesday.

The offering, via Banc of America Securities, was talked late last week at 11¼% to 11½%.

One other deal might be priced on Wednesday.

Saskatchewan Wheat Pool Inc. has set price talk for its C$200 million offering of 10-year senior notes at 7¼% to 7½%.

TD Securities, RBC Dominion Securities Inc., Scotia Capital and Genuity Capital Markets are the underwriters.

Mostly CDS trading

All told, a trader said, "there was not that much cash trading going on - it was all CDS [credit default swaps contracts]."

He said the market "opened up, and was doing OK - but then it sold off really hard, and then came back."

He saw the widely followed CDX index of junk bond performance closing unchanged on the day, at 93-93 1/8.

With the subprime lending debacle seen already hitting the automotive sphere - Allison Transmission Inc. postponed a $1.1 billion bond deal to help finance General Motors' sale of the unit to Carlyle Group and Onex Cop. and financing for Chrysler Group's planned buyout by Cerberus is running into headwinds - "there was a lot of pressure on these autos all day," the trader said, quoting GM's benchmark 8 3/8% notes due 2033 as having moved down to as low as 83 bid, before finishing down 1¼ points at 84.5 bid, 85 offered.

He also saw Ford's bonds off, "but not as bad" as GM's. The Number-Two carmaker's 7.45% bonds due 2031 "held up better than GM for some reason," ending off only marginally at 75.75 bid, 76.25.

He saw "the bulk of the [larger junk market's] activity was in the autos, with most of it on the downside. I didn't really see any others stand out."

A source elsewhere notes that the paper of GM, Ford and their respective financial arms was among the most actively bonds today, with GMAC LLC's 8% notes due 2031 actively traded down around the 92 area, while the Ford 7.45s were also busily traded, losing ½ point to end at 75.75.

Coal bonds cold

Apart from the auto OEMs, a trader said that "the coal sector, like other sectors was very weak."

He saw Peabody Energy's 5 7/8% notes at 88.5 bid, 89 offered, its 6 7/8% notes at 96.5 bid, 97, its 7 3/8% notes at 97.5 bid, 98.25, "quoting wide to be safe, because they were all over the place." Its 7 7/8% notes were at 96.75 bid, 97.5 offered, "all down significantly."

That followed the St. Louis-based U.S. top coal producer's second-quarter results, which showed profits fell 30% - much more than analysts expected - mostly on higher costs.

Net income slid to $107.7 million (40 cents a share) from $153.4 million (57 cents a share) a year earlier.

In line with Peabody's decline, the trader also saw Massey Energy's bonds lower, with the 6 5/8% notes trading down to 95.5, and the 6 7/8% notes at 97.

"Of course, there was weakness everywhere - there wasn't much support in the market," he noted, "until later in the day when some value shoppers came in and threw out some low-ball bids."

Paper names crumple

Another earnings-depressed area was in the paper sector, after Abitibi-Consolidated reported that its second quarter earnings fell to C$148 million (34 cents per share) from C$157 million (36 cents per share) - and excluding special items, the company came in with a C$111 million loss.

Abitibi's 6% notes due 2013 dropped to 79.25 bid from 82 previously, while its 7½% notes due 2028 slid to 75 from prior levels at 77.

A trader meantime saw Tembec's bonds off, pulled down by investor reaction to the latest bad news from the Montreal-based forest products company, which said that it would curtail newsprint production at its Pine Falls, Manitoba, newsprint mill.

Tembec may have also lost ground on the Abitibi earnings.

The trader quoted Tembec's 8 5/8% notes due 2009 down 3 points at 53 bid, 55 offered, saw its 8½% notes due 2011 also off a trey at 47 bid, 49 offered, and had its 7¾% notes due 2012 down 2 points at 46 bid, 48 offered.

Another trader saw the 8 5/8s at 55 bid, 56 offered, which he said was down 2 points on the day.

A market source at another desk pegged the 81/2s down 3 points at 48 bid.

Technical Olympic in rebound try

Elsewhere in the distressed-debt region, a trader saw Technical Olympic USA's bonds - which had stumbled badly on Monday in line with a generally lower housing sector - continuing to retreat Tuesday, although the downturn was more limited.

He saw the troubled Hollywood, Fla.-based homebuilder's bonds "down ½ to 1 point," with its 8¼% notes due 2011 half a point lower at 83 bid, 84 offered, while its 9% notes due 2010 were a point lower at 84 bid, 85 offered.

However, another trader said the company's bonds "were all over the place," but "caught a better bid at the end of the day." He saw the 10 3/8% notes due 2012 move up to about a 66.5 bid from 65.5 earlier, while its 7½% notes due 2015 were at 56.5 bid, 58 offered, then traded up to 58, before being left at 57.

And a third trader said that the 10 3/8% notes, in rising to about 65 bid, 67 offered, were about 5 points up from their prior levels.

Visteon lower

In the automotive parts arena, a trader saw Visteon Corp.'s bonds down about 2 points, although he saw no fresh news out about the Van Buren Township, Mich.-based parts supplier and former Ford subsidiary. He said Visteon's 8¼% notes due 2010 eased to 92 bid, 94 offered, while its 7¼% notes due 2014 were about 10 points behind that at 82 bid, 84 offered.

He saw Dura Automotive Systems Inc.'s 8 5/8% senior notes due 2012 drop 4 points to 64 bid, 65 offered, although he saw no fresh negative news out about the bankrupt Rochester Hills, Mich.-based automotive components manufacturer. Its 9% subordinated notes due 2009 stayed at the same 3 bid, 5 offered level they've been at for a while.

Delphi Corp.'s 6.55% notes that were to have come due last year were seen down 3 points on the session at 121 bid, 123 offered. Dana Corp.'s 6½% notes due 2008 were steady at 102 bid, 103 offered.

Movie Gallery horror show continues

A trader saw Movie Gallery Inc.'s 11% notes due 2012 - which were on the slide on Monday - fall another 4 points on Tuesday to 24 bid, 28 offered, though on no fresh negative news on the troubled Dothan, Ala.-based Number-Two U.S. video rental store chain operator, which announced Monday that its senior lenders had agreed to hold off until at least Aug. 14 on taking any action to punish the company for failing to meet the financial covenants in its bank credit agreement.

At another desk, a trader saw the bonds ending lower on the day, at 25.5 bid, 27 offered

Solo Cup lower

Among the consumer products companies, Solo Cup Co.'s 8½% notes due 2014 - which lost 3 points on Monday, although there was no news about the Lake Forest, Ill.-based maker of paper and plastic cups, plates and utensils - were seen down another point Tuesday at 81 bid, 82 offered.

A trader meantime saw Spectrum Brands Inc.'s bonds unchanged after having firmed slightly Monday, with the Atlanta-based battery and electric shaver maker's 11¼% notes due 2013 holding at 78 bid, 80 offered, while its 7 3/8% notes due 2015 were also steady at 68 bid, 70 offered.

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