Junk bounces back with Wall Street, auto benchmarks move up; primary quiet

By Paul Deckelman and Paul A. Harris

New York, July 30 - When Wall Street came roaring back in a big rally Monday, high yield came along for the upside ride, traders said, as investors took advantage of the lowered prices that came about last week, regarding them as a buying opportunity.

Although overall activity was limited, names were seen generally higher, including the big benchmark bonds of automotive giants General Motors Corp. - ahead of that company's scheduled release of second-quarter earnings data Tuesday - and arch-rival Ford Motor Co.

GM's 49%-owned GMAC Financial Services released its own earnings Monday. While those earnings, as expected, were lower as a result of the subprime mortgage lending industry meltdown, the company's bonds - hard hit last week amid investor subprime angst (GMAC does some residential mortgage loans) - rebounded smartly.

Apart from the auto names, Rural Cellular Corp. bonds were seen better on news that the Alexandria, Minn.-based rural wireless service provider has agreed to be acquired by telecom giant Verizon Communications.

Meanwhile, primaryside activity was seen extremely quiet.

Junk breaks out of its funk

A trader saw that "things were a lot better" Monday than they had been Friday, when the market had put the cap on a sorry week which saw junk market prices decline more than 2% on average, pretty much wiping out most of the gains high yield had accumulated up until now in 2007.

"It went down in a vacuum," he said the market "and it went back up in a vacuum." He said he had not seen a lot of transactions taking place.

The widely followed CDX index of junk bond performance, which had fallen to around 90 3/8-90 5/8 on Friday, initially bounced around at levels as low as 88 in morning trading before coming off those lows to push back up to 92-92 1/8 at day's end.

"That's a pretty good swing," the trader said of the 4 points plus range, "and it's up almost 2 points on the day."

GM, Ford drive higher

Among the big winners was GM, whose 8 3/8% notes due 2033 - the most actively traded high yield bond - were up more than 4½ points, a source said, to close above 82.5.

At one point, a trader said, those GM bonds had gone down as low as 76 bid, before rebounding to finish up at a close he marked as 80.75 bid, 81 offered.

Another market source called the bonds at 80.5 bid, 81.5 offered, while GM's 8¼% notes due 2023 were around that same level.

He saw GMAC's 8 % notes due 2031 at 91.5 bid, 92.5 offered.

Another source saw the finance arm's 8s up a full 4½ points on the day at 93 bid, while its 7% notes due 2012 were also up, though a more modest 1 1/8 points at 92.625, in active dealings.

GMAC - now officially known as GMAC Financial Services, now that it is no longer actually controlled by 49% owner GM - which sold a majority stake last year - reported Monday that in the second quarter, it turned a profit of $293 million. Although that was down from $787 million in the same period last year, it was certainly an improvement over the $305 million net loss it posted in the first quarter.

The losses were mostly due to the company's exposure to the subprime mortgage market through its Residential Capital Corp. subsidiary. Losses from residential lending totaled $254 million in the latest quarter - down from the yawning $910 million loss the unit had during the first quarter.

GMAC's chief executive Eric Feldstein said in a news release that the company had made strides during the first half to stem losses from the residential mortgage unit.

With GMAC's report out of the way, investors will focus on Tuesday's GM numbers. Wall Street is generally expecting the Number One carmaker to report a swing into the black for the second quarter, versus its year-ago red ink, on a better mix of products and strong growth in emerging markets.

They look for per-share earnings around $1.10 - a sharp rebound from the year-ago $5.98 per share net loss.

The rise in GM bonds was also seen helping rival Ford, which posted an unexpected return to profitability when it reported second-quarter numbers last week.

In Monday's trading, Ford's 7.45% notes due 2031 were seen up nearly 3 points at 78.5 bid, while its Ford Credit financing arm's 7 3/8% notes due 2009 were up almost 3 points at 97.5.

Rural Cellular better

The news that Verizon will buy Rural Cellular in a $2.67 billion deal, including debt assumption, helped push the latter's bonds up a point, a trader said. He saw Rural Cellular's 9 7/8% notes due 2010 at 103 bid, 104.5 offered.

The company's 8¼% notes due 2012 were likewise up 1 point at 103.5 bid, 104.5 offered.

LBO worries persist

A high yield syndicate official said that the broad market was "down big" at Monday's open, but toward mid-morning it came back.

At 10 a.m. ET the source marked the broad market "pretty much unchanged."

In the late afternoon a buy-side source saw junk stabilizing, but suggested that it was "just a credit short-covering rally," and added that rallying stock prices appeared not to be the catalyst for Monday's stability in junk.

The buy-sider added that high yield bonds and equities are not in very good correlation right now.

"The stock market doesn't have anything to do with it because the stock market is trading off of earnings multiples growth and the economy," the source said.

"High yield certainly is not doing that."

The source added that the high-yield market continues to be driven by apprehensions about the impact of the subprime mortgage mess on the LBO market.

The buy-sider, who focuses on both junk bonds and bank loans, added that people are still attempting to size up the impact on the loan market of the CLO bid going away.

That situation creates a lot more supply than people can handle, the source added, noting that it all is taking place against a backdrop of risk reduction.

"There are total returns programs being reduced and margin calls being made," the buy-sider asserted.

"There are a lot of guys who are long and don't want to be. And that ends up pushing things lower."

Waiting for Labor Day

Sources on both the buy-side and the sell-side were in agreement that "uncertainty" is the watchword in the high yield primary market.

"A lot of stuff has already been pushed back until Labor Day," a high yield syndicate official said, but declined to identify which stuff in particular.

Everything is on hold, said this official, who at this point is not even expecting any primary market news.

Meanwhile a buy-side source said: "I think they'll wait until Labor Day to try to move this stuff."

However about an hour after the Monday close another high yield syndicate member declined to move any of the current week's seven deals, totaling over $5 billion equivalent, to a different place on the calendar.

Nothing is really certain about the timing of these deals, the source asserted.

In particular the source mentioned the $290 million project financing deal from East Valley Tourist Development Authority.

Last week the company set price talk for the Merrill Lynch-led restructured offering of senior secured notes (B+) at the 9½% area, and withdrew a planned tranche of seven-year floating-rate notes.

The sell-sider also professed the belief that the Downstream Development Authority of the Quapaw tribe of Oklahoma's $235 million offering of eight-year senior notes (B-), a project financing via Banc of America Securities, could price this week.

The week's possibles also include a pair of sizable offerings.

GE Plastics, which has been on the road in Europe with its $2.765 billion equivalent two-part offering of eight-year notes, is scheduled to begin its U.S. roadshow on Wednesday.

The Pittsfield, Mass.-based supplier of plastic resins plans to place $1.95 billion and €590 million of the notes.

Citigroup, ABN Amro, GE Capital and HSBC are joint bookrunners.

Meanwhile, late last week Ceva Group, plc restructured its $1.4 billion notes sale, breaking out $400 million equivalent of dollar-denominated and euro-denominated seven-year secured second-lien notes in fixed-rate and floating-rate tranches, meanwhile downsizing its eight-year senior unsecured notes (B3/CCC+) tranche to $1 billion equivalent from $1.4 billion equivalent.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. are joint bookrunners for the deal.

However, the sell-sider conceded, only the East Valley Tourist Development Authority is in the market with price talk.

Dog Days

The sell-sider who refused to move any of the deals carried over from last week to this was outnumbered by a chorus of voices which insisted on Monday that the primary market is more or less closed until further notice - and possibly until Labor Day.

If it does indeed come to pass that the high yield primary market remains more or less dormant during August, that would perhaps be in keeping with the old axiom about "the Dog Days of Summer," when supposedly the capital markets, like worn-out baseball players, limp through the August heat toward the Labor Day break and a more purposeful stride in the crisp autumn air.

However a look at the issuance data reveals that only once in the past half-decade has the month of August actually produced the lowest amount of issuance among all the months of that year.

August 2002 was that year's most anemic month, but not by a huge margin: it produced $1.175 billion of issuance. The second-lowest month was July, at slightly less than $1.3 billion.

None of the other years since 2001 saw August produce the lowest amount of issuance although, perhaps in keeping with that "Dog Days" axiom, in none of the past five years has August been among the top six months of issuance.

In 2003 August was second-lowest at slightly more than $8 billion. March produced that year's lowest issuance at $7.825 billion.

In three of the past five years, 2001, 2004 and 2006, August ranked fourth from the bottom.

In the record-setting issuance year of 2006, August saw slightly less than $11 billion come out of the new deal market. September 2006 produced the lowest issuance of that year at slightly more than $9 billion.

Interestingly, among the past five years only the month of September emerged more than once as the lowest month for issuance in the high yield primary. With the terrorist attacks of Sept. 11, 2001 as a backdrop, September 2001 produced the lowest amount of issuance of that or any other year going back to the beginning of 2001: $363 million.

In 2002 the lowest month of issuance was July at slightly less than $1.3 billion. In 2003 the lowest month was March at $7.825 billion. In 2004 it was May at slightly less than $7 billion. And in 2005 it was October at slightly more than $3 billion.

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