Junk easier across board as stocks plunge; Tenet off on Credit Suisse report

By Paul Deckelman and Paul A. Harris

New York, Aug. 28 - The high yield secondary sector was mostly easier on Tuesday, with many market players driven to the sidelines by the dramatic stock market bloodletting which saw the bellwether Dow Jones Industrial Average slashed by 280 points in response to the latest news of weakness in the economy in general and the housing sector in particular - data showed that U.S. house prices suffered their worst decline in at least 20 years in the second quarter. Meanwhile, consumer sentiment took its sharpest plunge in nearly two years in August. Release of the minutes of the Federal Reserve's Aug. 7 meeting apparently yielded none of the signs the market was seeking within its oblique wording to indicate that the central bank is likely to cut its key federal funds rate anytime soon.

That was all the more excuse for the junk market - already in the process of winding down ahead of Friday's pre-Labor Day half session - to pretty much sit on its hands.

Traders saw most issues down perhaps ¼ to ½ point. Despite the bad news out of the housing sector there was no great sell-off in homebuilder names like Beazer Homes USA Inc. or WCI Communities Inc., although the bonds were quoted down a point or so.

A hedge fund manager said that the high yield-tracking CDX index was "hit pretty hard" on Tuesday, ending the day at 94 5/8 bid, 95 1/8 offered, 1 1/8 points lower on the day.

The source said that the headline news from the credit markets remains negative, and mentioned two stories: news that State Street Corp. has $22 billion of exposure to asset-backed commercial paper conduits which, investors fear, it may have to fund when the debt matures, and that Standard & Poor's cut the ratings on commercial paper and medium-term notes issued by two structured investment vehicles managed by Cheyne Capital Management Ltd.

Meanwhile a high yield syndicate official said that the cash market was ¼ point lower on Tuesday.

Tenet takes a tumble

A trader did see some downside movement - albeit limited - in Tenet Healthcare Corp. after Credit Suisse came out with a research report highly critical of the Dallas-based Number-Two U.S. hospital operator, causing its New York Stock Exchange-traded shares to plummet 9% to $3.34 - its lowest level in many years, in active trading.

The report warned that given present trends, which include heavy losses from the cost of providing services to uninsured patients, the company may have to file for bankruptcy in three years.

"We do not believe that THC can sell its positive cash flow hospitals, and we doubt anyone wants to buy its weaker facilities, at least at a price that will change the financial position of THC too much," analyst Ken Weakley wrote in a note to investors. "Without an industry recovery in volume or patient insurance, a Chapter 11 filing may be necessary."

Tenet issued a statement challenging the report's conclusions and asserting it had the financial resources to see its turnaround plan through successfully.

"It's the kind of thing where they've already cut to the bone," the trader said. "The problem is you sell the EBITDA-positive hospitals, and that cuts into your earnings. You try to sell the negative ones, and nobody wants those. So they have a lot of issues."

He noted that "none of this is really new information. I think that somebody finally came out here and said 'hey, look, the emperor has no clothes.'"

He said the Credit Suisse report "highlighted the fact that even if they did 90% of the capital expenditures that [larger rival HCA Corp.] does, that's still $600 or $700 million, and they'd run out of cash. There's just not enough money coming in. So the shares took a pounding, down to a 27-year low, and people are getting out."

Surprisingly, given the extent of the retreat in the company's equity, "we didn't see much of a reaction in the bonds - they were down a point, ½ point, ¾ point, like that, but my guess is that over time, people will come to the conclusion that these guys are in pretty serious straits."

At another desk, its 6 7/8% notes due 2031 were off 1½ points at 71.

He did acknowledge the fact that the company "doesn't have any near-term amortizations and they do have $700 million of cash on the books - but if you just do the math, they'll go through $400 million this year and then [by sometime next year] they're kind of out of dough."

He warned that "even if you cut capex to just maintenance levels, which is $250 million, you're not doing what's required to keep up with the competition. Then you lose doctors and patients and it just gets worse."

The trader suggested that "rather than saying the CS analyst is wrong, which is what came across the tape, they should say something about how they're going to fix the problems. The report was arguing that this is not a turnaround story - they've had the opportunity to turn around, and they haven't done it.

"They've done asset sales but haven't made a lot of money on them. They've been losing poorer-performing hospitals, but there really hasn't been much of a turnaround and it doesn't look like there will be much of a turnaround. It's a downward spiral and that's how the market has reacted as well."

He concluded that "it's kind of surprising to me that it takes this kind of report for people to really wake up and say 'wait a second.'" The market carnage is likely to continue, with Credit Suisse projecting that the stock price would fall to the $2 area, "so they're basically saying this country is in serious trouble, without openly screaming 'fire' in a crowded theater."

Housing, mortgage names down

Elsewhere, the bad news out of the housing sector was reflected in lower levels for related names - but there was no huge rush for the exits, traders said.

Beazer Homes was "down a couple," a trader said, its 8 5/8% notes due 2011 at 78 bid, 80 offered, and its 8 3/8% notes due 2012 at 77 bid, 79 offered, both down 2 points.

Meantime, Thornburg Mortgage Inc.'s 8% notes due 2013 were down 1 point at 82 bid, 83 offered. Another trader saw them down 2 points at 81 bid, 83 offered.

Troubled mortgage provider Fremont General Corp.'s 7 7/8% notes due 2009 were down 2 points at 89 bid, 90 offered, following a ratings cut by Moody's Investors Service and a 12% stock slide.

Residential Capital Corp.'s 6½% notes due 2013 were seen off 2 points in active trading to around 75.5.

Maxcom talks $25 million add-on

In the primary market, Maxcom Telecomunicaciones SA set price talk at 103 area for a $25 million tap of its 11% senior notes (B3/B) due Dec. 15, 2014, via Morgan Stanley.

Maxcom also has plans to sell $175 million of common stock in an IPO, with proceeds to fund the 35% equity clawback in those 11% notes.

Morgan Stanley will also underwrite the stock issue.

The original $200 million note issue priced at par.

Quiet elsewhere

Meanwhile the Tuesday session turned up neither news nor rumors on the huge pipeline of expected deals from U.S., Canadian and European companies presently parked on the forward calendar.

A high yield syndicate official said that the stillness in the primary market during the run-up to the three-day Labor Day break, the summer-fall boundary marker in the high yield market, is not surprising.

This official does not anticipate that underwriters will rush to bring deals to market when trading resumes on Tuesday, Sept. 4.

Although people are talking about September being a busy month, this official does not expect the "floodgates" to open.

"Not that much has changed," the source said.

"The secondary is more stable, but people still have some work to do on their commitments before they prep them for market."

Elsewhere, however, officials from high yield syndicate desks in other investment banks have asserted during conversations with Prospect News that September will produce a meaningful increase in primary market news.

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