NXP loses ground on earnings; NRG settles back in; Freeport-McMoRan debt gains despite Q3 loss

By Stephanie N. Rotondo

Portland, Ore., Oct. 21 - The junk market turned upward Tuesday as traders noted that "cautious optimism" was dominating the bond market.

NXP BV, the Dutch semiconductor marker, posted its earnings before the market opened. The company's bonds reacted to the decline in sales - and a warning about the next quarter - by declining as well.

Meanwhile, NRG Energy Inc.'s debt settled back in after gaining as much as 7 points the previous session on news of a potential takeover. One trader speculated that short covering might have also accounted for the run up on Monday.

Freeport-McMoRan Copper & Gold Inc. reported its third-quarter results, which showed a more than $250 million decrease in net income year over year. But the company tried to cajole investors, saying that it was looking at ways to cut costs, including deferring certain expansion projects. The strategy seemed to work, as the bonds ended slightly better on the day.

It was unclear whether Washington Mutual Inc. finished the session better or worse as chatter continued that the FDIC might be eyeing the bankrupt company's cash deposits. E*Trade Financial Corp.'s bonds were meanwhile unchanged as the market had not yet reacted to the company's earnings release.

Ford Motor Co. ended with a mixed bag on the news that investor Tracinda Corp. had unloaded some of its shares in the automaker at a loss. Some sources deemed the debt better, while others saw the structure continuing to decline.

Market looking up

Market indicators were slightly better on the day, but market sources gave mixed reports on what really happened during the session.

The CDX High Yield Index gained about 3/8 point to 82 bid, 82.5 offered, while the KDP High Yield Index moved up to 54.26, yielding 15.96%, from 54.18, yielding 15.99%, previously.

"The market is slowly a little better," a trader said. It is "slowly grinding higher."

"It seems like a number of things are pushing higher," said another trader.

But another source saw "everything pretty much down - not as much as the equities, but maybe about ½ point [generally]."

NXP loses ground on earnings

Chipmaker NXP saw its bonds slip some during trading after releasing third-quarter earnings.

A trader quoted the 9½% notes due 2015 at 42.5 bid, 43.5 offered, down from 44 previously. He noted that some trades got as low as 41 before coming back to the closing levels.

Another trader pegged the issue at 42 bid, 43 offered, up ½ point intraday but down 1 point from Monday.

Sales fell 4.2% from the 2007 third quarter to $1.34 billion. That number represented a 1% increase from the second quarter of 2008. A decline in demand resulted in a 10% drop in factory loads to 68% from 78% in the second quarter.

NXP has responded to the softer economy by restructuring. The plan to cut costs by $550 million a year will result in more than 4,000 lost jobs. However, as the company continues its efforts, NXP expects to see sales fall 8% to 14% in the fourth quarter.

"The financial crisis and semiconductor market conditions have caused a rapid deterioration of demand toward the end of the third quarter especially in sectors like automotive and consumer," said Frans van Houten, chief executive, in a press release. "We are convinced of the necessity to act decisively to lower our cost base and to prepare for a difficult market."

But despite the slowdown, Standard & Poor's left its rating on the company unchanged at B-. The rating agency defended its position by noting that the company's cash position was adequate, as was its revolving credit facility, which is completely undrawn. S&P also noted that the company's restructuring efforts have helped to eliminate cash burn.

NRG settles back in

NRG Energy's paper came back in after gaining as much as 7 points in the previous session on news of a potential takeover.

A trader called the 7 3/8% notes due 2016 down a point on the day at 83 bid, 85 offered. Another said the 7¼% notes due 2014 closed at 85 bid, 86 offered, down from the high-80s on Monday.

"Maybe there was some short covering initially on the news and it is coming back in now," he opined.

NRG confirmed Monday that it had received an unsolicited bid from Exelon late Sunday. The all-stock offer is valued at $6.2 billion.

Should the deal go through, the merger of NRG and Exelon would create the largest power company in the nation. NRG has interest in 44 power facilities that generate a total of about 24,000 megawatts. Exelon holds 10 nuclear power plants, with 17 reactors, accounting for about 20% of the country's nuclear power capacity and about 3% of total power output.

Still, the deal is not without obstacles. In a research report, a Jeffries analyst said that Exelon could have trouble renegotiating NRG's outstanding debt.

Even S&P was mixed on what the deal could mean, lowering its rating on Exelon while placing NRG on CreditWatch with positive implications.

But Gimme Credit analyst Philip C. Adams called S&P's downgrade an "overreaction," noting that "Exelon Generation's track record mitigates the risk."

Another Gimme Credit analyst, Carl Blake, said in a morning report that although NRG's top executives were not pleased with the deal, "holders of NRG's high-yield debt should be thrilled." The merger would constitute a change of control, he wrote, which would allow bondholders to put the bonds to the company at 101% of par.

Still, Blake was not without concerns. He said that the offer price undervalued NRG's assets and, like Mirant Corp.'s takeover bid in 2006, company management could reject the offer over the valuation.

"We are not banking on a merger but continue to believe NRG bonds are undervalued and maintain our outperform rating," he wrote.

Freeport bonds better despite Q3 loss

In its earnings release, Freeport-McMoRan tried to assure investors of its viability despite record declines in the price of metal over the last year.

And, the company's plans to keep its balance sheet lined up might have worked as traders called the copper producer's bonds firmer on the day.

One trader called the bonds up 2 points, with its 8¼% notes due 2015 at 82 bid, 83 offered and its 8 3/8% notes due 2017 at 80 bid, 81 offered.

Another trader agreed with the 2-point gain, quoting the 8¼% notes at 82 bid, 82.5 offered and the 8 3/8% notes at 79 bid, 81 offered.

The Phoenix-based company saw profits decline 33% in the third quarter, driven lower by the falling price of copper and gold. Net income fell to $523 million from $775 million the year before.

But as metal prices drop and the credit crunch tightens lending, Freeport has said it is looking at deferring some of its expansion plans in order to maintain liquidity. The company has also suspended its share buyback plan after purchasing $500 million in stock during the quarter.

In a prepared statement, the company said there was "significant uncertainty about the near-term price outlook for Freeport's principal products. We'll be responsive to current market conditions by reducing costs and capital spending and curtailing high-cost operations if required."

WaMu mixed, E*Trade unchanged

In the world of financials, traders gave mixed reports on Washington Mutual's senior holding company paper, which had fallen Monday on speculation that the FDIC might be eyeing the company's cash deposits.

One trader called the bonds, like the 4.2% notes due 2010, 3 points lower at 62.5 bid, 64.5 offered. But another said the bonds rebounded a tad to 65 bid, 66 offered.

The FDIC said in a court filing Monday that it might have "significant claims" against the bankrupt bank. In particular, the bank insurer wants to protect its position regarding $4.4 billion in deposits WaMu is seeking access to.

Meanwhile, E*Trade Financial's notes were deemed unchanged as the company posted its quarterly figures after the market closed.

Several market sources placed the 8% notes due 2011 at around 75.

"They have been trading at this level for the past few days," one trader said. Another said that there had yet to be a reaction to the financial report.

"I just haven't seen anything in those for a while," said another source.

The market was expecting a loss of 28 cents per share from the company. But the numbers came in above projections at a loss of 9 cents per share, or $50.5 million. That compared to a loss of 14 cents per share, or $58.4 million, the year before.

Elsewhere, a trader called First Data Corp.'s 9 7/8% notes due 2015 one of the more active issues of the day. The trader said the bonds opened weaker at 60 bid, 61 offered, only to come back to 62 bid, 63 offered, about unchanged.

Another trader pegged the paper at 62.75 bid, 63.75 offered, which he called "off a smidge."

Traders uneven on Ford

Investor Kirk Kerkorian and his company Tracinda Corp. announced that it had sold about $18 million of its equity stake in Ford Motor Tuesday. According to market sources, the news was a mixed bag.

One trader saw the Ford 5.8% notes due 2009 unchanged at 91 bid, 92 offered. But the benchmark 7.45% notes due 2031 were called a point weaker at 29 bid, 30 offered.

At another desk, the 7.45% notes were seen gaining half a point to 29.5 bid, 31.5 offered. Yet another trader placed the issue at 29.5 bid, 30.5 offered, up a point.

The company's term loan was also seen moving upward, closing 2 points better at 49 bid, 52 offered.

Tracinda said it sold the shares at a loss and was considering selling its remaining stake in the automaker as well. Still, the Dearborn, Mich.-based company said it remained committed to its restructuring plan.

"We remain confident in and focused on our plan to transform Ford into a lean global enterprise delivering profitable growth for all," the company said in a statement.

However, analysts were not as optimistic.

"Who needs the aggravation of trying to turn around a distressed company in a troubled industry in the middle of an economic downturn?" wrote Shelly Lombard, a Gimme Credit analyst, in a research report. "Ford has lost a potential source of liquidity, someone who could write a check for a few billion if it needed the capital."

In the rest of the autosphere, General Motors Corp.'s bonds were seen ending firmer.

A trader called the 8 3/8% notes due 2033 up 2.5 points at 26.5 bid, 28.5 offered, while another saw the bonds 3 points better at 29 bid, 31 offered. GM's GMAC LLC unit's 8% notes due 2031 were likewise 3 points stronger at 38 bid, 40 offered.

Broad market mixed

Sprint Nextel Inc.'s 6% notes due 2032 were called "pretty much flat from yesterday" at 62 bid, 63 offered.

A trader deemed Idearc Inc.'s 8% notes due 2016 "flat, maybe a little down," at 21.5 from 22 bid, 23 offered previously. But another called the bonds higher at 21.5 bid, 22.5 offered.

Community Health Systems Inc.'s 8 7/8% notes due 2015 were "up a tad" at 84 bid, 85 offered from 83.5 bid, 84.5 offered previously.

In the retail world, Rite Aid Corp.'s notes were "pushing up some," a trader said. He pegged the 9 3/8% notes due 2015 and the 9½% notes due 2017 around 40, from the mid-30s last week. He also saw the 7½% notes due 2017 at 62 bid, 62.5 offered, up from 58 bid, 59 offered.

Brocade's New York roadshow

The primary market did not produce any news on Tuesday.

However a roadshow for Brocade Communications Systems Inc.'s $400 million offering of six-year senior unsecured notes (B2/BB-), via Banc of America Securities and Morgan Stanley, took place in New York City.

The bonds represent the unsecured portion of the financing for Brocade's acquisition of Foundry Networks, Inc.

A source from a hedge fund estimated that 80 people were in attendance, and added hearing a report that Monday's Los Angeles roadshow was decently attended.

"It was a good crowd and a good presentation," the source said of the Tuesday roadshow in New York.

Pricing was not discussed, the source said, adding that the deal will continue to be marketed until early next week.

The question of the day was, "If the company does not succeed in placing the bonds will the bridge loan be funded?" the hedge fund source said.

"People must have asked that question 15 different ways," the source added.

"The CFO's response was always 'The banks have no choice. We have signed contracts.'"

Meanwhile a money manager from a mutual fund had a somewhat lower estimate of the size of the audience for Tuesday's New York roadshow for the Brocade deal: 50 to 60 people, altogether.

The company and the underwriters are feeling out the market at this point, the manager said.

"The dealer said that there are a number of accounts that have been looking at this for some time, and have an interest.

"It depends upon what condition the markets are in, but there is a good chance we can get some or all of this done."

It seems like the company is more eager to get a deal done than to bridge the loan, which is a little confusing because of the expected high interest rate, said the money manager, who agreed with the hedge fund source that the hot question of the deal was "Will they fund the bridge if they have to?"

"In a more stable environment this deal could get done," the money manager said.

"It's a relatively tight security package. There is good cash flow to the two companies. And there is good cash on the balance sheet."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.