Starwood continues ratings-fueled rise; more upside for Ford Credit

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - Bonds of Starwood Hotels & Resorts Worldwide Inc. were seen up for a second straight session Tuesday in the wake of Monday's announcement by Moody's Investors Service that it was raising the White Plains, N.Y.-based lodging giant's credit ratings to investment-grade levels.

Also on the upside again was Ford Motor Credit Co., still benefiting from investor speculation that parent Ford Motor Co. may consider selling a stake in its valuable finance unit, as a way of raising capital and lowering its borrowing costs by improving Ford Credit's ratings profile.

Jean Coutu Group Inc.'s subordinated bonds continued to firm from the lows they hit last week after the Canadian pharmacy company announced plans to sell its United States drugstores to Rite Aid Corp., as investors in those bonds gear up to challenge the company's assertions that it is not required to offer to buy them back.

The high yield primary market continued to amble along, not doing too much as players marked time and waited for the upcoming Labor Day holiday break.

And even in the secondary market, traders said, "there was not a lot going on," in the words of one.

"It gets worse and worse, quieter and quieter every day," said another, noting that the aftermarket too is looking forward to Friday's scheduled abbreviated session (The Bond Market Association has recommended a 2 p.m. ET close for U.S. debt markets), and the full market shutdown on Monday.

In the interim, though, while activity was restrained, "there was some movement," said a trader, though he added that it was "not a whole heck of a lot of activity. A couple of things traded early, and then died on you."

A source from a hedge fund marked high yield firmer Tuesday morning, and specified in an email message that the CDX 100 was trading one-sixteenth higher relative to Monday's close.

The source added that the early firming had taken place against a backdrop of weakness in Treasuries ahead of the $36 billion of two- and five-year government paper to be auctioned this week.

This source also commented that there appears to be some gloom on the consumer front, with the Conference Board's August consumer confidence index dropping to 99.6 from 107.0 in July - the lowest since last November - and consumer expectations about inflation for the coming year up to 5.5% in August from 5.1% in July.

Meanwhile in the mid to late afternoon portion of Tuesday's session, a buy-side source who focuses on both junk bonds and bank loans conceded that the market was possibly a tad higher, but stipulated that it is difficult to say that the market has moved one way or another "when nobody is in."

The source did allow that the auto sector felt a little better, but added that what transpired on Tuesday was far short of a rally in junk.

The source also specified that Treasuries, which had sold off earlier Tuesday, were a couple of ticks higher later in the session.

Following the Tuesday close a high yield syndicate official marked the broad market unchanged on the day, but confirmed that Treasuries were better.

This source marked 10-year government paper closing with a 4.779% yield, lower than Monday's close of 4.793%.

Primary remains quiet

As has been the case since the middle of last week, the new issue market produced no news whatsoever on Tuesday.

Nor was there any news regarding the post-Labor Day primary market, when business is widely anticipated to pick up.

A sell-side source noted seeing some new issue news from the bank loan market but none from the junk bond market.

Sources who commented on Tuesday said that the post-Labor Day week, itself, may not see a huge amount of primary market activity - although there will be some, they said.

Rather the consensus seems to be that the new issue calendar should see a gradual build, but that by late September and early October the new issue calendar could be formidable.

Starwood rises on ratings

In trading, one name a trader saw see as a little better was Starwood, whose bonds had also risen on Monday as Moody's upped the company's ratings from a high junk Ba1 to a barely investment grade Baa3, with a stable outlook. The ratings service cited Starwood's debt reduction from asset sale proceeds, its improved credit profile from higher earnings and lower debt levels "and a more consistent financial policy."

The Moody's move follows a similar upgrade to investment grade on July 26 by Standard & Poor's, which raised the ratings to BBB- from BB+. Fitch ratings still considered Starwood a junk credit, at BB+.

The trader saw Starwood's 7 3/8% notes due 2015 move up ½ point to 105.5 bid, 106.5 offered.

At another desk, a source said that the company's 7 7/8% notes due 2012, which had moved up more than 1½ points on Monday, tacked on another point to end at 108.25.

Yet another source saw those bonds up about ¾ point at 108.375.

Ford Credit firmer

Ford Credit's 7% notes due 2013 were seen having moved up to a closing level around 92 bid from Monday's finish at 91, although at one point those bonds got to be as good as a 94 context before backing off.

However, while the activity level was seen as fairly busy for a late-summer day, volume was off from the levels seen over the previous several sessions.

And another trader didn't even see a gain, quoting the Ford Credit bonds actually ¼ point lower at 92.5 bid, 93 offered, while the parent company's 7.45% notes due 2031 were also ¼ point down, he said, at 78 bid, 78.5 offered.

The Ford bonds, and those of its credit arm, had firmed smartly on Friday and again on Monday on continued market buzz that the embattled Number-Two domestic carmaker might follow the recent lead of arch-rival General Motors Corp. and sell a sizable stake in the credit unit. GM sold 51% of its General Motors Acceptance Corp. financing unit to a coalition of private-equity investors this past spring for $14 billion.

The Detroit News reported over the weekend that Ford might consider selling "a significant stake" in the Ford Credit arm, quoting an analyst as saying that such a sale could bring $6 billion into the carmaker's coffers - a welcome tonic for Ford, which has already lost $1.4 billion in the first half of this year alone, as sales of its popular pickup trucks and sport-utility vehicles have tumbled.

Besides giving Ford more liquidity, such a sale, should it occur, could lower the car company's bloated cost of borrowing money, since the presence of a strong financial buyer, particularly if it has a controlling interest, might convince the ratings agencies to bring Ford Credit back out of junk territory. It is currently rated Ba3 by Moody's, B+ by S&P and BB- by Fitch.

Speculation that Ford might be willing to shop a stake in Ford Credit - something it previously said it would not want to do - grew with the Friday resignation of former Treasury secretary Robert Rubin from Ford's board of directors. Rubin stepped down to avoid any conflicts of interest, since he is also a top executive and board member of Citigroup Inc., Ford's key financial advisor - also mentioned in the media as a potential buyer of the Ford Credit stake - and his departure would seem to clear the way for greater involvement by Citigroup in helping Ford to restructure itself.

Besides a possible sale of part of Ford Credit, other potential transactions being bandied about in the media include a sale of the unprofitable Jaguar nameplate and other luxury brands, possibly to a group headed by ex-Ford CEO Jacques Nasser; Ford's possible teaming up with other carmakers in an alliance, similar to the one that GM is negotiating with Renault and Nissan; or the founding Ford family taking the company private, as it was until 1956, which would give chairman William Clay Ford Jr. and his brain trust more flexibility to try to turn the company around. Such a going-private deal might cost at least $14 billion.

Metaldyne move continues

Elsewhere in the automotive arena, GM's 8 3/8% notes due 2033 were seen unchanged at 83 bid, 83.75 offered, while GMAC's 8% notes due 2031 were ¼ point lower at par bid, 100.5 offered.

Metaldyne Corp. - whose 11% subordinated notes due 2012 have moved up over the past few sessions to around the 80 bid level from last week's levels in the mid-to-upper 70s - continued to firm Tuesday, falling back to 77 at the opening from Monday's close around 80, but then rebounding to finish at 80.75.

The Plymouth, Mich.-based maker of metal parts for Ford and the other major automakers has been firming ever since a report last week on DebtWire indicating that a potential buyer might soon emerge, although there has been no follow up seen to that initial report, people in the market said.

Jean Coutu bondholders seethe

Apart from the automotive area, traders saw Jean Coutu's 8½% notes due 2014 firm by about a point on Tuesday to around the 94 level, continuing the better trend that was seen on Monday, when the bonds also rose about a point.

Those bonds have recently ridden a roller-coaster, jumping first from levels around 92 bid to 96 last Wednesday, when it was first reported that Jean Coutu was in talks to sell its nearly 1,900 Eckerd and Brooks drugstores to Camp Hill, Pa.-based Rite-Aid, the third largest U.S. chain, in a $3.4 billion deal.

When the deal was first announced, those bonds shot up to par levels on investors' assumption that they would be taken out using some of the deal proceeds - but then they fell back to actually close down two points on the day at 94, when Jean Coutu and Rite Aid said that the $850 million of bonds would instead by assumed by Rite Aid. Those bonds kept sliding on Friday to 92 - but began moving back up, around a point on Monday and another Tuesday, as news reports indicated that the balky bondholders have expressed their displeasure with the way things are going, and could try to challenge the company.

The subordinated bondholders are especially peeved because Jean Coutu's other series of outstanding bonds - its 7 5/8% senior notes due 2012 - will be paid down using some of the $1.45 billion cash portion of the Rite Aid deal. Those notes have tighter, more restrictive covenants in their indenture that require repayment. Accordingly, those bonds shot up from par bid to about 105 when the deal was announced, and have stayed there ever since.

A trader who saw the 81/2s hanging in around 94 bid, 94.5 offered on Tuesday explained that "if you go through the indenture [of the 81/2s, they have to buy them back] if they sell a material part of the company, and that's where the confusion lies. Their selling Eckerd's and Brooks is a major part of their operations, so [the dissident 8½% bondholders'] understanding of the wording is that the sale is a major change.

"If you and I invest our money in Jean Coutu and now they want to switch that debt to Rite Aid, well, we didn't want to invest in Rite Aid. We wanted to invest in Jean Coutu, and now they're switching it. They're trying to be slick, really, by the way they're doing it, contending that they are not really triggering those changes, but most [8½%] bondholders say 'yes you are,' because it's not the same company - Rite Aid is going to take over" the bonds.

The language in the 7 5/8s' indenture is "easy language - it's a no-brainer, that's what's going to happen. But the language in the 81/2s is worded in such a way that it's leading to a little bit of confusion."

He said that he had heard that "some of the bigger bondholders are organizing and they're getting together and there's going to be a long, drawn out fight over this."

Consolidated Containers "down big"

Elsewhere, he said that Consolidated Container Holdings LLC's10 1/8% notes "were down big," falling 4 points to around 91 bid, 92 offered. At another desk, the bonds were seen finishing at 91.375, up from their opening at 90, but well below their recent levels in the 95 area.

The packaging company said Monday that it reached a settlement agreement with Dean Foods Co. related to possible breaches under bottle and resin supply agreements. Consolidated agreed to pay $10 million to Dean Foods, which in turn waived certain claims it may have against Consolidated, a regulatory filing said.

It also said it defaulted on its credit facility as a result of contractual errors with customers and necessary restatements to previously financials. As a result of the default, the company cannot execute the amendment that was announced in July, which would have allowed for $50 million of incremental term loans and permitted additional acquisitions of up to $65 million.

Consolidated Container added that it intends to seek a waiver of the defaults and simultaneously will attempt to finalize the amendment as promptly as possible.

Energy Partners up, Stone down

Energy Partners Ltd.'s bonds remained strong in the wake of Woodside Petroleum Ltd.'s unsolicited bid to acquire the New Orleans-based oil and gas exploration and production company for $883 million, announced Monday. Its 8¾% notes due 2010, seen by a source to have closed Monday at 99 bid, up from 97 previously, were quoted Tuesday at 103.75.

However, Stone Energy Corp.'s bonds, which retreated Monday on news of that offer for Energy Partners, continued to ease on Tuesday, as the Lafayette, La.-based exploration and production company's 6¾% notes due 2014 dropped to levels around 97 bid from prior levels at par - since Woodside's offer to acquire Energy Partners is contingent upon Energy Partners shareholders rejecting the company's previously announced effort to buy Stone.

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