Quebecor, Buffets nosedive after bankruptcy filings; junk tracks stocks lower despite Fed cut

By Paul Deckelman and Paul A. Harris

New York, Jan. 22 - The other shoe finally dropped on Tuesday for two troubled credits whose agonizing deterioration had been the stuff of high drama in the high yield market for weeks, if not months - Quebecor World Inc. and Buffets Inc., both of which filed for Chapter 11 protection from their junk bond holders and other creditors, causing their bonds to plummet about 15 to 20 points on the day, down to the levels at which bondholders believe they will see returns.

Nothing quite so dramatic was happening in the rest of the junk market, back to work after the 31/2-day Martin Luther King federal holiday weekend.

The Federal Reserve's surprise 75 basis point cut in its key rates, bringing the federal funds target down to 3.5% and the discount rate to 4%, put the brakes on what had promised to be a truly horrendous day on Wall Street, since overnight action in the foreign markets and stock futures were pointing to a several hundred-point loss in the bellwether Dow Jones Industrial Average. Even so, equities initially fell sharply on recession fears despite the rate cut, only cutting their losses later in the day on probable short-covering. The junk market pretty much went along for the downward ride, with many issues ending a point or two down on the day.

While stocks of major homebuilder names such as Hovnanian Enterprises Inc., KB Home and WCI Communities Inc. were all higher, given a boost by the Fed rate cut and the prospect that lower mortgage rates which might result could help sagging new-home sales, bond investors were more wary, and the builder names, like most everything else, were lower. The same was true of mortgage names like Countrywide Financial Corp., whose bonds continued to erode, well down from the levels to which they had jumped earlier in the month on first the rumor and later the real news that the Calabasas, Calif.-based lender would be acquired by Bank of America.

A sell-side source reckoned that high yield bonds ended the Tuesday session lower by 1 to 1½ points after being down 1 to 4 points across the board, depending upon credit quality, when the session got underway.

The sell-sider chalked up the substantial rebound to a decision on the part of the Federal Reserve, to lower the Fed Funds rate by 75 basis points to 3½% from 4¼% - a notable move, the source added, because it came outside of the scheduled Federal Open Market Committee meetings - the customary occasion for the Fed's interest rate announcements.

"It certainly had an impact when they came out with the news," the sell-sider said.

"Some people were expecting it but the majority weren't.

"There is a sense that the Fed is behind the curve a little, and they are trying to play catch up."

Primary market activity - which hasn't even yet totaled $1 billion in pricings so far in 2008 - remained muted, as would-be issuers, underwriters and buyers continued to hang back and figure out which way the wind was blowing.

Market gauges pointing southward

A trader said that the widely-followed CDX index of junk market performance lost ¾ point to 90 1/8 bid, 90 3/8 offered. The KDP High Yield Daily Index finished down 0.51 at 74.74, while its yield widened by 15 basis points to 9.23%.

In the broader market, declining issues outnumbered advancers by a better-than two-to-one margin. Overall activity levels, reflected in the dollar volume, were down maybe 2% from Friday's truncated pre-holiday session.

The market was "kind of quiet," the trader said, although he noted that the market "was quoted down pretty hard."

Another trader said that "it was kind of a muted day." Thanks to the Fed action, "it wasn't the bloodbath it kind of felt like when you first got here."

Quebecor, Buffets swoon on bankruptcy filings

That is, unless you were a holder of either Buffets' 12½% notes due 2014 or the several issues of

Quebecor World bonds, all of which were quoted down anywhere from 15 to 20 points on the session following the companies' respective bankruptcy filings. Both names were seen among the most actively traded bonds on the session.

Quebecor World's bonds were all being quoted around 47 bid, 49 offered, down from their mid-60s levels before the Montreal-based printing company's Chapter 11 filing.

A trader at another desk said that its 6 1/8% notes due 2013 had opened the day at 44 and had finished up near 50, "up 6 points on the day - but down 15 from Friday's levels."

Another market source saw those notes fall as low as 42 bid on the day before coming back up from that nadir to finish around the 49 level, down nearly 15 points on the day, while its 4 7/8% notes that are slated to come due in November closed around 46 bid, down more than 21 points on the session.

Those bonds had hovered around the mid-60s level last week as the company wrestled with a Jan. 15 deadline set by its banks by which it had to come up with $125 million of new financing. Although corporate parent Quebecor Inc. and another investor stepped forward at the 11th hour with a rescue plan that would have supplied the company with up to C$400 million of financing - but the banks did not consider the plan to be the adequate fulfillment of Quebecor World's obligations, forcing it into the restructuring.

Also forced into restructuring was Eagan, Minn.-based casual dining operator Buffets. Its bonds nosedived to 7 bid, 9 offered after the company's Chapter 11 filing from 18 bid, 22 offered previously, a trader said, while another trader pegged them at 8 bid, 10 offered, down 10 points on the session.

A market source said the bonds lost more than 14 points on the session to finish at about the 9 bid level.

Junk mostly lower despite rate cut

Apart from the twin disasters of the day among the newly bankrupt, most high yield names were seen down 1 to 3 points on the session traders said, taking their cue from equities, which still ended lower on the day despite the Fed rate cut, although that rate reduction did allow equities to regain much of their early losses. The Dow, at one point down more than 450 points, ended off about 128 points.

But while the equity market saw the Fed cut as an opportunity for bargain hunting and covering shorts in many beaten-down names, bond investors were not convinced that much had changed.

"I've been highly critical of the Fed since their Oct 31 move to 'neutral', and they've done nothing since then to disabuse me of the notion that they are out of touch with how the financial system of today operates," declared Maxwell Bublitz, chief strategist at San Francisco-based SCM Advisors, which manages more than $11 billion of fixed-income assets, including about $1.5 billion in high yield holdings. "We need more pragmatists on the Fed."

Bublitz dismissed the Fed easing as "belated," although he conceded that it showed that "they are starting to figure it out." However, he added "because they are viewed as a weak hand on the tiller, a 75 basis point cut eight days before the next meeting smacks of a panic... not unlike yelling fire in a crowded movie theater."

Bublitz, like many other market-watchers, including analysts at such major houses as JP Morgan and UBS, expects the Fed to cut rates by another 50 bps at next week's regularly scheduled FOMC meeting. He said that this "will have to be viewed in the context of whatever fiscal plan can be cobbled together over the next few days. Whether the combination will be enough to break the psychology of a self-feeding recessionary spiral remains to be seen."

Fed cut fails to boost builders

While builder stocks were for the most part being pushed higher Tuesday on the hopes that lower rates and easier liquidity may help revive nearly comatose sales levels, bond investors refused to hop aboard the builders' bandwagon.

Among high yield builder names, Hovnanian's 8 5/8% notes due 2017, which had traded around the 69 level on Friday, went home down around 3 points at 66.

A trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 down 2 points to 69 bid, 71 offered. He had Standard Pacific Corp.'s 7% notes due 2014 likewise off 2 points at 59 bid, 61 offered. The latter's 6½% notes due 2010 were down nearly 2 points to the 65 level.

WCI Communities' 9 1/8% notes due 2012 "were down with the other builders," a trader said, pegging them 4 points lower at 47 bid, 49 offered.

Gimme Credit analyst Vicki Bryan, writing Tuesday about the homebuilding sector, warned that

"lower short-term interest rates have little effect on long-term mortgage rates, which already have retreated to 2005 levels. That is lower that in most of the past 20 years. Indeed, we believe the affordability of homes still is impaired by historically high pricing."

Bryan said that the builders "already have noted that steep price discounts and expensive incentives have done little to spur worried buyers to the table, particularly now with a potential recession looming. Therefore, we believe that the only recipe for too much inventory is even lower prices - and more pain to come for the homebuilders. We remain sellers of the homebuilders in our coverage."

As for Hovnanian specifically - to pick just one of the several companies Gimme Credit is warily watching, Bryan cautioned that "we remain concerned about Hovnanian's dwindling liquidity and we expect EBITDA to fall well short of covering its obligations in 2008." The analyst noted that Hovnanian has not written off assets like other builders have, and so "we expect future reductions to inventory value in 2008. That will reduce further the collateral value supporting its bank line and threaten its access to available credit. Hovnanian needs to borrow just to cover its costs, and it's unclear how long lenders will remain supportive if the weak housing cycle persists through 2008."

No help for lenders

High yield mortgage lenders also remained behind the eight-ball on Tuesday, despite the Fed rate cut. While Countrywide Financial's shares rose for the first time in a number of sessions, its 3¼% notes coming due in May were unchanged at 94 bid, 95 offered - but its 6¼% notes due 2016 lost 2 points to 76 bid, 78 offered.

Residential Capital LLC's 6½% notes due 2013 were down 2 points at 53 bid, 55 offered. Its 8 3/8% notes due 2015 were likewise down a deuce at 54 bid. A trader saw ResCap parent GMAC LLC's 8% bonds due 2031 down ½ point at 77.5 bid, 78 offered.

But another market source saw GMAC's 6 ¾% notes due 2014 down more than 5 points, around the 76 level.

Continued activity in Community Health

Outside of the homebuilder/mortgage axis, a trader saw Community Health Systems bonds continuing to be actively traded. He saw the Franklin, Tenn.-based hospital operator's 8 7/8% notes due 2016 up a point at 97.5 bid, 99.5 offered, although he observed no fresh market-moving news about the company.

Monoline troubles

Among the present deluge of negative financial headlines raining down upon the capital markets, a sell-side source said he believes that the erosion in credit quality of the monoline bond insurers, most notably MBIA and Ambac, is having the most bearing upon the leveraged markets.

"Ambac lost its triple-A rating last week," the source noted.

"It's not easy to say how important that is anymore. A lot of the banks have marked that counterparty exposure pretty close to zero.

"But it still feels like there has to be buyers for those guys."

Another market observer concurred that the monolines news, capped last week by Fitch Ratings downgrading Ambac two notches to AA and warning that more downgrades may follow, is deepening the freeze that has taken hold in the credit markets.

This source also said that Ambac now appears headed for court, facing a lawsuit brought on behalf of its shareholders who allege that last year the company understated its problems related to its exposure to CDOs.

The primary: Wait-and-see

A kind of gallows humor pervaded conversations with high yield syndicate officials during a Tuesday session which produced no primary news whatsoever.

According to these sources, there were three deals believed to be in the market at the end of last week, and all three apparently remained in the market at Tuesday's close.

From the LBO backlog, Harrah's Entertainment Inc. is on the road with a to-be-determined portion of its upsized $5.275 billion of senior unsecured cash-pay notes, which are expected to price on Friday via Citigroup, Deutsche Bank Securities, Banc of America Securities LLC, Credit Suisse, JPMorgan and Merrill Lynch.

Meanwhile Solutia Inc. is in the market with a $400 million offering of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities.

Some market observers had been expected to price before Friday's close, however no terms emerged.

And from the corporate sector - not related to the backlog of LBO debt - is Petroleum Development Corp.'s $250 million offering of 10-year senior notes (B3) via Morgan Stanley, expected to price by the end of the week.

One of these syndicate officials believes that given the present volatility in the capital markets, underwriters have moved into a "wait-and-see" mode with respect to new issuance.

This source estimates that it could take as much as half a year for activity in the bond and bank loan new issue markets to resume a meaningful level.

"We've really been in a tough spot since last August," the official said.

"The bank loan market is at all-time lows, since they began to track it properly.

"And high yield is above historical average spreads.

"It's a buying opportunity. It's just that no one wants to put $100 to work and come back in tomorrow and find that they only have $95 left.

"But at some point people will start to put their capital to work."

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