NOVA Chemicals falls on maturity worries; Rite Aid rebound goes on; gaming names continue slide

By Paul Deckelman and Paul A. Harris

New York, Jan. 30 - NOVA Chemicals Corp.'s bonds were seen lower across the board, with investors depressed by the company's bad quarterly numbers, concerns about the weakness of the overall chemical industry - and worries about whether Nova will pay off its bonds coming due on April 1.

Freescale Semiconductor Inc.'s bonds were being quoted at better levels, despite the high-tech manufacturer's report of a wider quarterly loss on substantially lower sales.

Rite Aid Corp.'s bonds were meantime better for a third consecutive session, helped by Thursday's announcement of an increase in same-store sales, the key retailing industry financial metric.

On the other hand, gaming issues were mostly lower, continuing the slide that began Thursday when Mohegan Tribal Gaming Authority turned in disappointing quarterly numbers.

The junk bond primary sector - which had a very busy and productive week, pricing three issues having a total face value of $1.625 billion, the third such billion-dollar-plus week in a row - sat back and took a rest Friday; although American Media Inc. issued $321 million of new 2013 bonds, these did not actually trade, but were only distributed to holders of the company's existing 2009 and 2011 bonds as part of its exchange offer for that paper. Meanwhile, the new bonds from Chesapeake Energy Corp. and Intelsat Subsidiary Holding Co., Ltd., as well as the recently priced issue from Crown Castle International Corp., were all seen higher on the day.

Market indicators head south

Back among the established issues the widely followed CDX High Yield 11 index of junk bond performance, which fell more than a point on Thursday, was again on the slide on Friday, with a trader quoting the market measure down another ¾ point at 74 bid, 74½ offered.

The KDP High Yield Daily Index was meanwhile down 22 basis points on the day at 54.02, although its yield was steady at 13.53%.

In the broader market, advancing issues gave up their modest lead over decliners, although they trailed them by only a relatively narrow margin.

Overall market activity, measured by dollar-volume totals, rose by one-third from the levels seen in Thursday's session.

A trader said that while it seemed like there had been "a fair amount of activity, nothing [really] stood out."

He said that apart from the usual names, "there was a lot of one-off stuff."

He saw the market "generally behaving. Earnings haven't killed the market, and there's been a [new deal] calendar, so there's been some flow. Where we've gotten some size and value in the calendar, that's where the cash has been going."

Back in the secondary, he said, "everybody is sort of sifting through the names, to see if there's anything there that's either undervalued or overvalued. It's on a name-by-name basis."

He noted that besides the new money coming into the market, as exemplified by the fund-flow data, there was also "all of this coupon income that's been accumulating while the cash wasn't spent."

Another trader, however, said that despite the numerical increase in the day's volume over Thursday "it seemed like it was a half-day session, or the day before a three-day weekend," with activity in one name - the harried NOVA Chemicals - accounting for a good deal of what trading there was.

Apart from that unusual circumstance, "it was extremely quiet."

He theorized that "the buyside players are just on the sidelines, trying to figure out what to do, looking for some direction from the Fed, I'm assuming," in the wake of the central bank's mid-week statement that it is ready to buy long-term Treasury issues to help keep interest rates low and boost the economy - although it did not announce concrete details of such a buy, disappointing the Treasuries market despite the general promise to lend support.

But while acknowledging that "certainly, the economic releases are ugly, I think everyone looking at the bigger picture realizes that there's still value in high yield, at least in the better-quality end. So we really don't see much selling in that area."

Liquidity surge props up junk market

Realization that junk bonds have value and are far outpacing other asset classes in terms of total yield - for instance, while stocks suffered an eye popping drop in January of more than 8% by most major market measures, junk, as measured by the Merrill Lynch High Yield Master II Index, had turned in an impressive 5.705% year-to-date gain as of the close on Thursday, which translates to over 101% on an annualized basis - has helped to spur the massive inflow of cash into the junk market.

The widely followed AMG high yield mutual fund money-flows measure showed a $352 million net inflow for the week ended Wednesday - the fourth such cash infusion on the year, against no outflows - and some $2.093 billion so far this year, according to market participants familiar with those statistics.

Meanwhile, another measure of junk bond fund flows, from Cambridge, Mass.-based EPFR Global, shows a $257.4 million inflow for the latest week and $2.264 billion year-to-date, also with inflows seen in all four weeks of 2009 so far (EPFR's figures differ from AMG's due to the inclusion of a sizable number of non-U.S. domiciled junk funds, although domestic funds still dominate; in the latest week, outflows to many of the overseas funds helped to drag down the overall inflow figure).

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends because there is no real reporting mechanism to accurately track the movements of cash to and from the junk market from other, larger sources such as insurance companies and hedge funds.

The trader said that the continued flow of liquidity "was what's preventing our market from either collapsing, or moving down in sync with equities," which suffered through another depressing session - the bellwether Dow Jones Industrial Average surrendered another 148.15 points, or 1.82%, to end at almost exactly 8,000, while the Nasdaq composite index retreated by 2.08% and the Standard & Poor's 500 backtracked by 2.28%, closing out stocks' worst-ever January.

While the bottom seems to be dropping out of stocks on the latest bad news about the economy in general and the embattled financial sector in particular, the steady pace of inflows "has really helped stabilize the [junk] market."

That having been said, he reiterated that "buyside accounts are not willing to jump in yet. They just don't have the confidence that everything is fine - and who can blame them, when you see the economic and earnings releases?

"Everyone was on the sidelines" Friday, he said. "People seemed to be handcuffed as far as moving forward here."

At another desk, a trader said that while some individual names seemed to have been busy, overall, "at a lot of big places, they were hearing about their end-of-the year bonuses, or the lack of same," and this put something of a damper on things, especially with some houses curtailing the bonuses, either simply due to the economics of reduced revenues following a horrendous year for most of the securities industry, or partly out of concern about the bad public relations impact handing out such largesse in the middle of a recession may have, with even the president using his bully pulpit to now hold them up as an example of corporate irresponsibility and misplaced priorities.

Against that somber backdrop, the trader said, "there was not too much enthusiasm there."

NOVA down on short-bond worry

Traders said that NOVA Chemicals' bonds were active, particularly the 7.40% notes coming due on April 1, in response to the company's earnings release on Thursday, which traders said raised doubts in the minds of some investors about the company's ability - or its willingness - to pay off the maturing issue.

A trader saw the bonds at 61 bid, 63 offered, which he called "down five-plus points" on the day. "Those bonds were ending ugly," he said.

Another trader saw the issue doing even worse, quoting the 7.40s at a round-lot level of 62 - for a yield to maturity of 383% - and saying that looking strictly at the big-block trades, they had slid from Thursday levels around 75, and from levels earlier in the week as high as 84 bid.

Those bonds, he said, were likely the most active junk issue on the day, with $29 million changing hands, which he called significant volume on an otherwise fairly quiet day. "That seems to be where the attention lies."

He also saw NOVA's 6½% notes due 2012 fall nearly 5 points to 29.5 bid, though on only $4 million of trading., and saw NOVA's floating-rate notes due 2013 at 25.75 bid, down 6 points, on $6 million traded.

"The bulk of our activity today was in NOVA Chemical," he said.

The Calgary, Alta.-based chemical maker posted a loss of $214 million on Thursday, blaming weak demand for plastic resins. A 36% decline in sales helped to push the company's bottom line into the red.

Although chief executive Jeff Lipton said in the company earnings announcement that NOVA "generated strong cash flow, increased its liquidity and reduced debt by $290 million in the quarter despite a large feedstock cost dislocation and low polyethylene order levels in October and November," the trader opined that with those kind of losses, "people are concerned that they're not going to pay [the April 1 bonds] off, with that kind of drop, and that short a maturity."

A trader at another shop agreed that it wasn't so much the loss the company reported on Thursday that was hammering the bonds, as "they're kind of equivocating" on whether they're actually going to pay off the April 1 bond. "It matures on 4/1/09, in a couple of months. They're not clear on what they're doing with it.

"They say they have the money - but they don't seem to be buying the bonds back. We'll see. Somebody seems to be [convinced] that they're not going to, and it looks like given the numbers we're seeing and the [chemical industry] overcapacity in the marketplace, it's liable to get worse before it gets better."

He also observed that the other bonds were only down a relative handful of points for the logical reason that unlike the '09s "they were trading at 30 cents on the dollar, while the '09s were trading as high as around 80 earlier in the week and tumbled to the low 60s.

At another desk, the NOVA 61/2s were being quoted as having fallen over 10 points to 29.5, although a source allowed that this might reflect the movements of the last two sessions.

Freescale up, though its financials are down

Another name seen trading in fairly sizable volume was Austin, Tex.-based computer-chip maker Freescale Semiconductor, whose paper was seen up even though the company reported a wider loss in figures released Thursday, amid other signs of financial deterioration.

A trader saw its 8 7/8% notes due 2014 trading at 18.5 bid on a round-lot basis, versus 17 on Thursday, on volume of $18 million. However, he cautioned that while the day's levels were higher than that final Thursday trade, the bonds had actually traded for most of the previous session in a 20-21 context, before dropping late in the session upon the release of the numbers.

A trader at another shop said those bonds "look up a good bit versus yesterday [Thursday]," pegging them at 22 bid, 22.5 offered at the end of the day, better than the 20.5 bid, 21.5 level at which the bonds had traded for much of the day, and around 3 or 4 points better on the day.

Another market source saw those 8 7/8s as much as 5 points firmer on the session, at better than 22 bid, while its 9 1/8% notes, also due 2014, improved to around the 14 area, up nearly 2 points on the day.

Yet another market source called the 8 7/8s gainers at 21, with the 9 1/8s at 14 and its floating-rate notes due 2014 having improved a point or so to 18.

Freescale improved despite a slew of negative numbers; Freescale reported a fourth-quarter net loss of $4 billion, widening from a loss of $3.5 billion in the previous quarter and growing sharply from a $525 million loss in the last year's fourth quarter.

Its loss from operations for the quarter was $4.2 billion, versus a loss of $3.4 billion in the prior quarter and $595 million in the fourth quarter of 2007.

Net sales for the quarter were $940 million, against $1.4 billion in the third quarter of 2008 and $1.5 billion in the fourth quarter of 2007, while adjusted EBITDA for the fourth quarter was $94 million.

Freescale did show some improvement in its financial position, with cash equivalents and short-term investments at year-end 2008 standing at $1.4 billion, compared with $1.3 billion on Sept. 26, 2008, the end of the previous quarter.

Fitch Ratings was not much impressed, downgrading Freescale on Friday to CCC from B.

Rite Aid rolls along

An upsider with some actual positive news to point to was Rite Aid; a trader saw the Camp Hill, Pa.-based drugstore chain operator's higher pretty much across the board, although volume was relatively light. He quoted its 7½% notes due 2017 up 1½ points at 59 bid on $2 million traded; its 9 3/8% notes due 2015 also up 1½ points, to 29 bid, while its 8 5/8% notes due 2015 gained ½ point to 28 bid, on low volume.

A market source saw Rite Aid's 9 3/8% notes at 29, up more than a point on the day.

Rite Aid's notes had fallen badly earlier in the week, on a combination of a Moody's Investors Service downgrade and the news that Rite Aid's bank lenders, while agreeing to extend a revolving credit facility backed by assets like receivables, had cut the company's borrowing availability, forcing Rite Aid to seek other financing to make up for the a $200 million reduction.

But after having been oversold on Tuesday - an analyst also opined that the previous gains in the bonds had come too fast and too far and were "unjustified" by its fundamentals - Rite Aid began turning around at mid-week, surging on Wednesday and Thursday and continuing upward Friday.

It was helped by a 1% rise in sales at stores which have been open for at least a year, the key financial metric in the retailing industry. That gain in same-store sales came as a number of other retailers were posting sales declines versus the year-earlier period.

Gaming bonds crap out, again

Gaming issues were behind the eight-ball for a second straight session, continuing the slide seen on Thursday after Mohegan Tribal Gaming Authority reported reduced fourth-quarter revenues because of the combined impact of the recession on expensive consumer recreational activities like gambling, and increased competition for its Mohegan Sun casino resort in Uncasville, Conn., from other Northeast gaming operators, including in-state rival Foxwoods Casino Resort and the racetrack-based slot-machine parlors recently opened in neighboring New York State and Rhode Island.

Mohegan's 6 1/8% notes due 2013, which had been seen falling 2 points on Thursday to around the 72 level, slid all the way down to 65 bid on Friday, a market source said.

That source also saw bonds of rival gamers following suit, including MGM Mirage's 8 3/8% notes due 2011, down a full 7 points to the 53 level, and Boyd Gaming Corp.'s 7¾% notes due 2012, which dipped about 3 points on the day to 88.

A trader saw Wynn Las Vegas LLC's 6 5/85 notes due 2014 actively traded, with more than $18 million changing hands; the bonds dipped 3/8 point to 72.75.

Harrah's Entertainment Inc.'s 5¾% notes due 2017 dropped more than a point to close at 14.

New deals stay strong

A trader said the new deals "seem to be holding their own, and are trading up." He saw the new Chesapeake Energy 9½% notes due 2015 sat 98 bid, 98.75 offered; the Oklahoma City-based independent oil and gas exploration and production company's greatly upsized $1 billion of bonds priced Wednesday at 95.071 to yield 10 5/8%, and began moving up from the moment they were freed for aftermarket activity; after brushing levels as high as the 99 area, the bonds seemed to settle in around a 98 context and have stayed there since then.

He also saw Intelsat's 8 7/8% notes due 2015 as "pretty good too, kind of hanging in there at 91.5 bid, 92 offered; the company, a unit of Bermuda-based satellite communications operator Intelsat Ltd., company priced a sharply upsized $400 million of those bonds on Thursday at 88.5 to yield 11.617%, and these bonds too immediately began to firm smartly.

Several other traders saw the new Chesapeake issue at that same 98 bid, 98.75 offered level. One also saw the Intelsat notes get as good as 92 bid, 92.75 offered.

The traders did not see Inergy Finance Corp.'s upsized $225 million of 8¾% notes due 2015; the unit of Kansas City, Mo.-based propane marketing and distribution company Inergy LP priced those bonds on Wednesday at 90.191 to yield 11%. They too traded up solidly when freed, reaching levels in a 94-95 context.

One of the traders also saw Crown Castle International's recently priced 9½% notes due 2015 "continuing to move up; he quoted the bonds at 97 bid, up ½ point on the day, on some $4 million traded. The Houston-based communications antenna tower operator priced a substantially upsized $900 million of the bonds on Jan. 22 at 90.416 to yield 11¼% and those bonds also began to head skyward; one day earlier in the week, the Crown Castle issue was even one of the most heavily traded bonds of that session, with almost $30 million changing hands in the mid-90s.

Landry's on road

Meanwhile crickets pervaded the primary market, with no issues pricing and none launched.

The final week of January 2009 came to an end with just one deal on the forward calendar.

Landry's Restaurants, Inc. continues to roadshow a $270 million offering of senior secured notes due 2011.

That roadshow is set to wrap up during the mid-part of the first week in February, and price after that, according to an informed source.

Credit ratings remain to be determined.

Jefferies & Co. is the bookrunner for the debt refinancing and general corporate purposes deal from the restaurant, hospitality and entertainment company.

Mainly drive-bys

By running a full two week roadshow, the Landry's deal provides something of an exception to a tendency that has been seen in the primary market since mid-December, sources say.

Most deals have been marketed very briefly. They tend either to be a.m.-to-p.m. drive-bys or else to come with investor presentations that have lasted one or two days.

Some of them, such as the past week's massively upsized $1 billion deal from Chesapeake Energy Corp., have been fully subscribed, or even oversubscribed, by the time they are launched, sources say.

And the present volatility in the capital markets renders the high-yield road a hazardous place, syndicate officials add.

"Things have been moving quickly," one banker said shortly after Friday's close.

"Everything has been a drive-by.

"With the market being as volatile as it is, you don't want to waste time on the road and then launch the deal only to find out that the market is gone."

$1.5 billion week

The final week in January saw three issuers raise slightly more than $1.5 billion of proceeds.

In addition to Chesapeake, which raised $934.5 million with its issue of 9½% six-year senior notes (Ba3/BB) at 95.071 to yield 10 5/8% on Wednesday, Inergy Finance Corp. raised $203 million by selling 8¾% six-year senior notes (B1/B+) at 90.191 to yield 11%, also on Wednesday, and Intelsat Subsidiary Holding Co., Ltd. raised $354 million with an issue of notes mirroring its 8 7/8% senior notes due Jan. 15, 2015 (B3/BB-), which it priced at 88.5 on Thursday, resulting in a yield of 11.617%.

The Chesapeake and Inergy deals came conspicuously tight to their respective existing bond issues, a high-yield syndicate official recounted on Friday.

"Both printed really tight," the official asserted, marking Inergy's new issue concession at approximately 75 bps to the existing paper, while the market extracted a new issue premium from Chesapeake of approximately 65 bps.

"Chesapeake is a seasoned issuer that can come to market whenever they want, and they always tend to print pretty well," the official said.

Asked if the new issue premium is thought to be decreasing, the official said that in early January it seemed that the premium was in the 75 bps to 150 bps range.

However when Prospect News invited the source to declare a trend toward reduced concessions in the high-yield new issue market the banker declined.

"People are getting the sense that we might be choking the market a little," the banker said.

Nevertheless, massive amounts of cash that have come into junk recently, reflected in nine consecutive inflows to the high-yield mutual funds that AMG Data Services has reported - $352 million for the most recent week - must be viewed as a positive as far as the primary market is concerned, the banker conceded.

"There are plenty of companies that need to raise money, and they certainly don't want to miss the window if there is one," the sell-sider said.

$4.87 billion is January

On a year-over-year basis January 2009 saw a lower amount of high-yield rated dollar-denominated issuance, $4.874 billion, than January 2008, which saw $7.185 billion.

However that past month's deal volume, nine dollar-denominated tranches, was greater than that of January 2008 which saw the issuance come in only four tranches.

Stephanie N. Rotondo contributed to this report.

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