Junk rally moderates; Rite Aid, Motorola lead gainers; little push for autos from union contract savings

By Paul Deckelman and Paul A. Harris

New York, March 11 - The junk bond market on Wednesday tried to build on the success it saw on Tuesday, but with only limited success. While a number of credits were up in active dealings, some of them by several points, market participants said that the tone seemed to be more tentative than Tuesday's, and was not helped by a fizzling out of Tuesday's big stock market gains, as shares moved up only very modestly Wednesday.

Among the gainers, traders saw Rite Aid Corp. bonds trading up several points, as the drugstore operator's paper bounced back from recently oversold levels, although there didn't seem to be any fresh news out about the company to otherwise explain the move.

Another gainer, though on no news, was Motorola Inc., extending the recent rise in the Schaumburg, Ill.-based electronics and mobile telephone manufacturer's bonds.

Announcements by Ford Motor Co. and domestic arch-rival General Motors Corp. that they expect to reap major cost savings from revisions to their labor contracts agreed to by the United Auto Workers union appeared not to give much of a jump-start Wednesday to either company's bonds, although the Ford paper is still considered well bid for, hanging onto most of the gains it notched after Ford's recent announcement of a $10 billion debt-cutting plan.

Market indicators continue rise

A trader saw the widely followed CDX High Yield 11 index of junk bond performance - which had jumped by 1½ points on Tuesday - up again on Wednesday, quoting it at 68½ bid, 69 offered.

The KDP High Yield Daily Index meantime rose by 51 basis points to end at 49.92, while its yield tightened by 12 bps to 14.56%.

In the broader market, advancing issues widened their lead over decliners to around a three-to-two margin.

Overall market activity, measured by dollar-volume totals, rose by 10% from the levels seen in Tuesday's session.

Early rally try fizzles out

A trader called Wednesday's session "a little boring," while a second characterized the day as "a real sleeper." He said that there had been "a flurry of activity this morning, as guys came in and tried to get the rally going again from [Tuesday] -- but it seemed like it was a non-starter. There were a few trades early - healthcare moved up anywhere from a half-point to a full point in some names, pretty much across the board, so that had a good opening."

He said that at his shop, "we saw buyers of Motorola paper, we saw buyers and sellers of HOT paper [i.e. Starwood Hotels & Resorts Worldwide Inc.], saw buyers and sellers of some of the bank hybrids and some of the bank paper."

He said the energy sector "was a little firmer. There was not much going on in utilities," although a few of the names in that sector "bounced back," like Dynegy Inc. - "we saw some buy interest" in the Houston-based electric power producer, "not only the 6 7/8% notes of 2011," which traded all day in an 87 bid context, up from recent mid-80s levels, "but also some of the other coupons."

He said "the consumer products sector just sat there, which is kind of surprising, because they had been viewed as defensive names."

Some of the selling they did see "was in the higher-dollar issues - things trading closer to par, with low coupons."

He also said that he "didn't really see much going on in CCCs today. I know they tightened [Tuesday] - the CCC index was up, but I don't know why. I haven't seen people coming in and buying CCCs."

Overall, he said "volume was pretty good," although he characterized the activity that took place during "a good part of the day" as "a Texas standoff, where buyers wouldn't move and sellers wouldn't move." He said "it got very, very quiet between 10:30 [a.m. ET] and 3:30 [p.m. ET] - then there was a flurry of activity, and now it's gone to radio silence again."

Yet another trader said that Wednesday represented "sort of an abrupt halt from [Tuesday], when there was definitely accounts coming off the sidelines that had not been playing for a couple of weeks. Today, there seemed to be some confusion about whether the equity market [rebound seen Tuesday] was a bear market rally, or was it really that we had hit bottom and this is the point to jump in. Quite honestly - no one knows that answer."

Wednesday's stock market results gave little clue. After surging mightily on Tuesday on the strength of positive profit predictions about the troubled banking giant Citigroup, shares only crept up on Wednesday, with the bellwether Dow Jones Industrial Average gaining 3.91 points, or 0.06%, to end at 6.930.40; the key market measure had zoomed some 379 points on Tuesday. The Standard & Poor's 500 index rose 0.24% Wednesday, while the Nasdaq composite market measure gained 0.98%.

With equities proving to be little help, over in Junkbondland, he said, "most people were really holding back." Although he acknowledged that "there were some good gains and decent volume," he stopped short of calling Wednesday's session very active. "There was decent volume - but it was different [from Tuesday's junk jump] by all means."

Hospital issues looking healthy

He saw Community Health Systems Inc.'s 8 5/8% notes due 2015, sometimes considered a reliable proxy for junk market activity because of its great size and widespread distribution, up 2 points at 92.5 bid, although he added the caveat that "I would not categorize the whole market up 2 points by any means - but it shows you the strength in our market." Some $32 million of the Franklin, Tenn.-based hospital operator's bonds changed hands.

In that same sector, he saw Nashville-based hospital operator HCA Inc.'s 9¼% notes due 2016 up 3 points on the session at 89 bid, on $12 million traded, calling it "a nice move - in fact, one of the biggest upside movers."

Aramark shows improvement

A trader saw Aramark Corp.'s bonds again "pretty active - there were people scrambling around to buy it." He said "there seemed to be a number of people out there trying to chase that, or at least get their hands on it." He saw the 8½% notes due 2015 "anywhere from 86 to 88, all day long, on good volume."

Another trader saw the Philadelphia-based food services and uniform provider's bonds up nearly 1½ points at 86.875 bid, on $40 million traded, making it one of the most heavily traded issues on the day - only Freeport-McMoRan Copper & Gold Inc.'s 8 3/8% notes due 2017, which turned over $50 million, was busier.

The trader said that Aramark's $1.2 billion deal might be considered something of a barometer because "I see it moving up and down with the market every day."

Meanwhile, he saw the Freeport bonds up 1½ points at 87.75.

Another trader agreed that the Phoenix-based copper and gold mining company's bonds "caught a pretty good bid today, up a couple of points."

Motorola continues moving up

A trader said of Motorola that "there were some buyers of their paper around," although he had seen no news out on the company. He said that the buying was "pretty much out the maturity curve," meaning the longer issues, "where people seemed to express interest."

A trader saw Motorola's 8% notes due 2011 firm to 92.25 bid.

Rite Aid has a rebound

A trader said that Rite Aid's bonds "were up 5 [points], down 5, with that kind of volatility becoming the norm."

He said that the Camp Hill, Pa.-based drugstore operator's bonds had "sold off 10 to 15 points in the last two weeks," citing liquidity concerns and market rumors that the company might be increasing its bank debt, putting even more structurally senior debt above the bonds.

"It sounds like there's been a lot of activity."

However, in Wednesday's dealings, he saw Rite Aid's 7½% notes due 2015 at 46 bid, 47 offered, "up a bit from [Tuesday], a few points."

He saw the 9½% notes due 2017 "pretty active" at 21 bid, 22 offered, although the bonds had gotten as high as 23/25. Still, they were "up a couple of points, maybe 2 or 3 points," versus Tuesday. "So there was some activity - and a lot of volatility."

Another trader said that Rite Aid "looks like they got some first aid," seeing the 91/2s at 21, some 2 points better, on $22 million traded.

Savings news no real boon to Ford, GM

A trader saw Ford Motor Co.'s 7.45% bonds due 2031 at 28.75 bid, off slightly from 28.875 on Tuesday on $5 million traded, apparently not much helped by company statements touting the savings it expects to realize from its new agreement with the United Auto Workers union. Ford anticipates $500 million in annual savings from the changes agreed to by the union, bringing its hourly wage base down to about the $55 level from around $70, which it says puts it "in the ballpark" with U.S. operations of overseas carmakers like Toyota and Honda, whose costs average about $49 per hour.

At another desk a trader saw the long Ford bonds down a point at 27 bid, 28 offered.

Yet another said "they ended right around that 27.5-28.5 [bid] range," estimating the bonds closing at 28 bid, 29 offered. "There's been some activity in that name today," he declared, "but I guess it wasn't exactly not expected.

"Things are trading - but I wouldn't put it down as very active."

The first trader saw Ford Motor Credit Co.'s 7 3/8% notes coming due on Oct. 28 at 84.5 bid - which translates to a 37% yield to maturity - down from 85.125, with $2 million traded.

Elsewhere in the autosphere, a trader saw General Motors's benchmark 8 3/8% bonds due 2033 at 12.5 bid, down from 12.875, on $8 million traded, while GM's 49%-owned financing arm GMAC LLC's 5 5/8% notes maturing on May 15 at 90 bid, or a 77% yield to maturity, up from 88.5 bid, on $2 million traded. GM too said it expects to reap big savings from changes in its union contract, perhaps even more than double Ford's.

Another trader said that he "didn't see" any impact from GM's predictions of cost savings from its amended UAW contract, pegging the long bonds in a 12-14 context.

"It just seemed like there was some trade, some activity. But I don't think that's much of a change. If they had ended up at 14, they would have been up for the day - but they didn't," ending at 12 bid, 13 offered, which called "up a little."

Financials draw some interest

A trader said that "Citicorp [i.e. Citigroup Inc.] was an active name." He said there was interest in the ostensibly investment-grade rated bank, "as well as some of the insurance names. You've got guys dabbling in some of that," although he said there was "nothing significant" going on - it's just new. It didn't seem to be that big a deal, but we did see some crossover buying."

Of all of the names in that sector, however, he said that Bank of America Corp. "probably saw more interest than any of the other names."

Elsewhere among financial names, a trader saw Lehman Brothers Group Holdings' various issues of bonds holding "right around" the 13 level where the bankrupt New York-based investment bank's bonds have recently been trading, in a context of 12.75 -13.75.

A trader said that E*Trade Financial Corp.'s 12½% notes due 2017 firmed by ½ point to a round-lot level of 41.5 bid, on $3 million traded, even as the company's shares lost 8%, after Fox-Pitt Kelton said there were likely more losses in its loan and securities portfolios, meaning the company may need to raise more capital to maintain adequate levels. He also saw the company's 7 3/8% notes due 2013 trading around 30 bid and its 8% notes due 2011 were at 38. Although there were no recent round-lot levels to compare those quotes to, both issues had been some points higher of late in odd-lot trading.

A trader said Washington Mutual Inc.'s senior holding company notes, like its 5¼% notes due 2017 were trading at 85.5 bid, 86.5 offered, on "some good volume." He saw the failed Seattle-based thrift operator's subordinated holding company notes, like the 4 5/8% notes due 2014, "up a couple of points" at 61.5 bid, 63.5 offered, although he said he did not see much volume in the latter. Traders say the bonds have been firming ahead of an expected meeting, which could take place as early as this week, to set recovery valuations.

Big contract gives no bounce to Bombardier

A trader said that he "did not see a single request for an offering" on Bombardier Inc. paper, such as its 8% notes due 2014, "and really, we were not aware of any paper trading," even after the Montreal-based aircraft and railroad equipment maker announced that it had snagged its first contract for a jetliner-sized plane, with Germany's Lufthansa, Europe's second-largest airline operator, putting in a $1.53 billion offer for 30 of Bombardier's new 110-to-130 seat CS 100 jetliners, which will go into service in 2013 and are intended to compete with Boeing's 737 and Airbus' A318-319-320.

Bombardier up until now has exclusively built smaller craft known as regional jets that are mostly used by major airline feeder subsidiaries such as airline industry leader AMR Corp.'s American Eagle Airlines for carrying loads of under 100 passengers. It said Lufthansa, already a customer for its regional craft, is buying the bigger planes for its Swiss International Airlines unit, has the option to double the order, and said it is shopping the plane around to several other airlines and jet leasing companies.

Primary 'closed'

The new issue market remained quiet on Wednesday.

"Right now the primary market is closed," said a banker who expressed a view that surfaced in four separate conversations with sell-side sources during the mid-week session.

There are two different but related reasons, these sources say.

Recent issues trading off

The first reason is that some of the recent issues which had been holding above new issue prices in secondary trading lately have tended to sell off.

This category includes, but is not limited to, the Denbury Resources Inc. 9¾% senior subordinated notes due 2016 which priced at 92.816 on Feb. 10, the Chesapeake Energy Corp. add-on to its 9½% senior unsecured notes due Feb. 15, 2015 which priced at 97.75 on Feb. 11, and HCA Inc.'s 9 7/8% senior secured second-priority notes due 2017 which priced at 96.673, also on Feb. 11, a high-yield syndicate source said Wednesday.

However among the underwater deals of recent vintage one in particular continues to be singled out: Plains Exploration & Production Co.'s 10% senior notes due 2016, which priced at 92.373 on March 3,

That paper was at 89¼ bid at Wednesday's close.

It was at 90 bid on Tuesday, according to a trader, who noted that the Plains Exploration 10% notes due 2016 had gone as low as 88½ bid in recent trading.

For the buy-side, which had enjoyed watching prices improve on notably cheap deals that priced in December 2008 and January 2009, the new issue market has lost some of its luster, the sell-siders reason.

Rising new issue premiums

The second reason that the primary market may be temporarily closed is a dramatic rise in the new issue premium, sources say.

At face value it could be 75 basis points to 150 basis points, according to a syndicate official.

However the spike in the high-yield new issue premium could be considerably more dramatic, the banker added.

Anixter International Inc.'s new 10% senior notes due 2014, which priced late last week at 92.625 to yield 12%, are reckoned to have priced at a 300 bps premium to that company's existing paper.

It may not be the best marker, the source conceded, noting that the $200 million face amount of bonds that priced in last week's transaction does not provide the kind of liquidity that investors prefer. Also the buy-side perceives some cyclicality with respect to the name.

Anixter no doubt paid something for both the relatively low liquidity and its possible cyclicality, the sell-sider said.

Nevertheless, to provide some sense of the trajectory of the new issue premium the banker pointed to the Videotron Ltee. add-on to its 9 1/8% senior notes due April 15, 2018, which priced at 98.625 to yield 9.35% in an upsized $260 million issue on Feb. 26.

That deal came at a 50 basis points concession to the company's existing paper.

Hence, using the most extreme recent examples, Anixter which paid 300 bps and Videotron which paid 50 bps, the new issue premium could have risen as much as 250 bps between Feb. 26 and March 6.

Dole price talk pending

The only deal on the active forward calendar is the Dole Food Co. Inc. $325 million offering of senior secured notes due 2014 led by joint bookrunners Deutsche Bank Securities and Banc of America Securities.

The roadshow ended Wednesday, and price talk is expected on Thursday.

Some market sources had anticipated hearing price talk on Wednesday. However none was available as Prospect News went to press Wednesday night.

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