GM lower amid cash-burn concerns; Hercules bonds dive; price talk emerges on Rock-Tenn deal

By Paul Deckelman and Paul A. Harris

New York, Feb. 27 - General Motors Corp.'s bonds were seen lower Wednesday, even as a major ratings service - while affirming the company's current ratings - warned that its continued negative cash flow could cause liquidity problems somewhere down the line. But traders also said that a strike by the United Auto Workers union against major GM supplier American Axle & Manufacturing Inc. probably would not have too much impact on the carmaker. Even American Axle's own bonds did not react negatively.

Elsewhere, Hercules Inc.'s bonds were seen down several points in very active dealings, although nobody had a ready explanation for the gyrations in the Wilmington, Del.-based chemical manufacturer's notes.

Also on the downside, AbitibiBowater Inc.'s bonds traded off ahead of Thursday's scheduled release of the big forest products concern's fourth-quarter earnings.

There was some stirring in the recently all-too-quiet primary market, where price talk was heard to have emerged on Rock-Tenn Co.'s upcoming issue of eight-year bonds.

Market indicators send mixed signals

A trader said that the widely-followed CDX index of junk market performance was off by 5/8 points Wednesday to 88 3/8 bid, 88 5/8 offered. Meanwhile, the KDP High Yield Daily Index edged up 0.01 to stand at 74.50, while its yield widened by 1 basis point to 9.52%.

In the broader market, advancing issues led decliners by only a slight margin. Overall activity, reflected in dollar volumes, rose by about 13% from Tuesday's levels.

Cott slide fizzles out

Market participants said that no one name seemed to monopolize attention Wednesday, unlike Tuesday's market, which saw soft-drink bottler Cott Beverages Inc. slide 8 points in very busy trading on the news that retailing giant Wal-Mart Stores Inc. plans to reduce the shelf-space it will give to its Cott-produced private-label store brand.

In trading Wednesday, those Cott 8% notes due 2011 remained around the lower-80s context to which they had fallen Tuesday, their downside momentum apparently spent.

GM off as Fitch eyes cash-burn trends

One name which did get some mention was GM, whose benchmark 8 3/8% bonds due 2033 were seen by a trader down ¾ point at 79 bid, 80 offered. Another trader saw them down ½ point at 79.5 bid, 80.5 offered, while yet another market source saw the bonds ending at 79 bid, but called that a 1¼ point loss on the session.

Not much was going on on the news front Wednesday, other than Fitch Ratings affirming GM's current single-B credit rating - but with a negative outlook, meaning a downgrade is possible within the next year.

The ratings agency said in its announcement confirming the current ratings that that despite what it called "significant" cost reduction programs and "very substantial" improvements in the cost structure that have occurred at GM's North American operations, "negative cash flows at GM are expected to increase in 2008, leading to more pronounced liquidity drains. Weak economic conditions in the U.S., continuing restructuring costs, high commodity costs and supplier issues (including Delphi) will more than offset healthy results from international operations."

Fitch warned that in the likely absence of improvement in North American economic conditions or access to additional capital, "GM's liquidity could drop below $20 billion within the next year. As a result, Fitch expects that further restructuring will be required in addition to the current employee buyout program." It said that the "persistent lack of profitability, even with a lower fixed cost base, indicates that GM will have to further prune low-margin vehicles and production capacity," which could lead to the closure of at least three additional assembly plants over the intermediate term beyond the belt-tightening which the world's largest carmaker has already announced.

American Axle strike not seen as a factor

But traders dismissed the news of a UAW strike against large GM parts supplier American Axle as being unlikely to have much impact on the Detroit giant and its bonds, noting that American Axle's built-up stockpile of parts and GM's bloated inventory of unsold trucks, among other vehicles, means that the strike would have to last a while to start pinching GM.

"It's sounding like nothing will be affected," one said of the strike. "They appear to have supply" of parts.

However, they could be wrong about that - after the close Wednesday came the news that GM will indeed temporarily close one of its truck plants, the Pontiac, Mich., Assembly Center, which makes Chevrolet Silverado and GMC Sierra pickups. GM gets all of the axles for its full-size pickup trucks and large sport-utility vehicles from American Axle. However, the company is still producing the pickups and SUVs at its other factories in Flint, Mich.; Fort Wayne, Ind.; Oshawa, Ont.; and at two plants in Mexico.

The trader said that he had not seen any trading Wednesday in American Axle's bonds. Another market source actually saw the Detroit-based parts supplier's 7 7/8% notes due 2017 about 2 points better on the day at the 88 level, although there had not been much trading in the credit.

Elsewhere in the automotive realm, a trader saw Ford Motor Co.'s 7.45% bonds due 2031 down ¾ point at 69 bid, 70 offered.

Financing unit GMAC LLC's 8% bonds due 2031 were seen by a trader at 79 bid, 79.5 offered, "maybe down ½ point." While there was "decent activity" volumewise, the ½ point decline he said was "no big change."

GMAC's 7¾% notes due 2010 were off 1¼ points at 92.25. Its 6 7/8% notes due 2011 lost ½ point to end at 85.

Hercules hits the skids

Outside of the automotive sphere, there was some movement seen in chemical manufacturer Hercules Inc.'s 6½% bonds due 2029, which were seen down as much as 5 points in fairly active trading, ending around the 79.5 level. However, no one had seen any fresh negative news out on the company that might explain such a retreat.

Abitibi off ahead of earnings

AbitibiBowater's bonds were seen down about 1 to 1½ points, a trader said, with its 8.85% notes due 2030 at 53, "and on a lot of trading too."

Another trader - noting that the Greenville, S.C.-based company is scheduled to release earnings Thursday - saw the bonds down 2 points, with the 8 3/8% notes at 56 bid, 58 offered.

The company was formed last year from the merger of Greenville-based Bowater Inc. with Montreal-based Abitibi-Consolidated Inc., creating one of the largest companies in the forest-products industry. However, it has not been a marriage made in heaven, as the combined entity has continued to struggle, hurt by sagging newsprint sales and downward pressure on prices.

Even with expected sales of $1.65 billion - nearly double a year ago - analysts on average are looking for a per-share loss in the $2.65 to $2.70 area, far more red ink than the 27 cents per share loss seen a year ago.

Idearc off as Moody's considers downgrade

Also on the downside, a trader saw Idearc Inc.'s 8% notes due 2016 at 67.5 bid, 68.5 offered, down from previous levels around 69. Another saw the notes at 67 bid, 67.75 offered, while yet another saw the bonds bid at 67.5, down 1½ points on a possible downgrade by Moody's Investors Service.

Also probably not helping matters was the news that recently appointed chairman and chief executive John Mueller has resigned due to health reasons just one week into his new job. The board appointed a company executive vice president, the board appointed Frank Gatto, as interim CEO.

Moody's said that its decision to consider downgrading the Dallas-based telephone directory publisher "is prompted by the company's recent financial performance, which has not produced the level of free cash flow or reduced leverage to the extent anticipated by Moody's when ratings were initially assigned in October 2006."

Moody's will consider whether Idearc's new senior management team "will succeed in revitalizing the company's free cash flow generation or otherwise reduce debt in the near term below a 5.5 times multiple of EBITDA," It will also try to gauge whether the company "can successfully defend market share and respond to the increasing competition and disintermediation facing its mature incumbent yellow pages publishing business."

Young Broadcasting turns higher

On the upside, Young Broadcasting Inc.'s recently badly battered 10% notes due 2011 were seen having gained 3 points on the session to 69 bid.

There was no major positive news seen out on the New York-based television station group owner, which is in the process of trying to sell its potentially most valuable asset, its San Francisco-area TV station.

Young also announced that it will hold an earnings call next Friday

Market up and down

A trader in a buy-side shop said that after a decent showing on Tuesday, high yield gave a fair amount back as the Wednesday session got underway, then got a little bounce.

"It's a story of 'fits and starts,'" said the trader, who added that cash bonds were flat through most of the session.

"They opened down, fought back and then drifted," the source said.

Regaining its senses

A mutual fund money manager who tracks both high yield bonds and bank loans said that cash loans backed off a little on Wednesday after having rallied strongly for the past week.

"Some names are up as much as 6 points from their lows," the buy-sider said, adding that recent volume is focused on 20 or 30 liquid names that were pushed down too far, and then pushed back too far.

This source more or less signed off on recent color from the high yield sell-side - that in order for a meaningful regeneration to take place in the high yield market the bank loan secondary market needs to come back.

And in order for that to happen, the source added, the backlog of LBO-related loan overhang needs to be cleared up.

"People seem to be saying there is around $150 billion of overhang in the bank loan market, which is too much supply when you have insufficient demand for that type of paper.

"That needs to clear one way or another, either by getting done or going away.

"And it will take a few months."

However, the buy-sider said, the week-long rally in bank loans could be seen as evidence that investors are regaining their senses.

After all, the buy-sider contended, since the leveraged markets started to sell off last summer bank loans fell below the bottom reached in the last recession when default rates were around 7½%.

"But this time default rates were at 1%," the investor said.

"That makes you wonder if some of the sellers had an outlook on the end of the Western World."

Regardless, lately the buy-side seems to have tired of the "end-of-the-Western World" scenario, the money manager continued.

"Some people think there won't be a recession. Some people think there will be a mild recession.

"If you look at Wall Street forecasts, the two most bearish firms are Goldman and Merrill. And neither one of them has more than two quarters of negative GDP. And both of them have GDP for all of 2008 up slightly."

Suddenly yields in the bank loan market look interesting, the investor said, adding that in any event there were never any "natural sellers" in the bank loan market, just "forced sellers," and others who were spooked by the forced selling because they lost track of a central tenet of debt-side investing: credit fundamentals matter a lot more than price.

Supply-demand balance

Whether or not the bank loan market is currently in the process of regaining its senses, supply and demand with respect to the LBO risk overhang must come into balance before the high yield bond market can truly reopen, the investor said.

"Bank loans, which are the top of the capital structure, have pushed down high yield," the buy-sider asserted, adding that it's unnatural for high yield to trade too far worse than bank loans, although by some calculations bank loans are actually trading at a higher yield than high yield.

"That makes no sense," the investor said.

"For everything to work it's important for the bank loan secondary market to come back.

"The exception would be good double-B high yield credits doing drive-bys.

"They never really need the bank loan market in the first place. They don't need it now. There is still plenty of natural demand for high yield.

"People want quality in high yield and they want the yield of high yield.

"But a generic high yield company that has a bank loan at the top and high yield in the middle needs the bank loan market to get back on its feet."

Rock-Tenn price talk

The Wednesday primary market produced only one piece of news.

Rock-Tenn Co. set price talk for its $200 million offering of eight-year senior notes (Ba3/BB-) at the 9 3/8% area.

Pricing is expected on Friday.

Banc of America Securities, Wachovia Securities and SunTrust Robinson Humphrey are joint bookrunners for the corporate-to-corporate acquisition financing.

The bond portion of the financing was downsized from $400 million, with $200 million of proceeds shifted to the company's term loan A, which was upsized to $550 million from $350 million.

The overall size of the credit facility was upsized to $1.2 billion from $1 billion.

Sources told Prospect News on Wednesday that both the bonds and the bank loan are going well.

An informed source said that 9 3/8%, the talk on the Rock-Tenn notes, represents the level at which the deal was pro formaed.

Does that mean the order book is already full? Prospect News asked.

The official seemed disinclined to directly discuss the order book, but insinuated that such is the case.

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