WaMu bonds nosedive, Lehman busily traded; market mostly lower; Ventas bucks the trend

By Paul Deckelman and Paul A. Harris

New York, Sept. 23 - Washington Mutual Inc.'s bonds took a Tuesday tumble, with some issues down 15 points or more, although the troubled Seattle-based thrift operator's shares were only modestly lower, amid news reports detailing WaMu's efforts to sell itself - preferably as a whole entity, but if need be piecemeal.

Lehman Brothers Inc.'s bonds were again active, hanging in at just under 20 cents on the dollar.

The overall financial crisis, which keeps dragging the equity markets down, was seen also continuing to cast its long and ominous shadow over a thoroughly spooked junk market, with most issues quoted lower - some by multiple points - on Tuesday.

Here and there, though, there were upsiders, including Ventas Realty LP.

Primary market activity meantime remained muted.

Sources on both the buy-side and sell-side saw junk lower on Tuesday.

"The lower quality stuff is melting," a buy-sider said. "The higher quality stuff is not doing too bad.

"The dealers are trying to get rid of stuff, and some of it is going into a little bit of a spiral. But it's name-by-name."

Sell-side sources mentioned uncertainty with the government's attempt to hammer out a deal to "rescue" or "bail out" Wall Street - both expressions were heard.

One high-yield syndicate source believes it is critical that the government provide some clarity as to what shape a rescue plan would take sooner than later.

However another official from a different high-yield syndicate desk harbors some doubt that any such plan would have a dramatic impact on the junk market.

Market barometers point lower

The widely followed CDX index of junk bond performance, after falling by ¾ point on Monday, lost another full point on Tuesday, a trader said, quoting it at 90½ bid, 91offered. The KDP High Yield Daily Index fell by 43 basis points to end at an even 68, as its yield rose 8 bps to 11.27%.

In the broader market, advancing issues trailed decliners by a margin of almost two to one. Activity, represented by dollar volume, rose by 29% from the levels seen on Monday.

A trader, asked to describe Tuesday's market, rhetorically demanded "where do I start - it's just all over the place, adding that "it's crazy times."

He noted that the emergence of fallen-angel financial paper like Lehman and WaMu - which have moved almost directly from the investment grade precincts down to the distressed regions of Junkbondland - "has taken a lot of focus of the high yield business lately. And with this equity volatility, it just further compounds that issue."

Indeed, the equity markets were careening around crazily. The bellwether Dow Jones Industrial Average - which had zoomed by more than 750 points on Thursday and Friday, only to spit back 370 of those points on Monday - zigzagged all day, moving up by over 125 points and later down by 180 - before closing the session down 161.52 points, or 1.47%, to 10,854.17. Broader stock indicators also swung wildly around on Tuesday before finally going home lower, with the Standard & Poor's 500 index down 18.87 points, or 1.56%, to a close of 1,188.22, and the Nasdaq composite index off 25.67 points, or 1.18%, to 2,153.34.

Back in the junk market, the trader said, "there was no real sector focus at all yesterday [Monday] or today. I would describe the market as somewhat listless. People were just kind of taking a breather, trying to digest this significant news [out of Washington] that nobody seems to really be able to explain, and its impact on credit."

On Tuesday, lawmakers from both parties were expressing emotions ranging from skepticism to downright opposition to that plan announced last week by Treasury Secretary Henry Paulson that would have the government spend at least $700 billion - and maybe more - to buy up bad debt on the books of banks and other financials in order to get that toxic paper out of the way and let the markets work their way out of the more-than year-long credit downturn without having to worry about surprise new disclosures of big writedowns and heavy losses.

The skeptics questioned just how this would occur, demanding details from administration officials; some wondered whether the measure would have any lasting impact at all, while critics demanded that the program include assistance for homeowners hurt by the credit crunch as well as the bankers, and balked at the notion that executives whose companies ended up on the rocks might still float away with fat golden parachutes.

The trader said that the session in the junk market "has just been a hodge-podge of various names. It's very, very spotty stuff."

Another trader said that he "would not necessarily categorize the entire high yield market down roughly two points, I think [the market's performance Tuesday] shows the need for liquidity.

Capitulation coming soon?

He also said that junk seemed to be slouching towards some kind of a capitulation phase which would see accounts selling out positions "as close to par as possible" to reap maximum returns - but "we really haven't seen the capitulation yet because of this late rally in equities last week and two sort of flat days in equities yesterday and today. But we're starting to get the sense that guys are going to start selling what they can close to par in the high-yield universe.

"We haven't gotten there yet - but it certainly feels like there's some money sitting really close to the edge, waiting for the orders to start selling it at anything close to par."

Such a capitulation, he acknowledged, would bypass credits which have been beaten down to levels many points - even many tens of points - below par. "You get into the Bon-Tons of the world and the Spectrums of the world, and some of the stuff that trades in the 30s, 40s and 50s. You always have distressed players and you'll have a bid."

Instead, he said he was talking about "real funds who owns billions of dollars [of junk] and you start to get them looking at their portfolio and them saying 'what can we sell here and get made whole on? Anything close to par, just sell it'."

He said that there were signs around mid-week last week that such a development might be coming "with real threats looming in the macro[economic] scheme - but that kind of got shaken up a bit with the rally Thursday and Friday. Then Monday was a 'wait-and-see' kind of day, kind of a breather and then today, we started to see the equities drift again. So my guess is there's a lot of nervous credit guys sitting around."

He allowed that it would probably behoove bondholders thinking along such lines to probably sell their bonds now - when many credits still carry prices of 95 or above, despite the market turmoil - rather than to wait until everyone starts selling, bids get hit left and right and drop of levels not-so-close to par anymore - and there's "a mad rush for the exits."

He said that there were credits "where you showed them a bid a week ago, and on Wednesday, they said 'stay in front of me on it,' but then by Thursday, they were saying 'nope, not a seller," wanting to ride the bonds further upward on the strong advance late last week. By Monday, he said, they were saying 'yeah, keep me up again' [i.e. alerted to the latest bids for such paper].

"My guess is that within a day or two, if the equities continue to bleed," then they'll come back looking for a bid. "Obviously, there are a lot of meetings going on at all these shops where people are sitting down and asking 'What can we sell?', 'What do we have to sell?', 'What in our book is troubled?' 'What's not troubled?' and 'Where can we raise some cash and get out at par?'"

Right now, though, he said, most investors are not yet at that point. "We've just got spotty data points. If we get a few more days of the stock market trading off, you might start to see some real paper start to come out."

The tone of the market, he concluded, "it's just telling you that it's not affirming that this [government debt-action] plan last week is going to hold."

WaMu getting walloped - at least the bonds

Among specific issues, a trader noted that "either Washington Mutual equity is rich, or their bonds are cheap, because the bonds really got hit today" - while the stock was down only a moderate amount. The biggest U.S. thrift operator's New York Stock Exchange-traded shares fell by as much as 11.4% during the session versus Monday's close, but by the end of the day, was off just 13 cents, or 3.90%, at $3.20. Volume of 114 million shares was only slightly more than normal.

However, over on the fixed-income side of the fence, it was quite a different story, where WaMu "was definitely the biggest mover of the day."

He saw its 4.20% notes due 2010, for instance, swoon to a final round-lot price of 33 from 50 on Monday - a 17-point slide. Volume was a fairly active $12 million.

WaMu's floating-rate notes due 2010 nosedived to 51.75 on a round-lot basis from 75 on Monday - a 23 point plunge, with $15 million bonds changing hands.

And he saw WaMu's 4 5/8% notes due 2018 down 15 points at 20 bid, while the 5¼% notes due 2017 last traded Tuesday at 32.125, versus 47 on Monday, on $8 million of trades.

Something doesn't add up there," the trader said. "This stock should have been cut in half, based on the losses on their debt."

WaMu has meanwhile been meeting with prospective buyers or investors in an attempt to avoid the fate of Lehman Brothers, which last week filed for Chapter 11 and which has since seen some of its assets snapped up at relatively bargain prices - much of its domestic unit to Barclays plc, while its Asian and European operations are being parceled out to Japanese financial giant Nomura.

WaMu in the meantime has been linked in the financial press with such potential buyers as Citigroup, Toronto Dominion Bank, J.P. Morgan Chase & Co., Wells Fargo & Co., HSBC and Spain's Banco Santander.

Federal officials are reportedly pushing for a quick agreement, but still to be determined is what impact the proposed federal bad-mortgage bailout plan might have on WaMu - which has a considerable holding of underperforming, stressed or defaulted mortgage assets - and whether WaMu might manage to remain independent if the bad debt is cleared from its books.

Lehman still an active mover

Also in the financial sphere, Lehman Brothers remains a key junk mover, although one of the traders remarked that "for the first day in a while, Lehman wasn't the most active issue" - that honor went to Sprint Nextel Corp.'s 6% notes due 2016, which dipped ¾ point to 85.5 bid, on turnover of $42 million.

But Lehman was not too far behind. He noted that Lehman's 6 7/8% notes due 2018 were hanging in at 19.25 bid on volume of $39 million, and the bankrupt New York-based investment banks' other senior issues, like its 6.20% notes due 2014, were also hovering around that generic 19 mark.

Auto names not much changed

A trader saw General Motors Corp.'s 8 3/8% bonds due 2033 up ½ point at 48 bid, 50 offered, and saw GMAC LLC's 8% bonds due 2031 unchanged at 48 bid, 50 offered. He saw Ford Motor Co.'s 7.45% bonds due 2031 down ½ point to 49 bid, 51 offered.

A second trader saw the GM long bonds unchanged at 50 bid, although he did see its 7.20% notes due 2011 off 3 points at 67. He saw GMAC's 8s untraded on a round-lot basis, although he said there were some odd-lot dealings as low as the 40s from Monday's closing level at 50. He saw the Ford bonds fall to 51.125 bid from 54.5.

Traders said that generally speaking, there was little or no impact on GMAC's bonds, or on the bonds of Ford's auto-loan arm, Ford Motor Credit Co., from a news story in The Wall Street Journal indicating that the Big Three carmakers' auto-finance arms are lobbying Congress and the Treasury to get distressed auto-loan bad-bet included in the $700 billion federal debt-cleanup bill. The measure at this point does not specifically include their debt with that of banks and other troubled financials, but the auto-finance companies are pushing for such language.

A trader said he thought the idea "humorous," while another said "hey, everyone is going to try" to get a piece of that $700 billion pie, "so I don't blame them."

Banc of America Securities, in a research note, opined that inclusion of auto-finance debt in the bailout bill "would clearly be a positive" for the bonds of GMAC and Ford Credit, "because a lot of risk surrounds their ability to maintain liquidity and funding needs, given that the ABS market has tightened up."

ArvinMeritor gyrates on better guidance

Also among the automotive credits, ArvinMeritor Inc.'s bonds climbed after the company issued its bullish guidance - but then came off those highs amid a generally lower market.

A market source saw ArvinMeritor's 8¾% notes due 2012 push as high as 90.5 from prior levels just above 88, with a number of large-block trades seen. However, those bonds then came back down to around 88.5.

It was the same story for the company's 8 1/8% notes due 2015. Those bonds got as high as 83, up 1½ points from their late Monday levels, before coming off that peak and slipping back down to under 81.

However, at another desk, a trader saw the 83/4s ending up ¼ point at 88.5 and called that "impressive, in this market environment." He saw the 8 1/8s ending up 1½ points at 83.

ArvinMeritor's NYSE-traded shares rose 3 cents, or 0.20%, to $14.79. Volume of 2.9 million shares was a bit less than twice the normal turnover.

The Troy, Mich.-based producer of axles, drivetrain components and other automotive systems, raised its projections for full-year earnings per share to a range of $1.55 to $1.65, up from its previous estimate of $1.40 to $1.60, and up from analysts' average forecasts in the $1.55 per share region. It will report its results for the current fiscal fourth quarter, which ends on Sunday, on Nov. 18.

It also expects improved free-cash flow for the year, versus its previous estimates; in the fiscal third quarter, the company forecast free cash flow for fiscal 2008 to be in the range of negative $50 million to negative $100 million.

ArvinMeritor's chairman, chief executive officer and president, Chip McClure, said in a statement that although the economic environment remains "uncertain," ArvinMeritor "has executed well this year. We are pleased that we are able to improve our outlook for fiscal year 2008 despite weaker market conditions in North America and Europe."

Ventas higher

A trader saw Ventas Realty, a healthcare-oriented real estate investment trust, on the upside, which he called "a surprise," coming as it did on no fresh news out about the company.

Its 6½% notes due 2016 "bucked the trend" and were "the only active upsider" on the day. He saw the bonds move up 2 ½ points to the 95 level, on volume of $16 million.

Elsewhere in that sector, the widely traded Community Health Systems Inc. 8 7/8% notes due 2015 - one of the junk market's major benchmark issues - dipped to 98.875 bid, down from 100.625, a 1¾ point fall, on volume of $22 million. There was no fresh news out on the Franklin, Tenn.-based hospital operator.

A trader said that he "would not necessarily categorize the entire high yield market down roughly two points, I think [the drop in Community Health's paper] shows the need for liquidity. Being such a large issue, and being a high yield barometer, every time there's a trade, there's a follow on this bond, so I think it's used to raise cash, when necessary - and there's a lack of liquidity in our market, which should be no surprise."

Deals in the wings

In the face of the present turbulence in the capital markets, sources in a position to know professed visibility on upcoming deals during Tuesday conversations with Prospect News.

A couple of corporate deals are prepped and ready to come in the near term, should the volatility in the stock market subside somewhat, according to one source, speaking well after the close.

High-yield watchers will recall that SunGard Data Systems Inc. brought its oversubscribed, middle-of-price talk $500 million bond deal last Friday, on the second day of a dramatic two-day stock market rally, as the Dow moved from a 10,609 open on Thursday morning to an 11,388 close on Friday afternoon, after having begun the week at 11,416 and falling to 10,610 by Wednesday's close.

Fresenius, this week or next

The next deal expected in the primary market is the downsized Fresenius Kabi $800 million bond offering via Deutsche Bank, Credit Suisse and JP Morgan, according to market sources.

The bond portion was downsized by $500 million, from $1.3 billion, with that amount shifted to the $2.95 billion bank deal (Baa2/BBB-), which is going very well, according to market sources.

Sources say Fresenius could bring its bonds, with proceeds to help fund the acquisition of APP Pharmaceuticals Inc., this week or next week.

Prior to this week's downsizing the Fresenius high yield bridge had already been downsized to $1.3 billion from $1.65 billion.

Brocade could bring bonds

Beginning with the above-mentioned SunGard deal, which saw a $200 million face amount shifted to the bank loan from the bonds, issuers and potential issuers have been moving portions of their financings upward on the capital structure to the senior secured realm from the senior unsecured.

In addition to this week's Fresenius news, Brocade Communication Systems Inc. also raised the size of its term loan, which is oversubscribed, and downsized its bridge loan.

The bridge loan, via Bank of America and Morgan Stanley, is now sized at $400 million, down from $500 million. The term loan (Ba2/BB+) upsized to $1.1 billion from $1 billion.

The company said that it will either take out the bridge with a junk bond or a convertible. However on Tuesday a high-yield market source said that with the turbulence in the stock market the convertible contingency could be looking a little less palatable to Brocade.

Last week, the company held a conference call during which the credit facility and bridge loan were discussed.

"We met with large syndicated banks to create a large syndication environment. That has gone beyond our expectations, incredibly well," the company said in the call.

"After we got the syndicated banks done, then we went out to other more retail oriented banks and investors. And the reception there has been extremely positive. And why is that? Because right now there's not a lot of good tech deals out there. We're one. They really like the math, as they focus in on their modeling, what they're coming to is they're coming back to the tremendous cash flow strength that the combined entities have.

"That is going very well. The term loan is going very, very well, as I talked about and we're on track with the third component, the smaller component, which will either be a bond facility or a convert facility.

"So, we're extremely confident in our financing because it's fully committed and it's done. Again, all of the work that we're doing at this point now is just to take us from bridge financing out to the markets and frankly we could be more pleased with where we are," the company added in the call.

Proceeds from the credit facility and the bridge loan will be used to help fund the acquisition of Foundry Networks Inc.

Brocade is purchasing the company for a combination of $18.50 of cash plus 0.0907 shares of common stock in exchange for each share of Foundry common stock. The transaction has an aggregate purchase price of about $3 billion on a fully diluted basis.

The acquisition is expected to close in the fourth quarter, subject to approval by Foundry's stockholders, regulatory approval and certain other conditions.

A special meeting for Foundry's shareholders has been scheduled for Oct. 24.

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