Junk slumps as equities lose bailout luster; MagnaChip slides on guidance; Sabine Pass slates mirror deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 9 - The high yield market executed what one trader termed an abrupt "about face" on Tuesday, as most issues moved lower in line with the widespread equity pullback, leaving Monday's euphoric response to the government bailout of troubled mortgage giants Fannie Mae and Freddie Mac was gone with the wind.

Just as General Motors Corp.'s struggling automotive and mortgage finance unit, GMAC LLC, was perhaps the leading gainer on Monday, it was among the big losers on Tuesday.

The biggest decliner, in terms of price change, was surely MagnaChip Semiconductor Ltd. The South Korean computer chip company, whose bonds had recently firmed smartly on news that it was shoring up its balance sheet with some new secured financing, slid badly in response to bearish guidance from company officials.

Even some bullish projections couldn't help the bonds of Sirius XM Radio Inc., which weakened despite optimistic estimates of synergies from its recent merger and revenues for this year and next during a presentation at an investor conference. While investors heard that good news, they also noted that it was tempered by some more sobering news, including uncertainty about how to pay an upcoming debt issue.

Among the few upsiders seen during the session was Six Flags Inc., continuing to inexorably edge higher on investor hopes for strong attendance and revenue numbers at its amusement parks.

In the primary arena, Sabine Pass LNG, LP was heard to be in the market with a new tranche of bonds mirroring its 7½% secured paper of 2016; syndicate sources heard price talk emerge on the upcoming issue.

Market indicators in retreat

The widely followed CDX index of junk bond performance was down 5/8 point, said a trader who quoted it at 93 1/8 bid, 93 3/8 offered. The KDP High Yield Daily Index meantime lost 14 basis points to end at 70.67, while its yield was 4 bps wider at 10.58%.

In the broader market, advancing issues trailed decliners by a not-quite five-to-four margin. Activity, represented by dollar volume, jumped 79% from the quiet levels seen on Monday.

"Our market," a trader said, "was once again tracking equities," as had been the case on Monday.

But while that had led Monday's junk market solidly higher, as stocks firmed smartly on the investor hopes that the Fannie-Freddie bailout by Washington would stabilize the troubled credit sphere, it was a wholly different story on Tuesday, as shares were routed on new investor worries, this time centering on the continued viability of Lehman Brothers Holdings Inc., seen by some in the market as the next Bear Stearns. The troubled investment bank's shares plummeted by almost 45%, and the bellwether Dow Jones Industrial Average surrendered virtually all of Monday's hefty gains, losing 280.01 points, or 2.43%, to finish at 11,230.73, with the broader market indexes recording even bigger percentage losses on the day.

Following the lead of stocks, the trader said, junk "started off actually feeling better - the gaming sector, for instance, opened up ½ to ¾ point better - but things quickly turned around as equities took it on the chin. Then, all focus shifted to Lehman Brothers and WaMu [Washington Mutual Inc.] and away from us and into investment-grade land," although he noted that with the pounding those two names were taking Tuesday on the debt side as well as in their stock, "there was no real investment-grade/high yield demarcation."

For instance, Lehman's 6 7/8% notes due 2018, among the most active nominally high-grade issues, fell as low as the upper 80s in intraday trading - usually an unheard-of level for an A2/A/A+ credit - before ending at a shade over 90, having been hammered down more than 4 points on the day in busy dealings, while WaMu's most actively traded issue, its floating-rate notes slated to come due next May 1, languished at the 81 level, carrying a spread of nearly 3,800 bps above comparable Treasuries, placing it will within the distressed category by any measure. The bonds' yield-to-worst stood just a shade under 40% - very high even by the standards of distressed junk.

"That pretty much stole most of the activity and most of the focus for the latter part of the day. Our market definitely sold off - some of the higher-beta names like Idearc [Inc.] and Univision [Communications Inc.], some of the more liquid names we saw probably down a point on the day from the opening. They probably opened up maybe ¼ to ½ point higher this morning, but then gave all of that back, plus 1/2, so all in all, they're probably closing down ½ point as a kind of generic kind of level."

As for name-specific trends, he said, "it's hard to really put a finger on it. It was pretty much across the board."

"Not much, really," was going on in junk, another trader said. "The market was lower, with the Lehman thing. Activity was pretty lousy."

He said that the almost irrationally exuberant euphoria that had propelled both the stock and junk bond markets up on Monday in the wake of the Fannie-Freddie news proved to be "a short-lived respite."

Yet another trader agreed that the junk market had made "an about-face" versus where it was on Monday.

"Except for a few select issues that were credit-specific, it was pretty much offered without [bids]." While "there were some bids out there, certainly it was a different mentality from [Monday]."

Crossover names back in focus

The first trader said that "one interesting thing was that we did see a lot of crossover-type names that we've been playing in the high-yield space come back to people's radar screens" - for instance, he said, credits like iStar Financial Inc., or Royal Caribbean Cruises Ltd. He said that he did not know if that was because "people are finally back in their seats and focused," or whether it was more due to "equities selling off, CDS [credit-default swaps] kind of widened out and cash [junk bonds] kind of lagging a little - that's typically when these crossover names get a little active."

He qualified the latter statement, explaining that this didn't necessarily mean that there were trades happening in those names, but "just people involved - responding to offers and bids and kind of dancing around and looking to get involved."

GMAC gives up gains; autos mostly off

Back among the purely junk issues, GMAC - whose bonds were seen having risen smartly on Monday, propelled by the generally stronger stance of financially-oriented names in the wake of the Fannie-Freddie rescue, was seen having given those gains back Tuesday, and maybe then some.

While one trader saw the Detroit-based auto and mortgage-finance company's widely traded 8% bonds due 2031 unchanged at 55.5, a second quoted them at 56, but called that ½ point lower.

However, a market source at another desk pegged the GMAC 8s down as much as nearly 2 points on the session going home, at about the 54.5 bid level., and also saw GMAC's 6 7/8% notes due 2012 off about 1¾ points at 57, both in active trading.

Another source saw the latter bonds at just under 58, down around a point, as were GMAC's 6 5/8% 2012 notes.

A trader saw 49% GMAC owner GM's benchmark 8 3/8% bonds due 2033 down 1 point at 49 bid, while another saw them down ½ point at 49.5 bid, 50.5 offered, and saw GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 off a point at 52 bid.

Among the automakers' shorter-dated paper, he saw GM's 7.20% notes due 2011 off ½ point at 66.5 bid, while Ford's 7 3/8% notes due 2009 were "one of the more active issues," turning over $8 million on the day. The bonds lost ¼ to end at 93.25.

MagnaChip gets mauled

A trader saw a 10 point plunge in MagnaChip Semiconductor's bonds after the chip manufacturer released bearish updated guidance for the second half of the year. He saw both the 6 7/8% notes due 2011 and the floating-rate notes due 2011 down 10 points to 46 bid, while the 8% notes due 2014 dropped to 23 bid from 36 previously. "Obviously [the investors] didn't like what [management] updated," he commented.

On Monday, the company said that it expects revenue for the third quarter to be in a range of $185 to $190 million, with EBITDA for the quarter in the range of $11 to $13 million. It said that fourth-quarter revenue would come in at $210 million to $220 million.

The company's chief executive officer, Sang Park, warned that MagnaChip was updating its previously offered guidance "to reflect lower than expected demand, as our customers continue to tighten their inventory control due to the current uncertain economic environment."

Park did say, though that in spite of "the challenging external markets, we are confident we can meet our updated revenue ranges. We continue to add new accounts and to offer new products and services which we expect to contribute to our revenue performance in future quarters."

MagnaChip's bonds had jumped by several points on Friday after the company said that it would augment its balance sheet with some $50 million of new first-lien debt, with the 2011 issues each pushing as high as around a 60-61 context on the financing news, traders said. However, they had retreated by several points on Monday - even a mid a generally stronger junk market - on the updated guidance, and really tumbled on Tuesday as more investors saw the more bearish revenue estimates, against the backdrop of an overall market retreat.

Sirius XM stalls, even on better revenue forecast

But even some optimistic guidance proved to be no match for Tuesday's generally soggy market sentiment, it would seem - particularly when that was followed by some equally worrisome projections. A trader said that Sirius XM was "lower - believe it or not," despite the bullish-sounding happy talk that company executives tried to provide for investors at the Merrill Lynch media conference in Marina Del Rey, Calif., on Tuesday.

He said that he had seen the headlines coming out of the conference about anticipated synergies and from the recent merger of the former Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc., as well as the company's better revenue projections, "and I would have expected the paper to trade up - but it seems like there are more sellers out there than buyers. "

He saw the New York-based satellite broadcast operator's 9 5/8% notes due 2013 offered at 77, with no bid, versus a 77 bid, 79 offered level at the opening, "before the headlines. I don't know whether there were some underlying [negative] things at the conference that I missed, just looking at the headlines that came across Bloomberg - or it may just be overall market sentiment and concern about the economy in general."

In the latter vein, he theorized that "if people have to choose what bills to pay, I think a pay-for-radio service may be one of the first ones that they would consider forgoing, versus mortgage, cable bill, car loan - I think [satellite radio] would probably rank pretty low in terms of being the first one to get paid."

In its presentation, Sirius XM's chief executive officer, Mel Karmazin, told conference attendees that the company had raised its estimate of anticipated 2009 synergies from the merger to $425 million from $400 million previously.

"We are finding significant cost savings on every line item of the P&L and are beginning to realize these synergies already," Karmazin declared. "Sirius XM also continues to be one of the strongest growth stories in media, with pro forma revenue growth of approximately 17% in 2008."

The company updated its anticipated revenue numbers to pro forma revenue of approximately $2.4 billion in 2008 and about $2.7 billion in 2009, both up from consensus Wall Street expectations of $1.76 billion and $2.39 billion, respectively.

However, after delivering that good news, Karmazin had to acknowledge that Sirius XM still has no definite plan in place yet to pay off $300 million of convertible debt coming due in February, and faces other big debt obligations next year. Karmazin said that the company is at this point still "actively" exploring various options, including discussions with a bank, and will "act opportunistically" when the time comes. He also said that besides the February payment, Sirius XM expects to extend the maturity date on $350 million of bank debt coming due next May - moves which he said would hopefully help Sirius XM to be able to make another $400 million debt payment coming due in December 2009, despite "how horrible the debt market is" is currently.

He also noted that Sirius will fall short of its goal of having advertising account for 10% of revenues because national radio advertisers are leaving the medium "in droves" due to the weak economic environment - although he said that should hurt the company's traditional terrestrial rivals more that Sirius XM, since the latter has subscription revenues while the traditional broadcasters do not.

But Wall Street was not pleased with the company's weaker-than-expected projection of subscriber growth - Sirius XM said it expected to have 19.5 million subscribers by the end of this year and about 21.5 million subscribers by the end of 2009, both less than some analysts had forecast.

Besides the retreat in the bonds, Sirius' Nasdaq-traded shares lost 12 cents, or 9.52%, to end at $1.14, on volume of 109 million shares, about double the usual turnover.

Steel issues off as Harbinger cuts AK stake

A trader saw steelmaker issues off, particularly AK Steel Holdings' 7¾% notes due 2012, down ¾ point to 99.75 bid, in line with a fall in the Middletown, Ohio-based specialty steelmaker's shares on the disclosure that its largest shareholder, Harbinger Capital Partners, had reduced its AK holdings by nearly one-third, selling some 3.1 million of its approximately 11 million shares.

Also in that sector, he saw United States Steel Corp.'s 7% notes due 2018 off ¼ point in active trading of $10 million, to 97.25, while its 5.65% notes due 2013 retreated by some 1 7/8 points in round-lot dealings, to 94.625, on volume of $4 million.

Six Flags rise rolls on

On the upside, a trader said that Six Flags "definitely continues to creep up in the face of the sell off in the broader market." He saw the company's 9 5/8% notes due 2014 trading up at 64.25, up from recent levels around 62-63, on "better buyers."

Another saw the bonds at 64 bid, up ½ point.

The New York-based theme park operator's bonds had begun firming last week on better investor sentiment about the third-quarter numbers which it will report, based on the strong preliminary attendance and revenue totals it recently reported for the first half of the current quarter.

Sabine Pass plans mirror deal

Meanwhile in the primary market sources said that with the major U.S. stock indexes dropping between 2.4% and 3.4% on the day, it was "no day to do a deal."

Nevertheless the deal-runners were busy with a pair of trades which, as the day began, were being discussed as possible Tuesday business.

However both were ultimately carried over at least into Wednesday.

Early Tuesday Sabine Pass LNG LP announced a $145 million offering of notes mirroring its existing 7½% senior secured first-lien notes due Nov. 20, 2016 (B2/B+).

Shortly before noon market sources told Prospect News that the mirror notes were expected to come with an original issue discount in the context of 83.75. However an informed source clarified that this context does not represent official price talk.

Citigroup has the books.

Proceeds will be used for general corporate purposes and to complete the liquefied natural gas terminal and pipeline project in Louisiana.

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

Meanwhile some market observers had been expecting the downsized Clear Channel Communications Inc. 10¾% senior cash-pay notes due 2016 (Caa1/CCC+) legacy deal, slashed to $325 million from $980 million on Monday, to reprice on Tuesday afternoon.

However well after the close no new terms were available.

Price talk of 71.00 to 72.00 had been heard on Monday.

On Tuesday a source familiar with the deal recounted that the Clear Channel 10¾% cash-pay notes due 2016 were pro formaed at launch at 74.00, and were marketed early on in the context of 72.00 to 73.00.

Sources have told Prospect News that the resale of the notes, which underwriters initially priced at par on Aug. 1, is apparently not going as well as some of the participants had anticipated.

Initially, sources said, the underwriters made a unified approach to the market with the $980 million of 10¾% cash-pay notes.

However, as levels on the re-sale pricing materialized holders of the majority of the notes backed away, and the deal size was cut to $325 million.

Deutsche Bank Securities, Morgan Stanley, Citigroup, Credit Suisse, RBS Greenwich Capital and Wachovia are the underwriters.

The notes are part of the financing for the LBO of Clear Channel by Thomas H. Lee Partners and Bain Capital.

Looking elsewhere

A money manager from a high-yield mutual fund, who spoke to the Prospect News primary market desk on background Tuesday, professed no interest whatsoever in the primary.

"New issue is dead right now," the investor said, adding that right now the high-yield secondary and the bank loan secondary seem like better places to find ideas.

The buy-side source was spotting junk lower on the day.

"You're not seeing a lot of transactions, but you're seeing stuff quoted lower," the source specified.

Similar to color heard from another high-yield investor late last week, this money manager noted that presently the investment-grade index has widened disproportionately to the double-B and single-B indexes.

The buy-sider also noted that the percentage of the market that is trading at spreads to Treasuries of over 1,000 basis points is not close to historic levels.

The investor said that the 1,000 bps-plus sector currently represents around 25% of the index, whereas its peak is around 35% or 40%.

As to why high-grades have widened more than junk, this investor suspects that the still-low junk default rate is at least part of the explanation.

"Defaults are low," the investor agreed.

"But you don't wait for the actual default to price the market appropriately.

"Right now it's difficult to predict how high defaults might be next year, but they're almost certain to be higher."

The buy-sider also expects issuers to show up with rescue financing deals through the remainder of 2008.

For a hypothetical example of what such a transaction might look like the investor selected the secured debt of Realogy Corp., which was acquired Apollo Management.

The investor said that Realogy could issue second-lien debt, and use the proceeds to take out some of its first-lien debt, which would get them "underneath" their senior debt test covenant.

"You know that the EBITDA is not going higher," the investor said, "it's likely going lower.

"One way for them to remain in compliance is to reduce the numerator - to get rid of some of the debt at the secured level."

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