Autos off as Lear gyrates on lower outlook; funds see $70 million outflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 21 - The automotive sector was once again riding in the breakdown lane on Thursday as the beleaguered bonds of carmakers and auto parts companies continued their retreat under the latest barrage of bad news.

Lear Corp. - considered one of the better credits in a sector full of companies that are already bankrupt or look like they are going there - was the latest bearer of bad news, as the Southfield, Mich.-based maker of automotive interior, seating and electronic components announced lower full-year guidance for 2006. Lear's bonds fell, although they cut their losses later in the day. Lear cited production cuts at its major customers, Detroit's Big Three automakers, as the cause of its troubles

And the biggest of those three, General Motors Corp., was off, traders said, on indications that GM probably now will not be able to forge the kind of far-reaching alliance with France's Renault and Japan's Nissan that many in the market had been hoping for.

Among the names continuing to lose ground was bankrupt Novi, Mich.-based vehicular frames maker Tower Automotive Inc., as well as Rochester Hills, Mich.-based parts supplier Dura Automotive Systems Inc. - not yet bankrupt, but probably headed that way in the view of many junk market participants.

Outside of the autosphere, traders said not too much else was happening, although retailers were seen up, healthcare names were off and Dole Food Co. - which has been falling all this week on investor angst over the damage that the ongoing E. coli outbreak might have on the vegetable producer - was once again lower.

The primary market remained quiet, with the only ripple being the word that Brake Bros. plc plans to begin marketing a sterling-denominated offering Monday in London.

Funds see another modest outflow

And as activity was wrapping up for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday $70 million more left the funds than came into them. In the previous week, ended Wednesday, Sept. 13, the funds saw a $19.8 million outflow.

However, even with the latest week's outflow, inflows have still predominated lately, seen in five weeks out of the last nine, during which time net inflows have totaled $452.5 million, according to a Prospect News analysis of the figures. Inflows have also now been seen in seven weeks out of the past 12 - a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. Over those dozen weeks, net inflows have totaled $549.3 million, according to the Prospect News analysis.

However, despite that recent show of strength by the funds, the year-to-date figures continue to tell a very different story.

Counting the latest week's result, the funds have hemorrhaged $3.087 billion since the start of the year, up from the previous week's $3.017 billion net outflow total, according to the analysis. Outflows have now been seen in fully 26 weeks out of the 38 since the beginning of the year, against just 12 inflows, most of them relatively small. The figures exclude distributions and count only those funds that report on a weekly, rather than on a monthly, basis.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15 % of the total monies floating around the high yield universe, far less than they used to - 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.

Dura down further

Back in the secondary market, a trader said that it was "a wild day in autos, with hundreds of millions [of dollars worth of automotive-related bonds] trading in different arenas, up, down and sideways. That was the action, to be sure."

Seeing the bonds of numerous auto names lower, some by several full points, he further declared "we're talking fog, black ice and a 1,000-car pileup on the Interstate beltway around Detroit."

For instance, he said, Dura's 8 5/8% senior notes due 2012 - which tumbled into the mid-50s during Wednesday's dealings as Moody's Investors Service cut the troubled company's already weak ratings further into junk territory - fell still further Thursday, finishing at 52 bid, 54 offered, while its 9% subordinated notes due 2009, which have been bid in an 8-9 context over the past few sessions, retreated to 7 bid, 9 offered.

"Dura was still getting whacked," another trader said, seeing the 8 5/8s ending around 53 bid, which he called down a point, in "pretty active" trading, while the 9s "were in the single digits."

Dura has been sliding for a week now, the 8 5/8s knocked off their long-time perch in the 70s by renewed speculation - fueled by a recent Lehman Brothers research note - that the company may soon join fellow partsmakers Dana Corp., Delphi Corp., Tower and Collins & Aikman Corp. in Chapter 11. Traders have also cited market rumors that Dura is having trouble lining up the debtor-in-possession financing that it would need in the event of a filing, as well as a recent negative court ruling in a case involving Dura and one of its vendors that supply it with component parts.

Yet another trader saw the Dura seniors fall as low as 50.5 bid, 51.5 offered in Thursday morning's trading, before coming back from that nadir to finish at 52.5 bid, 53.5 offered, which he called "still off two to three points."

Noting that the Dura 9% subs - which were still trading around the same levels where the company's senior notes are now as recently as the latter part of July - now trade only slightly north of Collins & Aikman's 10¾% notes due 2011, which languish in the mid-single-digits, he opined "it doesn't look good for them."

He saw the 9s trade as low as 6.5 bid, 8.5 offered in morning dealings, before firming a little to close down about a point at 8 bid, 9 offered.

Dana drops, rebounds

"A lot of the auto parts makers were down early, they made their lows, then came back [off the lows] but still finished lower," he said.

A case in point was bankrupt Toledo, Ohio-based partsmaker Dana, which the trader said was "pretty active, trading in a pretty good range today, like Dura."

He saw Dana's 6½% notes due 2008 fall to 65.5 bid, 66.5 offered in the morning, "but then they came back" to end at 68 bid, 69 offered, which he saw as down ½ point. Dana's 5.85% notes due 2015 hit early lows at 63.5 bid, 64.5 offered in the morning, before going home around 65 bid, 66 offered, down a point on the day, while its 7 1/8% notes due 2028 bottomed early on at 65.5 bid, 66 offered, before ending at 66.5 bid, 67.5 offered, still down 1½ points on the day.

Lear moves lower

Lear's bonds, he said, "didn't move as much as Dana's," with the former company's 8.11% notes due 2009 going out at 94.5 bid, 95.5 offered, down a point, and its 5¾% notes due 2014 at 79.5 bid, 80 offered, down around ¾ point.

Another trader also saw the Lear bonds not quite so bad later in the day, seeing the 8.11s down around a point after the news of the lowered outlook, to around 94 bid, 95 offered, "then it kind of drifted back up during the course of the day," trading back up to the 95 bid level, which he saw as off ½ point.

Yet another trader, however, flatly declared that Lear "got hammered," seeing the 8.11s at 94 bid, 95 offered at day's end, off 1 to 1½ point, and pegging the 53/4s at 79 bid, 80 offered, also down 1½ points.

Lear's New York Stock Exchange-traded shares meantime slid $1.77 (8.68%) to $18.61, on volume of 8.1 million, not quite five times the norm.

The bonds and shares moved lower after Lear warned that because of output cuts at major customers GM, Ford Motor Co. and DaimlerChrysler AG's domestic Chrysler Group, it was lowering its projections for full-year results this year.

Lear said that sales will likely come in about $300 million below its previously forecast $18 billion, with core operating earnings down some 15% from the company's prior estimate of a $400 million to $440 million range. Free cash flow - which had been expected to come in somewhere between $50 million and $100 million, will now be only "slightly positive."

No alliance for GM?

Big Lear customer GM's bonds meantime were "under pressure most of the day, which definitely did not help the cause" of the auto sector," a trader said, seeing the Detroit giant's benchmark 8 3/8% notes due 2033 at 84.5 bid, 85.5 offered, down 1½ points on the day. He cited news reports indicating that GM's possibility of inking a comprehensive alliance with overseas carmakers Renault and Nissan "now doesn't look too likely."

Another trader saw those bonds down 1¼ points at 84.75 bid, 85.25 offered, while the 8% notes due 2031 of GM's financing unit, General Motors Acceptance Corp., were unchanged at 102.75 bid, 103.75 offered. He also saw Ford's flagship 7.45% notes due 2031 down a point, in apparent sympathy with GM, at 76 bid, 76.25 offered, while the 7% notes due 2013 of Ford's financing arm, Ford Motor Credit Co., were off ¾ point at 91.5 bid, 92 offered.

Standard & Poor's said it was of the opinion that GM probably won't hook up in a wide-ranging alliance with Renault and Nissan - an idea which excited some in the market back around mid-summer when it seemed that such a combination might be able to help GM cut its costs and reverse its sales decline. There was even some talk at the time that Carlos Ghosn - widely credited with doing yeoman work in turning Nissan around and hooking it up with Renault, with Ghosn heading both companies - might come over to GM and likewise take over from current chief Rick Wagoner, a possibility that both Ghosn and Wagoner were quick to dispel.

Now that talks between the three companies have been going on for some weeks, with the negotiators scheduled to report back to Wagoner and Ghosn next month, "we don't expect a game-changing alliance to come out of that," S&P's chief auto analyst, Robert Schulz, said at an auto industry conference Thursday in New York.

Schultz added that "a broad, deep, all-encompassing alliance would be quite unlikely," news reports said.

Metaldyne deal doubted

Elsewhere among the autos, Metaldyne Corp.'s 11% notes due 2014 "have been very active," a trader said, citing rumors making the rounds that the Plymouth, Mich.-based parts maker's recently announced deal to be acquired by Asahi Tec Corp. "might get undone."

In both Wednesday's trading and Thursday's the 11s gyrated between the upper 80s and the lower 90s, "so there's been a struggle here.

"I don't know if the rumor is warranted or not - but they seemed to settle down, trading around the 90 level," after falling as low as 88-89 "before popping a little bit."

The trader meantime saw Tower's 12% notes due 2013 dip as low as 18 bid, 19 offered during the day, but said that "the bulk of trading was in the low 20s," and the bonds finished at "20 and change," which would still represent a one point retreat from Wednesday's levels.

"Tower is not a tower anymore," another trader quipped, seeing the bonds go as low as 18 bid, 21 offered before finishing at 19.5 bid, 21 offered, off the lows but still down on the day. "It was ugly."

Retail up, Dole, healthcare off

Apart from the auto names, the trader said, "the market was kinda firm all day," with the retailers up a bit. He saw "some action" in Linens 'N Things Inc.'s notes due 2014, "which have been up a few points in the last few days, as they came from the low 90s to the mid-90s. There was a lot of trading between 96 and 97."

He also saw Bon-Ton Stores Inc.'s 10¼% notes due 2014 around 97 bid, 98 offered, a bit firmer on the day.

Overall, "the market had set pretty high levels, they'd gotten pretty tight. Governments popped up today, so I think it loosened up spreads," he added.

Another trader saw Dole Food's bonds continuing to retreat as the E. coli outbreak linked to fresh packaged spinach - which is among the many products that the Westlake Village, Calif. fruit and vegetable processor sells - remains in the news. "It definitely put some pressure on the paper, which was a pretty big mover today."

He saw Dole's 7¼% notes due 10 down 2 points at 91 bid, 92 offered. "The whole structure was off," he said, "but that seems to be one of the more active ones. We'll see how they open up [Friday] morning. It was a slow grind, but they kind of got pummeled at the end of the day."

He also saw healthcare names "under some pressure," including Tenet Healthcare Corp., HCA Corp., InSight Health Services Corp. and Select Medical.

He saw Tenet's 7 3/8% notes due 2013 down a point on the day at 90 bid, 91 offered.

"They had a nice little run" upward, he said of the Dallas-based hospital operator. "Whether they were taking some profits, and a couple of guys put out 'sell' recommendations, it might have sparked some activity there."

Brake Bros. plans loan/notes

Thursday's only primary market news involved a £275 million offering of 5.5-year senior PIK loans/notes from U.K.-based food supplier and distributor, Brake Bros. plc.

According to a market source, the deal will be distributed as a loan but will subsequently offered in the form of notes via a repackaging, details of which are pending.

Proceeds will be used to fund a dividend and make a pension deficit payment.

The roadshow starts Monday for the deal which is being led by JP Morgan, Credit Suisse and Deutsche Bank Securities.

A modest calendar

One high yield syndicate official, commenting on the week's comparatively light news flow, said that the coming week has a "modest" calendar of deals that are expected to price in the primary market.

The two most conspicuous offerings are Georgia Gulf Corp.'s $750 million two-part offering of senior notes in eight- and 10-year tranches via Merrill Lynch & Co., and Service Corp. International's $500 million two-parter, with eight- and 12-year tranches via JP Morgan Securities and Merrill Lynch.

This source added that none of the prospective issuers for next week have put out official price talk.

In fact, the source added, the only present deal the market seems to actually buzzing about is the NXP BV/NXP Funding LLC (Philips Semiconductor) €4.5 billion equivalent multi-tranche offering. The deal is on the road now in Europe and set to roadshow next week in the United States, with pricing to follow by Friday's close.

The Eindhoven, Netherlands, microchip maker is selling €3 billion equivalent of seven-year senior secured floating-rate notes (Ba2/BB+) in dollars and euros, and dollar-denominated eight-year senior secured fixed-rate notes (Ba2/BB+).

The offering also includes a €1.5 billion equivalent tranche of nine-year senior unsecured fixed-rate notes (B2/B+), in dollars and euros.

Morgan Stanley, Deutsche Bank Securities and Merrill Lynch & Co. are joint bookrunners for the debt refinancing related to the acquisition of the company.

This source said that the huge build-up in the forward calendar that some on the sell-side were apprehensive about in the run up to Labor Day has not materialized.

"People seem to be picking their spots," the official observed.

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