CIT Canada is busiest junk name; American Axle jumps on GM aid; split-rated Watson only deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 18 - Bonds of CIT Group Inc.'s Canadian funding arm were actively traded at higher levels on Tuesday and one of them was the single busiest junk bond issue of the day, traders said. The catalyst for all of that activity was a suggestion by the company in a regulatory file that holders of those bonds might be able to file not one but two claims in the event the company went bankrupt, potentially doubling their recovery. CIT's other bonds, meantime, failed to share in that solid upside move.

But while CIT Group Finding Corp. of Canada may have been the busiest credit in Junkbondland on Tuesday, the biggest gainer by far was American Axle & Manufacturing Inc., whose bonds jumped anywhere from 10 to 14 points after its former corporate parent and still biggest customer, General Motors Corp., pledged to provide as much as $210 million in direct aid and funding to the company, while its lenders meantime agreed to further extend the financial covenant waiver they had previously provided, giving American Axle more time to try and get its finances in order.

Secondary activity apart from those two names remained muted, traders said, noting that the last half of August is traditionally a slow season in the junk market, with many participants choosing to take their vacations as the summer season starts to wind down.

And the primary market - exhausted from the dizzying pace of activity seen the last two weeks in general and last week in particular, and also a little nervous at signs popping up here and there seeming to indicate that the big high yield rally seen for most of this year may be starting to run out steam - was also on the quiet side. The day's only real action came off the high-grade desks, which priced a split-rated (Ba1/BBB-/BBB-) two-tranche deal for Watson Pharmaceuticals, Inc., which nonetheless saw some interest from junk accounts, perhaps for lack of much else going on.

Among recently priced purely junk issues, DISH Network Corp.'s $1 billion 10-year offering remained far underwater versus its issue price, while on the other hand, Olin Corp.'s 10-years held levels above issue - but on sharply reduced volume versus the activity level seen on Monday.

Cash bonds appeared mostly unchanged on the day, a trader said shortly after Tuesday's close.

However the CDX High-Yield 12 index was sharply higher, sources said. A syndicate banker who spoke hours after the Tuesday close gave a spot of 88.145 points mid, up 1.46 points on the day.

"It's very quiet," a trader said. "It's August.

"The banter in the primary market will resume in a couple of weeks."

Meanwhile a high-yield syndicate banker said that there had been a little improvement in the secondary market, which was to be expected with the improvement seen in stock prices on Tuesday.

"The primary market is quiet," the official agreed.

"Everybody we're talking to is price sensitive or opportunistic, and they are waiting on the sidelines for things to improve.

"They probably won't be back until after Labor Day."

This official professed visibility on a pair of deals from the energy exploration and production sector, one in the $300 million range, the other in the $250 million range.

"There is nothing definite," the banker said.

"They will come if they find pricing they like."

Junk investors involved in Watson

While sails luffed in the high-yield market, the investment-grade market remained underway on Tuesday, and is expected to continue to do so through the present week, a high-grade syndicate banker said.

In the high-grade bazaar, Watson Pharmaceuticals priced $850 million of split-rated senior unsecured notes (Ba1/BBB-/BBB-) in two tranches on Tuesday.

It played to considerable interest among junk investors, sources said.

The deal was structured as $450 million of 5% five-year notes and $400 million of 6 1/8% 10-year notes.

Both priced at a 262.5 basis points spread to respective Treasuries, 12.5 bps inside of the Treasuries plus 287.5 bps area price talk.

The deal, which played to $6.5 billion of orders, was initially talked in the low 300 bps-range, then gapped tighter, a syndicate source said.

Bank of America Merrill Lynch and Barclays Capital were active bookrunners. Wells Fargo Securities was a passive bookrunner.

Proceeds will be used to fund a portion of the acquisition of privately held Arrow Group, to redeem the $575 million of contingent senior debentures due 2023 and to repay $100 million of term loan debt.

Low protein

The Watson Pharmaceuticals deal was talked at a spread. And it came with yields of 5% on the five-year paper and 6.153% on the 10-year notes - seemingly an ultra-low protein diet for a high-yield investor.

After all, the Dole Food Co., Inc. $325 million offering of seven-year senior secured notes, which was pulled on Monday due to market conditions, was pro forma-ed at 9% to 9¼%, according to a trader.

And Dole failed to get traction among investors, a market source said.

However, the high-yield interest in split-rated Watson Pharmaceuticals, low yields notwithstanding, likely stemmed from the total absence of activity in the high-yield primary, a junk syndicate official surmised.

Market indicators seen mixed

Back among the established issues, the CDX Series 12 High Yield index, after having fallen 1¼ points on Monday, regained all of those losses on Tuesday, with a trader seeing the market measure up by 1¼ points, finishing at 87¾ bid, 88¼ offered.

On the other hand, the KDP High Yield Daily Index, which had lost 36 basis points on Monday, lost another 35 bps on Tuesday to end at 65.74, while its yield widened by 12 bps to 9.47%.

In the broader market, advancing issues - which finally fell behind the decliners by a nearly seven-to-four margin on Monday, after having led them for an amazing 21-session stretch - battled back to take a narrow lead of just a relative handful of issues on Tuesday

Overall market activity, reflected in dollar-volume totals, jumped 82% from Monday's tepid pace.

Market participants noted a little bit of a brighter tone in junk Tuesday, reflecting the turnaround in the equity market, which had suffered its worst loss in six weeks on Monday, with the bellwether Dow Jones Industrial Average down over 186 points; on Tuesday. In contrast, the Dow got back 82.60 of that, or 0.90%, to end at 9,217.94. Broader indexes, like the Standard & Poor's 500 and the Nasdaq composite, likewise bounced part of the way back, up 1.01% and 1.30%, respectively.

But while the gloomy sense of foreboding which overtook both the stock and junk markets on Monday seemed to dissipate at least somewhat, junk players were under no illusions that the red-hot rally of recent weeks is about to revive anytime soon.

For one thing, the calendar is conspiring against any such revival.

"This is a big vacation week," a trader said. "Really, the next couple of weeks are," culminating with the Labor Day holiday on Monday, Sept. 7 (unlike in years past, the preceding Friday, Sept. 4, will not be an official early close for the U.S. fixed-income markets due to a change of policy announced earlier this year by the Securities Industry and Financial Markets Association - but it is expected to be a slow day nonetheless, a de facto half-day for all intents and purposes).

CIT again in the spotlight

With people at many shops already away, he noted that "if it weren't for CIT, there would not be much going on today." He added that away from CIT, "there was not a lot of activity. They were the [big] news of the day, and the bulk of the activity."

In what seemed like a throwback to the market pattern seen earlier this summer, when New York-based commercial lender CIT Group's bonds were the main feature in the junk secondary for literally days on end amid its battle to avoid bankruptcy, CIT once more took center stage on Tuesday. However, unlike the situation seen over several weeks in mid-July, when the company's various issues absolutely dominated the Most Actives lists, often occupying most of the first 10 or 20 positions, while individual issues alone were sometimes racking up over $100 million of trades in a given session, Tuesday's market saw the activity concentrated in just a handful of CIT bonds issued by the company's CIT Group Funding Corp. of Canada unit.

The trader saw CIT Canada's 5.20% notes due 2015 rise to 73½ bid from 70 previously, on volume of $46 million, making it easily the most heavily traded junk bond of the day.

He also saw the unit's 5.60% notes due 2011 better by 6 points at 79 bid, on $21 million of turnover, and its 4.65% notes due 2010 up 7 points at 83 bid, on $5 million traded.

At another desk, a market source late in the session called the 5.20s up about a point at just under the 71 level, in brisk trading, while acknowledging that the bonds had traded as high as almost the 75 level before dropping back from that peak. Meanwhile, that source also saw the 5.60s up 6 points at the 79 level, slightly off the day's high around 80.

Those bonds got a shot in the arm from CIT's reference in a Securities and Exchange Commission filing late Monday indicating that the Canadian unit had issued $2.2 billion of unsecured debt, then lending those funds to another company affiliate. Media reports commented on the possibility that in the event of a bankruptcy, holders of the CIT Canada bonds could stake a claim against both the Canadian unit - now known as CIT Group Funding Corp. of Delaware - and might also go after the at this point unidentified company affiliate as well - potentially putting those holders in line for an increased recovery.

Accordingly, CIT's non-Canadian bonds - while somewhat firmer on the company's announcement Monday of its plans to restructure its debt outside of the bankruptcy courts, with asset sales seen as one possible option - were nowhere near as busy nor did they rise as much. A trader saw the parent company's 5 1/8% notes due 2014 up 1¼ points to 573/4, on $9 million traded, while its 5.65% notes due 2017 were unchanged at 57 bid, with $3 million traded.

CIT's 5.40% notes due 2012 were seen by a market source up 1½ points at 61 bid.

American Axle active on GM aid pledge

The day's other big name was American Axle & Manufacturing, whose bonds shot up dramatically after General Motors -- whose 1994 sale of its Saginaw Division's Final Drive and Forge Business Unit driveline and drivetrain components to a private investor group created American Axle - came to the rescue of its beleaguered former unit, agreeing to provide American Axle with $110 million in payments for costs from contracts made between the two Detroit-based companies before GM entered Chapter 11 earlier this year.

American Axle's regulatory filing also said that GM further agreed to loan it as much as $100 million, with the components supplier to issue five-year warrants to the carmaker, allowing GM to purchase as much as 7.4% of American Axle's outstanding stock, and for as much as 12.5% more based on the amount of the GM's loan it draws down.

A trader saw American Axle's two series of bonds "both active," with the 5¼% notes due 2014 at 66½ bid, versus 56 previously, on $13 million traded, and the 7 7/8% notes due 2017 up more than 14 points at 661/4, with $16 million changing hands. In the credit-default swaps market, the cost of insuring holder of American Axle bonds against a possible event of default declined to an up-front payment of 28% from 42% before the GM news, plus 500 bps annually.

Axle's New York Stock Exchange-traded shares meantime more than doubled in price, zooming $3.08 on the day, or 117.56%, to end at $5.70, on volume of 103 million - more than 10 times the average daily turnover.

Elsewhere in the autosphere, traders saw little GM activity on the American Axle news. A trader saw GM's 8 3/8% notes due 2013 up ½ point on the day at 15½ bid, on $7 million traded, while GM domestic arch-rival Ford Motor Co.'s 7.45% notes due 2031 were unchanged at 76 bid on $2 million of activity.

Another trader had the GM benchmarks unchanged at 15 bid, 16 offered, and the Ford long bonds also unchanged at 72½ bid, 74½ offered.

Among the auto financing names, GMAC LLC's 8% notes due 2031 dipped to 76¾ from their recent 78½ level, although on only $1 million traded, while Ford Motor Credit Co.'s 7 3/8% notes coming due on Oct. 28 traded at 100 1/8 bid, or a 6.54% yield to maturity, versus 100¾ on Monday. Some $4 million of the bonds changed hands.

Ford Credit's 7½% notes due 2012 gained nearly 2 points to close at just under 92, while its 7¼% notes due 2011 were ½ point better at 92.

TXU trading continues

Outside of the automotive parking lot, Dallas-based merchant power generator and utility operator TXU Corp.'s bonds were again seen actively trading around, although again on no firm news that anyone could point to.

A trader saw its Texas Competitive Electric Holding's 10¼% notes due 2015 trading at 69½ bid, up from 67 on Monday, with volume a peppy $25 million. Still, those bonds had been trading in the 70s last week.

Ply Gem gains resume

Building materials maker Ply Gem Industries Inc.'s 9% notes due 2012, which had firmed to 39 bid on Monday, were seen by a market source at 41 on Tuesday, enjoying the momentum from the company's announcement on Friday of relatively comfortable quarterly results and liquidity projections.

DISH disappointment continues

Among recently priced bonds, a trader said that DISH Network's new 8¼% notes due 2019 continued to languish well below the price at which that mega-deal had priced a week ago.

He saw them down another ¼ point on the session at 95½ bid, 96½ offered.

The Englewood, Colo.-based satellite TV broadcaster priced $1 billion of those bonds late last Wednesday - although the terms were not heard until Thursday - at 97.467 to yield 8¼%. Those bonds were seen treading water around the issue price late last week, before heading still lower on Monday and, again, on Tuesday.

DISH's existing bonds, meantime, were also "all easier," with the 6 3/8% notes due 2011 down 1/8 point at 99 3/8 bid, on $7 million traded, its 7% notes due 2013 more than a point below recent levels, at 96 7/8 and its 7¾% notes due 2015 at 97½ bid, off ½ point, both the latter two bonds on $5 million of turnover.

Olin bonds quiet down

While Olin Corp.'s new 8 7/8% notes due 2019, which priced on Friday, had traded busily during Monday's session, that activity died down on Tuesday. Monday had seen some $34 million of the Clayton, Mo.-based chemical and firearms ammunition manufacturer's new bonds changing hands, making it Monday's busiest junk issue - but that number had dwindled to about $5 million on Tuesday.

A trader saw the bonds at 100 3/8 bid, off slightly from 100½ on Monday.

The company had priced $150 million of those senior notes on Friday at 99.19, to yield 9%, and they had been seen on Friday trading as high as 101½ bid, 102½ offered, before falling back on Monday.

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