Builders, mortgage names lead drop after too-small Fed cut; Rotech dives; Calpine Canada issue expected

By Paul Deckelman and Paul A. Harris

New York, Dec. 11 - Some years back, the late noted song stylist Peggy Lee sold about a million records and won a Grammy award with her version of the melancholy lament "Is That All There Is?" That could have been Wall Street's theme song on Tuesday, as market players who had psyched themselves up for a 50 basis points cut in key interest rates by the Federal Reserve had to content themselves with just a 25 bps reduction in both the overnight lending rate and the discount rate.

While the junk bond market tends to be less keenly attuned to the Fed's doings than, say, stocks, Treasuries or investment-grade corporates, there was still a sense of disappointment at the small size of the rate cut, and that killed a morning rally that had taken many names higher. Some bonds tumbled several points - particularly in the homebuilding and mortgage sectors, which depend heavily on an easy flow of credit and which had a bigger cut on their wish lists. Downsiders included such familiar names as Hovnanian Enterprises Inc., Standard Pacific Corp., Countrywide Financial Corp. and Residential Capital LLC.

Outside of names pushed down by the lack of a bigger rate cut coming out of Washington, Rotech Healthcare Inc.'s bonds were seen to have slid more than 13 points on a series of large-block trades, although no fresh negative news was seen out about the company.

The primary market was quiet, although a reissue was heard to be in the works for Calpine Canada Energy Finance ULC.

A trader saw SPX Corp.'s new 7 5/8% notes due 2014 trading at 101 bid, 101.5 offered, well up from the par level at which the Charlotte, N.C.-based engineering solutions provider's new issue had priced on Monday.

Back among the more established issues, overall market volume was seen down around 30% from Monday's animated levels. Despite market disappointment with the lack of a larger interest-rate cut, advancing issues outpaced decliners by about a six-to-five margin. While a trader saw the widely followed CDX index of junk bond performance down a full point at 95¾ bid, 96 offered, the KDP High Yield Daily Index edged up 0.04 to 78.29, while its yield tightened by 1 bp to 8.55%.

Fed rate cut a disappointment

After much anticipation, the Fed announced a 25 bps cut in both the federal funds overnight bank lending rate and in its discount rate for direct loans from the Fed to banks, to 4.25% and 4.75%, respectively; many observers thought that it might cut the fed funds target rate by 50 bps to an even 4%, or would at least cut the discount rate by that amount to bring it more in line with the funds rate.

In its communiqué announcing its actions, the central bank cited the deterioration in the financial markets and also noted slowing business investment as consumer spending weakens. The statement did not include a "balance of risk" statement that would imply that inflation was of equal concern as the credit crunch, although it did note the increased uncertainty surrounding economic growth and inflation, on the possibility that energy and commodity prices may push inflation higher.

The net effect of all of this, a trader said was that "the Fed disappointed a lot of people. Credit got crushed" after the market got wind of the relatively small cuts the central bank actually elected to make.

One high yield syndicate official commented after the Tuesday close that: "The stock market responded by saying 'You should have done 50 basis points.'"

This source and others took note of an ensuing flight to quality, among investors, sending the yield on two-year Treasuries on a 25 basis points skid, to end the session below 3%.

"The Treasury market was up today by the most in three years or so," one sell-sider observed, adding that in an economy that has inflation running at around 2.5%, investors must be risk-averse, indeed, to take refuge in two-year government paper yielding below 3%.

The markets and the Fed "continue to be on different pages," said Max Bublitz, the chief strategist for SCM Advisors LLC.

"As a result of today's timid 25 basis point cut in both the Fed funds rate and the discount rate, the odds of recession have increased, and the markets immediately began to price in such an outcome. It is likely that economic growth in the U.S., as measured in real terms, has already slowed to under 1% in the fourth quarter, and the ongoing seizure in the credit markets suggests that growth could deteriorate further as we head into the new year."

Bublitz warned that by "simply stating that recent market conditions have increased uncertainty surrounding economic growth and inflation, the FOMC has lost important credibility with the market, not to mention precious time in unclogging the credit markets and cushioning the economic downturn."

He said that the Fed's "gradualist approach" now makes it more likely that this easing cycle "will become a drawn-out affair, perhaps taking the funds rate to as low as a two-handle. Given that a blunt instrument such as rate-setting works with a lag, the Fed has fallen significantly behind conditions."

The quarter-point rate cut which was announced "had already been baked in" to market prices, said J. Giordano Securities managing director Bill Featherston.

He said the financial markets, particularly on the equity side "were hoping for more," and reacted badly when they didn't get what they wanted - equity indexes were down more than 2% across the board, with the bellwether Dow Jones Industrial Average retreating nearly 300 points on the day, and there were similar sized pullbacks in the Nasdaq and S&P 500 indexes.

As for the junk market, a trader said, reaction "was somewhat muted." He refused to go as far as characterizing the small rate cut as a "non-event," but did note that some junk names, such as Delphi Corp., trading in their own little credit-specific orbits, "were not affected" at all by the day's news. Normally, he said, such interest-rate concerns don't directly affect junk, "except from an emotional or psychological aspect," although the homebuilders and mortgage concerns would probably qualify as exceptions to that rule.

Builders, lenders lower

He saw little activity in Beazer Homes USA Inc.'s normally widely traded 8 5/8% notes due 2011, but did see the Atlanta-based builder's 8 3/8% notes due 2012 down 2½ points on the session at 77 bid post-Fed, versus its earlier levels at 80.5.

He also saw a ½ point retreat in Countrywide's 6¼% notes due 2016 to 63, although he commented that it was "small-size trading."

Another trader saw the Calabasas, Calif.-based mortgage giant's 61/4s ending down 2 points at 61 bid, 62 offered, while its 3¼% notes due 2008 were likewise down 1 point at 91 bid, 92 offered.

He saw Residential Capital's 6 1/8% notes due 2008 down 1 point at 81 bid, 82 offered.

Another trader saw ResCap's 8% notes due 2013 push up to 70 bid, but then end at 67 bid, 69 offered, down 1 point on the day.

Homebuilders sink

Back among the homebuilders, a trader said that the sector was higher in the morning, but after the too-small rate cut, finished down on the day.

He saw Hovnanian's 6½% notes due 2014 down 1 point at 71 bid, 72 offered

Another trader saw Beazer's 8 5/8% notes start the session at 79.5 bid, 80.5 offered, get as good as 81 bid, but then come down to end at 77 bid, 79 offered.

Among other homebuilders, Tousa Inc.'s 8¼% notes due 2011 fell 3 points to 41 bid, 43 offered.

Standard Pacific Corp.'s 7% notes due 2015 were down 1 point at 70 bid, 71 offered. At another desk, a source saw its 7s sink to 68.5 bid, 70.5 offered from 71 bid, 73 offered before. But another source saw its 6½% notes due 2010 up 3 points at 73 - and those were not the only builder bonds were not getting hammered - WCI Communities Inc.'s 9 1/8% notes due 2012 were unchanged at 56 bid, 58 offered, Pulte Homes' 7 7/8% notes due 2032 were being quoted up 1½ points at the 87 level, and KB Home's 8 5/8% notes due 2008 were ½ point better at 99.

Rotech is routed

Elsewhere, Rotech Healthcare's 9½% notes due 2012 were seen having tumbled to just under 64 from prior levels at 77.5 - a nosedive of more than 13 points on the day. Trading was described as brisk, with a number of large-block trades at the lower levels. It was the first time the bonds had traded in more than a month, a market source indicated.

There was no immediate explanation for the sudden slide which the Orlando, Fla.-based medical products provider's bonds took. No news was seen out on the company, which primarily provides oxygen and breathing apparatus to home-bound elderly patients with respiratory problems. However, its nearly worthless penny-stock shares - already under a threat of de-listing by the Nasdaq - fell 3 cents, or 5.23%, to 54 cents, on volume of 46,000 shares, about half the usual turnover.

A big day Wednesday?

Tuesday, a trader said, "was a weird day. There was not a ton of trading in the morning - then [after the Fed], it opened up and went nuts in the afternoon."

Another trader opined that [Wednesday] will be a really big day, once people digest this, and see where they really want to be positioned for the year-end. We've been seeing a lot of buying on weakness. I don't think that people really want to go into year-end with a ton of cash. I think they'll probably be defensive, buying some better-rated names on weakness. It will be an interesting couple of days going forward."

All quiet in the primary

Meanwhile, apart from ratings the Tuesday primary market produced no news whatsoever.

Moody's Investors Service assigned its B1 rating to the Legends Gaming (DiamondJacks Casinos) restructured $220 million two-part offering of notes due 2012, coming to market via Jefferies & Co.

Earlier Standard & Poor's assigned its B rating to the notes.

The offering is comprised of a $160 million tranche of senior secured notes, with price talk of the 11½% area.

In a restructuring, the gaming company is also offering a $60 million tranche of senior subordinated secured PIK notes, of which 10% will be cash-pay and the remainder will be PIK for life. Price talk on the subordinated tranche is 16½% to 16¾%.

That price talk surfaced late last week, and some observers had been anticipating hearing the final terms by the Monday close. However the terms did not surface on Monday.

And once again on Tuesday there was no news on the Legends deal.

Calendar remains thin

According to sell-side sources, Legends is one of three deals presently "in the market."

Another deal expected to price during the present week is Quality Distribution LLC's $50 million add-on to its three-month Libor plus 450 basis points senior floating-rate notes due Jan. 15, 2012 (Caa1/CCC).

Coming into the Dec. 10 week, market sources had been expecting the deal to be completed by Wednesday. However Tuesday produced no word relative to price talk or timing on the Quality Distribution add-on.

Elsewhere Helix Energy Solutions is marketing a $500 million two-part senior notes offering (B3/B+) - a debt refinancing deal via Banc of America Securities.

The Houston-based energy company is in the market with tranches of fixed-rate notes due 2015 and floating-rate notes due 2014 which are expected to price early in the week of Dec. 17.

Also, informed sources say, Sequa Corp.'s $700 million bond offering, which launched in early November, is still out there, and could price by the end of the year.

Tuesday morning, more than 90 minutes before news of the FOMC Fed Funds rate decision circulated, a sell-side source said that the junk market was pretty quiet - even judging by the "ultra-quiet" standards that have prevailed over the course of the past two weeks.

This source's voice became part of a gathering chorus of syndicate officials lately asserting that "inactivity" could be the watchword for the primary market during the waning days of 2007.

Tuesday's close left eight full sessions to play out before Christmas Eve.

However one investment banker who spoke to Prospect News on Tuesday said that the primary market's window of opportunity is not likely to be nearly as extensive as that.

"People still have the rest of this week and a chunk of next week to get something done," the source asserted.

Calpine Canada reissue

Meantime in the distressed debt universe, Lehman Brothers is marketing a $144.25 million reissue of Calpine Canada Energy Finance ULC's 8½% senior notes due May 1, 2008 to qualified institutional investors, according to an informed source.

Calpine, a San Jose, Calif., power company, filed for bankruptcy in December 2005.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.