Junk slide continues on market unrest; gaming credits crap out; Huntsman deal gets a boost

By Paul Deckelman and Paul A. Harris

New York, Oct. 24 - Friday was another dreary, ugly day in the junk bond market, with most issues seen sinking, some by multiple points, as the equity markets gyrated around at mostly lower levels on investor pessimism about a likely spreading global recession.

Key sectors were seen getting hit, from healthcare, led by market benchmark Community Health Systems Inc., always a favorite selling target of accounts needing to raise cash, to gaming, notably MGM Mirage and Wynn Las Vegas LLC, to automobiles, with further bad news coming out of Detroit as Chrysler LLC announced companywide white-collar layoffs.

Other big losers, traders said, included United Rentals Inc. and Freeport McMoRan Copper & Gold Inc.

Here and there was an upsider, including Huntsman International, investors perhaps heartened by a positive development in the Salt Lake City, Utah-based chemical company's legal effort to force Hexion Specialty Chemicals Inc. to live up to the terms of the merger agreement between the two companies.

New deal activity remained muted as the market awaited the conclusion of the roadshow process for Brocade Communications Systems, Inc.'s upcoming $400 million deal.

Market indicators again lower

The widely followed CDX High-Yield 11 index of junk bond performance, which had fallen by about 3/8 point on Thursday, lost just under a point Friday, heading out Friday at 79 1/8 bid, according to a high-yield syndicate official who added that although the index was ½ point lower on the day it was up from its intraday low of 77½ bid.

"It traded in the low 78 range most of the day, and traded up slightly toward the equity close," the official commented.

The KDP High Yield Daily Index fell by 71 basis points to end at 52.94, as its yield widened out by 26 bps to 16.42%.

A trader said that it was "not a pretty scene." Although stocks rebounded off their lows - the bellwether Dow Jones Industrial Average came back from an early deficit of more than 500 points to get to within 115 points of Thursday's finish, which he termed "quite a comeback," before nosing downward again late in the day to finish down 312 points - "high yield just took it on the chin. When you have the equity markets and overseas [bourses] getting decimated, everyone just starts hitting any bid they see."

A second trader said that the market "was still softer. It was harder to get bids." He said most of the trades "were concentrated in some of the larger issues," including MGM Mirage, Community Health Systems and the latter's sector peer HCA Inc.

"It wasn't too bad," yet another trader quipped. "I just took my flak jacket off, so many bullets were flying around."

Snake-eyes for gaming bondholders

Investors in the gaming sector - long erroneously regarded as recession-proof - continued to lose their shirts Friday betting on the prospect that the hard-hit industry's bonds might finally be stabilizing.

A trader saw MGM Mirage's 8 3/8% notes due 2011, "hit particularly hard," even with gaming in general "on a downturn." The bonds plunged as low as 58 bid from Thursday's close around 69.75 before coming off that low to close at 62 - down nearly 8 points. The issue, he said, was one of those showing "excessive selling, or just a lack of support or liquidity. No one wants to catch the falling knife in that sector."

A second trader said that the issue "got rocked," and said it was representative of the whole gaming sector.

Another trader saw the Las Vegas-based casino giant's 7½% notes due 2016 finishing down 4 points on the day at 59 bid, 61 offered, while its 6% notes due 2009 were down 3 points at 79 bid, 81. The company's bonds, he said were "down significantly across the board."

MGM Mirage announced late in the session that it will release its third-quarter results before the market open this coming Wednesday, with a conference call slated for later that morning.

Another big loser was Isle of Capri Casinos Inc., whose 7% notes due 2014 were quoted by a market source down more than 7 points on the day at 47 bid.

Elsewhere in that beleaguered sector, the second trader saw Las Vegas Sands Corp.'s 6 3/8% notes due 2015 down 1 point at 43 bid, 46 offered. Another trader saw them down 4½ points at 46.5, while another pegged the issue at 45.5.

While all of this was going on, the New York Stock Exchange-traded shares of billionaire mogul Sheldon Adelson's Las Vegas-based gaming company nosedived by $1.89, or 23.02%, to $6.32, on volume of 21.7 million shares, or over three times the usual turnover.

In a research note Friday, analyst Steven Wieczynski of Stifel Nicolaus & Co. said that the shareholders were spooked by fears that the company "is in jeopardy of running out of cash and going bankrupt." The company announced that chairman/CEO Adelson and his family plan to take part in a capital raising program with an investment banking company, which was not identified. Sands said that it would disclose more details about the program "in the very near future."

Probably the most active name in the sector - and one of the most active in the overall market -was Wynn Las Vegas' 6 5/8% notes due 2014, with over $30 million of the bonds trading. A trader saw them down a point at 71 bid, 71.5 offered.

In that kind of environment, a trader said, "no one is willing to buy - even guys who are short" on this issue or that. "Why step in now?" he asked rhetorically. "The market is sure to be cheaper tomorrow."

Community Health under the weather

Outside of the gaming sector, Community Health's 8 7/8% notes due 2015, as usual, was one of the more actively traded issues, although in this case, a trader said, that translated out to about $16 million of trades. He saw the bonds at 80.5 bid on a round-lot basis, although they were up from their low print of 79.375 and had been quoted - though not traded - as low as 78. Still, the closing level was down nearly 3 points from the previous day's finish at 83.375.

Another trader saw a fair amount of activity in the Franklin, Tenn.-based hospital operator's benchmark bonds - which frequently lose several points during sessions when accounts are trying to raise cash by selling positions, given its tremendous liquidity - as well as those of sector peer HCA, whose 9¼% notes due 2016 lost nearly a point to dip to 84 bid, with some $25 million of those bonds changing hands.

United Rentals rapped

A trader said United Rentals' 6½% notes due 2012 were "something that got hit unusually hard," quoting the bonds trading at 68 bid, down from 73 on Thursday, on volume of $6 million. That 5 point drop "was more than the norm," with most other junk issues down a point or two.

He saw no news on the Greenwich, Conn.-based equipment rental company - whose fortunes are closely tied to that of the struggling construction industry - that might explain the drop.

Other big decliners in relatively active trading, he said, included Freeport McMoRan's 8 3/8% notes due 2017, which he saw down 2.125 points at 76.375, while the precious metals mining company's floating-rate notes due 2015 dipped more than 2 points to go home at 72 bid.

WaMu retreat continues

A trader saw Washington Mutual Inc.'s senior holding company notes - which fell sharply on Thursday - down another 2 points on Friday to 55.5 bid, 57.5 offered.

The bonds of the failed Seattle-based thrift operator had recently been trading as high as the 70s on expectations that the holding company had squirreled away nearly $5 billion which could be used to pay down those bonds. However, they have been falling from those levels since earlier in the month when the Federal Deposit Insurance Corp. - which had arranged for WaMu to sell its vast retail banking network practically at shotgun-point to J.P. Morgan Chase before WaMu collapsed - indicated that it would take legal steps to recover part or all of that money.

The bonds also retreated when the settlement price for WaMu's credit-default swaps contracts was set at 57 cents on the dollar, the level to which those bonds moved.

Autos continue to spin wheels

A trader saw General Motors Corp.'s 8 3/8% benchmark bonds due 2033 down 1 point at 24 bid, 27 offered, while the company's 49%-owned GMAC LLC financing unit's 8% bonds due 2031 were 1½ points lower at 33 bid, 36 offered. Domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 were also down 1½ points to 26 bid, 29 offered.

At another desk, a trader saw the GM bonds down 1 point at 22.5 bid, 23.5 offered, though he saw the Ford long bonds actually up ½ point at 26.5 bid, 27.5 offered.

Huntsman seen higher

One of the relatively few upsiders was Huntsman's 7 3/8% notes due 2015, seen up more than a point at 85.75 bid.

Huntsman announced Friday that it has received a written opinion from valuation firm American Appraisal indicating that the combined company that would emerge from the planned merger of Huntsman with Hexion Specialty Chemicals would indeed be solvent.

Huntsman and Columbus, Ohio-based Hexion have been battling for weeks in court in Delaware. The two had agreed to a merger in the summer of 2007, but the latter company and its owner, the Apollo Management private equity firm, has been trying to pull out of the deal ever since then, citing the changed economic circumstances and the tightening of the credit markets. Huntsman, which would be the acquired party, has insisted that Hexion and Apollo go though with the buyout at the agreed-upon price of $28 per share - more than double where Huntsman's stock now trades.

Hexion and Apollo, trying to break out of their deal, have presented their own valuation evidence indicating that a combined Hexion-Huntsman entity would quickly turn insolvent.

Huntsman also won a legal victory this week in the Texas courts, when an appeals court on Thursday upheld a lower court ruling in an action against Hexion lenders Credit Suisse and Deutsche Bank; Huntsman had sued the two banks to keep them from filing any lawsuit directly or indirectly alleging that the Hexion-Huntsman combination would be insolvent.

Another week of $0 issuance

Meanwhile there was no primary market news during the Friday session.

Once again the new issue market goose-egged during the Oct. 20 to Oct. 24 week. No deals priced.

Friday's close capped the fourth consecutive full week to pass with no deals pricing.

The last issuer to raise money by selling high-yield bonds was Memphis-based restaurant operator and franchiser Perkins & Marie Callender's Inc., which priced a $132 million issue of 14% senior secured notes due May 31, 2013 at 94.29 to yield 15¾% in a quick-to-market deal on Sept. 24 via Jefferies & Co.

However at Friday's close there was one deal in the market.

Foundry adjourns meeting

Brocade Communications Systems Inc. is expected to price some or all of its $400 million offering of six-year senior unsecured notes (B2/BB-), via Banc of America Securities and Morgan Stanley, during the week ahead.

The bonds represent the unsecured portion of the financing for Brocade's acquisition of Foundry Networks, Inc.

On Friday the target, Foundry Networks, announced that a special meeting of its shareholders, convened for the purpose of voting on the merger and scheduled to take place Friday, has been adjourned until Wednesday.

The company's press release cited "recent developments related to the transaction."

Trailing that news Foundry's stock (Nasdaq: FDRY) took a 25.6% dive, losing $4.67 to close at $12.67.

The roadshow for Brocade's bonds to help fund the merger deal began last Monday, and the New York roadshow took place Tuesday.

The Tuesday roadshow in New York was well attended according to a source from a hedge fund, who estimated that 80 people were on hand. Another estimate put that number at 50 to 60, however.

Sources told Prospect News that the most pressing question was, "If the company does not succeed in placing the bonds will the bridge loan be funded?"

The uniform response was "Affirmative," they added.

The dealers were confident they could get some or all of the deal done, a source from a mutual fund reported.

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