Stock rally spurs junk upward, GM/GMAC leading; Rent-A-Center gyrates; Apria, Avaya get LBO funding

By Paul Deckelman and Paul A. Harris

New York, Oct. 28 - A solid rally on Wall Street spilled over into the junk market on Tuesday, pushing high yield names broadly higher, a number by multiple points, with heavy overall volume.

Among the key gainers were the big automotive benchmark issues like General Motors Corp., its domestic arch-rival, Ford Motor Co., and GM's 49%-owned GMAC LLC financing arm - which got word late in the day that it had been cleared to join the federal government's new program aimed at helping to thaw out the frozen short-term commercial credit markets.

Elsewhere, Hovnanian Enterprises Inc. - whose bonds had tumbled on Monday on news that the Red Bank. N.J.-based homebuilder would exchange new debt for existing bonds, but only at a steep discount to the latter's face value and only for a small portion of the outstanding notes - were seen bouncing back.

Gaming giant MGM Mirage, whose bonds had been consistently coming up losers over the last few sessions, including Monday, on investor worry about the economic downturn's impact on the consumer-dependent sector, saw its fortunes change for the better Tuesday. Some of that luck rubbed off on the bonds of other gamers like Las Vegas Sands LLC.

But Boyd Gaming Corp.'s bonds were seen mixed after the Las Vegas-based casino operator posted a quarterly loss.

Rent-A-Center Inc.'s bonds were meantime bouncing all over the place, buffeted between the good news of favorable third-quarter results and the bad news of lowered fourth-quarter guidance.

There were whiffs of primary market news, including a forecast "middle-of-the-fairway" drive-by deal for Wednesday, to be led by Banc of America Securities, UBS Investment Bank and BNP Paribas.

The source with this information declined to furnish an issuer name.

Dealers were also heard to have rolled Avaya Inc.'s $1.45 billion of bridge debt incurred for the company's leveraged buyout into new notes, while lenders to another LBO borrower, Apria Healthcare Group Inc., has gotten its $1 billion of needed bridge financing from its lenders; that funding is also slated to be rolled into new bonds.

Market indicators climb

The widely followed CDX High Yield 11 index of junk bond performance, which had risen by ¼ point on Monday, jumped by 1 9/16 point on Tuesday, a trader said, quoting it at 79¾ bid, 80¼ offered. The KDP High Yield Daily Index was meantime up 7 basis points to 52.92, as its yield increased by 1 bp to 16.44%.

Cash name were up a point to a point-and-a-half, sources said.

That rally was led by various liquid names, said a high-yield syndicate official who mentioned HCA Inc.

"But a lot of activity was in the CDS," the source added.

In the broader market, advancing issues led decliners by a five-to-four margin. Activity, measured by dollar volume, soared by 69% from Monday's pace.

The key to Tuesday's gains was the powerful surge seen in the equity markets, which zoomed on heavy volume, particularly late in the day, as bargain hunters who had been sideline-sitting for quite a while, jumped back in to pick up some quality shares at extremely favorable prices. The bellwether Dow Jones Industrial Average rose 889.35 points, or 10.88%, to 9,065.12. It was the Dow's second-largest point gain-ever, coming after the 936-point jump the Dow saw on Oct. 13. Other, broader equity measures were equally robust, with the Standard & Poor's 500 index up 91.59 points, or 10.79%, to 940.51, and the Nasdaq composite index ahead by 143.57 points, or 9.53%, to finish at 1,649.47.

With that kind of wind at its back, a trader said that it was "not that I saw the balance of the market running, per se, but there's certainly a much better tone," especially when compared to some of the sessions that Junkbondland has seen in the past few weeks.

However, with so many issues doing better, he said, "surprisingly," Community Health Systems Inc.'s 8 7/8% notes due 2015 did not share in the generally stronger market, actually falling back ½ point to 80.25 bid. Some $25 million of the bonds traded, about 1½ times the amount that changed hands on Monday.

The Franklin, Tenn.-based hospital operator's bonds are considered by many to be a trusty market barometer because of the issue's great liquidity - some $3 billion - and the propensity of some accounts to use it as a convenient place to park cash when things are going OK and to sell in order to quickly raise cash when they are not. "I'm shocked about that," he reiterated, although he held out the possibility that "maybe it's not the true barometer" that many people think it is.

Autos drive higher

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 at 28 bid, 29 offered, up 3 points, and said that that the GMAC 8% bonds due 2031 were "up 3 points as well" at around 42 bid, 43 offered.

He also saw Ford Motor Co.'s 7.45% bonds due 2031 at 28 bid, 30 offered, with both the GM and Ford long bonds "at their highs of the day."

GM "was up quite a lot," a second trader said, pegging the '33s higher by 4 points at 28.5 bid 30.5 offered, with Ford's '31s up a deuce at 29 bid, 31 offered.

A trader who saw the GM benchmarks at 29.5 bid, up 3 points on the day, also saw the carmaker's 7.20% notes due 2011 doing even better - a 5 point gain to 43 bid. He saw the '31s trading in tandem at 29.5 with the Ford long bonds, 3 point gainers, while the Dearborn, Mich.-based Number-Two domestic producer's 5.80% bonds coming due on Jan. 12 were a point better at 93 bid. He meantime saw the GMAC 8s 4 points better at 43 bid.

"All of a sudden, are they selling cars?" he asked ironically, questioning the rationale behind investors wanting to get back behind the wheel of the badly battered junk jalopies that GM, GMAC and Ford have become.

At yet another desk, a trader saw the GMAC bonds "up a bunch today," calling the 8% bonds up 6 points to 41 bid, 43 offered, and he opined that GMAC "will probably continue to fly," especially now that the big Detroit-based lender, 49% GM-owned and the rest controlled by Cerberus Capital Management LP, has been given the OK to access the Federal Reserve's brand-new Commercial Paper Funding Facility, which on Monday began buying commercial paper from companies with the aim of unlocking the CP market.

Although the new facility's guidelines specify that the program is aimed at borrowers with the highest ratings, such as General Electric Co., the first borrower to tap it, junk-rated GMAC was cleared to access the facility via its investment-grade-rated New Center Asset Trust unit, which can issue about $10 billion of commercial paper backed by auto loans and other assets from GMAC units. With GMAC now able to again get liquidity via its commercial paper program, "I think we may see these bonds flying a little tomorrow," the trader said.

Hovnanian comes back

Apart from the autosphere, a trader said that Hovnanian Enterprises' bonds - which had slid badly Monday on the news that the company is offering to buy a relatively small portion of the $1.5 billion of outstanding issues back at a severe discount to their par value - were being quoted lower, at around the 26-27 mark for the 6¼% notes due 2016, where they had traded on Monday, but he said he'd seen no trades on Tuesday. "It was odd that they didn't even trade today," he mused.

However, another trader said Hovnanian was up, with its 8% notes due 2012 better by 5 points at 38 bid, 40 offered.

Its 6 3/8% notes due 2014 finished at 34, up 3 points on the session.

Still another trader saw the bonds mixed, with the 8s at 40 bid on a round-lot basis, versus 43.5 bid on Monday - but with the 6½% notes due 2014 jumping more than 7 points to 31.5 bid from 24 on Monday. "I guess they got oversold Monday," he ventured. He also saw Hovnanian's 7½% notes due 2016 last trading in round lots at 30.5 bid, versus 27 on Monday.

Hovnanian - looking to wipe debt from its balance sheet as it tries to cope with the continued housing downturn - on Monday offered to swap up to $250 million of new 18% secured paper due 2017 for existing bonds - but is offering just 41 to 47 cents on the dollar for the new bonds, with shorter issues, like those coming due in 2012, given a higher priority in the exchange offer.

MGM gain no Mirage

A trader said that the recently hard-hit bonds of gaming behemoth MGM Mirage were among the gainers on Tuesday, with its 6% notes coming due next Oct. 1 at 84.5 bid, up 4½ points on the day.

He also saw MGM's 7 5/8% notes due 2017 60.25 bid, up ¾ point.

Another trader saw the MGM 7½% notes due 2016 a point better at 59 bid, 61 offered. Its 6½% notes coming due next July 31, originally issued by the former Mandalay Resort Group, now a part of MGM, were seen up as much as 5 points at 86 bid.

Among other gaming names, one of the traders saw Las Vegas Sands' 6 3/8% notes due 2015 up ¾ point at 43.75, while Wynn Las Vegas LLC's 6 5/8% notes due 2014 gained perhaps ¼ point to 71 bid.

He saw Boyd Casino's 6¾% notes due 2014 drop more than 3 points to 59.75, after Boyd reported a weaker-than-expected 73% plunge in its quarterly profit from year-ago levels. The company had third-quarter net income fell of $8.7 million, or 10 cents a share, well down from $31.9 million, or 36 cents per share, a year earlier. Excluding special one-time items, Boyd's earnings from continuing operations were 16 cents a share, somewhat less than the 19-20 cents per share that Wall Street was looking for. Revenue slid 13% from a year ago to $426.5 million.

Another market source also saw the 6¾% notes down more than 3 points, though at the 57 bid level.

But while those notes were down, the source saw Boyd's 7¾% notes due 2012 up about 2 points in a 77-78 context.

On its conference call with investors, Boyd tried to impress them with the seriousness of its cost-cutting efforts by announcing that its much-ballyhooed Echelon development project on the Las Vegas Strip, slated to cost some $4.8 billion, will remain suspended for the next year, until conditions improve.

Rent-A-Center is roiled

A trader said that Rent-A-Center "dropped a bunch" after the Plano, Tex.-based company, which rents furniture, computers and other goods to consumers with an option to buy, issued bearish guidance for the fourth quarter. That overshadowed the good results it posted for the third quarter.

A trader saw its 7½% notes due 2010 bounce around at mostly lower levels before ending down a point at 92 bid, 95 offered.

A market source at another desk saw the bonds rocketing around between 90 on the low side and 97 on the high side, although those outlier quotes were mostly on smallish odd-lot trades.

Another trader, looking only at round-lot trading, saw the bonds holding steady in a 93 context, finally going home at that level, down ¾ point on active volume of $14 million.

Rent-A-Center's Nasdaq-traded shares meantime plunged $3.45, or 22.27%, to $12.04, on its lowered guidance. Volume of 8.5 million shares was seven times the norm.

Citing the ongoing economic problems of the nation as a whole, Rent-A-Center cut its revenue estimate for the fourth quarter to a range of $698 million to $713 million, down from $700 million to $715 million previously, and predicted that same-store sales will be flat to perhaps up 1% for the quarter.

Pilgrim's Pride continues to struggle

From out of the deeply distressed-debt precincts, a trader saw Pilgrim's Pride Corp.'s 7 5/8% notes due 2015 at 40 bid, versus 41.5 on Monday.

Another trader said the Pittsburg, Tex.-based poultry producer's bonds "are trading flat with due bills to the seller" on Monday's announcement that it will not make scheduled coupon payments on two issues of bonds on Nov. 3. He said the 7 5/8s were unchanged at 39 bid, 41 offered and the 8 3/8% notes due 2017 did not trade, but were still be quoted at 17-22.

Another trader saw restrained activity in the credit, seeing just 50 of the 7 5/8s trading at 40 and no trades at all in the 8 3/8s and the 9¼% notes; the latter issue was said to be one of those "tough trade" issues that "rarely trade."

Not so sunny for VeraSun

A trader said that VeraSun Energy Corp.'s bonds were "looking pretty not good this morning," with the 9 3/8% notes due 2017 at 10.5 bid.

The trader said that it was just one $1 million trade and "the bid was flat," or trading without the accrued interest, "and the offer was with [interest] this morning. It isn't marked as flat, or anything, but I'm going to assume it is flat," the trader said. The senior paper, the 9 7/8% notes due 2012, were meantime trading around 39 bid, 40 offered, versus levels around 43 on Monday, and last week's levels not far from 50. It was the trader's assumption that the senior bonds were trading with the interest.

A second trader also saw the '17s at 10.5, unchanged from recent levels, and said that while he had not heard specifically that the Sioux Falls, S.D.-based ethanol producer's bonds were trading flat, and "they haven't filed [for bankruptcy] yet - but of course, if both sides agree, they can trade flat." He noted that while the bonds were still showing a yield on the Bloomberg terminals, "that's only because per the company, they're still trading plus accrued. When you have two sides of a trade agreeing to trade without accrued, it's fine."

Another trader said that he "did not see much trading," with the 9 3/8s at 10.5, noting that trading in the company's shares had been halted on Monday on the sub-penny rule when they dipped below $1 in reaction to news that VeraSun had shut one of its plants, but he said that he did see the shares again trading Tuesday; in fact, they zoomed 33 cents, or nearly 46% Tuesday to close at $1.05, likely on investor short-covering of the beleaguered name.

B/E Aerospace heads for the skies

Elsewhere, a trader noted some strength in B/E Aerospace Inc.'s 8½% notes due 2018.

"Those bonds have been moving up again. They had a nice quarter," he said, quoting them in a context of 83-84.

B/E on Monday reported third-quarter net income of $51.8 million, or 54 cents a share, up 16.4% from $44.5 million, or 48 cents a share, in the year-ago period, and excluding costs related to its acquisition in July of Honeywell Inc.'s Consumables Solutions distribution business, earnings came to $56.6 million, or 59 cents a share. Revenues also went skyward, with net sales of $587.8 million - up 37.3% from $428 million a year earlier.

Before the junk bond primary market all but dried up over the summer under the onslaught of the credit crunch as well as the usual seasonal factors, the Wellington, Fla.-based maker of aircraft cabin components priced the $600 million issue of paper back at par on June 26 via J.P. Morgan Chase, Credit Suisse and UBS, as part of the financing for the Consumables Solutions deal. The trader reminisced that "I remember when these bonds were in the 104 range," having firmed smartly almost out of the gate after their pricing and then holding at that lofty altitude for some time before starting to drift back to earth, and then some.

Most recently, they've been in a lower-80s context, starting the week trading around 83.5. "I know they should be up," he said, "and I think they're going to trade a lot higher, because their recommendation has definitely changed."

The trader saw buyers cautiously emerging for a number of companies that "look like they can weather the storm." One such credit is O'Charleys Inc. "Their earnings are going to be out also," on Thursday, he said, "and there was an analysis done by our people saying that based upon the numbers, either the stock is really well over-valued, or the bonds are ridiculous. There's something that's out of whack on an EBITDA basis."

The Nashville-based restaurant operator's Nasdaq-traded shares currently hang out in the $6 area; meanwhile its 9% senior subordinated notes due 2013 were recently trading in a 66-67 context.

With buyers coming out of the woodwork this week, he added that "we're starting to see more and more of that. It's not just hitting bids, necessarily. It's 'let's look to see if there's some value out there', with the possible exception of the homebuilders."

In such an evolving climate - versus the dark funk that gripped the market only a few sessions ago - "it's almost well worth it."

Brocade roadshow wrapping up

In the primary, the roadshow for Brocade Communications Systems Inc.'s $400 million high-yield bond offer returned to the West Coast on Tuesday for one-to-one meetings with accounts there, as well as a lunch in San Francisco, according to a source close to the transaction.

The roadshow for the six-year senior unsecured notes offer (B2/BB-), via Banc of America Securities and Morgan Stanley, is wrapping up, the source said, adding that price guidance will surface later this week.

The deal could price late this week or early next week.

Observers will recall that the Brocade roadshow began Oct. 20 in Los Angeles, and has now returned to California, home to both Brocade and the target company, Foundry Networks, Inc.

Last Friday a special meeting of Foundry shareholders, convened for the purpose of voting on Brocade's $19.25 per share cash offer, was adjourned because of "recent developments related to the transaction," driving Foundry's share price (Nasdaq: FDRY) down by 25.6%.

That meeting was rescheduled for Wednesday.

The BCE buzz

Following a raft of stories in the financial pages over the weekend, the leverage markets continued to buzz on Tuesday with rumors that launching of the mammoth BCE Inc. LBO debt financing - including $11.3 billion equivalent of junk bonds and C$23.05 billion of bank debt - is imminent.

On Monday a source close to the deal, half-jokingly, said that the debt could come if the Dow Jones Industrial Average were to rally by 1,000 points.

Given that the Dow was 889.35 points on Tuesday (a little short, it's true) Prospect News deemed it worth a follow-up call.

No news on the deal despite the stock rally, said the informed source, reiterating that other pre-conditions for bringing the BCE debt include substantial rallies in the badly beaten up bank loan and high-yield secondary markets.

Therein lies the rub, said a sell-side official who is not among the bookrunners.

"Right now there is a lot of opportunity in the loan secondary market," the official said.

"And until that cleans up it's hard to figure out how you're going to do a BCE loan deal, and how you're going to do a high-yield deal."

Mixed signals

Secondary market prices in the loan market are being held down by an influx of bid wanted in competition (BWIC) offers, the official said.

"There's a joke out there in the loan market that the BWICs ("bee-wicks," in the parlance) are the new primary market," the banker said.

"You're getting mixed signals right now.

"Brocade is on the road, but the Apria bridge is funded," the source said, referring to the fact that Apria Healthcare Group, Inc.'s lenders funded a $1 billion senior secured bridge loan on Tuesday, as the LBO of the home health care services company, by The Blackstone Group, closed.

Meanwhile the Fresenius SE $1.5 billion equivalent of senior notes, to help fund its acquisition of APP Pharmaceuticals, Inc. - originally expected to come to market, like Brocade, during September - seems to be on permanent hold, the source added.

"The leveraged loan market is probably in worse shape than the high-yield because you keep seeing the huge BWICs coming into the secondary.

"Some of those loans are going for 60 and 70.

"Where are you going to price BCE?" the banker demanded to know.

"What level do you put on that, given that there is always going to be more paper?"

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