Canada bond markets quiet amid dry stretch; Yellow Media's bonds mixed; Teck tightens

By Cristal Cody

Prospect News, July 6 - The Canadian bond markets marked another quiet day without any primary activity on Wednesday.

One corporate bond source reached late afternoon said that the slow pace "is a reflection on the market, too. We haven't had a new issue in several weeks."

The market tone in Canada is improving over the previous week, but "not to the point where we're seeing a large amount of tightening," the source said. "We're seeing some buying out there but we're also seeing some accounts still selling corporate bonds. Spreads overall week over week are modestly tighter but day to day, nothing's really moving right now."

Moody's Investors Service's downgrade of Portugal's debt to junk status on Tuesday helped government bonds and, like the Greek situation, is causing concern for the overall market tone.

"In the short term, it probably has caused a softer overall feel today," an informed source said. "We haven't [had] any big credit stories within Canada, and most people are just waiting for the market to gain a little more confidence."

In trading, Yellow Media Inc.'s "shorter-dated bonds are doing better," a corporate bond source said.

Also in the secondary market, Teck Resources Ltd.'s new bonds ended June better by 13 basis points to 15 bps and traded Wednesday at about the same levels, a trader said.

Nortel Networks Corp. was Wednesday's nom du jour, as investors continued to push the company's debt higher.

The gains that started before last week's patent portfolio auction have only increased since the company announced the winning $4.5 billion bid. The higher-than-expected price has led many to believe that bondholders would receive 100% recovery.

Canadian government bonds rose, sending yields down 1 bp to 2 bps across the curve. The 10-year note yield fell 2 bps to 3.04%. The 30-year bond yield closed down 1 bp to 3.5%.

Yellow Media slips

Yellow Media's bonds fell C$2.00 to C$3.00 in the secondary market going out in June but started to climb modestly in the first week of July.

"We've seen some buying and a little bit of recovery," one bond source said.

Yellow Media's stock hit a record low on June 27 after Credit Suisse and RBC Capital Markets analysts lowered their price targets for the company, which makes Yellow Pages directories. The stock fell 4 cents, or 1.57%, to C$2.51 on Wednesday.

"The longer-dated bonds are still feeling more pressure on waiting to follow last week's update to get the Trader [Corp.] transaction closed, and it sounds like we're going to be waiting for another few weeks," the source said.

The bonds have not been active in trading this week with no recent quotes, according to a trader.

Montreal-based Yellow Media said on June 29 that it expects to close the sale of subsidiary Trader Corp. by the end of July.

Teck tightens

Teck Resources' new bonds sold on June 29 continue to trade firmer a week after issuance, a trader said on Wednesday.

The company sold $2 billion of senior notes (Baa2/BBB/BBB) in three tranches in the U.S. high-grade bond market.

A $300 million tranche of 3.15% notes due 2017 firmed to 140 bps bid, 135 bps offered on Wednesday. The notes priced at a spread of Treasuries plus 150 bps.

Also in the secondary market, Teck's $700 million tranche of 4.75% notes due 2022 traded on Wednesday at 158 bps bid, 153 bps offered, firmer than the 165 bps spread it priced at a week earlier.

The final tranche of $1 billion 6.25% bonds due 2041 priced at a spread of Treasuries plus 190 bps and narrowed 10 bps to 180 bps bid, 175 bps offered on Wednesday, the trader said.

The diversified resource company for mining and mineral development is based in Vancouver, B.C.

Nortel pops again

A trader said Nortel Networks was the "only name of interest" in Wednesday's session.

"That was the big active gorilla name," he said, seeing the 10 1/8% notes due 2013 and the 10¾% notes due 2016 closing around 107 bid, 107½ offered.

"They did pop a little bit," another trader said. He said the 10¾% notes were the "biggest trader of the day," with the paper opening around 105 bid, 106 offered and moving as high as 109 bid before settling back in at 106¼ bid, 107¼ offered.

The bonds have been on the upward ascent since June 27, when the Toronto-based bankrupt telecommunications products company began an auction for its patent portfolio.

With the auction garnering much more than originally anticipated, bondholders are now thinking they could recover 100% of their claims.

"I think that's a definite," a trader said. Pre-petition recovery of 100% would value the bonds around 105, he explained. Post-petition recovery increases that value to around 130.

Still, the sale has some obstacles to overcome. Canada is reviewing the sale to see if it falls within the realm of the Investment Canada Act. The U.S. Department of Justice has also been asked to look into the sale for antitrust concerns.

Another trader proclaimed that Nortel "was the name of the day" on Wednesday, as the bonds of the bankrupt Canadian communications equipment manufacturer firmed solidly - between 3 and 6 points, depending upon the issue - as Nortel announced the appointment of a court-ordered mediator, which is expected to speed up the allocation of the company's assets to its various creditor parties, including the bondholders.

The jump followed an even sharper rise late last week on the news that a consortium of high-tech powerhouse firms had bid $4.5 billion for a treasure trove of valuable Nortel patents - three times more than analysts had anticipated, and five times more than the original $900 million stalking horse bid by Google Inc., with the greater proceeds expected to generate a bigger recovery for the creditors as the troubled company is liquidated.

A trader estimated that "between all of their issues, north of $150 million traded."

He saw the biggest gain in Nortel's 6 7/8% notes due 2023, which zoomed by almost 6 points on the session to end at the 75 level, with $16 million traded.

The busiest issue he saw was the company's 10¾% notes due 2016, with over $63 million changing hands. He pegged those bonds up a little more than 3 points to the 107 level, which was also where its 10 1/8% notes due 2013 wound up on over $37 million traded. He said the latter issue was up by 2 points.

Another trader saw "hundreds of millions trading" across the company's capital structure. He saw the 10 1/8% and 10¾% notes going out in a 106 1/8-107 1/8 context, "probably up a couple of points," this after having come down from the day's peak levels around 108-108¼ earlier.

He saw the 6 7/8s were up between 5 and 6 points, around 75 bid, 77 offered.

"So basically, you can say that Nortel's lovin' life today," he observed. "The bond holders are pretty happy. There was a lotta, LOTTA volume."

Nortel announced that Ontario's provincial chief justice, Warren Winkler, will serve as the mediator following his appointment by the two courts overseeing Nortel's wind-down, the Ontario Superior Court of Justice and the U.S. Bankruptcy Court for the District of Delaware. The two courts held separate hearings last month in Toronto and in Wilmington on a proposed protocol for allocation of Nortel's assets, including the $4.5 billion generated in last week's patent auction, but have not released their rulings yet. "The mediation was ordered because of both courts' concern that the time required to prepare their decisions would also delay allocation proceedings and, therefore, distributions to creditors of the various Nortel estates," the company statement said.

Besides the news of the mediator, wires on Wednesday also crackled with the news that Canada's Industry Minister, Christian Paradis, said that he is looking into whether the government should review Nortel's patent sale under the Investment Canada Act. That law governs foreign investment in Canadian assets. Of the five companies in the consortium which won the auction - Apple Inc., Ericsson, EMC, Microsoft Corp. and RIM Ltd. - only the latter company, which contributed $770 million to the purchase, is based in Canada. Paradis wants to determine whether the sale of the 6,000 Nortel patents is a "net benefit" to Canada.

While this has the potential to delay the sale and ultimately, allocation of the proceeds to company creditors - some news reports on Wednesday theorized that Ottawa may decide not to review the patent sale on technical grounds - the Investment Canada Act mandates scrutinizing the purchase of a Canadian entity if the net value of the assets amount to more than $312 million in book value, but Nortel had reportedly written down the book value of the patents to zero.

The law also stipulates review of any transfer of assets generating more than C$73 million, but Nortel's global patent portfolio reportedly never made more than C$10 million annually.

Paul Deckelman and Stephanie N. Rotondo contributed to this review

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