Surprise big rate cut boosts junk, builders lead way; Claire's up despite sales drop; Donnelley readies deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 18 - The Federal Reserve's surprising decision to cut its key federal funds rate by a full 50 basis points - something that most market players wanted but were not expecting, having resigned themselves to settling for a token 25 bps reduction - gave a jump start to secondary trading Tuesday, particularly in the recently beleaguered homebuilding sector, with investors heartened by the possibility that with easier credit buyers will be lured back to the model homes.

One of the biggest beneficiaries was Hovnanian Enterprises Inc., whose bonds rose for a second consecutive session, helped not only by the Fed move but also continuing to ride the crest of the momentum generated by the Red Hook, N.J.-based homebuilder's much-ballyhooed "Deal Of The Century" promotion, which saw Hovnanian slash prices on homes nationwide by, in some cases, several hundred thousands of dollars in a 60-hour bargain blitz last weekend.

Other builders seen better included Standard Pacific Corp. and the recently problem-plagued Beazer Homes USA Inc.

Elsewhere, retailing names were seen doing better, likely on the assumption that easier credit will buoy the economy and help that sector; among the winners was Claire's Stores Inc.'s, even though it reported only so-so numbers, including a downturn in same-store sales, a key retailing metric.

In the new-deal sector, R.H. Donnelly Corp. was getting ready to begin marketing a $650 million 10-year note offering - which would be the first fairly big junk bond deal to occur in many weeks, should it come to pass. But Downstream Development Authority was heard to have downsized its upcoming issue of eight-year senior notes, which is now expected to price around the end of this week.

Fed gives the market a boost

A trader said, tongue only partly in cheek, "yeah, things were worse than we thought," if the central bank was cutting the key rate by 50 bps rather than the 25 bps most participants had resigned themselves to. "Things are not just a little bad - but really bad. Sell everything."

But even though the more drastic Fed move could be taken that way that was not the way junk marketers played it, instead rushing into buy, buy, buy.

The trader said that fueled by such possibly misplaced optimism, "everything went up - there was a lot of good price action" on the day. "Everything rallied," particularly the builders.

He saw KB Home's short paper firm nicely, its 8 5/8% notes due 2008 up 2 points to 99 bid, 100 offered. However, he saw "not much change" in the Los Angeles-based builder's longer issues, with its 7¾% notes due 2010 at 93.5 bid, 94.5 offered, and its 6 3/8% notes due 2011 at 90 bid, 91 offered, each unchanged on the day

Hovnanian rise continues

Hovnanian's bonds - which were seen up about 2 to 4 points on Monday - were being quoted up anywhere from an additional 1½ to 6 points pretty much across the board on Tuesday. A trader saw its 8% notes due 2012 at 80.5 bid, 81.5 offered, up around 1½ points on the session, while another saw a bigger rise, its senior 8 5/8% notes due 2017 better by 4 points at 82 bid, 84 offered and its subordinated 7¾% notes due 2013 at 72 bid, 74 offered, which he called up a whopping 6 points.

A market source at another shop saw the company's 6 3/8% notes due 2014, after having gained some 2 points on Monday, as tacking on another 4 points to nearly the 78 level. Another source called them up a more moderate 2½ points at 76. 5

The source said the 7¾% subs - one of the more actively traded issues - actually opened in the mid-60s, down about 3 or 4 points from the upper-60s level to which they had jumped on Monday in the immediate aftermath of the company's boast that the price-cutting promotion had been a "huge success." However, after that initial weakness, the bonds gained traction, and headed back up, peaking at above 72 before easing slightly from there to around 71.

Hovnanian announced earlier this month that it would slash prices on its big backlog of unsold houses and condominiums, some by as much as 25%, amounting in some cases to savings of over $100,000, or even $200,000. The sales sprint was compressed into 60 breathless hours from Friday morning to Sunday night - and when the dust had settled the company had signed sales contracts on about 1,700 properties in 19 states, and had taken buyer deposits on some 400 more.

The 2,100 total over slightly less than three days actually was not too far below what the company was able to sell, at regular prices, during the whole three months of its most recent quarter, ended July 31, when it reported 2,539 contracts, down 24.2% from year-earlier levels, and total sales of 3,179 completed homes, a 31.2% year-over-year drop.

Other builders also better

Among other homebuilder names, a trader saw Beazer Homes' 8 1/8% notes due 2016 "up a couple" of points at 78 bid. He said he "didn't see a lot of trading" in them but "did see them quoted around." He saw Beazer's 8 5/8% notes due 2011 up 2 points at 80 bid, 81 offered. Another trader saw Atlanta-based Beazer's 8 3/8% notes due 2012 up 4 points at 78 bid, 80 offered.

Standard Pacific's 9¼% subordinated notes due 2012 were up a point or 1½ at 68 bid. "Between 68 and 68.5, there were a lot of trades," he said, with "good volume on the Standard Pacific subs."

"I saw them quoted a lot. That's something that traded a lot." Another market source pegged those bonds up more than 1½ points, just above the 68 level.

That source saw Tousa Inc.'s bonds little changed to up slightly, seeing its 7½% notes due 2011 at 31.5 bid, "up maybe a half - it was no big deal." He said there was "not a lot of volume" on its 7½% notes due 2015, moored at 28.5 bid, 30 offered.

Another trader agreed that Tousa "really didn't do anything."

And a trader saw WCI Communities Inc.'s 9 1/8% notes due 2012 at 83.75 bid, up from Monday's 83, although he noted that "they've been strong in general - they have been the strongest [among the homebuilders], they've hung in there the best."

A trader said that the Fed rate cut boosted the market in general but the homebuilders, construction equipment rental companies and building materials companies in particular; among the equipment rental operators, he saw Neff Corp.'s 10% notes due 2015 at 78.25 bid, 80 offered, "up from the lower 70s." Rental Service Corp.'s 9% notes were better at 94.5 bid, 95.5 offered.

Among the materials companies, Ply Gem Industries Inc.'s 9% notes due 2012 firmed over a point to 83 bid, 83.75 offered.

Retailers on rise

Apart from the builders and building related names, a trader said retailers "did pretty well," with Burlington Coat Factory's 11 1/8% notes at 95 bid, 96.5 offered, up 2 points, and Claire's Stores' 10½% notes due 2017 at 80 bid, 81 offered, up 1½ points.

Another trader cynically noted that Pembroke Pines, Fla.-based specialty retailer Claire's "must be selling a lot of junk jewelry," calling it a big mover despite lackluster quarterly numbers that included a consolidated 1.7% drop in same-store sales, the key retailing metric. He said of its bonds "these dogs" were up 1½ points to 2 points, with the 101/2s at 79.5 bid, 80.5 offered, and its 9¼% notes at 89 bid, 90 offered.

Another source pegged the Claire's gains even bigger, quoting the 101/2s up as much as 5 points on the day to the 79 level.

A trader saw Tropicana Entertainment LLC/Tropicana Finance's 9 5/8% notes due 2014 up about 1¼ points at 76 bid, 76.5 offered, saying the Fort Mitchell, Ky.-based casino operator - owner of the famed Tropicana in Las Vegas - saw "a lot of trading today." He did not know why but suggested that "something must be going on with them."

A trader quoted the widely followed CDX index up ¾ point at 96 5/8 bid, 96 7/8 offered. Among other market indexes, the Banc of America Securities High Yield Broad Market Index rose 0.35% on the day to 1.97% year-to-date return. The KDP High Yield Daily Index gained 0.31 to end at 78.98, its yield narrowing 7 basis points to 8.14%.

Strategist optimistic after Fed

Max Bublitz, chief strategist at San Francisco-based SCM Advisors, which manages $12 billion of fixed-income assets, including about $1.5 billion of junk bonds, said that "one of the most important things that the Fed started to do on Aug. 17," when the central bank cut the discount rate by 50 basis points and announced other measures aimed at calming the jittery markets, "was to say 'look, we've been in a kind of wacky credit environment' - one that the Fed had not been comfortable with, with risk spreads say too tight - 'and we're going to transition now into a brave new credit world and we're not quite sure what that's going to be'."

He said that the initial jump from the old, "risk-oblivious world" into the new "risk-obsessed world" was "kind of emotional" - but since that time, "what I have seen over the last four weeks is the Fed has done a great job of at least trying to take emotion out of the price-discovery process."

At this point, he said "who knows where prices are going to settle? Who knows how the markets are going to react in a shipwreck [that hit the credit markets earlier in the summer] as more bodies float to the surface?"

But he said that having taken a walk around his firm's trading room earlier in the day, "corporate bond markets are a little bit tighter, things are trading better. The CDX markets are a bit tighter. Swap spreads have come in today."

The strategist said that "it's a little bit early, but my sense is that we're probably going to be a little more comfortable buying bonds - this whole price-discovery process, instead of dipping toes in the water, I think people will be jumping in up to their knees. I don't think anyone is totally comfortable that we've put this completely behind us. But it is clear that more and more people are participating in the process - to try and figure out what the new world is going to look like."

He concluded that "obviously, they're going to do that with the investment grade credits first - but sooner or later, we are going to see some activity in the high yield market."

Bublitz said "the 800-pound [gorilla] in the high yield market has been the hedge funds, and for a majority of time, it was simply a carry game, a spread game. When margin clerks get involved and they have to mark books to market, no one cares about spread and everyone freezes up and they sell things - but by and large, at 9%, or 400 bps over Treasuries, that is going to attract people to come in and start playing the spread game again. You're going to see hedge funds come back in. They're probably going to fund at 5½% or 6%, wherever Libor comes out, they're going to earn 9%, and they're going to lever that up - certainly not as much as they were two or three months ago. But the game will return - the credit markets will return, in some different form than we had a couple of months ago. What the Fed has done over the last month is said 'OK, let's speed that process up and figure out what the new world is going to be'."

Not all are impressed with Fed

On the other hand, Bill Featherston, managing director at J. Giordano Securities in Stamford, Conn., was not singing the praises of the Fed's move, declaring that "we will now be importing inflation." The rate cut, he said, "is going to crack the dollar, so imports are going to cost much more. You're perhaps going to see some foreign money leaving the country because of lower interest rates," which would make the United States a less lucrative and attractive venue for international investment than countries with higher interest rates, such as emerging markets powerhouse Brazil.

"It seems like this is bailing out troubled parts of the financial markets, such as the Street," he said, predicting that the rate cut's impact on the troubled mortgage industry - and down the line, on would-be homebuyers - would likely be "more psychological than real, because at the end of the day, after what the lenders have experienced in recent months, they're going to be tightening their lending standards, if nothing else. So unqualified buyers, like subprime borrowers, or Alt-A borrowers will not be able to get loans as they have in the past. Just because the banks and lending institutions have more money to lend - it doesn't mean they're not going to be more careful to whom they lend it."

In the immediate aftermath of the Fed announcement, Featherston saw "some upward movement for the most part in some of the housing-related bonds, so there was a little bounce in those," although he said that to a degree, that was already under way, spurred by Hovnanian's announcement of success with its weekend sales promotion.

"That, in addition to the Fed easing, has given that market a lift - Hovnanian bonds, Beazer bonds, that sort of thing, up another half [point] or so."

The J. Giordano managing director said that for the junk markets specifically, "it might be a longer-lived bounce" than for other credit sectors, "because what they're doing is encouraging a return to the type of speculation that got us in trouble in the first place, with lower interest rates. So that gives the marginal companies - i.e. the junk companies, the weaker junk companies - the opportunity to hang on in what may otherwise be a troubled environment, because they do have access to cheaper money."

Primary revives

Meanwhile the all-but-somnolent primary market perked up.

R.H. Donnelley Corp. plans to price a $650 million offering of 10-year senior notes (B3/B) in a Wednesday afternoon drive-by.

Elsewhere news was heard that the Downstream Development Authority deal is now downsized to $197 million from the previous $235 million size.

An investor call is set for Wednesday, and the deal is expected to price before the end of the week.

2 at 11

One high yield syndicate official, not in either deal, quipped late Tuesday that with news surfacing on two of the only three deals seen in the high yield primary since Labor Day it might have been possible for the prospective issuers to schedule their investor calls at different times.

Nevertheless, both the R.H. Donnelley call and the Downstream Development call are set to take place at 11 a.m. ET on Wednesday.

The official conceded that the respective bookrunners, JP Morgan for the Donnelley deal and Banc of America Securities for Downstream, may not have consulted with one another.

R.H. Donnelley's $650 million offering of 10-year series A-4 senior notes (B3/B) is expected to price in a Wednesday afternoon drive-by.

Proceeds will be used to refinance R.H. Donnelley Inc.'s 10 7/8% senior subordinated notes due 2012 and repay some term loan debt.

Meanwhile the downsized Downstream Development eight-year senior notes deal (expected B3/confirmed B-) - now $197 million instead of the previous $235 million - is expected to price before the end of the week.

In addition to the downsizing, there have been a covenant changes. The $50 million debt basket for future expansions was eliminated, as was the mandatory redemption of bonds with excess funds remaining in the construction disbursement account.

The prospective issuer is a Native American gaming concern which will develop and operate a casino-resort at the Three Corners border area of Oklahoma, Missouri and Kansas.

On Monday a sell-side source not in the Downstream deal told Prospect News of hearing that there were several large orders for Downstream's eight-year notes at around 11%.

Clear air

After news of the Fed interest rate cuts had time to circulate through the market Tuesday afternoon, Prospect News emailed a senior high yield syndicate official with the following question: Do you see the 50 bps cuts in Fed Funds and discount rates having a near-term impact on the primary market?

The response took only a few seconds.

"Yes," was this official's reply.

Meanwhile a money manager whose focus includes high yield bonds also saw the Fed cuts as a notably favorable development.

This source, however, took a few minutes to explain.

"This clears the air," the money manager said. "It was exactly the right decision.

"To lower the rate by 25 basis points, and leave everybody dangling as to whether they would do the other 25 would have been a mistake, I think.

"They sent a clear message that this isn't just about hedge funds and CDOs and bank loans. It's beginning to roll over into the real economy and into the real markets."

Also the money manager said that the cuts will favorably impact the leveraged markets.

"Too many entities have too much at stake to not get these LBO deals done," the buy-sider observed.

"Now, I think, one way or another - whether by downsizing or changing the terms - these deals will start to get done.

"This will make it easier for levered players to do these deals."

Having so commented, the money manager added that "ironically" Treasuries were actually unchanged to down a little on Tuesday, although the equity market went crazy.

The source surmised that it happened that way because the bond market had anticipated the move.

The buy-sider also noted that with the Fed Funds rate at 4¾% the yield curve is inverted, and added that two-year Treasuries were going out at 3.97% on Tuesday, three-year Treasuries at 4.0%, five-year Treasuries at 4.17%, 10-year Treasuries at 4.48% and 30-year government paper at 4¾%.

© 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.