Junk warily recovers from Tuesday slide as GM leads; WaMu walloped; Sabine Pass prices mirror deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 10 - High yield market participants peeked cautiously out on Wednesday following Tuesday's widespread junk market downturn, drawing a little bit of encouragement from stocks strengthening as troubled Lehman Brothers Holdings Inc. laid out its plans to get itself out of its current problems.

Nonetheless, some traders noted the pounding which the problem-plagued investment bank's bonds continued to take, even as its stock tried to make a comeback from Tuesday's complete rout - only to give up its modest intraday gains late in the session and end lower - and they predicted that it was only a matter of time before the still-nominally investment-grade rated Lehman paper would be trading regularly off junk desks, the way Bear Stearns' bonds circulated around in the high yield universe earlier this year as that unhappy financial giant collapsed. They also noted the continued carnage in another ostensibly high-grade financial credit, Washington Mutual Inc., whose bonds are already seen trading in some parts of junk bond land.

Back among the pure junk issues, General Motors Corp.'s bonds were seen solidly higher, particularly its widely held benchmark issue, although there seemed to be no fresh news out about the automotive giant that might explain its strength. Bonds of GM's troubled 49%-owned financing unit, GMAC LLC and the latter's wholly owned Residential Capital LLC mortgage business were also better despite a not-unexpected ratings downgrade for ResCap, probably helped by general financial market expectations that the government rescue of the floundering Fannie Mae and the flailing Freddie Mac will bring some badly-needed stability to other parts of the mortgage industry. That likewise gave a boost to such related names as KB Home and Realogy Corp.

In the primary market Sabine Pass LNG, LP brought to market the first new-issue that junk marketeers have seen in almost a month, pricing a tranche of bonds mirroring its existing 2016 notes. For good measure, Ford Motor Co.'s European financing affiliate, FCE Bank plc, was heard to have priced a euro-denominated four-year deal. However, both issues priced at a substantial discount to par.

Sabine Pass raises $146 million

Sabine Pass LNG LP, a wholly owned subsidiary of Houston-based Cheniere Energy, priced a $183.5 million issue of notes mirroring its existing 7½% senior secured notes due Nov. 20, 2016 (B2/B+) at 79 to yield 11.52% on Wednesday.

There was no official price talk, according to the source, who added that the deal, which generated approximately $146 million of proceeds, was taken down by just a few accounts. However when the deal launched early Tuesday market sources told Prospect News that the mirror notes were initially presented with an original issue discount in the context of 83.75.

Citigroup ran the books.

Proceeds will be used for construction, cool down, commissioning and completion costs of the Sabine Pass LNG receiving terminal and for working capital and other general business purposes of Sabine Pass LNG.

The original $1.482 billion issue priced at par on Nov. 1, 2006.

Ford's FCE Bank prices €400 million

Elsewhere FCE Bank, a U.K.-based wholly owned subsidiary of Ford Motor Credit Co., priced €400 million of 7 1/8% notes due Jan. 16, 2012 (B1/B+) at 82, a market source told Prospect News on Wednesday afternoon.

RBS was the bookrunner. Calyon Securities was the co-manager.

Affinia announces $200 million

Late Wednesday there was a deal announcement.

Affinia Group Inc. announced that it plans to offer up to $200 million of senior secured notes via a Rule 144A/Regulation S transaction.

No timing or syndicate names were disclosed in the press release.

Proceeds, together with funds from a new $340 million senior secured asset-based revolver, will be used to repay its existing senior secured credit facility and to finance the acquisition of HBM Investment Ltd., a Hong Kong company, and its wholly-owned subsidiary, Longkou Haimeng Machinery Co. Ltd.

Affinia is an Ann Arbor, Mich.-based producer of automotive replacement products.

Sabine edges up

A trader saw the new Sabine Pass 7½% secured notes due 2016 at 79.5 bid, 81 offered, versus their 79 issue price earlier in the session, "in line" with the existing notes. Another trader, however, said that he had not seen the smallish-sized new issue trading around

Market indicators seen easing

The widely followed CDX index of junk bond performance was seen by a market source to be unchanged at around the 93 3/8 level, while the KDP High Yield Daily Index fell by 5 basis points to end at 70.62, while its yield was 1 bp tighter at 10.57%.

In the broader market, advancing issues trailed decliners by a nine-to-eight margin. Activity, represented by dollar volume, declined about 8% from the levels seen on Tuesday.

The junk market, a trader said "seems to be in a little disarray," with a "definitely weaker tone - no question about it."

He said that "it's not that bids were hit and offerings were dropping points - there's just a real lack of liquidity across the board, from the dealer side and the buyside as well."

Another trader said that there were "only a couple of active names - but the ones that were active ended up being like Lehman was - very active. But there wasn't a lot else going on."

Lehman paper a big loser

Traders said that many junk players have been fixated this week on a story nominally going on outside their own market's borders - the erosion of Lehman Brothers' shares and bonds on investor fears that the troubled investment banking house may follow in the footsteps of Bear Stearns and for all intents and purposes go out of business, at least as an independent company, the way the venerable Bear did when it was snapped up earlier this year at a virtual fire-sale price by banking giant J.P. Morgan Chase & Co. Inc. Some junk traders have begun quoting Lehman's bonds, and believe they will soon be actively trading the stricken company's paper.

"Lehman was all over the place today," one said, with "a lot of sellers and very, very few buyers. Things changed every couple of minutes on them. Some [issues] definitely dropped 10, or even 15 points." He said that Lehman "looks like it's getting downgraded" and may eventually be a regular junk name, as Bear Stearns was for the last few weeks of its independent existence.

He saw Lehman's 3.95% notes due 2009, "even the short paper, maybe 80-83, down 9" points.

He said that after a flurry of activity in Lehman paper in the morning, things kind of died down in the afternoon. "We were still seeing inquiries on Lehman but we were seeing less. Everyone was kind of taking a second to catch their breath and try to figure out what was going on."

A market source saw Lehman's very actively traded 6½% notes due 2017 swoon more than 15 points on the session to a closing level around 64.375, although many of those late trades were smallish odd-lot transactions. Even looking at the bonds on strictly a round-lot basis, the source said, they were off 5½ points on the day to the 81 level.

Lehman's actively traded 6 7/8% notes due 2018 dropped more than 1½ points on the session in big-block trading to finish just under 88.75.

Lehman on Wednesday reported that in the fiscal third quarter it lost $3.9 billion, raising its losses this year to $6.5 billion. The red ink stands in stark contrast to its year-earlier profit of $887 million. In the latest period, Lehman logged gross write-downs of $5.3 billion on residential mortgages and $1.7 billion on commercial real estate positions.

With Wall Street in a tizzy over Lehman's prospects, the company unveiled plans for asset sales and other transactions to reduce risk and to raise capital. These include the sale of $4 billion in British mortgages to BlackRock Inc., a plan to sell a roughly 55% percent stake in some of its investment management businesses for perhaps as much as $8 billion - a deal which could be announced next month - and the spin off of $25 billion to $30 billion in commercial real estate assets in the coming year's fiscal first quarter into a separate company known as Real Estate Investments Global. Lehman will pump $5 billion to $7.5 billion into REI Global, and lend funds to it as well. Lehman's chief executive officer, Richard Fuld, said that although he would prefer to keep the 158-year-old firm independent, he would also entertain any forthcoming offers to sell the entire company.

Lehman's New York Stock Exchange-traded shares, which on Tuesday had plunged 44% by the close on more than six times normal volume, gyrated around on Wednesday, alternately falling and rising, before finally finishing down 54 cents, or 6.93%, at $7.25, on volume of 256 million, or four times the usual activity level.

While its stock was zig-zagging, Lehman's nominally single-A rated bonds were getting smacked around - and all three major ratings agencies put its credit under scrutiny for a possible downgrade. The smaller DBRS agency actually did pull the trigger on a ratings cut Wednesday, lowering Lehman's long-term credit to single-A from AA previously, and said it might cut the ratings again.

Junk players also watching WaMu

A trader saw Washington Mutual's 8¼% notes due 2010, which he said closed at 51 bid, 54 offered. The bonds, he said, were "all over the place.

"Towards the end of the day, a lot of sellers and very few buyers were seen, and bonds were offered without [bids]."

He estimated that the bonds were down 8 points on the day, in line with a plunge in the Seattle-based leading U.S. thrift operator's New York Stock Exchange-traded shares to $2.32 - a 17-year low. The shares plummeted 98 cents, or 29.70%, on volume of 214.4 million, about 2½ times the norm; they have already lost 92% of their value since the mortgage and credit-industry meltdown began in July 2007, on investor expectations that WaMu, a major residential lender, will have to write down additional billions of dollars of mortgages in its portfolio as borrower default rates remain high.

Another trader saw WaMu's 4 5/8% notes due 2014 languishing around 32 bid, well down from the 45.25 level at which round-lots were trading several days ago. He said that meantime, there had been a fair amount of smallish odd-lot transactions "that added up," but no really sizable dealings.

"I would have thought there were more active issues" than just those two, he said.

The company's 5 1/8% notes due 2015 were quoted as being actively traded at around the 50.5 level.

Junk financials seen mixed

Among the more orthodox junk-rated financials, a trader saw Thornburg Mortgage Inc.'s 8% notes due 2013 "moving around a little bit" at 64 bid, 66 offered, which he said was down 1½ points over the past two sessions. He said that the Santa Fe, N.M.-based jumbo mortgage lender's issue "wasn't as active today as it has been over the last couple of days."

He said that "there was an idea that the whole Fannie and Freddie thing would strengthen the homebuilders and thus strengthen the mortgage stuff a little bit - but it's all speculation" at this point. He said that there was "nothing specific" going on in the credit, which is in the process of tendering for its four classes of preferred stock as part of a $1.35 billion rescue package negotiated earlier this year. Thornburg said earlier this week that it had extended the deadline for completion of that tender offer to Sept. 16.

However, Residential Capital and its parent, GMAC, saw their bonds actually gain some ground, despite a downgrade from Moody's.

One trader saw ResCap's 6½% notes due 2013 unchanged at 25 bid, although another saw its 6 1/8% notes coming due on Nov. 21 actually up 3/8 point at 94.125, despite the downgrade. Its 9 5/8% notes due 2015 closed at 34 bid, 35 offered, while the 8 3/8% notes due 2010 ended at 30 bid, 32 offered. The 8½% notes due 2013 finished the day at 25 bid, 26 offered.

Moody's cut ResCap's senior secured debt to Ca from Caa2 and its junior secured paper to Ca from Caa3. The unsecured senior and subordinated debt were affirmed at Ca and C, respectively. The rating agency attributed its downgrade to ResCap's continued poor operating performance, as well as its declining liquidity position.

ResCap has lost $7.2 billion in the last seven consecutive quarters. Despite GMAC's best efforts, the subsidiary has failed to turn around its business, which was hurt by its subprime mortgage exposure. To that end, GMAC announced last week that it would cut about 5,000 jobs at ResCap, cutting the company's workforce in half.

The Moody's downgrade did not affect parent GMAC's ratings. A trader saw the latter's 8% bonds due 2031 perhaps ¼ point better at 56.25 , while its 6 7/8% notes due 2011 were at 65.375 bid, up 1½ points from its levels at the beginning of the week, on active volume of $7 million. The GMAC 6% notes due 2011 rose more than a point on the day to 62.

Another trader called the benchmark 8s up ½ point around 56.5.

At another desk, that issue was quoted at 56 bid, 57 offered. That particular source also saw the 6 7/8s at 64.75 bid, 65.75 offered and the 6 7/8% notes due 2012 at 58.5 bid, 59.5 offered. He called the financing company's debt up 1 to 1½ points across the board.

Other finance-related names seen getting a boost on overall market relief about the Fannie-Freddie bailout and its prospects for perhaps stabilizing the credit markets including Parsippany, N.J.-based real estate services company Realogy's 12 3/8% notes due 2015, seen up a point at just under 50 bid, and Los Angeles-based homebuilder KB Home's 7¼% notes due 2018, up a point at 86 bid.

GM bonds drive higher

The prospect that the troubled credit markets might stabilize also had to be good news for sellers of other big-ticket items besides homes, notably autos; a trader saw GMAC's 49% owner GM's 8 3/8% benchmark bonds due 2033 up 2½ points at 52, "a big move for this long piece of paper." He said that GM's 7.20% bonds due 2011 firmed 1¼ points to 67.75, on $8 million of the bonds traded.

Another market source saw the automotive giant's 7 1/8% notes due 2013 up 1¼ points at 57.5 bid.

Six Flags surge moderates

A trader saw Six Flags Inc.'s most actively traded issue, its 9 5/8% notes due 2014, at 63.875 bid, up oh-so-slightly from Tuesday's levels around 63.75, in busy dealings of more than $5 million. He meantime saw the 9¾% notes due 2013 unchanged at 64.5 bid, while the company's 8 7/8% notes due 2010 were at 83.5, although he said there had been no recent large-block trades against which to compare them.

Another trader saw the 93/4s at 62.5 bid, 64 offered, which he called down about a point from Tuesday's close.

It appeared as though the New York-based theme park operator's bonds - which have been steadily rising by about a half point to a point per session for much of the past week - seemed to be taking a breather from that breathless advance. There has been no fresh news out on the credit, but the bonds have surged upward by about 3 or 4 points in the lat week, a source said, on investor expectations that it will post strong third-quarter attendance and revenue figures

Stephanie N. Rotondo contributed to this report.

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