Junk surge subsides as stocks stumble; Lyondell gains post-Chapter 11; earnings powers Constellation

By Paul Deckelman and Paul A. Harris

New York, Jan. 7 - The clock struck midnight, and the junk bond market's coach turned back into a pumpkin, as the heady rally of the previous two sessions came to what one trader called an "abrupt" end on Wednesday with sentiment no doubt soured by the tumble seen in the stock market, which moved lower after earnings warnings from such blue-chip stalwarts as Alcoa Inc. and Intel Corp., as well as Time Warner Inc. and more indications of rising unemployment. But while some major measures of junk performance were lower, the downturn was seen as modest, and market breadth remained in positive territory.

Still, some issues which had been surging over the past several sessions, including healthcare benchmark Community Health Systems Inc. and telecommunications standout Sprint Nextel Corp., finished multiple points lower.

The recently robust automotive sector, including General Motors Corp., Ford Motor Co. and their respective auto-loan arms, GMAC LLC and Ford Motor Credit Co., were seen mostly - though modestly - lower, as recent good news for GM and GMAC recedes further in the rear-view mirror.

On the upside, Lyondell Chemical Co.'s bonds firmed for a second straight session, given a boost in the wake of the company's bankruptcy filing this week - and its owner's expressed hope that its creditors could recover "quite a bit" of their investment.

Elsewhere, Constellation Brands Inc.'s bonds, and Cascades Inc.'s, were seen better, gaining on better quarterly numbers.

Primary activity remained at a standstill.

Market indicators mostly in retreat

The widely followed CDX High Yield 11 index of junk bond performance, which had shot up by a full point on Tuesday, fell back by 3/8 point on Wednesday, a trader said, quoting it at 80½ bid, 80¾ offered. The KDP High Yield Daily Index - which over the previous two sessions had zoomed upward by an astonishing 307 basis points - eased by 9 bps Wednesday to 55.99, while its yield, which over the previous two sessions had tightened by 107 bps, widened by 6 bps Wednesday to 13.48%.

In the broader market, advancing issues kept lead over decliners, although that margin narrowed to around five to three from two to one earlier in the week. Overall market activity, reflected in dollar volumes, rose by about 2.5% over the pace seen in Tuesday's session.

"Well, that didn't last very long," a trader said of the strong two-day rally which junk had seen once operations fully resumed after the New Year's holiday lull. "All of the old adages could be applied here - what goes up, must come down, and all good things must come to an end."

He characterized the end of what he termed "our euphoria" of the previous two sessions as "abrupt. Once the market turned - and I think the equity market was actually the catalyst for that," with the bellwether Dow Jones Industrial Average off all day and finishing down 245.40 points, or 2.72%, at 8,769.70, while the Standard & Poor's 500 index lost an even 3% and the Nasdaq composite index surrendered 3.23%. Stocks suffered their biggest loss in a month.

With that underway, "it was almost like musical chairs," he continued. "No one wanted to be left without a chair, so people were just trying to hit bids on some of the issues which had just skyrocketed over the past two or three days." Most actives, he said, were down at least 2 to 4 points. "Once the market turned, following equities, there was immediate profit-taking."

However, another trader said that "despite the stock market, a lot of [junk] stuff continued strong." He said that even though many of the most active names were down, for some credits, it was still "up, up and away. Junk didn't exactly follow the stock market, and had a fairly decent day. There were some highlights here, today," he said.

Sprint, phone names hung up

Among specific credits, a trader said that Sprint Nextel "definitely" got hit, seeing its 6% notes due 2016 trading into a 75 bid, down 2 points from prior levels. "I guess the telecoms were a little weaker in the equity market, so that may have been a reason."

At another desk, a trader who had seen the Overland Park, Kan.-based wireless provider's bonds shoot up over the previous couple of sessions, called the 6s down 4 points to the 75 level, while its 7 5/8% notes due 2011 lost 2½ points to close at 88 bid.

A market source saw a 4-point fall to around 76 for Sprint's 6.90% notes due 2019.

Other recently rising phone names on the downside included wireless provider Metro PCS Communications Inc.'s 9¼% notes due 2014, down about 2 points to 94 bid, while sector peer Leap Wireless International Inc.'s 9¾% notes due 2014 were ½ point easier at 94.5 bid.

Hospital names get hit

Perhaps the most active name was Franklin, Tenn.-based hospital operator Community Health Systems' 8 7/8% notes due 2015. The market bellwether bond, which passed the solid rise of the past several sessions, fell back to 92 bid, 93 offered from prior levels at 96.25, on volume of $36 million.

Also in that sector, HCA Inc.'s 9¼% notes due 2016, "strong the last few days," a trader said, "look like they got hit," dropping over 4 points to 92.5 bid on $13 million traded.

He saw Iasis Healthcare's 8¾% notes due 2014 at 85 bid, off a point, although those levels are still well above where the bonds finished their 2008 trading a week ago.

Auto bonds going nowhere

A trader saw General Motors's benchmark 8 3/8% bonds due 2033 up 1½ points at 21.5 bid, 23.5 offered, while GMAC's 8% bonds due 2031 were quoted at 57 bid, 60 offered for the old "junior notes" not tendered in the recent debt exchange, while the new secured "senior" notes were at 60 bid, 62 offered. GMAC's 6¾% notes due 2014 lost more than 3 points to the 66 level.

The trader saw Ford's 7.45% bonds due 2031 up a point at 29.5 bid, 31.45 offered.

Another trader saw the GM benchmarks up ¾ point, though on only $4 million of volume, while GM's 7.20% notes due 2011 declined to 27 bid, down a deuce, on volume of $2 million.

He saw the GMAC long bonds unchanged at 60 bid, though on just $3 million traded, while GMAC's most active issue, the floating-rate note maturing May 15, eased ½ point to 95 bid on $15 million traded. Ford's long bonds were down ¾ point at 30.25 bid, on turnover of $6 million. Ford Motor Credit's 7 3/8% notes coming due in October were off 1½ points at 89 bid, with $13 million changing hands.

Constellation bonds sparkle

On the upside, a trader said that Constellation Brands' bonds were "up another point" after pretty decent earnings, with its 8 1/8% notes due 2012 at 101 bid, which he called up ¾ point, while its 7¼% notes due 2016 and 2017 were each up around a point in the 98.5-99 range.

The company's 8 3/8% notes due 2014 traded as high as 103, on a small-sized trade, and were left at 101.5-102, as "people liked what they heard" when the Fairport, N.Y., maker and importer of name-brand wines, liquor and beers reported better-than-expected fiscal third-quarter earnings, although it did trim its fiscal 2009 profit outlook.

On that lowered guidance, Constellation's New York Stock Exchange-traded shares fell $1.39, or 8.24%, to end at $15.48 on volume of 4.2 million, nearly double the norm.

Constellation narrowed its '09 adjusted profit forecast to between $1.68 and $1.72 per share, from $1.68 to $1.76 per share previously, citing the impact of the economic downturn on its key markets.

For the fiscal quarter ended Nov. 30, Constellation - known for its Robert Mondavi label wines, Corona and St. Pauli Girl beer, which it imports to the United States, and its Fleischmann's vodka and Black Velvet Canadian whiskey brands - earned $83.5 million, or 38 cents a share. While that was down from $119.6 million, or 55 cents a share, a year earlier, excluding one-time charges, earnings were $132 million, or 60 cents a share - topping Wall Street's forecast by a penny.

Cascades climbs on numbers

Also up on numbers he said, was Cascades Inc.'s 7¼% notes due 201, which he said had "a decent day," sparked by "nice earnings," for the Kingsey Falls, Quebec-based recycled paper products company which caused those bonds to move up 2 to 3 points to 56.5 bid.

Freeport firming continues

Freeport McMoRan Copper & Gold Corp.'s 8¼% notes due 2014 "traded up a lot," the trader said, gaining 3½ points on the session to 88 bid, extending their gains seen Tuesday - which had followed a slide on Monday, one of the few downsiders in that overwhelmingly positive session.

The Phoenix-based metals mining company's other bonds were also among the more actively traded credits, with a market source pegging its 8 3/8% notes due 2017 at 89 bid and its floating-rate notes due 2015 at 76. All of the bonds racked up more than $10 million each in volume, with the 8 3/8s topping the $30 million mark

Another trader saw the latter bonds at a round-lot level of 87, up from 86.25 on Tuesday.

Quiksilver a gainer

The first trader also saw Quiksilver Inc., a Huntington Beach, Calif.-based maker of swimwear and other athletic apparel and equipment, "having a big day today," with its 6 7/8% notes due 2015 starting out in their recent 33-34 range and then spiking up to 37, with a heavier-than-usual volume topping $6 million.

"You couldn't give them away a couple of days ago at 34, and now they're trading anywhere from 35.75 to 37," their closing level.

He saw no news out on the company, which makes apparel and equipment particularly for surfing, skateboarding and snowboarding, and which on Tuesday announced that it had settled its long-running legal feud with ESPN over the sports cable network's logo for its "X-Games" extreme sports competition, which Quiksilver claimed had violated the protected trademark on a similar "X" logo the company puts on some of its apparel lines.

Lyondell up as chairman hopeful

A trader saw Lyondell Chemicals' bonds continue to gain, following Tuesday's bankruptcy filing; he pegged its 10¼% notes due 2010 at 26 bid, well up from 20.25 on Tuesday, with $8 million traded.

At another desk, a market source also saw the bonds trading around that same level.

It was the second straight day that the bonds had risen, following the bankruptcy filing earlier in the week of Houston-based Lyondell.

"They jumped up," a trader said. "People want to buy them, now that they're bankrupt."

Debtholder sentiment improved Wednesday as the Financial Times reported that the company's principal owner, billionaire Len Blavatnik, the chairman of Lyondell's corporate parent, LyondellBasell Industries AS SCA, said that he hopes that many creditors will be repaid when the company reorganizes.

The paper quoted Blavatnik as saying that "it's a shame for everyone who has lost money" and that he believes there is a "chance to recover quite a bit of it."

Another encouraging development was a bankruptcy judge's giving permission for Lyondell to borrow $100 million from Citibank on an emergency basis to keep its operations running while it seeks approval for an $8 billion loan debtor-in-possession loan.

Rally beats expectations

While the high-yield market checked its impressive stride on Wednesday, a syndicate official said that the returns on junk on Monday and Tuesday - as much as 5% or 6% - were far greater than the modest rally players had been anticipating heading into 2009, the official recounted.

The rise came to an end Wednesday, though.

"We saw a pretty good run-up during the first two days of the year, but it has been flat today," said a syndicate official just after lunchtime in New York.

Looking for a calendar

"We ran up this morning, and then definitely came off, especially into the late afternoon," said a trader for a high-yield mutual fund.

"Intel's numbers didn't help," added the trader, referring to the Santa Clara, Calif., microchip company's announcement that fourth-quarter sales appear to have been down 23.4% from year-ago sales of $10.7 billion, and below analyst expectations of $8.7 billion in sales.

"The stock market didn't help either," said the trader, noting that the S&P 500 dropped by 3% on Wednesday.

"This is the end of a short-covering rally that started in the middle of December.

"There has not been a lot of volume moving this market.

"Where we go from here will have a fair amount to do with the new issue calendar."

Naming names

With respect to a possible high-yield primary market sources started naming names on Wednesday.

A list of possibles from a buy-side source of names "rumored in the new issue market" included DISH Network Corp., DIRECTV Group, Inc., Cablevision Systems Corp., Chesapeake Energy Corp. and HCA Inc.

A high-yield syndicate official added the above-mentioned Community Heath Systems.

Not much has changed since the deals of December, this official commented, referring to El Paso Corp.'s $500 million of 12% five-year notes (Ba3/BB-) which priced at 88.909 to yield 15¼% on Dec. 9, and Kansas City Southern Railway Co.'s $190 million issue of 13% five-year senior unsecured notes (B2/BB-/) which priced at 88.405 to yield 16½% on Dec. 16, the source added.

"Right now we're talking to companies that are in the strike zone," said the source, using a baseball metaphor to describe companies familiar to high-yield audiences, have good credit ratings and businesses that tend not to be cyclical.

Issuers that do come are still going to have to pay up, the official said, with a nod to the above-mentioned deals from El Paso and Kansas City Southern.

The only possible difference from December might be a preference among investors for deals with some size, the source added, suggesting that the market's preference could be for deals the size of El Paso's $500 million December issue.

Technicals or fundamentals

Meanwhile, questions as to whether junk is lately trading on technical forces or economic and business fundamentals tend lately to generate lively discussion. The debate has been heightened by the impressive $1.4 billion of inflows to high-yield mutual funds reported by AMG Data Services over the past two weeks, the biggest two weeks of inflows since late summer 2003.

However presently sources seem not to like either choice.

The market was definitely oversold, one high-yield syndicate official said on Wednesday.

"Late in the year some investors were restricted from buying, but now that it's 2009 those restrictions are lifted.

"So you had all this distressed stuff, and some people are realizing that there are credits that were much better than the levels where they were trading."

That response includes both technicals - year-end buy-side balance sheet adjustments - and fundamentals - credits that were much better than the levels where they were trading.

"On the loan side, the small CLOs were forced to sell," the syndicate official added.

"Many of the loans will be held by buy-and-hold guys who can withstand the pressure to sell and see a value to the company and would not sell at distressed levels."

However, on balance this source seemed to be leaning toward "fundamentals."

"But not every credit is trading on fundamentals," the official insisted.

"It's just that with names like Community Health, people look at it and believe that there is no way it should be trading in the 70s, as it had been in mid-December.

"There are plenty of names like that, now that the selling pressure has subsided. Once again you have people looking at credit-specific issues."

Meanwhile a buy-side source said that the early 2009 rally might be an indication that forced liquidations from leveraged players, such as hedge funds, may be subsiding.

"If you were under pressure to liquidate you certainly ought to have been selling into the rallies that we saw on Monday and Tuesday," the buy-sider reasoned, adding that had a sizable portfolio hit the auction block during that time it might have crushed the rally.

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