Neff leads equipment rental sector lower; CDX off 1/4; traders see short squeezes in Remy, Claire's

By Paul A. Harris

St. Louis, Sept. 10 - The broad high yield market was lower on Monday, according to sources from the buy-side and the sell-side.

Specifying that stock prices essentially remained flat, players were marking junk down anywhere from 1/8 to ½ point.

At 10:30 a.m. ET a syndicate official spotted the high yield tracking CDX index down 1/8 point at 94 5/8 bid, a 421 basis points spread to Treasuries.

Later, at the close, sources said the CDX was at 94 3/8 bid, 94 5/8 offered, ¼ point lower on the day.

Throughout the market sources said that trading in junk bonds remains extremely light.

"We're in a kind of limbo right now," a hedge fund manager said.

"Until we get some indication of where we're going with this forward calendar, not much is likely to happen."

Secondary market activity continued to be focused on the equipment rental sector where sentiment remains negative.

One source marked that sector 2 points lower on the day.

Suffering most of the spotlight's glare was Neff Rentals, Inc., trailing the late August announcement of disappointing second quarter earnings, according to a trader who focuses on both junk bonds and leveraged loans.

And in an otherwise becalmed market, two different traders reported suspicions of "short squeezes."

One saw evidence of such activity in the existing bonds of Delco Remy. The other reported a short squeeze in the Claire's Stores Inc. 10½% senior subordinated notes due 2017.

Meanwhile the primary market stood stock still on Monday.

Sources seemed to be waving off the latest rumor on First Data Corp.'s $24 billion LBO financing. Although the Wall Street Journal reported Monday that Kohlberg Kravis Roberts & Co. appears poised to make concessions on the bank loan covenants, which could bring a retail launch of the bank deal by the middle of this week, sources who spoke to Prospect News seemed skeptical and downright weary of the subject during Monday conversations.

"You're starting to get a buildup of treadmarks on these rumors," a trader said, adding that there really has been no hard news on the bank deal that is expected to demonstrate the market's appetite for highly leveraged risk, and possibly for the massive supply of LBO deals brooding on the high yield forward calendar.

Leveraged loan market sources told Prospect News that the First Data credit facility is now expected to come to market with a leverage covenant, as opposed to being covenant-light, due to the recent negotiations between the bankers on the deal and Kohlberg Kravis Roberts & Co.

Noting that the Jewish New Year celebrations this Thursday and Friday will thin the ranks, and that what is building up to a momentous meeting of the Federal Reserve's Federal Open Market Committee on Sept. 18 - one week away - sources are anticipating that the present week is apt to be "event-lite."

Neff, rental sector down

Mid-afternoon on Monday sources were spotting Neff's 10% notes due 2015 at 66 bid, 68 offered.

One sell-sider said that the paper was 12 points lower since late last week, although others put the damage as being even bigger.

A trader who focuses on both high yield bonds and leveraged loans said that the Neff paper has been getting "crushed" for the past couple of weeks, and added that the bonds were down another 5 points on Monday, having gone as low as 63 bid, 65 offered in the afternoon, and closing at 64 bid, 66 offered.

The source said the bonds were probably at 69 bid on Friday morning, adding that at the end of August the equipment rental company reported a loss of approximately $45 million for the second quarter of 2007.

A hedge fund manager spotted the Neff 10% notes at 64 bid, 66 offered shortly after Monday's close, and added that they were at 85 bid, 87 offered on Friday.

Also after the close a trader spotted the bonds maturing 2015 having gone out at 65 bid, 66 offered, down 3 points on the day.

"The whole rental sector is really getting whacked," said the trader adding that RSC Holdings III, LLC's 9½% senior notes due 2014 were at 91.50 bid, 92.50 offered at Monday's close, off ½ point to a whole point on the day.

"For whatever reason Neff is getting hit harder," said the trader who added that volume was low on Monday, exaggerating both the upside and the downside.

Another trader professed the expectation that the existing bonds of United Rentals Inc., Neff's chief competitor, are not likely to move relative to the volatility in the sector.

That's because the Greenwich, Conn., equipment rental company is being acquired by Cerberus Capital Management, LP.

"Those are all yield-to-call bonds right now because they are going to get taken out," the trader explained.

Short squeeze

A trader who specified that the broad market was off ½ point at most on Monday, said that buying continues in Delco Remy bonds.

"There's a big short out there," the source said, specifying the 9 3/8% senior subordinated notes due 2012 and the 11% senior subordinated notes due 2009.

Both were at 120 bid, 125 offered, unchanged on the bid side, the trader said, adding that the offerings are higher.

Another trader, who was marking junk 1/8 to ¼ point lower, said the market appears "spooked."

"High yield was bid-for through the balance of last week," the trader said, adding that there seems to be a sentiment that the forward calendar is never really going to materialize, and the big LBO deals are not really going to get done.

"There is substantial cash," the trader said, alluding, in part, to two consecutive weekly inflows to the high yield mutual funds, as reported by AMG Data Services, the most recent being a $196.8 million inflow for week to Sept. 5.

"Cash has been building," the trader asserted.

"People are putting some of it to work in specific names: obviously Treasury-sensitive bonds, such as double-B credits, were very firm.

"There is a flight to quality."

Having said that, however, the trader also noted that among triple-C paper trading is lately "kind of mixed.

"People are willing to step in, given the right circumstances."

The source reported seeing some activity around Claire's Stores 10½% senior subordinated notes due 2017 during the past couple of days, "both up and down.

"There was a pretty significant Street short," the trader added. "So there is a bit of a short squeeze going on.

"Retail numbers have been better than expected, and it spooked some people because Claire's was one that had been shorted, almost out of the gate.

"The bonds went from par to the mid-to-high 70s," the trader recounted, referring to trading levels since the $335 million issue priced at par in late May as part of a total $935 million bond deal.

"We've heard from some accounts that they are not lending them out.

"And they're going to try to get them to move higher."

Homebuilders continue weak

Elsewhere a market source told Prospect News that the homebuilders sector continued to be weak on Monday.

The debt of single-family builder Standard Pacific Corp. was down around 2 points, with the 7¾% notes due 2013 ending 74 bid, 76 offered.

Also down 2 points were bonds of another single-family homebuilder, New Jersey's Hovnanian Enterprises, Inc.

The source spotted Hovnanian's 7¾% notes of 2013 finishing the day at 68 bid, 70 offered.

The 'F' words

In the leverage markets, eyes are trained on the First Data bank deal and the Sept. 18 Fed meeting, according to a trader who focuses on both junk and leveraged loans.

This source added that the junk market was completely dead on Monday, and marked the long paper of Ford Motor Co., the 7.45% notes due 2031, at 74 bid, 75 offered.

"Maybe they were 74¾ bid on Friday, but given what Treasuries did, and the weaker stock market, overall the market is not trading much at all," the trader said, adding "It got very quiet after lunch."

Prospect News asked this trader which event, the First Data deal or the Fed meeting, was being weighted more heavily by junk-watchers.

"Pick your poison," said that trader who added that next Tuesday's Fed meeting is being closely scrutinized throughout the capital markets, while it is conceivable that in the credit markets the First Data deal remains on screen number one.

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