Continued stock rally buoys junk tone; autos lead rebound; Sprint up, busily; Tesoro hit as CFO quits

By Paul Deckelman and Paul A. Harris

New York, Nov. 25 - A third consecutive "up" day on Wall Street Tuesday finally seemed to be convincing some junk market players that maybe the worst part of the financial markets' downturn was behind them; this led to a generally much better tone in Junkbondland, with rises in most market indicators. While volume picked up from Monday's levels, it was still constrained by the approaching Thanksgiving holiday period, which will see a partial session on Wednesday, a full market close on Thursday, and another truncated session on Friday.

Among the gainers were the recently hard-hit automotive issues, even as the fate of the requests by General Motors Corp., Ford Motor Co. and Chrysler LLC for a massive federal bailout is by no means assured, since it will depend on what kind of answers the struggling automakers can give to Congress when they present a comprehensive industry turnaround plan to the legislators early next month. Even with that continued uncertainty, bonds of GM, Ford and their respective loan financing arms, GMAC LLC and Ford Motor Credit Co., were up from recent levels. The latter were seen deriving some benefit from news of the latest government initiative to re-start the credit markets, including providing support for the auto-loan sector.

One of the busiest names with strong gains was Sprint Nextel Corp., although there was no fresh news out on the Overland Park, Kan.-based wireless provider that might explain the rise.

On the downside, Tesoro Corp.'s bonds fell by several points in busy dealings, in line with a downturn in the stock of the San Antonio, Tex.-based petroleum refiner, which announced the abrupt departure of its chief financial officer but offered no explanation for that sudden exit.

Primary market activity remained shut down.

Market indicators better

The widely followed CDX High Yield 11 index of junk bond performance, which was up 7/8 point on Monday, pushed another 1 3/8 points higher on Tuesday, a trader said, quoting it at 73¾ bid, 74¼ offered. The KDP High Yield Daily Index meantime rose by 44 basis points to 47.77, while its yield tightened by 11 bps to 17.32%.

In the broader market, advancing issued led decliners by a 10-to-nine margin. Overall market activity, reflected in dollar volumes, increased by 26% from Monday's pace.

A trader said that he did not see "tremendous volume" on the last full trading session of the week, and the month, "but the market definitely had a better tone," likely taking its cue from the stock market, which was up for the third straight session - the first such hat-trick that the market has managed to pull off since late August. The bellwether Dow Jones Industrial Average, while not coming anywhere close to matching its torrid 891-point rise seen over Friday and Monday, did manage to battle back from a 161-point intraday deficit to finish up 36.08 points, or 0.43%, at 8479.47, helped by the news out of Washington that the Treasury Department and the Federal Reserve will team up to provide $800 billion to help unfreeze the market for consumer debt and to make mortgage loans cheaper and more available, hoping to revive those moribund markets. Among the broader indexes, the Standard & Poor's 500 was up on the day but the tech-heavy Nasdaq finished lower on investor fears that companies are cutting back on their high-tech capital expenditures.

But with the overall equity tone continuing to show cautious improvements - unlike recent rallies which abruptly ended after a session or two of gains - the trader said a wary hopefulness seemed to carry through to the junk market, where it seemed as though participants were breathing "a sign of relief," feeling that "the worst may finally be behind us."

However, he added, "there's still hesitation by accounts to jump in. It's more a case of people feeling around."

That having been said, though, "with this new scenario, or environment that we're in, the anxious sellers" who contributed so much to the recent market downturn by heading for the exits even on fundamentally good credits, "have all disappeared." Of course, there's a downside to that latter development; while the panicky sellers have vanished, he said, "so have the best values."

Another trader characterized Tuesday's market as "weird," and mostly marked by "a lack of interest" in doing very much.

Market benchmark keeps improving

The first trader noted that the widely followed Community Health Systems Inc. 8 7/8% notes due 2015 - seen by many as something of a bellwether for the overall market, because of the issue's great size and liquidity, its widespread distribution - and the ease with which it can be sold by accounts needing to raise cash - were again higher, as they continued to rebound from their recent lows in the mid-70s.

The Franklin, Tenn.-based hospital operator's bonds were up another point to 79 bid, although the issue was "not very active," with only about $3 million changing hands - a restrained activity level that he opined was "indicative of a pre-holiday environment."

Another market source saw those bonds doing even better, pushing above the 80 level, up nearly 3 points on the session.

Among other hospital names, the first trader saw HCA Inc.'s 9 1/8% notes due 2014 as "another big upsider," up nearly 4 points on a round-lot basis, to 78 bid, while Tenet Healthcare Corp.'s 7 3/8% notes due 2013 firmed to 70 bid from 67.75.

Auto credits get in gear

In the autosphere - roiled in recent days by the now-you-see-it, now-you-don't nature of the prospect for a government bailout of Detroit's distressed Big Three - a trader saw General Motors' benchmark 8 3/8% notes due 2033 down a point in round-lot dealings to 15 bid, on volume of $14 million, the busiest of any GM issue.

He also saw the GM 7.20% notes due 2011 up ¼ point at 19 bid, with $12 million of the bonds changing hands, and saw its 8¼% notes due 2023 move up 1 5/8 point to 15 bid, on $5 million traded.

Another trader saw the GM benchmarks little changed at 14 bid, 16 offered, calling them "pretty blah," although he said that there had been "decent, good size" in the dealings, but a third trader pegged the bonds at 15 bid, 17 offered, which he called up 2 points on the session.

A market source at another desk quoted GM's 6¾% bonds due 2028 up 4 points on the session at 14, while its 7 1/8% notes due 2013 gained more than 3 points to end at 18.5 bid.

One of the traders saw solid movement in GM's 49%-owned GMAC financing unit, particularly in its short paper, "which continues to be active." Probably the busiest issue was its 6 7/8% notes due 2011, last seen trading in round-lots around 36 bid, up 3 points on the day, at 36, with $15 million of the bonds changing hands.

Other shorties moving around included the 5 5/8% notes coming due in May, up 1¾ points to 67 bid, on $7 million traded.

GMAC's 8% bonds due 2031 were up perhaps ¾ point, he said, to 25.75 bid, on $5 million traded.

Another trader said the GMAC long bonds "pretty much stayed where they were" on Monday, around a 25-26 context.

A market source said GMAC's 7¾% notes due 2010 jumped more than 5 points to 51 bid, while its 6 7/8% notes due 2012 were up perhaps a point around the 33 level.

A trader saw Ford's benchmark 7.45% bonds due 2031 unchanged at 16 in round-lot trading, on relatively light volume of $3 million. However, another trader called the Ford issue up 1½ points at 17.5 bid, 18.5 offered.

A market source called Ford Credit's 7% notes due 2013 some 3 points better at 41 bid, while its 5.70% notes due 2010 were being quoted up 4 points on the day at 57. However, its 7.80% notes due 2012 lost 2 points to around the 40 mark.

A trader at another desk saw Ford Credit's 7¼% notes due 2011 shoot up 4 points to 42.5 bid, while its 7 3/8% notes, also due in 2011, pushed up to 43.25 from 42 earlier.

There was no fresh news out on Tuesday about the carmaker's efforts to convince Uncle Sam to open his seemingly bottomless wallet and front them $25 billion, other than dire warnings that the corporate chieftains of GM, Ford and Chrysler will have to jump through hoops and provide skeptical congressional leaders with proof that they will make serious changes in their companies' business models, from slashing executive pay and perks on down, as well as demonstrating that if these changes are undertaken and the money provided, the carmakers will be a viable industry. They are racing against an early-December deadline to draw up a viable strategy plan to present on Capitol Hill.

But the sector got some good news in the form of the expansive Fed-Treasury effort to revive the moribund mortgage and consumer credit markets. Besides buying $100 billion of debt issued by Fannie Mae, Freddie Mac and other government-sponsored enterprises and then buying another $500 billion of mortgage-backed securities guaranteed by the GSEs, the Fed will start a new $200 billion lending program to unfreeze the market for car loans, student loans, and other forms of consumer credit, with Treasury agreeing to absorb the first $20 billion of any losses. The Fed will lend money to investors via the primary dealers, with the investors using the money to buy AAA-rated securities tied to consumer debt, providing new liquidity for those frozen markets.

Sprint bonds continue to run

Elsewhere, a trader said that Sprint Nextel's 6% notes due 2016 were "probably the most active issue," with over $22 million traded by mid-afternoon. Those bonds - which had "gotten hammered over the last few weeks," he said, but which had jumped by 3 points on Monday - were up about another roughly 3 points on Tuesday to close at 56. He didn't see "anything sticking out," news-wise, that might explain the two-day surge.

Another market source saw the company's 7 5/8% notes due 2011 up nearly 4 points, in busy trading, to levels just below 74 - quite a rebound from a similar-sized drop which the source saw those bonds take on Monday.

Meanwhile, the company's 6.90% notes due 2019 were seen 4 points better at 56 bid.

In other telecom names, the first trader saw Texas-based cellular operator MetroPCS Wireless Inc.'s 9¼% notes due 2014 trade up to 81.5, a 1½ point gain on $12 million bonds traded, but had seen no news that might explain that rise. He did say there might have been some positive analyst comment out about the company.

On the other hand, Qwest Corp.'s 6 7/8% notes due 2033 lost more than a point on $10 million bonds traded to finish at 60.25 bid

Tesoro takes a tumble

A big downsider was Tesoro's 6¼% notes due 2012, a trader said, comparing their 71.375 finish with the most recent round-lot close of 73, on $15 million traded. He noted the news of the sudden departure of the company's chief financial officer, Otto Schwethelm, as a likely factor.

Tesoro said in a Securities and Exchange Commission filing that Schwethelm, who was also its senior vice president and treasurer, had left the company "effective immediately," and did not offer any explanation of the circumstances surrounding his abrupt exit.

That uncertainty pushed the company's New York Stock Exchange-traded shares down 23 cents, or 2.70%, to $8.30.

Schwethelm was replaced by a former CFO, Gregory Wright, who has already been serving as an executive vice president and who will continue in that capacity, in addition to his CFO duties.

Junk financials mixed

Junk-rated financial issues were seen mixed, in contrast to their investment-grade rated cousins, which continued to firm on news of the latest government efforts to help unstick the stuck credit markets.

A trader saw Lazard Group's 6.85% notes due 2017 drop to 59.5 bid, on $6 million of bonds traded, following the news that Moody's Investors Service had changed its outlook on the company's B1 senior unsecured rating to "stable" from "positive" previously, reflecting the ratings agency's expectations of a more difficult operating environment facing Lazard's M&A advisory business and the impact of sharp declines in asset valuations on revenues in the asset management businesses.

A trader saw iStar Financial Inc.'s 5.15% notes due 2012 at 36 bid, 38 offered.

Lehman Brothers Group Holdings Inc.'s bonds were languishing around 10 bid, 11 offered.

A trader saw Washington Mutual Inc.'s bank paper at 26 bid, 27 offered, "maybe a little better" on the day. He saw its subordinated holding company bonds at 18 bid, 20 offered, and its senior holdco paper at 58 bid, 60 offered.

Realogy Corp.'s 10½% notes due 2014 lost 1½ points to end around the 18 level. However, another real estate name, Rouse Co.'s 3 5/8% notes coming due next March, was seen up 3 points at 29 bid, a market source said, in line with a solid rise in the shares of corporate parent General Growth Properties Inc., on news that savvy hedge-fund operator William Ackman's Pershing Square Capital Management LP, had bought a 20% stake in the shopping-mall real estate investment trust company through shares and swaps.

Hovnanian hobbled as swap offer ends

A trader said that homebuilders "were a big flop," particularly Hovnanian Enterprises Inc, in which he saw "not much trading" and mostly unchanged levels, even with the news that Hovnanian's effort to take out existing debt by offering new 18% notes had been pretty much a resounding failure, with just a small fraction of the outstanding bonds tendered before the offer expired (see related story elsewhere in this issue). Another trader saw Hovnanian's 8% notes due 2012 at 28 bid, none offered, in over-the-counter trading.

However, yet another market source quoted the Red Bank, N.J.-based builder's 6 3/8% notes due 2014 some 2 points better at 27 bid.

And a high-yield mutual fund manager said homebuilders benefited from news of the federal government's "term asset-backed securities loan facility" for as much as $200 billion to support debt issuance backed by various forms of loans.

Pulte Homes, Inc.'s CDS were 45 bps tighter on the day at 440 bps bid, 460 bps offered, the buy-sider added - tighter from 495 bps bid, 515 bps offered previously.

"That's because mortgage rates are going to be coming down," the investor asserted.

"That's going to help get rid of the existing supply of homes out there, if we can get mortgage rates down.

"In the last week Bernanke has clearly said that they're going to focus on collapsing the spread between the 10-year Treasury and 30-year mortgage."

Treasuries had a huge move on Tuesday, with the yield on 10-year governments hitting an all-time low, the source said. He spotted the 10-year note yielding 3.09%, 23 bps lower on the day, dipping below the record level set in 2003.

The intraday dollar-price was 105.28 bid, which was the high, the buy-sider said, adding that just before the Tuesday close the note was trading at 105.20 bid.

Healthcare better

Beyond the housing sector, healthcare also got a lift on Tuesday.

HCA Inc.'s second-lien notes were up 3 points, Community Health Systems Inc.'s bonds were up 2½ points and Tenet Healthcare Corp.'s unsecured paper was up 3 points.

Outstanding bonds of Freescale Semiconductor Inc. and Nortel Networks Corp. were up 3 to 4 points each, while DISH Network Corp. bonds were up 3 points, according to a high-yield syndicate official.

Meanwhile the CDX closed at 73 7/8 bid, up 1 3/8 points on the day, a sell-side source said.

Lately that index has lagged cash bonds in both the upward and downward swings of the market, sources say.

Hovnanian: 'A disaster'

The new deal market remained silent on Tuesday, and one syndicate official said that it is entirely possible that it will remain that way for the rest of 2008.

However market-watchers remain tuned into a parade of distressed exchange deals - in which issuers are attempting to monetize drastic price depreciations in their securities in exchange for higher-yielding and/or better secured paper - now wending their ways through the market.

However results from the first of these deals, an exchange from Hovnanian Enterprises, Inc., were a disaster, sources said.

Out of a possible $250 million of notes that could have been involved, slightly more than $29 million were exchanged.

Flaws in the deal included having third-lien debt being the last to mature in the capital structure, said one sell-sider who tracked the transaction.

Also, troubling was the fact that the 8% senior notes due 2012 would mature inside of the second-lien notes.

In addition the deal provided no covenant protection against future exchanges that could add additional third-lien paper, the source added.

"It only really made sense for the bondholders who held the longer-dated senior unsecured notes."

Another sell-sider from a different institution said investors are going to look at these exchanges in terms of where the deals will get them later.

"If the offer doesn't keep them at status quo, or put them in a better position, there is no incentive to take it."

Realogy squabble

Meanwhile Realogy Corp. disclosed that it received a letter Monday from a law firm representing holders of a majority of its outstanding 11% - 11¾% in kind - senior toggle notes due 2014 objecting to the company's recently announced exchange offer.

Among the claims, the holders allege that the company's invitations to holders of its 10½% senior notes due 2014, senior toggle notes and 12 3/8% senior subordinated notes due 2015 to participate as lenders in the company's new second-lien term loans constitute a breach of indentures.

On Nov. 13, Realogy announced an offer to exchange some of its outstanding notes at a discount for up to $500 million of the new second-lien incremental term loans.

The company said that it believes, in consultation with its counsel Skadden, Arps, Slate, Meagher & Flom LLP, that the assertions contained in the letter are without merit, and plans to proceed with the offers as scheduled.

GMAC could get done

GMAC LLC's massive $38 billion exchange and tender deal for some outstanding GMAC and ResCap debt securities could get done provided GMAC's application to the Federal Reserve Board of Governors for approval to become a bank holding company is accepted, according to a buy-side source.

And the Fed should accept that application, the buy-sider contended.

"If they want to get some auto loans and housing loans going again, that's the way to accomplish it.

"And clearly, with the actions today that's what they want to happen."

The GMAC exchange deal, which is being led by Banc of America Securities, Citigroup, Goldman Sachs and JP Morgan, launched last Thursday.

GMAC is offering to purchase and/or exchange any and all of several notes series for either new securities, consisting of a combination of newly issued senior guaranteed notes for the old GMAC notes maturing prior to 2031 or a combination of new guaranteed notes and newly issued 8% subordinated notes due 2018 for old GMAC notes due 2031, and newly issued 5% perpetual senior preferred stock.

Station Casinos, Interface launch exchange

Elsewhere two more distressed exchanges launched Tuesday.

Station Casinos, Inc. launched an exchange offering new 10% senior secured term loans due 2016 and new 10% junior secured term loans due 2016 to holders of its 6% senior notes due 2012, 7¾% senior notes due 2016, 6½% senior subordinated notes due 2014, 6 7/8% senior subordinated notes due 2016 and 6 5/8% senior subordinated notes due 2018.

Deutsche Bank Securities is leading that deal.

Prices offered for the existing subordinated notes are as low as $0.17 on the dollar.

"That's a big percentage move," a buy-side source said, while spotting the Station Casinos 6½% senior subordinated notes due 2014 at 5 bid, 7 offered on Tuesday.

Also after the New York close, Interface, Inc. announced an exchange offer relating to holders of the $152.588 million of outstanding 10 3/8% senior notes due 2010. Interface is offering $306 in cash (including a $20 consent payment) and $700 of new replacement 13½% senior notes due 2012 for each $1,000 principal amount of the 2010 notes.

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