Junk slips as stocks slide; most issues down points; Consol Energy up on asset sale; funds lose

By Paul Deckelman and Paul A. Harris

New York, Aug. 18 - After several sessions of gains with not too many gyrations, the high-yield bond market on Thursday found itself roughly thrust back into the maelstrom seen last week, when stock market volatility proved to be a treacherous backdrop.

As was the case on several days last week, junk retreated across a broad front as equities got crushed on renewed investor angst about the economy, both here and in Europe.

Junk traders said that far more stocks were down than finished on the upside, and many of those losers were down by 1 full point or 2 or maybe even 3. Among them were such familiar names as Caesars Entertainment Corp., Ford Motor Co., Hovnanian Enterprises Inc. and the new HCA Inc. megadeal.

Another surprisingly busy downsider, despite a lack of fresh news, was newspaper publisher McClatchy Co.

Notable gainers were few and far between, although Consol Energy Inc. firmed on news of a big asset sale and Eastman Kodak Co. was up for a second straight day on the prospects of selling off its lucrative trove of technology patents.

Secondary market performance indicators uniformly headed south

Little was seen in the primary market, stilled by a combination of the traditional mid-summer issuance lull and current volatile and unfriendly market conditions.

And just how unfriendly those conditions may be was underscored by yet another sizable outflow from high-yield mutual funds, which are seen as a reliable proxy for overall junk market liquidity conditions.

Funds off by $408 million

As Thursday's session was drawing to a close, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $407.74 million more left those weekly reporting funds than came into them.

It was a sizable outflow, though dwarfed by the eye-opening $3.42 billion hemorrhage seen the week ended Aug. 10, the second biggest on record, which in turn had followed - and vastly overshadowed - the $804.25 million cash bleed seen in the week ended Aug. 3.

Over that three-week period, the funds have tallied a net loss of some $4.632 billion, according to a Prospect News analysis of the numbers. That more than offset the $2.775 billion, which came into the funds in the four weeks dating to the week ended July 6, according to the analysis.

For the year as a whole, although inflows have still been seen in 21 weeks versus 12 outflows, the latest week's loss finished the job of wiping out all of the remaining net inflow accumulated for the year.

For the first time in 2011, the funds saw a negative cumulative funds-flow figure of minus $351.74 million, versus a paltry, though still positive, $56 million year-to-date net inflow recorded last week. The new cumulative loss stood in stark contrast with the peak year-to-date net inflow level of $7.82 billion recorded in the week ended May 25, according to the analysis.

Fund-flow patterns began the new year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year. Then, fund-flow patterns turned choppy, with two or three weeks of declines followed by several weeks of inflows, going back and forth since then.

"Portfolio managers appear to have raised too much cash last week," a fund manager told Prospect News on Wednesday.

"Hence people may still be long cash and not be in a position where they need to raise more," the manager added.

"It will be interesting to see on Friday whether people are willing to be long, heading into the weekend," said the manager, noting that the Lipper-AMG number only covers the week to Wednesday, and Thursday's extremely volatile sessions in the global capital markets are not reflected in the funds flow numbers reported on Thursday.

EPFR $2.21 billion outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $2.21 billion from the funds in the latest week.

That cash loss followed last week's mammoth $6.71 billion outflow - the single largest loss of cash from those funds since EPFR began tracking fund flows some years ago. It was also nearly twice the size of the previous record loss, $3.51 billion in the week ended June 22.

It was the eighth time in the past 11 weeks that EPFR saw more money exiting the funds than was being put into them. Its calculations now show 23 weeks of inflows so far this year against 10 outflows.

The latest week's cash loss brought the EPFR year-to-date net inflow number down to an estimated $4.6 billion. Last week, that figure had been more than chopped in half, down to $6.8 billion from about $13.5 billion.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts some exchange-traded funds.

Cumulative fund-flow estimates, whether from Lipper/FMI or EPFR, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years.

Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall so far in August.

High yield primary wrap for Aug. 19

Bigger outflows from loans

Cash is moving out of bank loans at a much higher rate than from junk bonds, said a manager active in both bonds and loans.

Bank loan mutual funds saw $2.12 billion of outflows for the week to Wednesday, according to Lipper-AMG.

For the flight of capital from bank loans, the portfolio manager blames the recent announcement from the Federal Reserve Bank's Federal Open Market Committee, stating that the Fed Funds rate will remain near zero until 2013.

"People gravitated toward loans as a hedge against rate increases," the manager recounted, adding that earlier in 2011, with the stock prices improving and the capital markets in general rallying, it seemed as though it would only be a matter of time until the Fed decided to move. Indeed, three Fed presidents cast dissenting votes against the extended rate hike moratorium statement at the most recent meeting.

In any case, with rate hikes pushed well more than a year into the future, bank loans look less attractive, the portfolio manager said.

A quick look at one of the extremely few leverage deals in the market this week seems to spell this out.

Immucor, Inc.'s 11 1/8% senior notes due 2019, which priced at 98.714 to yield 11 3/8% on Tuesday, were 101 bid at Thursday's close, the manager said.

That's off the highs of 102 bid, but still above the issue price.

However, the Immucor term loan, which priced Wednesday at 96, was wrapped around the issue price at Thursday's close, down from its highs of 96½ bid, 97½ offered.

Secondary gets slammed

Away from the new deal sphere, traders saw junk bonds down left and right, often by multiple points, as high yield seemed to take its cue from collapsing stocks, which fell broadly and deeply on renewed investor worry about the fragile state of the U.S. economy and whether Europe's continued severe debt problems might cross the Atlantic and kick it back into a recession.

The bellwether Dow Jones Industrial Average nosedived by 419.63 points, or 3.68%, to finish at 10,990.58. Broader indexes, such as the Standard & Poor's 500 and the Nasdq Composite, were, if anything, even more to the downside on a percentage basis.

Back in Junkbondland, a trader declared: "The market in general was down about 1 to 2 points, depending on what issue. Some credits were down a little bit more, but mostly they were somewhere in the 1- to 2-point range."

A second trader said that he saw "decent volume."

He said, "If you pick a name, I'll find it - but [down 2 or 3 points] was pretty much the mood of the whole place."

He said that investors were following the maxim "when in doubt, they sell 'em out."

Yet another trader simply characterized the whole session as "kind of a rocky day today."

Market indicators fall back

Junk market statistical indicators, which had moved back into the black across the board on Wednesday after having turned mixed on Tuesday, gave up all of Wednesday's gains and then some on Thursday.

A trader saw the CDX North American Series 16 HY Index plunge by 1 15/16 on Thursday to finish at 93 3/8 bid, 93¾ offered, after having gained 13/16 of a point on Wednesday.

The KDP High Yield Daily Index swooned by 37 basis points on Thursday to end at 72.42, after having risen by 29 bps on Wednesday.

Its yield ballooned out by 13 bps, to 7.81%%, after having come in by 10 bps on Wednesday.

And the Merrill Lynch U.S. High Yield Master II Index fell by 0.457% on Thursday - its first loss after four consecutive sessions on the upside, including Wednesday's, when the index rose by 0.25% advance. Those four straight sessions of gains going back to last Friday snapped a skid of eight consecutive downside sessions, which had brought the index's cumulative 2011 return down to near its lowest levels on the year, set in early January.

Thursday's loss, meantime, lowered the year-to-date return to 2.015%, down from 2.483% on Wednesday, and well below the peak level for the year of 6.362%, set on July 26.

McClatchy gets mauled

Among specific issues, one of the busiest credits on the day solidly lower was McClatchy Co.'s 11½% notes due 2017, an issue not usually seen trading actively around. Over $20 million of those bonds changed hands, as trading intensified from Wednesday, when there was $11 million traded.

A trader saw those bonds down 3 points on the day at 97¾ bid.

He said that there seemed to be no fresh news out on the Sacamento, Calif.-based publisher of such notable newspapers as the Miami Herald, Kansas City Star, Fort Worth Star-Telegram and Charlotte Observer.

Hovnanian hammered

Another underachiever was Hovnanian Enterprises Inc.'s 10 5/8% notes due 2016, which were down 2½ points on the day, at 86½ bid, 87½ offered, on "a lot of volume," a trader said.

There was no fresh news out on the Red Bank, N.J.-based homebuilder, whose New York Stock Exchange-traded shares plunged by 24 cents, or 13.11% on Thursday to end at $1.59 per share on volume of 3.3 million shares, a 43% increase over the normal turnover.

Most names knocked down

One of the traders said that "in general, stuff was about 2 points lower, though maybe a little less."

For instance, he saw Caesars Entertainment Corp.'s 10% notes due 2018 "down only 1¼ bid, ending at 79¾ bid.

Its 12¾% second-lien senior secured notes due 2018 dropped 2½ points, to 91 bid, while the Las Vegas-based gaming giant's 11¼% senior secured notes due 2017 dropped by 1½ points, to 105½ bid, "in line with everything else."

Another market source saw the 10s of the company formerly known as Harrah's falling "a lot lower" to 79½ bid, 80 offered, from levels between 81 and 83 previously.

Another familiar name driving on the downside was Ford Motor Co's benchmark 7.45% bonds due 2031. They were seen down 1½ points on the day at 107½ bid, 108½ offered.

And the same was said about Nashville, Tenn.-based hospital giant HCA Inc's big two-tranche deal, both halves of which priced at par on July 26.

A trader saw the $3 billion of 6½% senior secured notes due 2020 down 1¼ points, at 98¼ bid, on volume of about $10 million.

The company's $2 billion issue of 7½% notes due 2023 lost a point from Wednesday's levels to end at 97¼ bid.

Aquilex still at bay

A trader said that Aquilex Holdings LLC's 11 1/8% notes due 2016 continued to languish in the 80s, well down from recent trading levels in the upper 90s, although there has been little actual trading activity in the Atlanta-based company's paper.

"There was a tiny trade today," he said, "and the paper is offered around the mid 80s, 87 or so, and there haven't been trades for two weeks - but two weeks ago, these things were at 98-99."

Consol climbs on deal

One of the few notable upsiders on the day was Consol Energy's 8% notes due 2017. These rose to 108 1/8 bid, a gain of more than 2 points. on the session.

The Pittsburgh-based coal and resources company's bonds firmed after its announcement that it will sell half of its interest in its Marcellus Shale natural gas holdings in Pennsylvania and West Virginia for $3.4 billion.

Consol said that it expects to pay down debt, issue dividends or buy back stock with cash from the deal.

Kodak aims higher

Another gainer on the day was Kodak's 7¼% notes due 2013, which gained strength just one day after a research report came out claiming that the company's patent portfolio could be its saving grace.

A trader said he saw "odd pieces" trading as high as 90. Round-lot trades were around 881/4, while the 10 5/8% notes due 2019 and the 9¾% notes due 2018 were quoted at 85 bid, 86 offered.

Another market source pegged the 7¼% notes at 88 bid, up 3 points on the day.

A third source said the 7¼% notes were also higher around 88, while the other bonds were in the mid-80s.

In a new research report out Wednesday, MDB Capital Group Inc. said that the Rochester, N.Y.-based company's patents could be worth as much as $3 billion as various companies like Apple Inc. and Google Inc. aim to grab up patents.

Last month, the company said it was shopping its patents in an effort to increase its revenue stream.

Stephanie N. Rotondo contributed to this report

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