Better junk tone despite stock slump; Opti Canada, Charter, lead gainers; GMAC gains on exchange progress

By Paul Deckelman and Paul A. Harris

New York, Dec. 17 - A day after the Federal Reserve surprised the financial markets with an uncharacteristically bold rate-cut move, junk names were seen moving mostly upward - separating themselves from stocks, which fell back on Wednesday's profit-taking off the big gains which Wall Street had notched on Tuesday with the help of the Fed.

With high yield names up pretty much across the board as investors mulled the impact of government moves to lower interest rates, leaders included Charter Communications Inc. - among the most active issues as the troubled St. Louis-based cable-TV operator's paper bounced back strongly from the declines it recently suffered on the news that it would try to negotiate with its bondholders to ease its crushing debt burden.

Another gainer - likely the biggest upside mover - was Opti Canada Inc., as the energy company announced the sale of a part of its stake in an oil-shale joint venture to its joint venture partner, with proceeds slated to repay soon-maturing debt.

Traders saw GMAC LLC's bonds continue to firm in the wake of the increased debtholder participation in its massive bond-exchange offer, now that the automotive and residential finance company has sweetened the terms somewhat. Meanwhile, bonds of GMAC's 49% owner, General Motors Corp. and the latter's domestic arch-rival, Ford Motor Co., were seen pretty much steady, with no dramatic new developments reported on the auto bailout front.

There weren't too many downsiders, but two which had been tumbling on Tuesday continued to get whacked on Wednesday - American Media Inc. and RathGibson Inc.

The primary market - having batted out what is expected to have been its final deal of this year, Kansas City Southern Railway Co.'s upsized offering of five-year bonds - was pretty much idle on Wednesday, as participants instead focused their attention on several ongoing efforts by issuers to exchange new debt for existing paper, notably GMAC's, and Neff Corp.

Market indicators continue climb

Among the established issues, the widely followed CDX High Yield 11 index of junk bond performance, which rose ½ point on Tuesday, jumped another 2 points on Wednesday, with a trader quoting it at 75 bid, 75½ offered. The KDP High Yield Daily Index meantime was up 54 basis points at 47.72, while its yield tightened by 23 bps to 17.12%.

In the broader market, advancing issues widened their lead over decliners, beating them by a nearly three-to-two margin. Overall market activity, reflected in dollar volumes, was up 39% from the pace seen in Tuesday's session.

A junk trader said that "the market had a better tone than I would have categorized," given the retreat in stocks, which left the bellwether Dow Jones Industrial Average - tantalizingly close to climbing back above the psychologically potent 9,000 mark after Tuesday's nearly 360-point advance after the Fed slashed its key lending rate a larger-than-expected 75 bps - instead finishing Wednesday down 99.80 points, or 1.12%, at 8,824.34, as Wall Streeters took profits from Tuesday's gains, and worried about whether the Fed has any more economy-stabilizing tricks in its bag, now that it has pretty much lowered the rates that it directly controls to about as low as they can go. Broader market indexes, while lower on the day, were not off by quite so much, with the Standard & Poor's 500 index down 0.96% and the Nasdaq composite off by 0.67%.

But over on the junk bond side of the fence, the trader said, "there seemed to be more upticks in the more active bonds than downticks."

"You had Charters up, Opti Canadas, Freeport [McMoRan Copper & Gold Inc.] up, even Idearc [Corp.] was up, and Hertz [Corp.] was up."

Junk is presently a two-tiered market, added a trader for a high-yield mutual fund: there are bonds trading between 0 and 30, which don't move and are just offered, and then there is higher-quality paper "which people are buying up."

Meanwhile the European high-yield session was quiet in the late London afternoon, according to a syndicate source there, who added that European equities were down 0.5% at the time.

The only active names in the European junk bond market were the cyclical chemical companies, the source said, spotting Ineos paper at 13½ bid, 15½ offered.

Hopes for GMAC exchange

There was no news in the primary market, as sources continued to profess the belief that the new deal bazaar is shuttered for the remainder of 2008. But exchange activity continued.

For the fifth time GMAC LLC extended the exchange and tender offers for 33 series of outstanding GMAC and Residential Capital, LLC debt securities. The early delivery time is now 5 p.m. ET on Dec. 19 instead of Dec. 16, and the offer will expire at 11:59 p.m. ET on Dec. 26.

In its Wednesday press release the company said it has received a significant amount of additional tenders bringing to $16.6 billion, or 58%, the amount of the outstanding GMAC notes tendered and $3.5 billion, or 37%, of the ResCap notes.

The participation levels are up from 24% of the outstanding GMAC notes and 25%, of the outstanding ResCap notes which had been tendered prior to a press release issued on Dec. 10.

GMAC need 75% participation in the exchange for its notes in order to raise $30 billion in regulatory capital demanded by the Federal Reserve to be granted bank holding company status.

The significant amount of additional tenders that GMAC announced Wednesday represents $10.5 billion of paper in the hands of investors who are part of the ad hoc committee of GMAC noteholders which is represented by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, according to a market source.

This source added that the buzz is that bondholders representing approximately $5 billion more of GMAC bonds - enough to get the deal across the 75% threshold - appear prepared to get in the exchange.

In trading, GMAC's bonds continued this week's show of strength on the prospect that its debt situation might improve.

A trader saw its 8% bonds due 2031 trade up to a round-lot close of 36.5 bid from 33 earlier in the week, although he said that there was "not much volume" in the issue, with only about $5 million traded.

The more active bonds were its shorter paper, with the 5.85% notes coming due on Jan. 14 easing to 88.25 from 89 previously, with $15 million traded.

A second trader, though, saw GMAC "trading up a lot," with the 7¾% notes due 2010 firming to 60.75.

Yet another saw the 2031s at 32 bid, 36 offered, which he called up 3 or 4 points on the news that GMAC was "getting close" to its 75% participation target in its ongoing offer to take out $38 billion of existing GMAC and its Residential Capital LLC unit's bonds by offering tendering holders a mixture of cash, new debt and preferred stock.

Apart from GMAC, a trader saw 49% owner GM's bonds little moved, with its 8 3/8% benchmark bonds due 2033 unchanged at 15 bid, 17 offered, although he did see Ford's 7.45% bonds due 2031 up a point at 22 bid, 25 offered.

GM restructuring expected

Elsewhere on Wednesday the expectation circulated that General Motors Corp., which is now seeking a government bailout, will show up with a massive restructuring deal, according to a buyside source who added that neither size nor timing on any such deal have yet been heard.

The restructuring deals will likely continue to command a big portion of the high-yield market's attention well into 2009, according to a senior syndicate official.

However the early signs indicate that existing bondholders - even though they were extensively canvassed as to what exchange prices might entice them to participate before the recent spate of distressed exchanges were rolled out - are turning out to be unappreciative.

"There was an early perception that investors wanted to get some cash out of their positions at a premium to mark-to-market," the syndicate official said.

"But that's proving not to be the case."

Optimistic news for Opti Canada investors

In the secondary, likely the biggest mover on the day was Opti Canada Inc., whose 8¼% notes due 2014 jumped more than 11 points on the day to 53.25 bid, on $24 million traded and whose 7 7/8% notes due 2014 got as high as 54 bid before coming off that peak level to end at 51, still up 9 points on the day, with $9 million traded, a trader said.

At another desk, the '14s were being quoted as high as 56 bid, a nearly 15-point zoom.

The Canadian energy producer's bonds rose on news that it had sold a stake in the Alberta Long Lake oil-shale project to joint-venture partner Nexen Inc. for C$735 million, or $608 million, to meet near-maturing debt payments. Opti Canada will retain a 35% interest in the project, while Nexen, with a 65% stake, will become the sole operator.

Opti plans to use the proceeds to repay C$150 million of revolving bank debt due in June - and warned that if it did not do the sale, it would not be able to stay in compliance with its debt covenants in the upcoming quarter and would have trouble making the final payment when the loan came due.

The company plans to use the remainder of the sale proceeds to partially repay another credit line, cutting the outstanding balance down to C$350 million from C$500 million.

Charter changes direction

The trader said that the most active bond of the day was Charter Communications' 8¾% notes due 2013, with over $26 million changing hands. The bonds moved up to 52.75 bid in round-lot trading versus 45.125 on Tuesday, which he called "quite a move."

He also saw the Charter 10¼% notes due 2010 rise to 34 bid from 31.5, on $15 million traded.

Charter's CCO Holdings 8¾% notes due 2015 were being quoted up as much as 8 points on the day at just above 53 bid.

At another desk, a market source marked the latter bond also around the 53 area, but called it just a 4 point improvement, while Charter's badly battered 11% notes due 2015 ended up around 2 points at the 11 level.

Charter's Nasdaq-traded shares - admittedly a nearly valueless penny stock - meantime rose more than 1½ cents on Wednesday, or 12.98%, to 14 cents, on customary volume of about 5 million shares.

Charter, the first trader said, "has really been active" over the last several sessions in the wake of Friday's news that it had asked its long-standing financial advisor, Lazard LLC, to initiate discussions with its bondholders about financial alternatives to improve its balance sheet, which currently groans under the weight of some $21 billion of debt.

That news - raising the specter that the company would seek to extend or take out at least some of that debt at a distressed-price level, something which is still quite possible if not probable, according to many analysts - sent the company's bonds spiraling downward in trading Friday and Monday.

However, they abruptly reversed course and were seen rising strongly on Tuesday and Wednesday, no doubt helped by the revelations that the company has over $900 million of cash and equivalents on hand, almost double what it had the previous quarter, and with no significant maturities this year, does not have to be stampeded into a hasty bankruptcy filing that some investors had feared.

Hertz, Freeport among other gainers

Among other gainers Wednesday, former Ford unit Hertz Corp.'s 8 7/8% notes due 2014 were up nearly 2 points at just below 51 bid, a trader said, while a second, also seeing them at 51, called them 2 point gainers on $9 million traded.

A trader said that Freeport McMoRan's bonds "continue to be active, and to rebound" from recent lows, its 8 3/8% notes due 2017 up 3 points at 75.5 and its 8¼% notes due 2015 ahead by 5 points at 78.5 The Phoenix-based metals mining operator got a boost from the sharp rise in gold prices, a function of the weaker dollar; in Wednesday trading in New York, February-delivery gold was up $25.80 an ounce to $868.50 - its highest level in nine weeks.

From deep in the distressed precincts, Idearc's 8% notes due 2016 had an uptick to 7.25 bid from 6.75 previously, on a round-lot basis, with $15 million of the bonds changing hands. Sector peer Dex Media Inc.'s 8% notes due 2013 gained more than a point on the day to end above the 14 level.

Hospital bonds healthier

Community Health Systems Inc. - whose 8 7/8% notes due 2015 are sometimes considered a proxy for overall market movements due to its relatively large size, widespread distribution and easy tradability - mirrored Junkbondland's overall better tone, gaining ¾ point to end at 79.5 bid, a trader said, on turnover of $14 million.

Another market source, while also locating the Franklin, Tenn.-based hospital operator's bonds at 79.5, called them 2 point gainers on the day.

Also among the healthcare names, HCA Corp.'s 9¼% notes due 2016 firmed to 77.25 bid, a 2 point gain on the day, on volume of $13 million.

US Oncology Inc.'s 10¾% notes due 2014 rose more than 3 points to just under 76 bid.

Builder slump taking its Toll

The ongoing credit crunch and economic downturn continues to punish the homebuilding industry, with Washington reporting that November housing starts were down 18.9% to the lowest pace since 1984, while the unexpectedly strong October starts number reported last month has now been revised downward.

Even so, one of the traders saw what he called "a surprising uptick" in Toll Brothers' 5.15% notes due 2015, up some 2½ points to 70, on volume of $8 million. He theorized that "with Treasury [yields] moving lower and interest rates getting cut, maybe people think that people will want to buy homes" - but added that he personally thought it was "a little bit early to be jumping into homebuilders.

American Media, RathGibson continue fall

There wasn't much of a downside Wednesday, but two of the names in it continued their slide from Tuesday's levels.

RathGibson Inc.'s 11¼% notes due 2014 were being quoted sharply lower for a second straight session. The Lincolnshire, Ill.-based metal tubing maker's bonds - which had been quoted around 28 bid on Tuesday, way down from the levels in the mi-90s at which they had last previously traded, early in the summer - swooned again Wednesday, to a 21.5-22 context, though only on a couple of large trades.

There was no fresh negative news out on the company.

And American Media Inc.'s 10¼% notes slated to come due in May - which had slid 10 points on Tuesday - were seen down another 10 points on the session Wednesday at 20 bid, after the Boca Raton, Fla.-based publisher of supermarket tabloids like the National Enquirer extended for another month to Jan. 15 its pending tender offer for those bonds and its 2011 notes. It meantime said that it remains in talks with lenders holding more than a majority of the borrowings under its operating unit's credit facilities and bondholders holding more than a majority of each series of the notes, and "believes substantial progress continues to be made toward achieving a financial restructuring and significant delevering of the company."

Kansas City Southern bonds hang in there

A trader said that Kansas City Southern's new 13% notes due 2013 were trading at 92.5 bid, with none offered.

Those bonds had shot up to a 92-93 context after their pricing Tuesday at 88.405. A trader said the subsequent movement was 'just another case of the underwriters mispricing the bonds. They talked the issuer into giving a much bigger discount" than was needed, he opined, and compared the issue with last week's El Paso Corp. 12% notes due 2013, which also priced at a steeply discounted level to boost yield - 88.909 - and which then also moved smartly higher to the 92-93 area.

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