Junk slide continues even though stocks rebound; ATP Oil & Gas attacked; Emdeon eyes roadshow

By Paul Deckelman and Paul A. Harris

New York, Oct. 4 - It was more of the same old, same old in the high-yield market on Tuesday as Junkbondland was once again the scene of a pronounced market downturn amid continued investor angst.

Things were again lower pretty much across the board, with only a few exceptions, and junk failed to follow the lead of equities, which took a beating for much of the day but then staged a late rally to end the session with a notable gain.

One of the hardest-hit names, for a second consecutive day, was offshore energy operator ATP Oil & Gas Corp.; not only were its bonds down multiple points, but it was easily the most heavily traded junk credit.

Recently priced bonds, like those of energy concern Newfield Exploration Co. and hospital operator HCA Inc., continued to struggle.

However, a few issues, including HCA sector peer Community Health Systems Inc. and gaming giant Caesars Entertainment Corp., managed to break over to the upside.

Eastman Kodak Co.'s bonds, recently on a rollercoaster ride, stabilized at the somewhat higher levels they reached on Monday.

In the primary arena, syndicate sources heard that Emdeon Inc. plans a roadshow to market at least a portion of its upcoming $750 million two-part issue.

Back in the secondary, statistical performance measures were mixed, though with a downside bias.

Primary sidelined

Once again, volatility sidelined the primary market on Tuesday, sources said.

A contemplated best-efforts drive-by deal, which a syndicate source mentioned on Monday as a possibility for Tuesday's session, failed to materialize.

Equities rallied late in the session, with the S&P 500 advancing 2¼% after spending most of the day deep in the red.

That late rally appeared to be driven by a story in the Financial Times that reported that finance ministers in the European Union, conceding the urgency of the credit situation, are moving purposefully on plans to backstop the debt of euro zone banks, a high-yield mutual fund manager said somewhat incredulously.

Around the same time that news story appeared, however, Moody's Investors Service downgraded Italy's government bond ratings by a whopping three notches, to A2 from Aa2, the manager added, suggesting that all in all, the Tuesday credit news out of Europe appeared to be a wash.

Junk getting decked

Once again, the tailwind enjoyed by equities failed to fill the sails of the high-yield bond market, said the fund manager, who added that the Lipper High Yield index ended the Monday session with a negative 3.5% year-to-date return and likely fell to negative 3.8% on Tuesday.

HCA's 8% senior notes due Oct. 1, 2018, which priced at par in a $500 million issue one week ago, went out at 95 bid, 95½ offered.

Some older issues, particularly ones in the gaming sector, have seen drops of 15 to 20 points in a week, the manager exclaimed.

Volatility alone can't explain such dramatic drops, sources said.

Rather, the high-yield market has come under tremendous technical pressure from the unwinding of the so-called "double-decker" trade, in which offshore funds placed big bets on dollar-denominated junk bonds and overlaid those bets with foreign exchange positions that were typically long the Brazilian real and short the dollar.

When the real recently dropped by 15% versus the greenback, the funds in the double-decker trade were forced into a junk bond firesale, selling the most liquid names in their portfolios to raise cash in order to cover the overlying foreign exchange trade that went bad.

Offshore accounts are presently thought to represent 6% to 9% of the high-yield market, according to a recent report that Barclays Capital's Jeffrey Meli and Bradley Rogoff made to clients.

As much as $25 billion to $30 billion of U.S. high yield is currently managed with a currency overlay, the Barclays report added.

Tough choices

The dramatic technical downdraft that has taken hold of junk bonds is forcing dealers to make some tough choices, the mutual fund manager said.

Underwriters are keen to bring two sizable leveraged buyout deals should the storms in the capital markets abate, sources said.

Kinetic Concepts Inc. could bring $2.15 billion of bonds as early as the middle part of the Oct. 10 week, according to a source close to the deal.

Emdeon, which will launch a $1.2 billion term loan on Thursday, is expected to follow with a $750 million two-part offering of Rule 144A senior notes before the end of the month.

The syndication of the bridge loan backing the Kinetic Concepts bonds expires on Friday.

Meanwhile, the dealers have elected to hold the Emdeon bridge, which has been partially syndicated (see related story in this issue).

The fund manager, who participated in the syndication of the bridge loan backing Sealed Air Corp.'s $1.5 billion of bonds in late summer, said on Monday that the dramatic price drops now hitting junk are rendering the interest rate caps on the Kinetic Concepts and Emdeon bridges - set at the time the financing commitments were initially made - practically unworkable.

Hence the dealers must decide whether to move forward with the bond deals at interest rates that breach the bridge caps, writing off the differences, or maintain the bridges, or at least a portion of them, on their own balance sheets.

Erosion of new deals continues

In the secondary market, a trader saw recently priced deals continuing to struggle. For instance, he said that HCA's 8% notes due 2018 continued to get sicker and sicker.

"Do you know where they are now?" he asked rhetorically. The answer: 94¼ bid, 94 3/8 offered.

That was down from the 96 bid, 97 offered level at which those bonds went home on Monday and well down from the par level where the Nashville-based hospital operator's quickly shopped $500 million issue priced on Sept. 27.

The trader saw Newfield Exploration's 5¾% notes due 2022 slide to 95½ bid, 96 offered, down 1½ points from where they closed out on Monday - which itself was off by nearly 2 points from the close at the end of last week.

At another shop, a market source pegged the bonds at 95 3/16, bid, calling them down 1 9/16 points on the day, on heavy round-lot volume of nearly $28 million, making the Houston-based energy company's upsized $750 million drive-by issue one of the most actively traded junkers of the day.

Those bonds also came to market on Sept. 27. They priced at 99.956 to yield 5¾%; they then traded around that issue price for the next several sessions before easing to around 98¾ bid, 99½ offered on Friday and then falling further on Monday and again on Tuesday.

Also among the recently priced energy issues, a market source saw El Paso Pipeline Partners Operating LLC's new 5% notes due 2021 - a split-rated (Ba1/BB/BBB-) deal that still generated at least some interest among junk players as well as high-grade investors - down nearly a full point on the day at just under 99¾ bid. Over $18 million of the bonds changed hands.

The Houston-based natural gas transportation and storage company's opportunistically timed $500 million issue priced on Sept. 15 at 99.337 to yield 5.085%, or 300 basis points over comparable Treasuries.

Qwest Communications International Inc.'s 6¾% notes due 2021 lost 1 5/8 points on Tuesday, a market source said, dropping back to 96 1/8 bid on heavy volume of over $33 million.

The Denver-based telecommunications operator was a long-time junk market mainstay. Its ratings were raised to barely high-grade territory (Baa3/BBB-/BBB-) following its acquisition, completed in April, by rival telecommunications company CenturyLink, Inc. of Monroe, La., but it still attracts attention in the junk precincts, traders said.

Its quickly shopped $950 million issue priced along with HCA and Newfield on Sept. 27, coming at 98.181 to yield 7%. Those bonds had held steady in a 97-98ish context in the aftermarket last week before retreating on Monday and Tuesday.

And the beat (down) goes on ...

Away from the recent deals, a trader opined that Tuesday was "a totally, totally crappy day."

The day's action, he said, was "totally defensive."

Names were taken down "with no mercy. They're taking no prisoners out there." As a result, "people are so scared."

Another trader called Tuesday's session "another get-beat-up day." He volunteered that he saw "no winners on the day."

Junk market statistical performance indicators, sliding for the past several sessions, turned mixed on Tuesday, but they had a mostly downside bias.

A trader said that the CDX North American series 17 High Yield index actually managed to push higher by 5/8 of a point on Tuesday to end at 86 bid, 86¼ offered, partially recovering from Monday's 2-point plunge. According to reports from other sources, the index was up ½ of a point to ¾ of a point on the session.

However, the KDP High Yield Daily index swooned by an eye-popping 103 bps on Tuesday, limping home at 68.34 after having nosedived by 45 bps for each of the previous two sessions. Its yield ballooned upward by 36 bps, to 9.04%, after having gained 15 bps on Monday and 13 bps on Friday.

And the Merrill Lynch U.S. High Yield Master II index fell by 1.566% on Tuesday, its fifth straight downturn and the second-largest retreat the index has seen this year. Only the 1.664% loss recorded on Aug. 8 was larger. On Monday, the index had lost 0.791%.

Tuesday's loss widened the index's year-to-date deficit to 3.998%, a new low for the year, from Monday's 2.471%. The deepening cumulative losses stood in stark contrast to the peak gain for the year of 6.362%, which was set on July 26.

Several other levels tracked by the Merrill Lynch index reached notable negative milestones on Tuesday, with the yield to worst rising to 10.117%, the first time it has topped the psychologically potent 10% mark this year, and its spread to worst breaching the 9% mark, rising to just under 902 bps.

With so much selling going on, a market source said that the pace of junk market activity, as measured by dollar-price volume, jumped by 45% on Tuesday after having increased by around 13% on Monday from the previous day's level.

ATP bonds drilled again

Among specific established issues, Tuesday's market saw more rough seas for Houston-based offshore energy operator ATP Oil & Gas' 11 7/8% senior secured second-lien notes due 2015.

A trader said that those bonds fell to 59 bid, 61 offered, from Monday's levels around the 62-63 bid area, on "huge, huge, huge" trading on Tuesday. A market source at another desk estimated that volume in the credit soared to nearly $90 million, making ATP easily the most heavily traded junk bond of the day.

On Monday, the bonds had dropped at least 7 points on the session to end in the lower 60s, though on considerably less volume, about $19 million.

There was no company-specific news out, leading traders to theorize that ATP was getting hammered in response to investors fearing the company might not have enough cash flow to fulfill its obligations. For its part, the company has said that it is well on its way to increasing production and with that, cash flows.

Another concern, the traders said, has been oil prices, which have been under pressure lately amid investor fears of a renewed global recession that would slash demand for energy.

However, oil prices rallied on Tuesday, climbing for the first time in four sessions on news of an unexpected decrease in U.S. crude stockpiles. That raised the price of benchmark West Texas Intermediate light sweet crude oil by $1.96, or 2.59%, to finish the day at $77.63 per barrel on the New York Mercantile Exchange.

Kodak steadies

A trader said that Eastman Kodak's bonds "were still doing a little better," following the big rise on Monday in its 7¼% notes due 2013. That same issue was hammered down viciously into the 20s on Friday on investor bankruptcy concerns about the Rochester, N.Y.-based photographic products and digital imaging technology company following its hiring of a law firm that specializes in restructurings.

He said that the 7¼% notes - "the least secure of their bonds, but the first one that's going to mature" - were in a 371/2-38 context on Tuesday, around where they had been at the close on Monday, when it was the only notable gainer in a sea of big losers. The last trade he was "just a small piece" at 37 5/8 bid, 37¾ offered, "so that's still up."

He meantime saw the company's secured bonds, such as the 9¾% notes due 2018 and the 10 5/8% notes due 2019, remaining in the lower 70s.

Another trader said that the 7¼% notes "stabilized" in a 39-41 range and so were about unchanged.

He said the secured bonds fell as low as 68 bid during the session but were back in that same 70-72 range seen on Monday by the close on Tuesday.

A market source said volume in the Kodak 7¼% notes was considerably lower on Tuesday than it had been on Monday, when nearly $14 million had changed hands, making it one of the junk market's most active issues.

Benchmarks bounce back

Among the widely traded benchmark issues, a trader said that Caesars Entertainment's 10% notes due 2018 were among the relatively few upsiders on Tuesday, seeing them gain between 1½ and 2 points to end at 59 bid, 60 offered on "huge volume."

They had fallen more than 2 points on Monday to end at 57.

Become rebounding, however, he said that those bonds had plunged earlier in the session to as low as around 54 bid.

He did not see any fresh news out on the Las Vegas-based gaming giant formerly known as Harrah's Operating Co. Inc., suggesting that they had perhaps just been oversold and were snapping back.

Another market source saw the bonds up 1¾ points on the day at 59¼ bid on volume of over $50 million, second only to ATP on the Trace system and more than double Monday's activity level.

And Franklin, Tenn.-based hospital operator Community Health Systems' 8 7/8% notes due 2015 were seen by a market source up by a quarter-point on the day at 96¾ bid, although another participant saw then down by three-quarters of a point at an even 96 bid.

Stock gain a non-story

A market source noted that stocks staged "a very late rally," with the bellwether Dow Jones industrial average shooting up in the final minutes to finish up 153.41 points, or 1.44%, to close at 10,808.71.

Junk, he said, had failed to follow equities higher. "We'll see [Wednesday] if it follows it up," he said.

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