Junk keeps falling as stocks slide; automotive skid continues; Thornburg quiet despite coupon miss

By Paul Deckelman and Paul A. Harris

New York, Nov. 19 - The junk market continued its slide to nowhere on Wednesday, this time pulled lower by an eroding stock market that hit is lowest levels in more than five-and-a half years, and with the bellwether Dow Jones Industrial Average breaching a significant support level.

Among specific credits, the widely held big automotive names like General Motors Corp. and Ford Motor Co., as well as their respective consumer financing arms, GMAC LLC and Ford Motor Credit Co., were seen multiple points lower across the board, even as the Ford and GM chief executive officers, joined by their counterpart at Chrysler LLC, attempted for a second day to persuade an increasingly skeptical Congress on the urgent need for a $25 billion government bailout. Some of the congressmen ridiculed the corporate chiefs for begging them for government assistance - while having traveled to Washington for their hearings on expensive private jets.

But while many names were seen points lower on the session, one name which was largely unchanged was Thornburg Mortgage Inc. - even as the Santa Fe, N.M.-based jumbo mortgage lender, trying to fend off possible bankruptcy, announced that it had not made the scheduled interest payment earlier this week on its bonds, and would now work with its lenders during the mandatory grace period.

And while most junk bonds now trade far, far below par, a few - although they were lower Wednesday - manage to hold at relatively strong levels, at least for this market, names such as Landry's Restaurants Inc. and Nalco Co.

Market indicators keep falling

The widely followed CDX High Yield 11 index of junk bond performance lost another 2¼ points on Wednesday, a trader said, quoting it at 74¼ bid, 74¾ offered. The KDP High Yield Daily Index meantime plummeted by 142 basis points to 49.25, while its yield widened by 49 bps to 16.69%.

In the broader market, advancing issues trailed decliners by a margin of more than two to one. Overall market activity, reflected in dollar volumes, fell by nearly 15% from Tuesday's pace.

A trader said that "things started off soft and then just got softer."

He said that activity "was pretty muted," totaling just over $1 billion on the TRACE bond-tracking system, which he called "on the light side," adding that he was "surprised" to see even that mark reached.

He called the market in general "mushy, pretty much across the board." He said that Junkbondland had been softer by about a point on Tuesday "with stocks up - today, with stocks drifting lower, it kind of went from bad to worse."

Equities - which had bounced in late trading on Tuesday - slid on Wednesday, with the Dow giving up 427.47 points, or 5.07%, to dip below the psychologically potent 8,000 mark and finish at 7,997.28. In the broader market, the Standard & Poor's 500 index fell 52.54 points, or 6.12%, to 806.58. Both closed at their lowest levels since March 2003, and are rapidly approaching the lows of the bear market which held sway from 2000 to 2002.

Another trader likened the high yield market to "the Twilight Zone - like a bad nightmare; you try to get out of it, but you can't."

He said that the market's activity level and overall vigor were sapped by a Bank of America conference going on in Orlando, Fla.

One could ask - facetiously, of course - why anyone would want to go to sunny central Florida at this time of the year rather than enjoy the mid-November weather in a Northeastern business center like New York, which saw nighttime temperatures nose down into the 20s as the region got its first taste of the approaching winter; however, the trader asked - quite seriously - why anyone would go to that gathering. "It's shocking to me," he said. "How can anyone spend the money - the corporate funds [that would pay the way for anyone from a financial firm attending the conference] and how can they be away from their desk?" with the volatile market clearly deteriorating. "In this type of environment, I was actually shocked to hear that there was a conference."

The longtime trader said that "every single bond in the most active column was down - the first time I have seen this ever." He noted that on the particular computerized tracking service he uses, the screen is divided into six different broad sectors - "and every single most active issue is down."

"Everything's down," a third trader said. "Things are just getting smoked, and they just keep going down." The only exceptions to that rule, he said were the bonds of Lehman Brothers Holding Inc. - he saw the failed financial company's 6 7/8% notes due 2018 down "only a little," at 9 bid, 11 offered, and Washington Mutual Inc., whose bonds, he said, were "holding strong," the 4% notes coming due next year unchanged at 61 bid, 63 offered.

Otherwise, he said, everything else was "headed in that [downward] direction. We'll see if they do it tomorrow."

Another trader ironically summed it up this way: "the world is coming to an end."

"The whole world is waiting for the fate of the Big Three auto makers to be resolved," added a money manager from a mutual fund, whose portfolio includes junk bonds.

"It's just hanging over everybody's heads, and it's a big negative," the buy-sider said.

"It's time to pull the plug on these guys," the investor said, asserting that bankruptcy will lead to a more efficient and more complete restructuring of the Big Three auto makers.

"The government needs to say it will fund the DIP financing," the source said, adding that regardless of whether the government withholds the bailout, a great many auto workers are almost certain to lose their jobs.

"The government should set up extended unemployment for those people," the investor said.

"Meanwhile, in bankruptcy the suppliers will continue to get paid.

"It's something that just has to happen."

Auto bonds' skid continues

A trader said that Ford and GM "obviously," and GMAC and Ford Motor Credit were the busiest and most-watched names of the day, "a lot of eyes there, with all of the capital proceedings." He saw the bonds "softer by a couple of points, especially on the short end."

Ford and GM's bonds "got clocked," another trader said, seeing GM's 8 3/8% benchmark bonds due 2033 at a round-lot price of 16, down 3 points, while its 7.20% notes due 2011 fell 6 points to 21 bid.

He said that "pretty soon," the long bonds "will trade at even dollar values with the stock," which fell under $3 on Wednesday.

He noted that "even 20 points ago, it looked like these bonds were at bankruptcy levels - and now, they're just ridiculous."

GM's 8¼% notes due 2023 lost 3 points to finish at 17.

A trader saw GMAC's 8% bonds due 2031 "straddling 30" at 29 bid, 31 offered, 3 points lower, while Ford's 7.45% bonds also due 2031 lost 3 points to 20 bid, 22 offered. He additionally saw the GM long bonds as low as 14 bid, 16 offered, likewise down a trey.

A trader saw Ford Credit's most actively-traded issue, the 5.80% notes coming due in six weeks, on Jan. 12, falling to 87.75 bid from prior levels at 91. The credit unit's biggest loser was its 5.70% notes due 2010, which declined by 7 points to 60.5.

"Everyone was just bailing," he said of the OEM carmakers' bonds. "The ship is sinking - everybody out."

Among the suppliers, Tenneco Inc.'s 8 5/8% notes due 2014 were seen 5 points lower at 39.75 bid.

Hertz Corp.'s bonds "got pounded again,' its 8 7/8% notes due 2014 down 4 points at 56, on $9 million of volume.

Market bellwether heads lower

A trader saw Community Healthcare Systems Inc., widely considered something of a market benchmark issue because of its great size and liquidity, and its widespread distribution, going home at 78 bid, 78.5 offered, down from 79 bid, 81 offered at the opening,. He noted that the bonds had opened on Tuesday closer to 81 bid and on Monday, "at an 83 handle, so you're down almost 5 points since Monday. That's a pretty good benchmark bond - if people have to sell something, they sell that."

Gaming sector craps out

A trader said the gaming sector was "pretty much softer across the board."

He saw Wynn Las Vegas LLC's 6 5/8% notes due 2015 at 69.5, down about a point from Tuesday's close and around 2 points from Tuesday's opening. The Nevada-based gaming company's bonds were off by "about 3 or 4 points since Monday."

He saw MGM Mirage's 13% notes due 2013 at 84 bid, 84.75 offered, down from 85.5 bid, 86.5 offered, and well down from the 93.132 level at which the bonds recently priced.

Wynn "got smoked," another trader said, seeing the bonds down 1½ points at 69.5, on $9 million of activity.

Thornburg quiet despite missed coupon

A trader said he did "not really see any activity" in Thornburg Mortgage Inc.'s 8% notes due 2013, despite the news that it had not made its Nov. 17 $12.2 million coupon interest payment.

Several market sources quoted the issue unchanged at 19.25 bid.

After the company said it defaulted on the notes, Standard & Poor's downgraded its ratings. The agency said it seemed unlikely that Thornburg would pay the coupon within the 30-day grace period.

"Given the long-standing nature of the negotiations [with bank lenders] through this point, we feel that it will be difficult for Thornburg to finalize negotiations and make its payment," said a group of S&P analysts led by Adom Rosengarten in a press release. However, in its own statement, Thornburg said it indeed hopes to make up the payment within the grace period and once it reaches an agreement with its lenders.

Junk market broadly lower

Junk names were lower across a broad range of sectors. A trader said that one of the most active names, surprisingly, was Qwest Corp., since the Denver-based telecommunications company is, relatively speaking, "one that you rarely see." He pegged its 8 7/8% notes due 2012 at a round-lot level of 83, down from 86 earlier in the week, on busy volume of $37 million. He did not see any news on the company that might explain the busy dealings.

He also saw AK Steel Corp.'s 7¾% notes due 2012 trade down to 69 bid from 72.5 on Tuesday, with $17 million of the bonds changing hands.

United Rentals Inc.'s 7% notes due 2014 dipped to 60.5 bid from 62.125 on Tuesday on $15 million of volume, while its 7¾% notes due 2013 lost 1¼ points to end at 62.5.

Elsewhere, in the retailing sector, a trader said that everything he'd seen was offers.

Landry lower - but still well above market

Another downsider was Landry's Restaurants, whose 9½% notes due 2014 last traded at 91 bid, down from 92.125 on Tuesday, on volume of $14 million. A trader noted that the Houston-based restaurant chain's bonds, though lower on the session, are still trading well above the levels seen for virtually the whole rest of the junk market, where even the best-quality bonds are trading perhaps in the 80s, or more likely, in the 70s and below - and in some cases, well below that.

The Landry's bonds, it turns out, trade as well as they do because they are puttable back to the company at 101 on this upcoming Feb. 28.

'Decent credits get whacked'

Another name seen trading at relatively exalted levels for this junk bond market is Naperville, Ill.-based chemical manufacturer Nalco Co., whose 7¾% notes due 2011 dipped to 89 bid from 92.75 on Tuesday, while its 8 7/8% notes due 2013 dropped to 80 bid from 85. The trader suggested that with no early puts coming up and additional capital-structure security for the bonds, particularly the 73/4s, "maybe it's just a decent credit - but in this market, even the decent credits are getting whacked," for no real fundamental reason.

Another case in point, he said, is Sprint Nextel Corp. The Overland, Park, Kan.-based wireless carrier's 5 7/8% notes due 2011 fell 5 points on the day to 72.5 bid, for a yield of 21.67% - amazing, he said, in view of the fact that the company is a 5-B credit, rated at Baa3 by Moody's Investors Service, BB by S&P and BB- by Fetch.

"There's all of this hype that the average [junk] yield just broke 20% - and here you have a 5-B credit at over 21%." Average junk yields, as measured by the authoritative Merrill Lynch & Co. High Yield Master II index, nosed up to 20.14% on Tuesday, its highest level since January 1986.

Hovnanian's game theory

The primary remained quiet but players in that sector continued to mull the recent spate of exchange offers.

The Hovnanian bond exchange deal, the first of what is expected to be an onslaught of deals asking bondholders to lock in price depreciations in exchange for moving up in the capital structure to secured paper that is customarily longer dated, is set to end on Monday.

To briefly recap, the exchange targets Hovnanian's 8% senior notes due 2012, its 6½% senior notes due 2014, 6 3/8% notes due 2014, 6¼% senior notes due 2015, 7½% senior notes due 2016, 6¼% notes due 2016 and 8 5/8% senior notes due 2017.

Those who tender will be exchanged into 18% senior secured notes due 2017.

The exchange, which is being led by Credit Suisse, has a pretty good chance of getting done, according to a banker not in the deal, but who has examined it.

The exchange plays bondholders in different parts of the capital structure against each other, the banker said, adding that it is a sensible way to run an exchange.

"Either you do something or you're stuck," said the banker, adding that the structure of the exchange seems to cleave to principles of classic game theory.

"If you don't take what's presented the person behind you will likely take it and put you lower in the capital structure.

"If you have one of the later maturities you have an incentive to get ahead of some of the guys next to you. That also encourages the holders of the shorter maturities to take the exchange.

"They structured it in such a way that there is an incentive for the shorter maturities to participate to avoid being passed up in the capital structure by the longer maturities."

Meantime, as market sources predicted when the lights came up on the Hovnanian exchange deal, other exchanges in which issuers seek to "monetize" price depreciations in their securities have surfaced.

These include exchanges from Harrah's Entertainment, Inc. and Neff Corp., which were announced Monday, and Realogy Corp., which announced its exchange late last week.

Traction in high-grades - the good news

The high-grade bond market appears to have gotten some traction lately, a high-yield investor conceded on Wednesday.

That's good news and bad news, however, the buy-sider added.

On Tuesday Verizon Wireless priced $3.5 billion of notes (A2/A) in two tranches: $1.25 billion of 7 3/8% five-year paper which came at a 537.5 basis points spread, tight to price talk of 537.5 to 550 bps, and $2.25 billion of 8½% 10-year notes which priced at 512.5 bps, again tight to talk of 512.5 to 525 bps.

Meanwhile Kroger Co. priced an upsized $600 million of 7½% five-year senior notes (Baa2/BBB-/BBB) at Treasuries plus 535 bps, on top of price talk. The size was increased from $500 million.

These were good executions, the buy-sider agreed.

"Even though spreads are at record wides you've seen companies come over the past couple of weeks," said the investor.

"High-grade issuers were very astute earlier this year, and raised money with five-handle types of yields and very narrow spreads.

"Now a lot of companies are revisiting.

"They could be reasoning that they had better get some cash in the till in case they start to see real credit stringency and no longer have access to their banks. Or that their numbers, so far, look pretty good, and they should raise cash before those numbers go downhill.

"In both scenarios they're being pre-emptive."

The bad news

Even though the high-grade issuers are lately seeing good executions, the buy-sider said, spreads are very wide, causing everything else, including high-yield bonds, to reprice wider.

Hence the high-yield primary market is essentially closed, the investor said.

"If you ever get through the selling pressure and the economy stabilizes, you could have high-yield gap tighter.

"But that does not look like a near-term event, but rather an event that is some months off."

Is that a light ahead?

Not surprisingly, this high-yield investor had some difficulty surmounting the bad news lately choking the market.

"Everything is for sale," the investor said, echoing what has become a familiar refrain.

This buy-sider keeps an eye on the Texas Competitive Energy Holdings Co. LLC (TXU Corp.) 10¼% senior notes due in November 2015 because it is a liquid issue.

Those notes were at 61 bid, 62½ offered late Wednesday afternoon, down 3 points, the source related.

"Two weeks ago they were trading in a range of 70 bid to 75 bid.

"Also you see a lot of single A names and good triple B names offered, now. Those tend to be insurance company items, and you just never see them for sale.

"Everybody needs liquidity. It's the end of the year.

"And who wants to buy?"

Asked how an institutional investor charged with putting money to work in risky assets such as high-yield bonds copes in times such as these, the investor replied that no one currently in the business has ever seen times such as these.

"Everything turned out to be a lot riskier than we thought," the buy-sider said.

"The short-term trend is not your friend because you can see that from overhanging uncertainties, especially with the autos, you have continuing write-offs and losses on the part of financial institutions.

"The year-end selling is probably going to continue for a while.

"So the trend appears to be downward, with wider spreads, until we get into the new year, where we may get a little break because a lot of the year-end tax selling will have played out.

"And on a fundamental basis you may start to see some beneficial effects of bank solvency being restored."

Stephanie N. Rotondo contributed to this story.

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