Market surrenders early bulge, ends up modestly; MBIA rises on interest OK; Moog in retreat

By Paul Deckelman and Paul A. Harris

New York, July 9 - The high yield bond market initially pushed higher on Wednesday, in line with a stock market that was looking to build upon the gains it recorded on Tuesday. But when that equity follow-through failed to materialize, junk bonds came off their earlier high levels and ended the day only modestly higher.

General Motors Corp. and its 49% owned GMAC LLC automotive financing unit were each seen higher, although well below their early peak levels.

MBIA Inc.'s junk-rated surplus notes were seen having firmed smartly for a second straight session, buoyed by the news that New York insurance regulators had cleared the way for the troubled bond insurance company to make a scheduled interest payment on that paper.

A trader saw a puzzling decline in the heretofore strongly traded bonds of Moog Inc., although he saw no fresh negative news out about the East Aurora, N.Y.-based defense contractor that might explain the sudden drop.

And there was sufficient negative news out about Sealy Corp., which reported quarterly earnings - but the company's bondholders were unfazed, taking the notes higher.

Wednesday afternoon a high-yield trader at an investment bank said that derivatives held in fairly well during the session but cash bonds underperformed.

Meanwhile the primary market stood stock still, generating no news whatsoever.

The day ended with the new issue calendar containing half a dozen deals. Three were carried over from the pre-Independence Day week. The other three, all related to the spin off of assets by IAC/InterActiveCorp, launched on Monday and are expected to price early-to-mid next week.

Market indicators mixed

A trader said that the widely followed CDX junk bond performance index was down by 3/8 point on Wednesday, seeing it around the 92 3/8 bid, 92¾ offered level. The KDP High Yield Daily Index, however, broke out of its recent rut and gained 26 basis points to end at 71.53, while its yield tightened by 7 bps to 10.42%.

In the broader market, advancing issues edged ahead of decliners by a not-quite five-to-four margin. Activity, represented by dollar volume, was up about 18% from the levels seen in Tuesday's session.

A trader said that "the overall junk market was definitely weaker after the stock market started to take a dive. It felt good in the morning - like the stock market - bonds were firm, and buyers were starting to nibble away and feel a little confident. Then [there was] negative financial news" which started the equity market down its slippery slope - the bellwether Dow Jones Industrial Average gave up its small early gains to finally plunge 236.77 points, or 2.08%, ending at 11, 147.44, while broader market indexes were likewise lower - "and BOOM," the junk trader continued, "people were selling some paper that they normally wouldn't sell, just to lighten up a little bit."

He stopped short of calling it a capitulation - by most accounts, junk did manage to keep its head at least above water on the day - but stressed again that "people were starting to lighten up."

Another trader said that the junk market "started to get hit" in the early-to-mid afternoon as what had been up till that point an essentially neutral day for equities began to turn into a rout with the financial names leading the way downward.

GM, GMAC give up early gains

A trader saw General Motors's 8 3/8% bonds due 2033 gain a point on the day to end at 56. He said that the always busily traded GMAC 8% bonds due 2031 "had been up 3 or 4 points earlier," but had come down to 58, up 2½ points, by late afternoon, as the overall junk market came down from its earlier highs in tandem with the late stock slide. Noting the eroding price, he said "wait 15 minutes or so and they'll probably be back down to unchanged."

Another trader saw the GM benchmark bonds up 1 point to 55 bid, 56 offered, and saw "nothing extraordinary" in GMAC's 8s, quoting them at 58 bid, 59 offered, up ¼ point on the day - although he acknowledged that they were trading around 60 bid, 61 offered earlier, before the market started to soften in the afternoon.

However, a market source at another desk saw the GMAC long bonds finishing the day a point higher at around 60.5, in active dealings, but indicated that was only a little below its day's high. The source saw the GM 8¼% bonds due 2023 finish up more than 2 points at 56.5.

Yet another trader saw the 8 3/8s - which he said had "caught a bid the last couple of days" - trade as much as 2 points better on the session before going home up just ½ point at 54 bid, 55 offered. He saw the GMAC 8s up a point at 58.5 bid, 60 offered, while GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 backed off a 1 point intraday gain to end unchanged at 55 bid, 56 offered. Another trader meantime saw those flagship Ford bonds unchanged at 55 bid, 56 offered.

In the shorter-dated automotive paper, a market source pegged GM's 7 1/8% notes due 2013 up a point at 60, GMAC's 6 7/8% notes due 2012 up 1 point at 63, and Ford Motor Credit Co.'s 7% notes due 2013 rose more than a point to 73 bid.

Another saw GMAC's 6 7/8% notes due 2011 up as much as 6 points intraday before going out at 64, still 3 points ahead on the session, while the Ford Credit 5.8% notes due 2009 also gave up some of their early gains but still rose 1½ points on the day to end just below 96.

Moog move a mystery

A trader said that he was baffled by the movements over the past couple of sessions of Moog's 7¼% notes due 2018. The company priced an upsized $200 million offering of the bonds at par on May 28, and they broke higher out of the gate, firmed to above the 101 level and pretty much stayed there for more than a month.

However, the trader said, over the past two sessions the bonds had descended from those Olympian heights and are now trading in a 97.5-98.25 range.

"That's down - and no one knows why," he said, adding that the bonds "were trading in good size" at that lower level, and he had not seen any news that might explain the slide.

The bondholders, he said, "are dumbfounded, because they were paying up to 101 for these bonds, and now these bonds in the Street are 97.5-98.25." He said he was sure of that latter level "because we traded them there."

The slide was particularly puzzling because the company is "a good name, with big demand" when the bonds priced a couple of weeks ago, "and most accounts did not get their allocations. It traded up to 101, and now, all of a sudden," it's a good three to four points off that, "so we were as stunned as everyone else." He said the bonds were still holding above par as recently as Monday, "and then - boom."

Constellation back to being a star

On the other hand, he said, Constellation Brands Inc. is "a name that's starting to regroup," particularly its 8 3/8% notes due 2014. He said the Fairport, N.Y.-based wine, liquor and beer manufacturer and importer's bonds had been trading as high as a 105-105.25 context before the recent release of its quarterly earnings, "and then they drifted down to that 101-101.5 range before the earnings," which turned out to be "fine."

However, he said that the bonds had traded off even before that on market speculation that "they may take on a huge acquisition, which would put a heavy load on the debt. People are leery."

Perhaps that speculation was stoked by the company's announcement several weeks ago that it was generating cash by selling some Northern California winery assets for $209 million, this on top of an earlier deal to sell a Canadian distillery to food and beverage processor Diageo plc on undisclosed terms.

At any rate, the trader said, since the earnings announcement on July 1 - fiscal first-quarter profits jumped 50% from a year- earlier - "they're regrouping a little bit," with the bonds pushing back up to around 102-102.25. The company's 7¼% notes due 2017, which had recently traded as high at 99.625 and as low as 93.5, have come off their recent lows to stabilize at around 95.

"There's nothing wrong with the credit," he said, in explaining the fall for the recent highs - "but people are scratching their heads. Where there's smoke, there's fire? Are they contemplating making a huge acquisition?"- especially since the escalating dustup between investment-grade sector peers Anheuser Busch and its would-be suitor, InBev NV, over the latter's attempt to buy the former, as well as the pending combination of SAB Miller and Molson Coors has awakened investors to the possibility of consolidation in the drinks sector.

Sweet dreams for Sealy bondholders

Sealy Mattress had earnings out Wednesday - and while the numbers were just "mediocre," the trader said, its 8¼% notes due 2014 "didn't go down" - if anything, they rose, to 83 bid, 83.5 offered, versus 81.25 bid, 83.25 offered on Tuesday.

"They had a [conference] call this morning," he noted, and the investors apparently liked what they heard from the executives of the Trinity, N.C.-based manufacturer of such well-known mattress brands as the eponymous Sealy, Posturepedic, Stearns & Foster and Bassett. "The bonds were up 2 to 3 points," despite the lackluster numbers, he said.

Another market source pegged those bonds up nearly 2 points on the day at 82.75.

However, another trader said that while the bonds "may have been up ½ point" earlier in the day when junk was doing better, by the day's end, he saw them down ½ point in round-lot trading at 81.75 bid, 82.75 offered. He said the highest trade was around 83, but suggested that was "too high" for a going-home level.

Sealy said that fiscal second-quarter earnings slid 26% to $12 million, or 13 cents per share, from $16.1 million, or 17 cents per share, a year earlier, as domestic sales volumes declined and material costs surged.

MBIA moves up

A trader saw bond insurer MBIA's 14% surplus notes due 2033 up 7 points on the session to 55 bid, 57 offered. Those bonds - considered junk despite the Armonk, N.Y.-based company's nominal investment-grade rating - had previously risen about 5 points to the 47 mark on Tuesday. The trader said that "all the action" Wednesday was in MBIA and GMAC.

The bonds rose smartly after the New York State Insurance Department gave the troubled company the green light to make a scheduled $70 million interest payment on July 15. State insurance regulatory approval is a necessary condition of any interest payment, according to the bonds' indenture.

In January, MBIA - beset by speculation that it might not be able to pay any spike in bond default claims arising out of the mortgage-based credit crunch - issued $1 billion in surplus notes to help shore up its balance sheet.

Day-to-day deals

As to the trio of deals carried over from last week, junk market watchers have termed them "opportunistic" debt refinancings.

Ferro Corp. is in the market with a $200 million offering of eight-year senior notes (B2) via Credit Suisse, Citigroup and JP Morgan, with most of the proceeds going to fund the tender for its 9 1/8% senior notes due 2009.

Meanwhile Ferrellgas, LP and Ferrellgas Finance Corp. have been marketing a $250 million offering of notes mirroring the company's existing 6¾% senior notes due May 1, 2014 (Ba3/B+).

Banc of America Securities LLC and JP Morgan are joint bookrunners for that deal, proceeds from which are slated to term out the company's revolver.

On Tuesday a high-yield portfolio manager said that the existing bonds were trading around 92.

A syndicate source, also noting that the Ferrellgas deal is an opportunistic financing, said that the company does not feel compelled to be a "price-taker," in the present situation, forced to cheapen the price for the mirror notes simply because market conditions have deteriorated.

Another sell-sider, not in the deal, said Wednesday that with the Ferrellgas mirror bonds it's a question of price, not a question of access to the market.

However this source added that the fortunes of the energy sector, which has paraded out slightly less that $7 billion of "rich" new issuance since the beginning of May, have likely shifted as the accounts became loaded up on paper from that sector.

On Wednesday one informed source advised that the Ferrellgas deal's status remains day-to-day. It could happen this week, the source said. But that would be a best-case scenario.

The third of the trio of deals pushed forward from last week is AEI's $250 million offering 10-year senior bullet notes (B2/B), a debt refinancing via Credit Suisse. The notes have been talked at the 10¼% area, and are being simultaneously marketed to high-yield and emerging markets accounts. One informed source reckoned that the split between high-yield and EM interest is roughly 50-50.

IAC deals

Apart from the trio of day-to-day deals mentioned above, three new offerings surfaced on Monday. All three are related to spin offs of entities including HSN, Inc., Interval Leisure Group, Inc. and Ticketmaster from Barry Diller's IAC/InterActiveCorp.

Ticketmaster launched a $400 million offering of eight-year senior notes via JP Morgan, Merrill Lynch and Banc of America Securities.

Interval Acquisition Corp. launched a $300 million offering of eight-year senior notes (B1/BB), via left bookrunner Morgan Stanley and joint bookrunners Barclays Capital and Wachovia Securities.

And HSN, Inc., formerly the Home Shopping Network, launched a $250 million offering of eight-year senior notes via Banc of America Securities, JP Morgan and Morgan Stanley.

All three are expected to price early-to-mid next week.

In the run-up to the Independence Day break a syndicate source correctly forecast that those three deals would surface early in the post-holiday week irrespective of market conditions.

The key is 'stability'

The prediction that the three IAC spin off deals would launch regardless of market conditions is interesting since market sources roundabout say that those conditions are presently not good.

Sell-side sources polled on Wednesday were in agreement that weakness in the secondary market is inhibiting primary market activity at present.

Prospect News asked one senior official from a high-yield syndicate desk whether the market had drifted into a dormant patch similar to that of March 2008, when the primary generated just over $1.8 billion of proceeds.

The banker replied that while "a return to March" is not a likely scenario, "some of the volatility needs to subside, and the secondary market needs to firm up a bit before any opportunistic issuers are going to get into the fray."

This official was particularly focused on Wednesday's equity markets.

"You need some stability there," the banker asserted.

"Europe closed up 1½%, depending upon which index you look at. We ended the day down 2%."

The official suggested that stocks in the financial sector, particularly Fannie Mae, which led a big rally in U.S. equities on Tuesday, were, by extension, responsible for sparking the rally in Europe on Wednesday, and subsequently sold off, leading the U.S. markets lower.

"These are pretty volatile intraday swings," the banker said.

© 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.