CIT volatility continues amid funding talks; new Virgin Media bonds firm up

By Paul Deckelman and Paul A. Harris

New York, July 17 - CIT Group Inc. spent a seventh straight session in the spotlight- meaning it has been the focus all of this past week, as well as last Thursday and Friday - with its bonds once again trading with both great volatility and huge volume, as investors and speculators reacted to the latest developments in its saga. On Friday, these included reports that the New York-based lender was talking with banking giants J.P. Morgan Chase & Co. and Goldman Sachs Inc. on possible funding that might keep the company out of bankruptcy. The battered bonds - which had been bludgeoned badly on Thursday - bounced back on news reports of those talks, although traders noted that there was some pullback late in the day on reports that debtor-in-possession financing for a bankruptcy was being discussed.

With that level of drama, CIT completely dominated the secondary, both in terms of the size of the movements its bonds were going through as well as the sheer volume. As has been the case over the past week, virtually all of the names on everybody's Most Actives list have been issues of parent CIT or one of its subsidiaries, such as CIT Group Inc. Income Fundings Trust.

One of the very few exceptions was Virgin Media Finance plc, which priced a solidly upsized add-on tranche to its existing 2016 notes on Thursday. Those bonds pushed upward from their issue price, and the New York-based provider of U.K. broadband services' existing bonds likewise traded upward on heavy volume.

Another one of the week's new issues, Freedom Group Inc. had also firmed by several points from the level at which those bonds had priced.

The primary market - which saw four dollar-denominated issues and one euro deal totaling $1.2 billion and €525 million price this week, a marked pickup from the previous week - ended the week on a relatively quiet note, with no further pricings or even new-deal announcements. However, market participants heard price talk emerge on Chevy Chase, Md.-based commercial lender CapitalSource Inc.'s upcoming $300 million issue of five-year senior secured notes, which could price early in the upcoming week.

Market indicators stay strong

Overall in the market, the CDX Series 12 High Yield index - which had been unchanged on Thursday, holding on to the gains it had notched the previous session, was up ¼ point on Friday to 85 bid, 85½ offered, a trader said. That put the index up nearly 2 full points over the past week, versus 83¼ bid, 83¾ offered at the close the previous Friday, July 10.

The KDP High Yield Daily Index, which had gained 13 basis points on Thursday, jumped another 37 bps on Friday to end at 63.26, while its yield narrowed by 11 bps, to 10.40%.

In the broader market, advancing issues - which had fallen behind declining issues on Thursday, roared back on Friday to lead them by a two-to-one margin.

Overall market activity, measured by dollar-volume totals, fell 31% from Thursday's level, as the part of the market not involved with CIT paper reverted back to its typical summer Friday mode.

CIT gyrations continue

But the heavy and volatile CIT trading served to mask the fact that this was, indeed, a summer Friday, rocketing around for a seventh straight session on investor hopes and fears related to the latest news about the troubled company.

Another trader said it was "all CIT - hundreds and hundreds of millions [of dollars] traded."

Another trader called the day's trading in CIT "ludicrous - I don't know how you follow it."

He said that although the bonds had been up earlier in the session - recovering some of the ground they had lost in the bond massacre Thursday on the news that Washington will offer no more bailout money to the troubled company, raising the specter of a possible bankruptcy - by late afternoon, he noted, "now they're drifting back down again" as investor sentiment soured on news that DIP financing for a bankruptcy is one of the items CIT and bankers J.P. Morgan and Goldman Sachs are talking about.

He said that the bonds had been up about 4 or 5 points from their Thursday finishing levels on the rumors of the financing talks, "but then late - and I mean late - now they're talking that they may have to resort to DIP financing" - meaning a bankruptcy filing may be the company's eventual fate after all.

"It's a real roller coaster, with all kinds of rumors going around."

He said that "if they do DIP financing, you know what happens - they crush the existing bondholders, and the stock gets wiped out to zero." However, he stressed that "it's all still rumors at this point." Even with that late retreat, he noted that compared with Thursday's debacle, "the bonds were definitely stronger today - but at the end, for those who were still here, they started getting weaker."

For instance, he noted that probably the most heavily traded CIT bond - the CIT Group Inc. Income Fundings Trust floating-rate notes slated to come due on Aug. 17 - which had been "in the 80s a couple of days ago," before dropping into the 50s Thursday on the news that there will be no federal bailout - had managed to push back up to around 67 7/8 late in the day Friday. He had actually seen them even higher at 701/2-71, but said the bonds had come down from such peak levels. He said the late level was "still 6 or so points above [Thursday's close] - but they were still off their high."

The floaters, he said, "are a $1 billion issue, and that's the one that a lot of accounts play."

Bonds starting to converge

A second trader saw activity in the 7 5/8% notes due 2012. Those bonds, he said, had traded in a range of 50 to 56, finally ending around 53½ bid - "whatever that means."

He went on to say that "all of this stuff is traded with huge spreads, point spreads, back and forth." Everybody, he said, "is unsure of where it's going to pan out. Thursday was just as crazy, and maybe a little lower in the dollar prices."

However, he noted that while the CIT bonds had been higher throughout most of the Friday session on the reported talks with JP Morgan and Goldman, "that changed at the end of the day."

With no clear resolution by the close Friday on whether CIT will get its financing to stave off bankruptcy - whether "it will be the outhouse or the penthouse - bankruptcy or financing," some of the late selling might be attributable to accounts not wanting to be long CIT heading into the weekend, when anything could happen - and probably will. The company's bondholders - who held a conference call on Thursday to discuss their possible options - reportedly were to hold another conference call on Saturday. Published reports indicated that the bondholders would like to see the company offer new debt for their existing debt.

The trader suggested that a good strategy for investors at this point might be to "go long the lower dollar prices. They've pushed everything down in price, and things are starting to converge in dollar prices - across the capital structure, you can say that 50 to 60 covers all the bonds - the shorter stuff in the high 50s, the longer stuff in the low 50s. That means people think it's going to file" - which would likely see the higher-priced issues pushed further down and the lower price issues gain several points to some point in the middle of that range.

Floaters seen holding their own

At another desk, a trader recognized that CIT "was dominant, and definitely very active." He saw the '09 floaters, after having closed around a 60-62 region on Thursday, closing at 70 bid, 72 offered on Friday.

"The rest of the curve didn't do that much, he asserted - while the 6 7/8% notes coming due in November pushed up to 62 bid, 64 offered from a Thursday finish at 57½ bid, 59½ offered, CIT's 5% notes due 2014 were virtually unchanged at 52 bid, 54 offered.

"All of the action was in the short end, in terms of upward movement. It was active, though not relative to [Thursday]", when over $1 billion of CIT bonds had traded.

While he saw some of the CIT issues give up part of the day's gains after CNBC reported that DIP financing was under discussion, the really short issues, he said, like the '09 floaters, "did maintain their gains."

New, old Virgin bonds trading higher

The trader said that apart from CIT, "the market had a very strong tone."

He said that the new Virgin Media 9½% add-on notes due 2016 ended at 99¾ bid, 100¼ offered, while another added that they "did really well - they kept trading in a very tight range, 99 7/8-par, all day."

Virgin Media had priced the $600 million add-on to its '16s - upsized from the original $300 million - on Thursday at 98.662, to yield 9¾%

A market source meantime said that the company's $750 million of existing notes, which had priced back on May 29 at 95.574 to yield 10 3/8%, were busily trading around 101 bid. Volume was estimated at some $89 million, a number which under normal circumstances would clearly be the busiest junk issue - but on this day, it paled beside the estimated $146 million turnover of the CIT August floater notes.

Remington parent's issue going great guns

A trader said the new Freedom Group 10¼% senior secured notes due 2015 "continued to trade up," seeing the bonds around a 1011/4-101½ context.

The company - corporate parent of Madison, N.C.-based firearms and ammunition manufacturer Remington Arms Co. Inc. - priced its $200 million issue on Wednesday at 97.827 to yield 10¾%. Proceeds will be used to fund the company's redemption of Aug. 7 of the existing Remington 10½% notes due 2011, which lately has stayed anchored to the anticipated par takeout level.

Buyout buzz boosts AK Steel

A trader said that AK Steel Corp.'s 7¾% notes due 2012 were up between a 1 and 1¼ points to the 98 level, along with strength in the West Chester, Ohio-based specialty steel alloys producer. He attributed the gain to "rumors of a takeover - I don't know by whom, maybe [larger rival] U.S. Steel. I didn't hear any names mentioned, but the bonds were strong all day today."

He noted that generally this was the case in most commodity producer names. For instance, he said, "with oil prices up, above $63 and change [per barrel], your refiners were up ½ to ¾ point, across the board."

However, he saw "only very light trading" in names other than CIT Group. Almost all of the portfolio managers were involved in that - and that's what occupied the time."

CapitalSource sets talk

Friday's primary market generated very little news.

CapitalSource set price talk for its $300 million offering of five-year senior secured bullet notes (Ba3/expected BB) at the 13½% area.

The deal is expected to price early in the week ahead.

Credit Suisse is leading the debt refinancing from the Chevy Chase, Md.-based commercial lender and money manager.

$1.225 billion week

Four domestic issuers priced deals during the July 13 week, placing a face amount of $1.225 billion.

The biggest of the deals, and as it happens the most recent, came from Virgin Media Finance plc, which priced a massively upsized $600 million add-on to its 9½% senior notes due Aug. 15, 2016 (B2/B) at 98.662 to yield 9¾% on Thursday.

The quick-to-market deal, which doubled in size from $300 million, came at the tight end of the 9¾% to 10% price talk.

The original $1 billion equivalent issues priced at 95.574 to yield 10 3/8% on June 1, 2009, in tranches of $750 million and €180 million.

Those who played the add-on included a lot of accounts that had been cut back on the original dollar- and euro-denominated tranches, an informed source told Prospect News on Friday.

The order book for the add-on was more than four-times oversubscribed at the $300 million initial size, the source added, noting that there were big anchor accounts in the deal.

"It was really well allocated," the official remarked about the Thursday add-on.

The notes were trading at 99¾ bid, par 1/8 offered, at mid-day on Friday, up from the 98.662 issue price, the official added.

Finally, in commenting upon the week in high-yield, one syndicate source noted that, bad news on CIT Group notwithstanding, the CDX High-Yield 12 index was nearly 2 points higher, Friday-to-Friday.

On Friday afternoon the index was at a mid level of 85 1/8, the official said - up from a mid level of 83¼ on Friday July 10.

The week ahead

The July 20 week gets underway with five - or possibly six -deals expected to price by Friday's close.

In addition to the above-mentioned CapitalSource bonds, they include:

• Duane Reade Inc.'s $325 million two-part offering - $215 million of six-year senior secured notes and $110 million of seven-year senior subordinated notes - via Goldman Sachs, expected to price early in the week;

• Reliance Intermediate Holdings LP, with a $250 million offering of 10-year senior notes (Ba2/BB-//DBRS: BB), a Credit Suisse deal also expected to price Tuesday;

• MTR Gaming Group with $250 million of five-year senior secured notes (expected ratings B2/B) via Goldman Sachs, expected to price mid-week; and

• Prospect Medical Holdings, Inc.'s $160 million offering of five-year senior secured first-lien notes (B3/B), with RBC Capital Markets moving the ball, expected to price during the week ahead.

The relatively small size of the Prospect Medical offering has generated some comment among market sources.

However the deal has an audience, said a sell-side analyst not involved in the transaction.

"It's a niche player," said the source, regarding the hospital and health management services company which operates five hospitals in the greater Los Angeles area.

"However it is roundly perceived to be a solid credit."

Apart from the deals mentioned above, a consumer/retail name is expected to show up with a medium-size offering during the week ahead via Banc of America Securities.

It likely won't be a one-day drive-by, said the source, who declined to furnish the name of the issuer.

However it won't travel a full roadshow either, the source added.

Finally, junk-watchers will also be trolling for news on Basic Energy Services Inc. during the week ahead.

The company kicked off its $225 million offering of eight-year senior notes on the Monday following the Fourth of July. And there was some expectation that it would price before the end of that post-holiday week.

However it has been "radio silence" on the deal since early July gave way to mid-July, market sources say.

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