Junk buying spree continues on elevated volume; Freeport McMoRan rebounds, ResCap rises, phones strong again

By Paul Deckelman and Paul A. Harris

New York, Jan. 6 - For a second consecutive session, the junk bond market moved strongly higher Tuesday, as investors looking to put cash to work came buying, and, in the absence of any primary activity, pushing up bonds that had only recently been badly beaten down. Some traders cautioned that the market seemed to be getting a little frothy - but nobody seemed ready to, as Alan Greenspan once famously put it, "yank the punchbowl away just as the party is getting started."

Numerous issues were up by multiple points, notably Residential Capital LLC, in the wake of the successful recent conclusion of parent GMAC LLC's debt exchange offer, which resulted in about 39% of the Minneapolis-based mortgage lender's outstanding bonds being tendered at a steep discount to par. However, GMAC's own lately very robust bonds were seen mostly where they had been, along with other automotive names, as that big upside move seems to have slipped into low gear.

Another gainer was Freeport McMoRan Copper & Gold Inc., whose bonds had been among the few notable losers on Monday, when most everything else was up, but which got with the program on Tuesday.

Telecommunications bonds like Cricket Communications Inc. continued to leap upward, as did those of larger sector peer Sprint Nextel Corp.

Even the recently beleaguered gaming sector - battered for months by sharply falling revenues amid consumer reluctance to spend increasingly tight money on a very non-essential luxury like gambling - was a winner Tuesday, with gains seen in names like Wynn Las Vegas LLC.

Market indicators solidly higher

The widely followed CDX High Yield 11 index of junk bond performance, which lost 3/8 point on Monday, jumped by 1 full point on Tuesday, a trader said, quoting it at 80 5/8 bid, 81 1/8 offered. The KDP High Yield Daily Index meantime zoomed 194 basis points to 56.08 - on top of Monday's screaming 113 bps rise - while its yield, which on Monday had narrowed by 43 bps, tightened another 64 bps on Tuesday to 13.42%.

In the broader market, advancing issues kept their better than-two-to-one lead over decliners. Overall market activity, reflected in dollar volumes, shot up by 50% over the pace seen in Monday's session.

A trader said that the junk market was "still cranking higher," on what surely was "a very active day," although he could see signs that "it's kind of begun to stall - but generally, you name it, it's pretty active."

"The upside volume was just enormous," another trader marveled, adding that "there is no question that our market is leap-frogging, both in [price] appreciation and in the increase in volume."

He said that "the mentality of this market is so interesting - no one wants to be the first to jump in - but once people see things moving, it's like everyone's just diving in here."

Even as he was giving price levels late in the afternoon, he said, "there are still upticks" in the volume numbers.

The first trader said "everything's getting lifted - there must be a lot of money coming in. A lot of those exchange-traded funds are needing bonds. It's just amazing."

He believed there was a confluence of technical factors such as the need to deploy cash and to cover shorts, and fundamentals, such as improved investor optimism, at least for now.

"It's kind of both - technical, because people were caught short on some stuff, and it seems like there must be money flowing in, because people certainly seem to have money to [put to] work," as well as the more fundamental factors. "It's like a perfect storm."

If anything, he suggested that the junk market "might be ready for a little pause in the action. People are trying to get the most that they can for the bonds, and I think the worm can turn a little bit here soon. Some stuff has really run up. I can see some people [saying] 'alright - I'm ready to sell'" and take some money off the table. "Maybe it will take a little step back. We're due for a little pause."

Meanwhile a high-yield mutual fund manager noted that the CDX index continues to lag cash bonds.

"The trade is to go long cash bonds and short the index because the index ran too much," asserted the buy-sider.

"Cash is what has outperformed."

As others have done during the two opening sessions of 2009, the buy-sider pointed especially to health care names.

"Some of them are trading close to par again," the investor said.

Freeport golden again

A trader said probably the most active bond of the session, from where he sat, was Phoenix-based precious metals mining company Freeport McMoRan's 8 3/8% notes due 2017, which he saw push up to 86.25 bid, up more than 2 points on the day, on volume of $71 million. "I can't remember the last time that we had that kind of volume" on an individual issue, he exclaimed.

Another trader agreed that "a lot of stuff was active," with Freeport a standout at 86 bid, 87 offered, which he termed a 4-point gain - this after the bonds had been about the only notable issue to be definitely down on Monday in an otherwise surging junk market, despite a lack of fresh news.

Yet another source saw those bonds hit a peak late in the session of 91 and change, up nearly 10 points from Monday's level, although they later came back down from that zenith.

ResCap on a roll

For the size of its rise, probably the clear leader Tuesday was ResCap.

A market source pegged the company's 8 7/8% notes due 2015 up more than 20 points on the session, moving it up to the lower 40s, this despite a lack of firm new news about the troubled mortgage lender, a unit of GMAC.

Its 6 3/8% notes due 2010 shot up to a round-lot price of 47 bid, up from 20.5 back on Dec. 19, the last previous time that there was a sizable trade, on $13 million traded.

Other ResCap paper "did not trade," a trader said, including its floating-rate notes coming due on May 22 and its 6 7/8% notes due 2015.

Another trader said its 9 5/8% notes due 2015 and 8½% notes due 2010 were "big movers," the former up 10 points at 43 bid, 47 offered, the latter up 15 points at 67 bid, 72 offered.

ResCap was seen benefitting from the recent string of good-news developments at GMAC, including the relatively successful conclusion of the latter's offer to exchange new debt, preferred shares and cash for its own outstanding bonds and those of its troubled mortgage subsidiary. Although GMAC fell far short of its goal of really cutting its debt load by having GMAC and ResCap bondholders tender some three-quarters of the two companies' more than $38 billion of bonds covered in the offer, it still managed to convince holders of about $17.5 billion, or 59% of its own $29 billion of bonds and holders of some $3.7 billion, or 39% of ResCap's $9.5 billion of paper, to go along with the offer.

GMAC has also recently benefitted from the Federal Reserve's allowing it to become a bank, despite having not really met the Fed's capital-raising guidelines, which included taking out the 75% of the bonds, and its subsequently being able to tap the $700 billion federal TARP bank-bailout program for $5 billion of fresh capital.

Autos spin their wheels

As for GMAC's own bonds, traders seemed split on where it was going Tuesday. One said that the bonds "continued to fly up," quoting its 5 5/8% notes coming due this May at 96 bid, 98 offered, up 1½ points on the day.

At another desk, GMAC's 7¾% notes due 2010 were suitably busy, rising to 90.5 bid from 88.625 on Monday, with $34 million traded. But other GMAC paper failed to follow suit, a trader said, pegging the company's 8% bonds due 2031 down a point at 60 bid, though on only $1.5 million traded. He called the 5 5/8s down 1¼ points at 96, though on only $3 million of dealings, while its 5.85% bonds maturing next week, which have moved to the upper 90s, "didn't even trade."

Activity seemed to likewise die down among the formerly busy and robust carmaker bonds, with one of the traders seeing 49% GMAC owner General Motors Corp.'s 8 3/8% bonds due 2033 at 21.75 bid versus 20 on Monday, but only on about $1 million of volume. There was even less activity in GM's 7.20% notes due 2011, which moved up to 29 bid from 26 Monday, on very thin trading.

The trader saw Ford Motor Co.'s 7.45% bonds due 2031 at 31 bid, up from 29.5, though with only $2 million traded.

At another desk, a trader pegged the GM benchmarks up a point at 20 bid, 22 offered, while the Ford long bonds were at 28.5 bid, 29.5 offered, up ½ point.

Yet another trader said that the autos were "taking a pause. Don't get me wrong - there were some trades - but the focus was not on that paper" as it was the last two weeks. "The sector was not dominating."

Ford, he said, "is off - and GM is no better [than Monday's levels]."

Although Ford and GM lagged, there was much more activity in Ford Motor Credit Co.'s paper, though not much price movement; a trader saw Ford Credit's 7 3/8% notes due this October up ¼ point at 90.5 bid, on $16 million traded, while the 7¼% notes due 2011 were unchanged at 77 bid on $16 million traded. Ford Motor Credit's 8% notes due 2016 moved up nearly 2 points to 69 bid on $12 million of turnover.

Phones still feelin' good

For a second straight session, wireless telecom bonds were seen mostly solidly higher, helped in part by better market sentiment about the sector in the wake of the pending consummation of the merger of Alltel Corp. into the larger Verizon Communications Inc., and its implications for possible renewed sector consolidation

The Little Rock, Ark.-based rural cellular carrier's 7 7/8% notes due 2032, which had risen several points on Monday, gained another point Tuesday to 101 bid, on $5 million traded.

A trader also saw strength in larger wireless operator Sprint Nextel, particularly its most active issue, the 6% notes due 2016, which climbed to 80 bid from 76.75 Monday, on $29 million traded.

The Overland Park, Kan.-based Number-Three U.S. wireless operator's 7 5/8% notes due 2011 rose to 90.5 bid from 87, on $27 million traded, while Sprint's 8¾% bonds due 2032 were nearly 4 points better at 76.25, on turnover of $22 million.

San Diego-based prepaid wireless provider Cricket Communications' 9 3/8% notes due 2014, which gained several points on Monday, gained 3 more Tuesday to end at 95, on trading of $23 million.

Tech takes off

A trader said the most active bond that he saw was First Data Corp.'s 9 7/8% notes due 2015, which "traded like water," with over $33 million changing hands. He saw the bonds at around the 70 level, up 3½ points on the session. He also saw Sungard Data Systems Inc.'s 9 1/8% notes due 2013 at 91 bid, 92 offered, up about 1 \½ points on the day, with over $20 million of the bonds traded.

Another market source saw those bonds up nearly 2 points at 91.375 bid.

Healthy gains for hospital bonds

A trader said that Community Health Systems Inc.'s 8 7/8% notes due 2015 got as high as 97 bid, 98 offered. "A lot of those bonds trade every day," he said, noting that the Franklin, Tenn.-based hospital operator's bonds - seen as something of a mirror reflecting overall market movements, since they generally jump when the market is strong and are about the first bond to get hammered down when the market is falling and accounts have to sell something - had not too long ago "been around 80."

A market source at another desk who saw that 97 level estimated a 4-point gain on the session.

Another trader also saw those bonds "continuing to trade up," rising to a round-lot finish of 96.25 bid versus 95 on Monday. He also noted that the credit's volume - which at one point in December had dwindled to around $3 million to $5 million a day - had also been increasing steadily, hitting $20 million on Tuesday.

Out of that same sector, Nashville-based hospital operator HCA Inc.'s 9¼% notes due 2016 had risen a point to 97.5 bid, on volume of $24 million, while its 9¼% notes due 2014 were really big movers, up nearly 5 points in round-lot dealings at 97.75, versus the much lower levels at which they had closed out the year, with $9 million of turnover.

Dallas-based hospital company Tenet Healthcare Corp.'s 6 3/8% notes due 2011 were quoted up nearly 7 points on the day at 85.

Gaming gets lucky

Even the recently hard-hit gaming sector got into the upside act on Tuesday; a trader saw Las Vegas-based Wynn Gaming's 6 5/8% notes due 2014 as "one of the biggest gainers," up 4¾ points on $13 million traded to end at 84.75, while crosstown rival MGM Mirage's 7 5/8% notes due 2013 moved up to 40.5 bid from 37.875 on Monday.

However, another trader said that Trump Entertainment Resorts Inc.'s 8½% notes due 2015 were being quoted around a 12-14 or 12-15 context, but said that while "that was where they were being quoted, I'm not seeing any trades of any size."

Another trader noted that the Atlantic City, N.J.-based gaming company was in the midst of a three-week forbearance period granted by its bondholders and bankers that gives it until Jan. 21 to negotiate a debt restructuring.

Big moves

The mutual fund manager quoted above noted that during the last two weeks in December cash bond spreads narrowed by 200 basis points. He reckoned that since the beginning of the year they could have come in that much, again: 400 bps altogether.

On a total return basis it was Waterloo in the junk market in 2008, the investor recounted.

However, during the month of December the Lipper Current High-Yield Index, which began December around negative 29%, gained 7½%, the source added.

Incoming cash tide

This investor made mention of the approximately $1.4 billion of inflows into high-yield mutual funds for the two-week period ending Jan. 30, as reported by AMG Data Services, and expressed the belief that another big AMG inflow could be reported during the present week.

"I don't think we're off to the races but there is definitely a bid to the market, and it seems pretty deep given that people were already long cash and now the flow of money is coming in," the buy-sider said.

"We're still seeing inflows of cash into our funds.

"Our wholesalers are just now getting up to speed on the opportunity in credit, so the flows into credit could continue for a while."

The investor added that with the junk index trading at a 20% yield, when bonds are trading in the 70s, equities don't look near as attractive as would be the case if bonds were trading at par.

Nothing for sale

It is extremely difficult to buy positions of any size in high-yield at present, the buy-sider said, adding that it's not just the high quality paper that's being bid up.

"Telecom has been unbelievable," the investor said, noting that bonds which were selling at 70 in mid-December are 90 bid today."

"The sell-off got overdone," the buy-sider remarked.

"People have too much cash - in some cases 10% or more - and don't want to miss out on any rally.

"High yield is always panic-selling or panic-buying, but right now there are no sellers."

Exacerbating the problem is the fact that the dealers have no inventory coming into the new year, having shed risk from their balance sheets at the end of 2008, the buy-sider said

"Now they're buying too," the source exclaimed.

"We tried to buy some spread bonds today, and couldn't. We told them 'You make the offer, whatever it is, because we want some.'

"And nobody would do it."

Refuge in high grades

With nothing for sale in the high-yield, some junk players have drifted over to the busy investment grade primary market, sources say.

While junk spreads have gapped in, high-grade spreads continue to linger near historic wides.

Junk accounts took part in Weatherford International Ltd.'s upsized $1.25 billion issue of 9 5/8% senior notes (Baa1/BBB+), which priced in two tranches on Monday, with the 10-year notes coming at a 723 bps spread to Treasuries, sources said.

"That was a case of them just wanting to get more liquidity in the revolver, so they started out at $500 million and upsized it," said the mutual fund manager, who did not play the deal.

However later Tuesday a syndicate source confirmed that high-yield accounts had indeed been involved.

"If your view is that spreads have to tighten then you buy whatever you can get liquidity in," said the mutual fund manager.

"High-yield guys have money they want to put to work, and they can't get anything in the high-yield secondary. So they'll buy anything if they think it's going to tighten."

A little later a high-yield syndicate source exclaimed that the high-grade market was "going nuts," with nine deals pricing during the Tuesday session.

A window opening

Given the built-up cash positions of the buy-side - some of them 10%-plus - as well as the continuing inward flows of cash, the lack of supply in the secondary market and the weeks-long absence of a high-yield forward calendar, an issuance window appears to be opening in high-yield, according to an investment banker.

However, this source warned, initially prospective issuers must still be prepared to pay up. The rally notwithstanding, issuers ought to be braced to pay 150 bps concessions to their existing paper in order to bring a deal in early 2009.

Maybe the discount will not need to be as great as those which clinched deals for El Paso Corp. and Kansas City Southern Railway Co. in the waning days of 2008 - both priced notes in the high 80s).

"But people will still have to pay to get a bond deal done," the banker said.

However the high-yield mutual fund manager seemed to think that some issuers could find themselves on the receiving end of some significant price relief, should they elect to come to the high-yield primary in the near term.

For example, the investor said, El Paso Corp.'s new 12% five-year notes (Ba3/BB-), which priced at 88.909 to yield 15¼% on Dec. 9, were trading at 99½ bid, 100½ offered on Tuesday.

"If they came today the market is telling you they would be paying a yield of 12%," the investor calculated.

And given the market's strength in early 2009, lower quality issuers might be tempted to test the waters, the investor reasoned.

"Anybody who has a 50% drawn revolver, if they want to tap the market just to term some of that out and maintain liquidity, the bankers are no doubt telling them that it's time."

But who are the bankers telling this to?

As is so often the case sources declined to volunteer names on Tuesday.

However there are deals on the radar screen, the syndicate sources say.

In fact, news on one or two of them could surface by the end of the week.

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