GM bonds skid on SEC probe, bankruptcy buzz; Argo Tech zeroes price; funds see $91 million outflow

By Paul Deckelman and Paul A. Harris

New York, Oct. 27 - General Motors Corp. bonds took the low road Thursday, falling in response to the company's announcement that federal regulators said had issued subpoenas as part of a probe into its accounting practices. Traders said the bonds were also hurt by something that at one time would have been unthinkable - market speculation, however unfounded, that the once-mighty GM, the world's largest carmaker, might consider a bankruptcy filing.

A source said that the rumors apparently began overnight in Asia, and were sparked by news of the U.S. Securities and Exchange Commission's probe of pension-related issues at GM. The source further commented that the buzz was strong enough to prompt a GM corporate communications official to strongly deny that the company was considering bankruptcy.

That investor angst also pulled down the bonds of GM's financing unit, caused the bonds of rival auto giant Ford Motor Co. to also steer lower, and pulled most of the auto sector names down as well.

Meanwhile in the primary market two drive-by deals were priced totaling $443 million of proceeds.

And as things were winding down for the session, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $90.5 million more left those funds in the week ended Wednesday than came into them.

It was the seventh straight weekly outflow, following the $255.4 million hemorrhage seen in the previous week, ended Oct. 19; in that time, outflows have totaled approximately $2.624 billion, according to a Prospect News analysis of the AMG figures. Outflows have now been seen in eight weeks out of the last nine, and in 14 weeks out of the past 16. During that latter timeframe, net outflows have totaled about $3.497 billion - up from the previous week's $3.406 billion total, according to the Prospect News analysis.

For the year so far, outflows have now been seen in 34 weeks of the 43 since the start of the year, against only nine weekly inflows. Cumulative net outflows for the year total around $10.536 billion, according to the Prospect News analysis, up from $10.445 billion last week.

The latest series of outflows pretty much establishes that the junk funds have reverted to the trend seen earlier in the year, when outflows totaling about $6.776 billion were seen in 15 straight weeks from mid-February through late May, according to the analysis. After that, there was a short period in which no clear trend could be seen, with about a month of inflows and outflows showing up on alternating weeks - but since July money has been almost consistently flowing away from the funds.

While the mutual funds only comprise between 10% and 15% of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

One sell-side source remarked that the $90.5 million outflow reported Thursday afternoon is not necessarily terrible news.

It is a small outflow, the sell-sider reasoned, adding that it was eclipsed by the fact that two drive-by deals were completed during the session, an indication that the primary market is open.

Colorado Interstate prices $400 million

And in primary action Thursday, Colorado Interstate Gas Co. completed the day's biggest deal, a quick-to-market $400 million issue of 6.8% 10-year senior notes (B1/B) that priced at 99.952 to yield 6.806%.

The yield printed at a 225 basis points spread to Treasuries, on top of the 225 basis points area price talk.

Citigroup and Credit Suisse First Boston ran the books for the deal from the Colorado Springs, Colo., gas transport company.

Argo-Tech prices discount notes

Also pricing was Argo-Tech Corp. and AT Holdings' $67 million issue of eight-year senior discount notes (Caa1/B-) which were sold at a 63.598 dollar price, in a quick-to-market transaction, to yield 11 ¾%.

The JP Morgan-led note sale generated $42.6 million of proceeds for the Cleveland, Ohio, manufacturer of aircraft fuel-flow devices.

GM lower

Back in the secondary market, GM took a detour downward, propelled in that direction by market reaction to the latest piece of negative news to come out of the auto sector - the revelation, in a regulatory filing late Wednesday, that the Securities and Exchange Commission is scrutinizing GM's handling of retirement benefits and its relationship with bankrupt parts supplier Delphi Corp., formerly a GM unit.

GM said it also has received SEC and federal grand jury subpoenas involving its General Motors Acceptance Corp. financing arm, as part of "industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance."

GM's benchmark 8 3/8% notes due 2033 were down more than three points, a trader said, quoting the bonds at 74 bid, 75 offered, well down from prior levels at 77.5 bid, 78.5 offered.

"They started out that way, and never regained their footing," he said.

At the same time, GMAC bonds were also on the downside, its 8% notes due 2031 "not as bad" as the parent company's bonds, dipping to 103 bid, 104 offered before coming off those lows to end at 104 bid, 105 offered, down a point on the session.

"GM and Ford were both down" in response to the GM disclosure - and what he called the "crazy" market speculation about a possible bankruptcy filing by the giant carmaker.

Ford's 7.45% notes due 2031 were trading "at a similar price" to the GM flagship issue, falling to 73.5 bid, 74.5 offered from 77 bid, 78 offered.

The overall market, the trader said, "was very quiet and non-committal - but once the GM thing started, the crazy rumors, that was it."

GM was concerned enough about the bankruptcy rumors to flatly deny that it had any plans for such a Chapter 11 filing.

"What we're saying is the rumor is absolutely false. We are not preparing a bankruptcy filing," a GM spokesperson said on Thursday, going on to call such talk "bad information, a bad rumor. Shame on the people who continue to spread it."

The rumors appear to have started after Delphi's Chapter 11 filing earlier in the month, which raised the possibility that GM might be stuck holding the bag on as much as $12 billion of its former unit's pension and healthcare costs as a result of the bankrupt filing.

Indeed, Delphi chief executive officer Steve Miller had recently warned that GM might be "fatally wounded" in the aftermath of the Delphi filing, and said that because it faced many of the same kind of labor cost issues that drove Delphi to the courts, GM is "at risk of ending up where Delphi ended up."

At another desk, a market source saw the GM 8 3/8s dip to 73.75 from prior levels at 76.75, while its 7 1/8% notes due 2013 were two points lower at 80 bid. GMAC's 8 7/8% notes due 2012 were a point down at 97.5 and its 8s were about ¾ point lower at 103.25 bid, 103.75 offered.

Auto sector sinks

GM's bad news had a ripple effect throughout the auto supplier sector, towing most of the names lower. A trader saw Delphi's 6.55% notes due 2006 slightly lower at 66.75 bid, 67.75 offered, while another trader saw the bankrupt Troy, Mich. -based automotive components supplier's "a little weaker," with the company's 6½% notes due 2013 down a point at 66.5 bid, 67.5 offered.

Earnings hurt Dura

Dura Automotive Systems Inc.'s bonds were lower, not only on the GM news, but because the Rochester Hills, Mich.-based auto components supplier's fiscal third-quarter result showed a sharp widening of its net losses from a year ago - $6.6 million (35 cents per diluted share) in the latest period versus $2.7 million of red ink (15 cents per share) a year earlier. Revenues shrank to $535.9 million from $616.4 million in the prior-year quarter, largely due to production cutbacks - and thus smaller orders for Dura - at GM and Ford (see related story elsewhere in this issue).

A market source saw Dura's 9% notes due 2009 at 65.25, down from 66, and its 8 5/8% notes due 2012 at 85, down from 86.25 pre-numbers.

Goodyear rises on results

About the only automotive-related name that managed to buck the otherwise largely negative trend was Goodyear Tire & Rubber Co., whose benchmark 7.857% notes due 2011 moved up to 96.25 bid from 95.5, and whose 9% notes due 2015 rose to 96.5 from 95.

The Akron, Ohio-based tiremaking giant reported that its third-quarter earnings more than tripled as drivers increasingly bought premium tires rather than lower-margin low-priced brands. Goodyear earned $142 million (70 cents per share) on sales of $5 billion for the quarter, up from year-earlier earnings of $38 million (20 cents per share) on sales of $4.7 billion.

Forest products down

Outside of the automotive area, a trader saw forest products mostly weaker, with Domtar Inc.'s 5 3/8% notes due 2013 dipping to 80.5 bid, 81.5 offered from prior levels at 82 bid, 83 offered; Abitibi-Consolidated Inc.'s 6% notes due 2013 down a point at 83.5 bid, 84.5 offered; Bowater Inc.'s 7.95% notes due 2011 half a point lower at 95.75 bid, 96.75 offered; and Norske Skog's 7 3/8% notes due 2014 two points lower at 90.5 bid, 91.5 offered.

"The only one that bucked the trend" was Stone Container, whose 8 3/8% notes due 2012 were half a point better on the day at 95 bid, 96 offered.

Tenet lower

Tenet Healthcare Corp. notes were seen lower, "though not by that much," the trader said with the Dallas-based hospital operator's 6 3/8% notes due 2011 at 87 bid, 88 offered and its 6 7/8% note due 2031 at 76.5 bid, 77.5 offered, both a point lower. Investigators in New Orleans have subpoenaed dozens of staffers from Tenet's now-shuttered Memorial Medical Center, where 34 patients were found dead in the wake of Hurricane Katrina. Tenet has insisted that the patients, mostly elderly and already very fragile, had not been neglected or abandoned to their fate, but died as a result of unbearable hurricane-related conditions at the facility over which it had no control.

Refco Inc.'s bonds "were all over the place," the trader said, although he added that it was the "first day in a while" in which activity in the name was fairly quiet. He saw the bankrupt commodities trading company's 9% notes due 2012 at 65.5 bid, 66.5 offered, up from 64 bid, 65 offered previously, the note apparently buoyed by the emergence of potential buyers for the company's units.

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