MGM Mirage bonds slide but come off lows; Wynn quiets down; Fed's bond plan boosts junk market

By Paul Deckelman and Paul A. Harris

New York, March 18 - MGM Mirage's already battered bonds were points lower across the board in the early going Wednesday as investors reacted negatively to the troubled Las Vegas-based gaming giant's fourth-quarter swing into the red from a profit a year earlier and the going concern warning from the company's auditors that would seem to point to a bankruptcy filing somewhere down the road. Those negatives outweighed the temporary respite which the company won by from its bankers, who granted waivers on financial covenant compliance through May 15. However, the bonds made a comeback late in the session to end only modestly lower or, in some cases, even unchanged to up slightly.

MGM, like many other junk names, was seen benefitting from the general strengthening later in the session after the Federal Reserve gave the financial markets overall a shot in the arm with its announcement of plans to make massive buys of long-term Treasury bonds and increase its purchase of mortgage bonds to bring down overall lending costs.

Wynn Las Vegas LLC, whose bonds had moved up Tuesday in extremely heavy trading after a successful equity offering augmented the company's liquidity and raised hopes of a debt paydown, were seen still firm on Wednesday, although on considerably reduced volume.

Sprint Nextel Corp.'s bonds and those of its Sprint Capital Corp. unit remained actively traded on Wednesday, although the strong bids seen earlier in the week seemed to ease.

Primary activity remained muted.

Market indicators firm up

A trader saw the widely followed CDX High Yield 11 index of junk bond performance - which was unchanged for a second straight day on Tuesday following four consecutive upside sessions - improving by ¼ point on Wednesday, quoting it at 69¾ bid, 70¼ offered.

The KDP High Yield Daily Index meantime turned upward, gaining 13 basis points to end at 51.18, while its yield tightened by 3 bps to 14.13%.

In the broader market, advancing issues retained their lead over decliners, by about a three-to-two margin.

Overall market activity, measured by dollar-volume totals, rose more than 17% from the levels seen in Tuesday's session.

A trader said it was "busy this morning, then it got quiet" until after the Federal Reserve announced plans to buy as much as $300 billion of longer-term Treasury issues and to step up its purchases of mortgage bonds by as much as $750 billion as a means of bringing down borrowing costs across the economy, which caused a sharp rally in government paper.

"That's going to affect some of the crossover stuff, I would think," he said. "It's huge news."

Crown Castle gyrates with market

A trader meantime saw Crown Castle International Corp.'s 9% notes due 2015 bouncing up and down along with the broader market. The bonds, he said were "very active" and trading all day long in a 99-par context.

He saw the Houston-based communications antenna tower operator's bonds - $900 million of which had priced back on Jan. 22 at 90.416 to yield 11¼% - starting the day at 99.75 bid, par offered, then going down to 99 bid, 99.25 offered, and then moving back up to 99.5 bid, par offered before finally firming a bit more to end essentially unchanged on the day.

"Par was the high mark on these things - we had a couple of guys that were looking to sell. I think people were sort of negative on the market early this morning, and things felt heavy, but then after the Fed came out and made their announcement, everything kind of reversed, and has now moved higher."

Overall, he said, "we're just seeing generally better buyers of paper, pretty much across the board."

He continued that "we had a little reversal" from conditions in the morning, "and the market went from feeling a little bit overdone, like it had sort of peaked out a little bit, to maybe have some fresh legs now, because people are all bulled up with the Treasury market run."

He said that "in general, it's going to give a bid to spread product. We did see guys coming in and looking for spread product," noting that "there's a lot of pent-up demand. I didn't think that the high yield market was really going to sell off all that much anyway - the technicals are very strong and there's a lot of cash on the sidelines. A lot of guys are looking to put money to work."

These investors, he added "are looking for a calendar to develop, so they can really put their cash to work, so we're going to wait and see."

Another trader meantime saw frequently-cited market bellewether bond Community Health Systems Inc.'s 8 7/8% notes due 2015 at 94.75 bid, moving up from 93.875 Tuesday, "a nice little pop" on the overall market's late strength. Some $22 million of the bonds changed hands.

Big MGM drop actually a Mirage

MGM Mirage's bonds were initially seen at least several points lower pretty much across the board, with one issue - its 6% secured notes slated to come due on Oct. 1 - seen having plunged 10 points or more in the early going, down into the lower 50s, in heavy trading, before bouncing back from those lows to end only about 5 points off the pace. Other issues were only initially down 3 to 5 points, before ending off only slightly, or, in the case of a couple of bonds, actually up slightly, traders said.

The bonds were bouncing around in very active trading, as investors weighed the impact of all of the news they received after the close of equity trading on Tuesday night - the company's slide deep into the red in the fourth quarter versus its year-earlier profit and the issuance of a going concern warning by its auditors, balanced against the two-months of breathing room the company won from its bankers on complying with its credit facility loan covenants, while it attempts to improve its dire financial situation.

A trader said that the company's bonds were "riding a roller coaster." He said that "the really short stuff got hit early this morning, with the 6% secured notes slated to come due on Oct. 1 opening at 61 bid, down from Tuesday's closing levels around 65, and then nosediving down into the 50s. However, the bonds came off those lows - likely helped by the generally stronger market later in the day following the Federal Reserve's announcement on its plan to buy government bonds - to finish up "right around the 60 level, still down on the day."

He saw the company's 8½% notes due 2010, which had finished Tuesday around a 46 context, getting down to around 43 in early Wednesday dealings, but came just about all the way back, "bouncing up several points" to end essentially little changed in the 46 area.

The company's secured 13% notes due 2013 were "down a couple of points" early on, falling from Tuesday's 81 bid, 83 offered close to levels as low as 75 bid, 77 offered, before rebounding to end around 80 bid, 81 offered.

"The real activity was in the short stuff," he said. Among the somewhat longer issues, he saw the 5 7/8% notes due 2014, the 7½% notes due 2016 and the 7 5/8% notes due 2017 all gyrating around in the 30s, going from Tuesday's respective closes around 38 down to around 33-34, but then coming back to end around 38.5 bid, 39.5 offered, "actually a little stronger than they were [Tuesday]."

He saw "good volumes on this stuff. They've had busy days, but [on Wednesday], they definitely were among the volume leaders, no question."

Another trader pegged the 13s at 79.5 bid, 81.5 offered, up, he said, from around 77 earlier, while the 6s were "all over the lot," moving from levels as high as 65 early on down to 54 "and all between," and then heading back up to around 60, "really active, with a 10-point spread, but it settled off the high, while the 13s ended up at the high."

MGM, yet another trader said was clearly the most active name in Junkbondland on Wednesday, seeing $50 million of the 81/2s trading at 45 on a round-lot basis, bid, which he called down from 48 on Tuesday. He saw the 6s going out trading at 59.875, for a 136% yield to maturity, down from 65 on Tuesday, on volume of $37 million, while $19 million of MGM's 6½% Mandalay Resort Group legacy bonds coming due on July 31 traded at 70.25, for a 127% yield to maturity, down a little from 72.25 on Tuesday.

MGM's New York Stock Exchange-traded shares meantime initially plunged as much as 40%, before coming off those lows to end down 16 cents, or 5.28%, at $2.87. Volume of 8.7 million shares was not quite twice the usual level.

A $1.15 billion loss

The bonds fell after MGM, the second-biggest gaming operator in the world, behind only Harrah's Entertainment Inc., reported poor fourth-quarter numbers as the financial markets were closing on Tuesday.

It suffered a net loss of $1.15 billion, or $4.15 per share, in stark contrast to its year-earlier profit of $872.2 million, or $2.85 per share. The loss included a $1.18 billion charge related to the declining value of properties which it acquired with the 2005 purchase of rival casino operator Mandalay Resort Group. Excluding those charges and other unusual items, the company posted 10 cents per share of adjusted earnings, about a nickel per share less than Wall Street's expectations. It also reported a 16% year-over-year drop in revenues to $1.62 billion, versus analysts' average expectations of around $1.7 billion.

Along with those disappointing earnings, MGM delivered the news - which hardly came as a surprise to anybody who has been following its descent - that its auditors expressed "substantial doubt" whether the company could continue as a going concern, given the downturn in the whole gaming industry and MGM's own extensive financing needs and heavy leverage burden - as the end of 2008, its balance sheet was swollen with some $13.5 billion of long-term debt.

In announcing its earnings, MGM noted that its fourth-quarter results "were impacted by global economic conditions and market trends," adding that those negative trends have continued into the current first quarter.

It reiterated its recent declaration that while it was in compliance with its financial covenants under its senior credit facility as of the end of 2008, "if the recent adverse conditions in the economy in general - and the gaming industry in particular - continue, the company believes that it will not be in compliance with those financial covenants during 2009."

MGM flat-out predicted that "given these conditions and the recent borrowing under its senior credit facility," including the drawdown earlier this month of the final $842 million of available funds from what had at one time been a $7 billion revolving credit line, "the company does not expect to be in compliance with these financial covenants at March 31, 2009."

With the prospect of a default staring it in the face, MGM sought, and obtained from its lenders, a waiver through May 15 of having to comply with the credit facility financial covenants.

Having obtained that two months of breathing room, MGM said that it intends to work with its lenders to obtain whatever additional waivers or amendments prior to that new deadline to address future noncompliance with the senior credit facility, although it added the standard boilerplate disclaimer that it could give no assurance that such waivers or amendments could be reached, and that the failure to do so could open MGM to actions by its senior facility lenders to accelerate that loan, as well as triggering cross-defaults on other obligations such as its bonds and the $1.8 billion senior secured credit facility for its CityCenter development project in Las Vegas, which MGM is building as a 50-50 joint venture with partner Dubai World.

Wynn winds down

Also in the gaming sector, a trader saw Wynn Las Vegas LLC - the star of Tuesday's session as it moved up a point or so on very heavy dealings after the Nevada casino company's successful equity offering -- as "busy earlier on, although it's gotten quiet now [by late afternoon]."

He saw the "old" 6 5/8% notes due 2014 - so-called because the $1.3 billion issue was the first of two tranches of those bonds to price, back in February 2004 - going out at 72 bid, 73 offered, while the "new" 6 5/8% '14s, which priced in 2007, continuing to trade around 2 to 2½ points behind that. The latter bonds, he said, "really didn't trade much today," quoting them at around 70 bid, 70.5 offered. In fact, he said, "it usually doesn't trade very much at all."

He noted the disparity in the trading volumes and the prices, even though the bonds have identical coupons, maturities and other terms, pointing out that "it is a smaller issue," at about $400 million, less than one-third the size of the original tranche, "and obviously, that has something to do with it. There's less liquidity and people can't short it, while the other [larger] tranche is a surrogate" for the gaming sector. "It's one of the large issues, and especially a single-name issue - and it's still in relatively decent shape compared with these other guys" like MGM, Harrah's and Station.

"With the larger issue, you can short it - and that's always worth some valuation," although objectively speaking, he said it's "probably not" worth the spread between the two tranches.

At another desk, a trader saw the "old" Wynn 6 5/8s continuing to gain, pushing up to 73 bid, 73.75 offered on Tuesday. However, unlike that session, when over $80 million of the notes changed hands, making them easily the most actively traded paper of the day, if not the most actively traded junk issue in a good many days, he saw just $14 million of the bonds moving on Wednesday

Sprint trades, though gains fade

A trader said that Sprint paper "was active," although down a little from the levels seen on Tuesday and in recent sessions, by around ½ to ¾ point.

He saw the Sprint 6% notes due 2016 at 66 bid, 66.75 offered, down around ½ point, although he said the Sprint Capital 8 3/8% notes due 2012 "actually came back" after being down ½ point in the morning dealings to end "about unchanged' at 81 bid, 82 offered, although he said that was below where the bonds opened on Tuesday.

The Sprint Capital 6.90% notes due 2019, he said, were "flat on the day" at around 65-66. "It's a very mixed bag," he added.

At another desk, a trader also saw Sprint's activity levels down from what they had been on Monday and Tuesday, opining "what a difference a day makes."

He pegged the Overland Park, Kan.-based wireless telecommunications company's 6s at 66.75 bid, down ¼ point, on $3 million traded, while the 6.90s were off ¾ point at 65.5, also on $4 million.

Still another trader acknowledged that Sprint "has been the mover" this week, although he saw its notes now pretty much unchanged, with the 6 7/8% bonds due 2028 steady at 55 bid, 57 offered.

Price levels on Sprint bonds, particularly those which the company inherited in its acquisition of the then-Nextel Communications Inc., have recently been helped, some in the market say, by investor belief that the company may opt to take those bonds out via an exchange offer (see related story elsewhere in this issue).

GM seen shifting to neutral

A trader saw General Motors Corp.'s 8 3/8% bonds due 2033, which have recently been on an upside tear, retreating a point to 17.5 bid, although on volume of only $1 million, while GM's 7.20% notes due 2011 were unchanged at 23 bid, on $2 million of dealings.

He saw far more activity in Ford Motor Credit Co.'s 7.80% notes due 2012 rising to 67.25 bid from 66 on Tuesday, with $9 million traded.

Another trader, though called the GM long bonds a point better on the day, at 17 bid

Hertz not hurting

Also in the autosphere, a trader said that Hertz Corp.'s 8 7/8% notes due 2014 were "a little bit better" at 48.5 bid, which he called a gain of 1 to 1¼ points, with the trading happening "pretty much this morning."

There was no fresh news out on the Park Ridge, N.J.-based car rental king, although its NYSE-traded shares were also much better, to the tune of 33 cents, or 12.5%, to end at $2.97 after falling over 7% on Tuesday after Barclays Capital analyst Brian A. Johnson warned that Hertz and arch-rival Avis Budget Group Inc. could face liquidity pressures next year. He further cautioned that Parsippany, N.J.-based Avis, in particular, was in danger of possibly violating its debt covenants as soon as the current quarter.

E*Trade trades up

A trader saw E*Trade Financial Corp.'s 8% notes due 2011 up a point or two at 37 bid, 39 offered.

At another desk, a trader saw the New York-based on-line financial services company's 8s get as good as 39 on a round-lot basis, versus recent levels at 37.5, with $4 million traded, although he did see the company's 7 7/8% notes due 2015 dip to 27.5 bid from 29.25, with $2 million traded.

E*Trade's Nasdaq-traded shares meantime surged 37 cents, or 40.66%, to $1.28, on volume of 41.1 million, more than 4 times the norm, propelled upward by a rise in trading volume for its on-line brokerage service, as well as a decline in its rate of customers behind in payments on loans, particularly home equity, in February.

New Dole bonds continue rise

A trader said that Dole Foods Co. Inc.'s new 13 7/8% secured notes due 2014 were once again on the upside, quoting those bonds at 94.5 bid, 95.5 offered, up from 94 bid, 94.5 offered on Tuesday.

The bonds had been trading at 93ish levels on Monday, after the Westlake Village, Calif.-based fruit and vegetable processing company had priced its upsized $350 million offering of the bonds at 92.883 on Friday.

However, while seeing the rise, he said there was not a lot of trading in the credit and further noted that "a lot of that was a roll - a lot of people got out of [existing Dole bonds] and into the next, so you're not going to see a lot of excess float.

"So there was never a lot of trading in that one - a couple of buyers, and that was pretty much it."

Primary market remains quiet

Meanwhile from the buy-side, a money manager at a high-yield mutual fund in the Midwest said he is continuing to see cash inflows.

However cash flows are apt to be negative with respect to the overall asset class, the buy-sider reckoned.

"Our flows have continued to be strong, but I get the sense that it's not that way across the board," the source said.

The primary market, meanwhile, remained quiet on Wednesday.

A couple of deals had been expected to surface this week, according to a high-yield syndicate official However they will likely be pushed back until next week.

"Right now I think the arrangers are just waiting for an opening," the official said.

One factor that potential issuers are facing is the potential of notably high new issue premiums - as much as 150 basis points to 200 bps of concession to existing bonds.

The evidence can be seen in two of the most recent deals to clear the market, sources say.

On March 3 Plains Exploration & Production Co. priced a downsized $365 million issue of 10% senior notes due 2016 at 92.373 to yield 11 5/8%, at the wide end of official price talk of the 11½% area at a discount. The deal was reduced from $500 million. Shortly after pricing the notes traded lower in the secondary market.

On March 13, meanwhile, Dole Food priced approximately $350 million of restructured 13 7/8% five-year senior secured third-lien notes at 92.883 to yield 16%.

Although that deal went better than the Plains Exploration trade 10 days earlier, the original issue discount was steeper than the 95 area issue price at which the deal was shopped. And Dole had to make concessions with respect to call features and covenants.

"It did seem like Plains Exploration cooled the new issue market down a little, because it didn't seem to go very well," an investment banker said Wednesday.

"Dole was a better credit, and it's trading better in the secondary."

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