Atlas prices downsized deal; MBIA notes nosedive; WCI up on credit changes; funds lose $144 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 17 - Atlas Energy Operating Co. was heard by high yield syndicate sources on Thursday to have successfully priced a downsized offering of 10-year notes - just the second new junk deal of 2008. The deal priced fairly late in the session and was not seen in aftermarket dealings.

Back among the established names, MBIA Inc.'s recently issued surplus notes were the talk of traders. Even though they were sold at par with solidly investment-grade ratings just a week ago, they have slid precipitously over the past several sessions, with a particularly big drop Thursday, in line with the mounting problems of the bond-insurance industry in which MBIA is the biggest player.

Elsewhere, Residential Capital LLC's bonds were seen lower across the board - this despite optimistic-sounding reassurances offered by the big mortgage lender's corporate parent, GMAC LLC, which said its problem child would remain in covenant compliance and will likely lose less money in the coming year.

Community Health Systems Inc.'s bonds have been actively traded over the past several sessions - although traders don't have a ready explanation for the downturn in the Franklin, Tenn.-based hospital operator's paper.

On the upside, WCI Communities Inc.'s bonds were looking good, given a boost by the announcement late in Wednesday's session that the Bonita Springs, Fla.-based homebuilder had made the necessary amendments to its credit facility within the allotted deadline.

Overall, sources were marking the broad high-yield market off a point, as the bleeding continued on Thursday.

Nor is anyone claiming to have spotted the light at the end of the tunnel, at present.

"Cash flows were lighter today," one banker said, adding that more trading had taken place in credit default swaps.

"Things are starting to look cheap, but cheap to what?" the source asked rhetorically.

"The last time we got into an economic downturn spreads blew out to 700.

"We're at 550 now.

"If you look at stuff in the context of the past couple of years things look cheap right now on a relative basis.

"But people are concerned that the economy could get worse, that bonds will trade lower and defaults will go up.

"There are legitimate concerns as to whether you step in now, or wait another inning or two."

Fund flows off $144 million on the week

Meanwhile, a market source familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, some $143.7 million more left those funds than came into them.

It was the fifth consecutive weekly cash exodus, according to a Prospect News analysis of the AMG figures, including the $285 million outflow recorded in the previous week ended Jan. 9. In that time, dating back to mid-December, outflows have totaled $787.8 million.

The source added that the negative flow extends year-to-date outflows among funds that report to AMG on a weekly basis to $491.7 million.

Meanwhile funds that report on a monthly basis have seen $374.9 million of inflows thus far in 2008, according to the source - not sufficient to push the aggregate flows, which tally both the weekly and monthly reporting funds, above the balk line.

Year-to-date aggregate flows, to Wednesday's close, were negative $116.8 million, according to the market source.

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 - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Market measures point lower

A trader saw the widely followed CDX index of junk bond performance down 7/8 point on the day at 91 bid, 91 3/8 offered. The KDP High Yield Daily Index fell 0.41 to 75.35, while its yield widened by 9 basis points to 9.25%.

In the broader market, declining issues outnumbered advancers by a margin of almost two-to-one. Overall activity, as reflected in dollar volume, declined by about 19% from Wednesday's levels.

"Generally, the market was a little weaker," a source said. "I think a lot of guys were focused on the stock market" - equities cascaded downward for a third consecutive session, spurred by recessionary fears - "and what was going on with MBIA, and the potential for what could happen."

In the latter regard, he noted news stories indicating that Merrill Lynch - which took some $15 billion of writedowns and other adjustments relating to its losses on mortgages or securities backed mortgages on its way to reporting a $9.8 billion fourth-quarter loss on Thursday - "plans to write off all of their bond insurance default protection" - yet another body blow to the already-staggering bond insurance industry.

That, he said, "sidelined people halfway through the day. [The junk market] opened pretty busy, then it seemed like activity kind of slowed as the news got worse as the day went on."

Some market participants were also seen making an early exit on the last full trading session of the week. U.S. debt markets will be closing at 2 p.m. ET on Friday, ahead of the Martin Luther King Day holiday weekend, which will also shutter the financial markets for a full day on Monday.

New MBIA issue gets mauled

Junk traders were watching the spectacular fall of MBIA's 14% surplus notes due 2032, which had priced at par just a week ago but which have been falling ever since as the bad news continued to mount for the bond insurance industry.

A trader quoted the bonds at 80 bid, 83 offered, well down from 89 bid, 91 offered on Wednesday - but that was one of the more conservative quotes around.

"The MBIA '14s continued to be under pressure," a market source at another desk said, quoting the paper as having traded down around 70 bid at the end of the day, after having opened at 83 bid, 86 offered and having traded around 86 during the morning.

"It was a very volatile name," he added, "definitely one to ask around about."

Another trader saw the MBIA bonds "everywhere, all over the place. They were kind of a touchy subject." He saw the notes going home at 74 bid, 77 offered, well down from their prior levels in the high 80s.

The proximate cause of the big slide in MBIA paper was Moody's Investors Service's pronouncement late Wednesday that it may downgrade rival bond insurer Ambac Financial Group Inc.'s Aaa financial strength rating - which could have the effect of finishing the company as an insurer, since a sterling rating is considered an imperative to getting any new business. That caused Ambac's shares to lose more than half their value on Thursday, and spelled trouble for other companies in that same sector, including MBIA, whose New York Stock Exchange-traded shares plummeted some 32%. And the news got worse as the day wore on, with Moody's saying it would also scrutinize MBIA's Aaa rating, with a possible eye towards downgrading it.

The bond insurers are the latest victims in the spiraling credit crunch that grew out of last year's subprime mortgage industry meltdown. Companies like MBIA, Ambac and ACA Capital Holdings Inc. guarantee more than $2 trillion principal amount of various types of bonds against default - including many mortgage-backed securities which may include subprime loans as part of their collateral. The insurers agree to make payments to cover principal and interest on bonds should issuers be unable to pay their obligations in the event of a default.

With the rising number of foreclosures among borrowers with subprime mortgage, paper secured by such loans, even if only in part, is looking increasingly risky to Wall Street. Moody's and the other ratings agencies have expressed concern whether the insurers have the resources to meet any sharp rise in defaults and insurance payouts. Ambac on Wednesday announced plans to raise $1 billion of new capital - after estimating that a $3.5 billion after-tax write-down it will take for the fourth quarter would erase nearly two-thirds of the company's net worth. Fitch Ratings had previously said that without the additional $1 billion of capital, it would lower Ambac's ratings. Moody's raised the possibility that it would cut Ambac's ratings even with the $1 billion infusion.

MBIA, while larger than Ambac, is hurt by many of the same deteriorating industry dynamics. Fitch also prodded MBIA to augment its capital in order to keep its AAA rating, and MBIA responded with last Friday's sale of $1 billion of 14% notes. It also said it would sharply cut its dividend and take out reinsurance to bolster its capital reserves.

Moody's said that because of the potential MBIA downgrade, all bonds insured by MBIA will also be put on review for potential downgrades.

ResCap off despite reassurances, GMAC too

Among other financial names trading around on Thursday, Residential Capital's bonds were seen lower, despite assertions by corporate parent GMAC that the mortgage unit would be in compliance with its covenant obligations for the most recent quarter, and that it anticipates smaller losses from ResCap than the mortgage company posted last year.

A trader saw ResCap's 6½% notes due 2013 down 3 points at 53 bid, 55 offered, despite the seemingly good news. He remarked that "in this kind of market, there IS no good news."

Another trader saw the Minneapolis-based mortgage originator's 6 3/8% notes due 2010 down 1½ points at 57.5 bid, 59.5 offered. Its 8 3/8% notes due 2015 were down 1½ points at 56 bid, and its 6 7/8% notes due 2015 were seen at 55.

Meanwhile, despite GMAC's hopeful projections for ResCap and for itself, its 8% notes due 2031 were seen down 2 points at 77.5 bid, 78.5 offered, while its 6 7/8% notes due 2015 were off 1½ points at 81.5

In a filing with the Securities and Exchange Commission, GMAC said it expects to be profitable in 2008, citing the impact of anticipated "substantially reduced" losses at ResCap - which lost $2.26 billion during the calendar third quarter, helping to drag its parent down to a $1.6 billion quarterly loss.

GMAC is also counting on good performance in its insurance business, which it said would help to offset "delinquency headwinds" in its core auto finance operations.

GMAC's 49% owner, General Motors Corp., was also lower Thursday, a trader seeing its flagship 8 3/8% bonds due 2033 down a point at 76 bid, 77 offered. However, another market source saw GM's 7.20% notes due 2011 falling more than 5 points on the session to the 89 level - despite GM's own rosy projections of significantly improved operating earnings and cash flow generation over the next two to three years which the giant carmaker made during a presentation to analysts.

Community Health less than robust

Elsewhere, Community Health Systems' 8 7/8% notes due 2015 were among the most actively traded bonds for a second consecutive session - although there was no fresh news out on the hospital operator that might explain what, if anything is going on with them.

A market source saw those bonds down nearly a point Thursday to 99.75 bid, on top of a slight loss on Wednesday.

At another shop, a trader said that the bonds had opened at 100.5 bid, 101 offered, and then had traded slightly off that level for much of the morning. However, he said, by day's end, the bonds had dropped to 99.5 bid, 99.75 offered, "down a little with the market." The roughly 1 point drop, in brisk trading, "seemed pretty characteristic of Thursday's market," where a number of names were seen a point or more lower.

Another trader saw them going out at 99 bid, par offered, off a point.

Tech tumble continues

Most high-tech names were seen lower for yet another session, continuing to feel the sector heaviness following the disappointing quarterly numbers and forward projections of semiconductor industry leader Intel Corp., which apparently do not bode well for the entire sector.

Intel rival Advanced Micro Devices Inc.'s 6% notes due 2015 were down a point at 66 bid, 68 offered and its 7¾% notes due 2012 were also down a point at 75.5 bid, 76.5 offered. Korean computer chip maker MagnaChip Semiconductor's 8% notes due 2014 lost 2 points to 70 bid, 72 offered, while IT solutions provider Unisys Corp.'s 6 3/8% notes due 2010 were seen down a point at 92.5.

However, a trader saw Amkor Technology Inc.'s 7¾% notes due 2013 up a point, rebounding from Wednesday's loss, finishing at 90.5 bid, 91.5 offered.

Finlay firms after recent losses

One of the few upsiders seen Thursday was Finlay Fine Jewelry Inc., whose 8 3/8% notes due 2012 had recently been getting hammered amidst the general investor angst about the retail industry's prospects. But on Thursday, a market source saw those bonds at 45 bid, up a point. At another desk, though, those bonds were being quoted as high as 51 bid - up 6 points.

WCI up on credit announcement

Another big gainer was WCI Communities, whose bonds were solidly higher on the announcement late Wednesday that the builder had successfully completed amending its credit facility within the allotted timeframe. One trader pegged its 9 1/8% notes due 2012 at 52 bid, 55 offered, up from 47 bid, 49 offered.

Another trader saw those bonds at 54.5 bid, 56.5 offered, which he called a 6 point gain.

Yet another market source had the bonds at 56, up more than 6 points on the day.

But other builder names were mostly lower, with Hovnanian Enterprises Inc.'s 8 7/8% notes due 2012 off 3 points at 44 bid, 46 offered, while its 6 3/8% notes due 2014 down 1 point at 63 - and that was before the late-afternoon announcement by Moody's of a two-notch downgrade in the company's bonds.

A trader saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 down a point at 70 bid, 72 offered, while Standard Pacific Corp.'s 7% notes due 2014 were also a point lower at 60.5 bid, 62.5 offered. That credit too was cut by Moody's.

Tousa Inc.'s 8¼% notes due 2011 were unchanged at 41 bid, 43 offered.

Atlas Energy prices $250 million

Meanwhile the primary market saw one deal price during the Thursday session.

Atlas Energy Operating Co. and Atlas Energy Finance priced a downsized $250 million issue of senior notes due Feb. 1, 2018 (B3/B) at par to yield 10¾%.

Price talk was 10% to 10¼%, at a discount.

JP Morgan and Wachovia Securities were joint bookrunners for the debt refinancing deal, which was downsized from $400 million.

Focused on Harrah's

With the Atlas Energy deal having cleared on Thursday, one offering remained on the calendar as business expected to be completed by the end of the week: Solutia Inc.'s $400 million offering of eight-year senior notes (B2/B-), a Chapter 11 exit financing via Citigroup, Goldman Sachs & Co. and Deutsche Bank Securities.

However the market heard no news on the Solutia deal during the Thursday session, sources said.

Meanwhile the focus is on the bond and bank LBO financing from Harrah's Entertainment Inc.

The company is in the market with an unspecified amount of an overall total of $5.275 billion of senior unsecured cash-pay notes, upsized from $4.525 billion.

Harrah's is also marketing a $3 billion tranche of its overall $7.25 billion three-part term loan, which is talked at Libor plus 300 basis points, discounted to 96.50.

A trader who focuses on both high yield bonds and bank loans told Prospect News on Thursday that the word is out that a couple of high yield accounts have put in orders for the term loan tranche.

Meanwhile a sell-side source, not in the deal, expressed the belief that underwriters will require the participation of high yield bond accounts in order to place the loan.

However this source doubted that the junk bond accounts will be motivated by the coupon and discount.

"With Libor where it is, if you take Libor plus 300 at 96.50, and you swap it out using the four-year swap rate, you get a bond equivalent yield of 7.42%," the sell-sider said, adding that in order to reach a yield equivalent of 9% - where, according to the source, junk investors might begin to pay attention - the underwriters would have to sell at 91.50, a scenario that this sell-side source thought unlikely.

One problem facing the loan is the descending Libor rate, the sell-sider added.

"Libor has dropped so much that your yield on leveraged loan securities, when you're swapping out to a fixed rate, has gone down significantly.

"Libor used to be about 5%. And now that it's 4% and headed south you have already chopped a hundred basis points off the yields that people are getting.

"On top of that your forward rates are lower than your current rate. So people are going to demand more coupon to compensate for the probability that the base rate is going down.

"That will make it harder to sell leveraged loans, which are Libor-based instruments."

© 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.