NOVA knocked again after ratings revisions; Starwood active on possible return to junk; Royal Caribbean retreats more

By Paul Deckelman and Paul A. Harris

New York, Feb. 2 - The junk bond market meandered around in a quiet session Monday, ending with the various market indicators pointing in different directions and making it difficult to get a definitive reading on the market.

NOVA Chemicals Corp., last week's biggest loser, was again everyone's favorite whipping boy on Monday, after Standard & Poor's and Fitch Ratings downgraded the Calgary, Alta.-based chemical company in response to moves by Nova's lenders to impose additional restrictions on its line of credit.

The distinct possibility that Starwood Hotels & Resorts Worldwide Inc. - currently a precariously investment-grade credit - may soon turn back into the junk-rated company it once was spurred some fairly active trading in its bonds on an otherwise very quiet session; the bonds managed to hold their own, declining only slightly.

Rite Aid Corp.'s bonds - which had pushed up smartly over the previous few sessions, rebounding from the oversold levels seen a week ago - appeared to steady at those higher levels.

Royal Caribbean Cruises Ltd. continued its voyage to nowhere, the Miami-based cruise line operator's bonds falling another several points, on top of the losses seen last week when it reported a much worse than expected 98% drop in its profits from the year-earlier quarter.

Quiet in the primary

The new issue market failed to generate any news as the month of February got underway.

One deal is in the market, sources say.

Landry's Restaurants, Inc. continues to roadshow a $270 million offering of senior secured notes due 2011.

That roadshow is set to wrap up during the mid-part of the week, and price after that, according to an informed source.

Credit ratings remain to be determined.

Jefferies & Co. is the bookrunner for the debt refinancing and general corporate purposes deal from the restaurant, hospitality and entertainment company.

Market indicators turn mixed

Back among the established issues not impacted by new-deal placements, the widely followed CDX High Yield 11 index of junk bond performance, which fell ¾ point on Friday, dipped again on Monday, with a trader quoting the market measure down another ¾ point at 73 ¼ bid, 73¾ offered.

However, the KDP High Yield Daily Index was up 11 basis points on the day at 54.13, while its yield tightened by 10 bps to 13.43%.

Cash bonds gave up a point on Monday, according to a banker working in the leveraged capital markets group of a Wall Street investment bank.

Although junk continues to cling to gains garnered in a rally that began in mid-December, like as not it will relinquish all of those gains, the banker said, noting that the Dow Jones Industrial Average penetrated an intra-day low of 7,780 on Monday.

In the broader market, advancing issues regained their lead over decliners, shading them by an eight-to-seven margin.

Overall market activity, measured by dollar-volume totals, plunged nearly 59% from the levels seen in Friday's session.

Junk market is (Super) bowled over

A trader said that there was "not a lot to write home about" during the session, adding that "volumes are really low."

The session, said another, was "pretty quiet," while a third described it as "boring - it was that kind of a day."

Several traders attributed the lack of any notable activity to Sunday's nationwide Super Bowl blowout, with one noting that "everybody whoops it up on Super Bowl Sunday" to the point that many are in no shape - or have no real desire - to do very much the next day.

A second agreed that "it looks like everyone has a Super Bowl hangover."

He noted that two of the issues which are sometimes viewed as market barometers because of their great size and liquidity, Community Health Systems Inc.'s 8 7/8% notes due 2015 and First Data Corp.'s 9 7/8% notes due 2015, were little traded on Monday, with the former ½ point down at 96.25 bid on only $2 million traded, and the latter up ½ point at 56.5, but with just $3 million changing hands.

He said that only a handful of issues even racked up as much as $10 million of trading, among them R.H. Donnelley Corp.'s 8 7/8% notes due 2016, up ½ point at 11.125 bid, and Charter Communications Inc.'s 11% notes due 2015, unchanged at 17.5 bid, both on volume of $11 million.

The recently priced Crown Castle International Corp. 9% notes due 2015, which continue to be "in there" among the actives, were down 7/8 point from Friday's level at 96 bid while SunGard Data Systems Inc.'s 9 1/8% notes due 2013 dipped ¼ point to 83.75, both on volume of about $10 million. He said that Crown Castle - whose $900 million of bonds priced on Jan. 22 at 90.416 and then proceeded to move right on up to levels in the mid-to-high 90s -- "had the biggest drop among the most actives."

Starwood eyed as likely junker - again

Perhaps the most active name seen trading around Junkbondland on Monday isn't even a junk bond at all - at least for now: Starwood Hotels & Resorts. The trader saw some $13 million of its (Baa3/BBB-/BBB-) 7 7/8% notes due 2012 changing hands, "which doesn't sound astronomical, but it was actually our volume leader today," attracting attention from high yield accounts after Moody's Investors Service threatened to downgrade the White Plains, N.Y.-based lodging company's senior unsecured rating to junk.

In placing Starwood's ratings under scrutiny for a possible return trip to speculative-grade - where its bonds were until Moody's raised them to investment grade in August 2006, following a similar move by Standard & Poor's and likewise followed, in the fall of that year, by a Fitch Ratings upgrade - the agency cited the company's recently reduced earnings guidance for 2009.

On Thursday, Starwood said that excluding one-time items, it expects earnings from continuing operations to range between 2 and 7 cents per share in the first quarter and said it should total about $1.10 per share for the full year - well below the company's previous predictions of a full-year profit of $1.55 per share. Starwood said that weak hotel demand and ongoing struggles at its timeshare business will push its results lower than originally thought.

Moody's warned that although Starwood has moved to reduce costs and curtail capital spending in an effort to generate cash to reduce debt, "industry fundamentals continue to weaken. This can be evidenced by declining RevPAR (revenue per available room) trends - as leisure and business travelers continue to curtail travel. Additionally, the lower earnings outlook coupled with limited visibility regarding future trends increases the probability that Starwood will need to amend its debt/EBITDA covenant."

Against that somber backdrop, the trader said that the 7 7/8s eased by ¼ point to 88.25. "That's pretty good, considering the industry it's in" - hotel operators have been hammered by the economic downturn, which has forced major cutbacks in leisure and even business travel - "and [the fact that] the most likely outcome of the Moody's review will be a downgrade - it's just a matter of how much of a downgrade. So that's not bad, being down [just] a quarter-point."

No relief for NOVA

An actual downgrade meant more downside for NOVA Chemicals, whose bonds had already been falling - especially its 7.40% notes coming due on April 1 - on investor worries that the company will not be able to pay those bonds off at maturity.

NOVA, a trader said "was getting hit again," while another quoted the 7.40s at a 63-ish context, which he called "down a bit from the upper 60s." He said he saw "some trades - but not really a lot. He also saw the company's 6½% notes due 2012 trade down to 29.5 bid, from prior levels around 30 bid, 31 offered.

At another desk, the company's paper was seen down a point after the Fitch Ratings downgrade, with the 7.40s pegged at 62 bid, 64 offered, while the 61/2s were at 30 bid, 31 offered.

However, late in the day, another trader said, NOVA "got clobbered even more" than it had been earlier; although the 7.40s seemed to have steadied in the lower 60s for much of the day, after having come down from early highs around 70, several late-session trades dropped those bonds right down to around the 60 level. The trader saw those bonds then plunge further still to around the 55 level, on a big block trade of at least $1 million.

NOVA'S New York Stock Exchange-traded shares, meanwhile swooned another 55 cents, or 30.73%, to end at $1.24 - about one-third of where they were trading just a week ago. Volume of 9 million was over eight times the usual turnover.

"The consensus in the market seemed to be that [NOVA] is not going to be able to pay off on those bonds on April 1," the trader declared.

Fitch Ratings downgraded NOVA's secured and unsecured notes and preferred shares to BB- from BB+ after the chemical company's banks imposed stringent new conditions on the use of its $350 million revolving credit facility.

"These financing requirements create considerable new hurdles for the company given the difficulties of locating new financing sources in today's high-yield chemicals markets," Fitch said in announcing the downgrade. "They also suggest that the company's bank group may be less willing to show forbearance than Fitch had previously considered."

S&P in turn downgraded NOVA a full three notches to CCC+ from B+, and said NOVA would remain on CreditWatch - meaning another downgrade is possible - on the agency's concern about the banks' requirement that Nova raise $100 million by the end of this month to maintain access to its credit facilities, as well as raising another $100 million by June 1.

The massive downgrade, the agency said, "reflects what we view as NOVA Chemicals' liquidity issues in light of the large debt maturities it faces in the next 18 months, heightened risk of covenant violation in the second half of 2009, and expectations of weak cash flow generation because of what we see as a severe cyclical downturn in the industry."

Rite Aid surge slows

A trader saw Rite Aid's bonds trading a little lower, after several consecutive sessions on the upswing at the end of last week; he quoted its 9½% notes due 2017 at 28.5 bid but said that he "did not see that much to warrant any notice" of them.

Another trader said that Rite Aid was "pretty much unchanged," its 9 3/8% notes due 2015 hanging in at 28 bid, 30 offered.

Yet another trader also saw the Camp Hill, Pa.-based drugstore chain operator's bonds mostly steady, with the 8 5/8% notes due 2015 staying at 28 bid and its 7½% notes due 2017 also stable at 59.

However, he did see the company's 10 3/8% notes due 2016 rise to 67 bid from prior levels at 64.5, though only $1 million of the bonds traded.

The Rite Aid bonds had fallen badly last Tuesday on what market participants saw as a reaction to the previous solid rise in the bonds, which one analyst said had been overdone, as well as a ratings downgrade from Moody's and a decision by the company's lenders to cut its availability under an asset-based credit revolver, forcing Rite Aid to scramble to make up those funds from another loan.

But just as the previous rise had been overdone, so was the selloff, sparking three straight sessions at the end of last week which pushed those bonds back up, helped by the company's announcement of a 1% rise in January same-store sales from year-earlier levels.

Abitibi ahead on asset-sale anticipation

AbitibiBowater's 8 3/8% notes due 2015 got a 1 point boost to 15 bid, 16 offered, on news reports that the paper producer may sell its Canadian hydroelectric assets - although some analysts are skeptical whether the deal will really do it very much good in the long run.

Canadian newspapers were reporting Monday that Montreal-based Abitibi is close to a deal to sell its lucrative Ontario hydro assets to a unit of Brookfield Asset Management; back in December, Abitibi announced it accepted a non-binding proposal to sell its 75% stake in its Ontario hydroelectric generating stations for $197.5 million.

Abitibi needs to chop down its $6 billion debt load, including a $347 million secured loan coming due at the end of March, followed by another $600 million due by next summer.

Abitibi has said it is committed to reduce its debt by $1 billion over three years and plans to sell $750 million worth of assets by year-end.

However some analysts have expressed skepticism over whether Abitibi can manage to monetize all of those assets - and even whether such sales will help it stave off what may be an inevitable restructuring.

"We don't understand how it's going to make it through the medium and long-term," analyst Paul Quinn of RBC Capital Markets said in a research note on Monday.

Royal Caribbean runs aground again

Royal Caribbean's bonds - which fell last week after the cruise-ship operator reported sharply lower than expected quarterly earnings - remained marooned in troubled waters on Monday.

A market source saw its 8¾% notes due 2011 trading at around the 75 level, down more than 5 points on the session.

At another desk, a trader saw those bonds even lower, at 74 bid, down nearly 7 points from Friday's levels, on $6 million traded.

Royal Caribbean reported that net income fell 98%, to $1.4 million, or just a penny per share, from $70.8 million, or 33 cents per share, a year ago; analysts on average were looking for earnings of 5 to 10 cents per share. For the full year, earnings totaled $573.7 million, or $2.68 per share, down from $603.4 million, or $2.82 per share, in 2007. And 2009 doesn't look any better; faced with softening consumer spending for leisure, the company warned of a first-quarter loss between 30 cents and 35 cents per share; it said full-year 2009 earnings will likely come in at only a little more than half of 2008's already-shrunken profit, at no better than $1.40 per share. Those projections are worse than analysts' consensus expectations.

B/E off on cautious guidance

B/E Aerospace Inc.'s bonds were seen about a point lower - though on restrained trading - after the Wellington, Fla.-based manufacturer of airplane seats and other aircraft interior components reported fourth-quarter numbers and released guidance for the current first quarter and for the full year.

A market source saw B/E's 8½% notes due 2018 down about a point at 93.5 bid, though on relatively light dealings, although at another desk, a trader only called the bonds down ¼ point on the day, on $2 million traded.

The easier bonds were in marked contrast to the company's shares, which pushed skyward, as the results, excluding unusual one-time items, exceeded analysts' expectations; they ended up $1.12, or 11.58%, at $10.79. Volume of 4.8 million shares was 2 ½ times the norm.

B/E reported that in the fourth quarter it lost a net of $253.6 million, or $2.59 per share - a sharp deterioration from its year-earlier profit of $42.3 million, or 46 cents per share. However, the loss was due to a pretax goodwill impairment charge of approximately $390 million, which the company took as a result of "adverse equity market conditions that caused a decrease in current market multiples and the company's stock price" as of the end of the year, it said in its earnings announcement. Excluding that one-time item, B/E earned 53 cents per share, beating both its year- earlier gain and analysts' consensus forecasts of about a 45 cent per share profit.

Fourth-quarter sales improved to $526.8 million from $463.5 million, helped by the contribution from the Consumables Solutions distribution business which B/E bought last July from Honeywell International's aerospace unit; however, sales still came in well under the roughly $595 million Wall Street had been expecting.

However, for the full year, it reported company-record net earnings of $200.6 million, or $2.12 per share, record operating earnings of $353.8 million, and record revenues of $2.1 billion. Looking ahead, B/E projected first-quarter earnings of 40 cents per share, about a nickel less than what the analysts had been forecasting; it cited a weak product mix at the company's commercial aircraft segment, reflecting decreased retrofit shipments, decreased shipments associated with reduced new-aircraft deliveries growing out of the 58-day walkout last fall by unionized machinists at Boeing Co., a major B/E customer, and lower revenues from spare-parts sales due to cash-conservation measures by its airline customers.

For the full year, the company expects revenues to be up slightly from 2008 or approximately $2.25 billion, reflecting the inclusion of the Consumables Solutions business for the full year. But 2009 per-share net earnings are expected to be around $2 -- slightly below 2008's - "reflecting a deterioration in mix due to lower sales of higher margin aftermarket products, reduced shipments associated with new aircraft deliveries as a result of the Boeing strike and decreased retrofit shipments."

Morris mauled on missed coupon

From deep in distressed-debt territory, a trader said Morris Publishing Group LP's 7% notes due 2013 were offered at 5, versus prior levels at 13 bid, 14 offered.

The slide came after the Augusta, Ga.-based newspaper publishing company announced that it has not paid the $9.7 million interest payment due Feb. 1 on that $278.5 million of 7% bonds.

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