New debt weighs on United Rental's bonds; Downgrades hurt homebuilders; Trump boosted

By Paul A. Harris and Stephanie N. Rotondo

Portland, Ore., June 10 - The junk bond market was once again softer Tuesday, with United Rentals Inc. leading the pack lower.

The equipment rental company announced a plan to repurchase over 30% of its common stock Tuesday, with much of the cost being financed with bank borrowings. The company also said that it had already bought back all of its preferred shares, which it exchanged for new debt and cash.

It was the new debt that made investors jump ship, a trader said. As a result, the company's bonds fell as much as 3 points on the day.

Meanwhile, homebuilders were under pressure in response to a series of ratings downgrades in the sector. Traders reported that bonds were lower across the board by ¼ to 1 point, with names on the slide including KB Home, Toll Brothers and Standard Pacific Corp.

More losses for gamblers meant more money for Atlantic City casinos Tuesday. In its monthly report, the state's gaming commission said losses at the machines and tables increased over 1%. That news helped Trump Entertainment Resorts Inc.'s bonds edge higher. Throughout the sector, however, gaming names ended the session mixed.

The primary market, meanwhile, was strapped for news on Tuesday.

Junk market slips

The CDX index fell 5/16 on the day, a market source said, closing at 95 5/8 bid, 95 7/8 offered. The KDP High Yield Index was also weaker, ending at 75.27, with a 9.41% yield, compared to closing levels of 75.46, with a 9.35% yield, on Monday.

Earlier in the day, at mid-morning, a syndicate official saw junk a little softer, but added that there apparently remains cash to be put to work in high yield.

Among benchmark issues in the junk market, General Motors Corp.'s 8 3/8% notes due 2033 slipped ½ point to 67.5 bid, 68.5 offered, while Ford Motor Co.'s 7.45% notes due 2031 were likewise lower at 66 bid, 67 offered.

New debt weighs on United Rentals

A stock repurchase plan sent United Rental's bonds downward, as bondholders turned squeamish at the idea of adding new debt to the company's capital structure.

A trader called the equipment rental company's bonds down 1½ points on the day, the 7% notes due 2014 at 79 bid, 80 offered, the 6½% notes due 2012 at 91 bid, 92 offered and the 7¾% notes due 2013 at 82.5 bid, 83.5 offered.

At another desk, a trader pegged the 6½% notes at 91 bid, 91.5 offered, while another saw the 7% paper around 80, down 3 points.

Yet another source called the debt down a trey, the 7¾% notes at 82.5 bid, 84.5 offered.

The Greenwich, Conn.-based company announced Tuesday that it plans to buy back just over 27 million shares of its common stock through a modified Dutch auction. It also said it is has repurchased all of its preferred stock, in exchange for cash and new 14% notes due 2014.

But while stockholders boosted the equity on the news, bondholders did not react as favorably.

"It's good for the stockholders, but not the bondholders," said one trader. "They are buying back something below the bonds," he added in a reference to the preferreds.

The trader added that the plan could also hurt the company's liquidity position.

"[Bondholders would prefer them to use liquidity to delever or buy back some senior bonds," he said.

In anticipation of the buyback, United Rentals obtained a new $1.25 billion asset-based revolver. Using $800 million of borrowings under the new revolver, $270 million from its asset securitization facility and cash on hand, the company repaid $464 million outstanding on its former revolver and term loan, paid fees and expenses and will pay for the share repurchases.

On the news, Standard & Poor's placed the company on CreditWatch with negative implications. Moody's Investors Service affirmed its corporate ratings on the company, but lowered its speculative-grade liquidity rating. Moody's also lowered the outlook to negative from stable.

Analysts at Gimme Credit LLC also downgraded the outlook to stable from improving. In a morning report, analyst Shelly Lombard warned of such "shareholder-friendly" plans, such as the repurchase, as it would put further weight on the bonds - a move viewed as unwise given economic conditions in the construction arena.

Meanwhile, Neff Corp.'s bonds fell during trading, though activity was light. A trader quoted the 10% notes due 2015 at 44.5 bid, 45.5 offered, down 1½ points. Another saw the bonds at 43 bid, 45 offered.

Downgrades hurt homebuilders

A trader said the homebuilding sector had a "knee-jerk reaction" to a series of ratings cuts from Moody's and Fitch Ratings.

The trader said the sector by and large fell about ¼ point, adding that the ratings agencies did affirm some ratings, but mostly downgraded. He pegged Toll Brothers' 8¼% notes due 2011 at 96.5 bid, 97.25 offered and KB Home's 6¼% notes due 2015 at 98 bid, 98.5 offered.

Another trader saw KB's 5 7/8% notes due 2015 at 87 bid, 87.5 offered, while yet another placed that issue at 86.5 bid, 87.5 offered, down 1 point.

The trader also saw Standard Pacific's 9¼% notes due 2012 fall a point to 77 bid, 79 offered. Bucking the trend, Hovnanian Enterprises Inc.'s 6½% notes due 2014 managed to gain a point to close at 69 bid, 70.5 offered.

On Monday Moody's downgraded Pulte Homes, Inc., Centex Corp., KB Home, D.R. Horton, Inc., Lennar Corp. and Ryland Group, Inc.

Fitch followed on Tuesday with cuts to D.R. Horton, Inc., Centex Corp., Ryland Group, Inc., Pulte Homes, Inc., Beazer Homes USA, Inc., Meritage Homes Corp., M/I Homes, Inc. and Lennar Corp. plus affirmations for Hovnanian Enterprises, Inc., KB Home, MDC Holdings, Inc. and Toll Brothers, Inc.

"The downgrade reflects the current difficult housing environment and Fitch's expectations that housing activity will be even more challenging than previously anticipated during the balance of calendar 2008 and that new home activity will still be on the decline well into 2009," Fitch said in a statement.

For the month of April, the National Association of realtors' index of future home sales increased 6.3% as prospective buyers took advantage of decreasing home prices.

Trump up on 'decent' gaming numbers

Trump Entertainment's bonds got a boost on the back of what one trader called "decent numbers" from the New Jersey Casino Control Commission.

A trader quoted the 8½% notes due 2015 at 68.25 bid, 68.75 offered, versus previous levels of 67 bid, 68 offered. Another placed the bonds at 68.25 bid, 68.5 offered.

"They have quietly moved up over the last three or four days," the second trader said. "This time last week, they were 66.5 [bid], 67 [offered]."

Elsewhere, a trader called the paper "a little better, up about a point" at 68.5 bid, 69 offered. Yet another source said "good numbers" earned the bonds a point, to close at 68.5 bid, 69.5 offered.

Unlucky casino patrons lost $415.3 million in Atlantic City during the month of May, a 1.6% increase from the month prior. The bulk of that was lost at the slots, though slot revenue declined 9.5%.

In the rest of the gaming arena, casinos ended the session mixed. Harrah's Operating's 10¾% notes due 2016 closed at 86 bid, 86.25 offered, essentially unchanged. Tropicana Entertainment LLC's 9 5/8% notes due 2014 were also holding steady around 55, despite news that the company's top executive was being forced out by disappointed creditors.

MGM Mirage's 6 5/8% notes due 2015 moved up slightly to 85.25 bid, while Isle of Capri Casinos' 7% notes due 2014 fell a point to 75.5 bid. Station Casinos were likewise lower, though just by ¼ point, at 84 bid.

Las Vegas Sands' bonds declined in sympathy with its equity, as did that of Wynn Las Vegas LLC. The former's 6 3/8% notes due 2015 slipped a point to 88.5 bid, 89.5 offered, while the latter's 6 5/8% notes due 2014 dipped to 94.5 bid, 95.5 offered.

Broad market weaker

Ply Gem Industries Inc.'s 11¾% notes due 2013 closed a little lower, a trader said, after news hit the wires that a distributor had terminated an agreement with Georgia Pacific.

"It was first taken as a negative and guys were leaning on the bonds," the trader said, which hit a low of 95 on the day. But by the afternoon, the bonds came back to end around 97, about ½ point lower.

Citizen Communications' 9% notes due 2031 fell a point in trading to 93 bid, 94 offered.

In the autosphere, Delphi Corp.'s bonds slipped back to the high-30s, a trader said, pegging the debt at 39 bid, 40 offered. Another source called the bonds down anywhere from 1½ to 2½ points during the session around 39.

Metaldyne Corp.'s paper was also weaker, its 11% notes due 2012 at 30 bid, 32 offered, down a deuce.

Retailers also did not fare too well. Claire's Store Inc.'s 9¼% notes due 2014 lost as much as 2 points to 66 bid, 68 offered, while Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2014 were 1½ points lighter at 83.5 bid, 85 offered.

Source Interlink planning notes

Pressed for word of any activity in the primary market, sources mentioned Source Interlink Cos. Inc. which, they said, plans to sell $465 million of senior subordinated notes due 2017 (Caa2) to refinance the bridge loan incurred in its acquisition of Primedia Inc.'s Enthusiast Media division.

No timing or bookrunner names were heard, Tuesday, and the company did not return a telephone call from Prospect News.

Almost exactly a year ago, just prior to the sell-off in the credit markets, the company announced a $465 million offering of senior subordinated notes (Caa1/CCC+) with a coupon in the high 9% area.

The financing, which also included a $1.18 billion credit facility, was led by Citigroup and JP Morgan.

Sequa notes up a little

A money manager from a mutual fund whose portfolio includes both high yield bonds and bank loans noted Tuesday morning that in an otherwise "buckling" high yield market it was remarkable that the Sequa Corp. notes which underwriters priced on Monday in two tranches totaling approximately $711.4 million - a bridge refinancing deal - were holding in.

The deal included a $500 million tranche of 11¾% senior cash pay notes that priced at 91.731 to yield 13 ¾%, and an approximately $211.4 million tranche of 13 ½% senior PIK notes that priced at 95.23 to yield 14 ¾%.

At the close a source spotted the cash-pay notes at 91.75 bid, up slightly from the 91.731 issue price.

The PIK notes closed Tuesday at 95 3/8 bid, up from the 95.23 issue price.

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