Junk market rout in high gear after S&P downgrade; nearly all names down multiple points

By Paul Deckelman and Paul A. Harris

New York, Aug. 8 - High-yield market participants who thought they had seen a lot of blood-letting last week, especially during Thursday's downturn, found out that was only the coming attraction for Monday's epic horror show, which took place amid world market chaos following Standard & Poor's unprecedented downgrade of U.S. government debt from its formerly golden AAA status.

With equity markets leading the riskier asset classes downward, junk, which up until last week had managed at least some semblance of separation from the carnage going on in stocks, lived up to the nickname many traders and investors give it: equity with a coupon. The market took its lumps right alongside Wall Street.

Traders said that virtually all names were down pretty much across the board, many of them by multiple points and some of them in pretty heavy trading volume.

In many cases, they said that no sooner would an offer on something come in that other lower offers would appear, pulling prices inexorably downward.

Among the big losers, they said, were such familiar credits as the new HCA Inc. megadeal that priced less than two weeks ago, Ford Motor Co.'s benchmark 2031 issue and the bonds of gaming giant Caesars Entertainment Corp.

Statistical performance indexes notched some of their worst-ever losses across the board.

While the junk primaryside has been largely sidelined of late amid the market downturn, sources on Monday heard medical product maker Immucor, Inc. planning a $400 million bond sale as part of the financing for its pending acquisition by TPG Cpaital.

Extreme turbulence kept the high-yield primary market quiet again on Monday.

Heading into Aug. 9, no European or North American high-yield issues had been priced during the month to date.

Marooned calendar

The thin active forward calendar is unlikely to escape the impact of the intense volatility engulfing the global capital markets, syndicate bankers said on Monday.

The three deals on the calendar expected to price before Friday's close could be "marooned" by the turbulence, one banker said.

"This is a bad time to put prices on deals," the banker remarked and added that market conditions such as the present ones would all but ameliorate the stigma attached to postponing a deal, which had already been launched.

"Given what we're seeing, you could not blame people for walking away," the source said.

As previously reported, Jeld-Wen, Inc. is in the market with a $575 million offering of seven-year senior secured notes (B3/CCC+) via Bank of America Merrill Lynch, Wells Fargo, Barclays and KeyBanc.

Rock Ohio Caesars LLC plans to sell $380 million of seven-year second lien notes (/B/), via Credit Suisse and Deutsche Bank.

And M&G Finance Corp. has completed the marketing of a $500 million offering of seven-year senior notes (expected ratings B3//BB) during the pas week. That J.P. Morgan-led deal is day to day, market sources say.

Seeing redemptions

High-yield funds, which were seeing significant redemptions throughout the past week, saw more dramatic redemptions on Monday, according to a portfolio manager from a high-yield mutual fund.

"The marks are still catching up," said the manager, who fielded a telephone call 45 minutes after the Monday close in New York.

High-yield bond funds saw $1.13 billion of outflows for the week to Aug. 3, according to EPFR Global.

Lipper-AMG, meanwhile, reported $804 million of outflows from the high-yield mutual funds for the week to Aug. 3, according to market sources.

"It's hard to imagine what will convince people to put back on some risk in these circumstances," the fund manager said heading into Monday evening.

The European Central Bank commenced a bond buying program on Monday in order to prop up some of the sputtering sovereign debt from distressed euro zone member states, in particular Italy and Spain.

In the United States, expectations grew that the Federal Reserve Bank might undertake a new round of purchasing U.S. Treasury bonds. However, the fund manager professed skepticism that such moves would convince investors to shoulder more risk.

"It didn't really work the last time," the investor remarked, referring to the Fed's bond-buying program known as QE2 (i.e., quantitative easing).

The markets in the United States are taking their cues from a lack of leadership in Washington D.C., the investor insisted.

That lack of leadership, which culminated in the political brinkmanship seen in the "debt ceiling" battle, which took place in late July between the executive and legislative branches of the U.S. government and culminated in last week's downgrade of long term U.S. debt by S&P, has seriously corroded investor confidence, the buysider added.

The manager did glimpse a silver lining on at least one of Monday's storm clouds: crude oil prices dropped by $8 per barrel.

That could be a stimulus in the making, the investor said.

"Gas could soon sell for $3 per gallon at the pump, which would put a lot of cash in consumer's pockets," the source said.

The average price nationwide for a gallon of regular gasoline was $3.67 on Monday, according to the Energy Information Administration.

Traders see total rout

A trader - with no small amount of understatement - declared that "things were pretty ugly."

"There were a lot of buckets on trading desks today because people were puking things up, left and right. Things weren't going down, they were gapping down," the trader noted.

He saw multiple instances in which "I would see an offering come in at, say, 1021/2, down 2 points from last week, and before you could finish typing to send out that message, or call someone on the phone, you would see it offered a point cheaper. That was pretty much what was going on all day: something would come in cheap, then another offering in the same name would come in, a half-point cheaper or a full point cheaper."

At another desk, a trader exclaimed: "Everything on average was down 3 points. We could pick out a couple [of names] that were down that much or more, but it would be doing a disservice to the other 500 or 600 bonds that we're not mentioning.

"It's a pretty generic 'down-3' day, without anything standing out," he said.

The trader said that volume-wise, "I wouldn't say that it was massive, but volumes were definitely heavy," especially among the big, liquid, widely traded "go-go" names that generally dominate the most-actives lists.

"We saw real selling - there was dealer selling as well as account selling. They're selling across the board today."

The first trader, asked to compare Monday's dealings to the sizable junk market downturn seen on Thursday, said that "this was much worse."

Down, down and down

The trader said that he was trading some of Houston-based energy operator Plains Exploration & Production Co.'s 7% notes due 2017.

"This morning, the bonds were offered at 103. An hour later, they're offered at 102. Ten minutes later, they're offered at 1011/2, then at 101 and then at 1001/2. It was that way time after time after time - offer after offer after offer.

"I guess the marching orders were 'buy me the bid.' "

Selling intensified

The trader continued: "This will now kind of feed on itself as the retail and 'mom and pop' investors go online and see 'our funds were down.' If the [CDX high-yield] index was down 4 points today, 'our fund just lost 3% or 5%. Let's put our sell orders in.' So, it's like everyone starts anticipating for the redemptions coming in.

"You have the retail guy probably freaking out tonight and calling his broker the next day, saying 'let's get out of this asset class.' "

Another trader disagreed somewhat:

"I would say that media is so fast these days, that I don't think there are people that were unaware of what went on today," noting that if a small investor had a cable connection, they could watch the debacle unfolding on CNBC the same as professional traders.

"It's not like you have to read the [next day's Wall Street] Journal to find out what went on, like you used to do 20 years ago."

He allowed that probably "there will be some of that - probably moreso from guys that [just] check account balances than from not knowing what went on and seeing how much they lost today, but I don't think it's going to be a shock to anyone, really."

Little or nothing on upside

A trader said that "usually, you at least get one or two names that are a little out of whack [versus the rest of the market], but in my space, I don't have anything that shows up on the day. Nothing at all."

At another desk, a trader agreed that "there was basically nothing that traded up - I think maybe six bonds traded up, and nothing's over $1 million of trading, so they were just kind of odd lots. The rest of it was just all negative."

A market source saw a little scattered trading to the upside, including the 7½% notes due 2013 of Edison Mission Energy, which ended at 97½ bid, up 2¼ points. The company, a unit of Rosemead Calif.-based utility operator Edison International, had also been seen firmer on Friday following not-unfavorable earnings data.

Perrysburg, Ohio-based packaging maker Owens-Illinois Inc.'s 7.8% notes due 2018 gained about three-eighths of a point to close at just under 104."

Most names off many points

But those were the exceptions to the rule - and the rule on Monday was that most names were off by multiple points.

For instance, a trader said this was true "of just about any name you looked at."

He saw Nashville, Tenn.-based hospital operator HCA, which sold $5 billion of new junk in a two-part megadeal that came to market on July 26, both tranches pricing at par, saw its 6½% senior secured first-lien notes due 2020 down about 5 points on the day, at 94¼ bid.

"And we're not talking just 500 bonds ($500,000) - there were $19 million traded," putting it near the top of the Junkbondland most-actives list.

He also saw the company's new 7½% senior unsecured notes due 2020, which were part of that same huge deal, trading at 92 on Monday, down 5½ points.

Another big loser, he said, was No. 2 automaker Ford's benchmark 7.45% bonds due 2031, which were off by 6 points on the day, at 105 7/8 bid.

However, a trader at another shop said later that the bonds close at 108 bid, 109 offered, which he called down 4 or 5 points on the day.

One of the trader saw the Caesars Entertainment 10¾% notes due 2016 - issued back when the Las Vegas-based gaming giant was known under the more familiar Harrah's Entertainment name - at 86 bid, noting that "two weeks ago, they were trading in the high 90s."

He also saw the company's widely traded 10% "go-go" notes due 2018 down 4 points on the day, to 76¾ bid.

A trader said that "for whatever reason, Sprint Nextel came in a lot."

He quoted the Overland Park, Kan.-based No. 3 U.S. wireless carrier's shortest piece of paper, its 6 7/8% notes due 2013, down by 1 point, at 99 bid.

However, its 8¾% bonds due 2032 plunged by 9 points to go out at 91 bid, "and that's a BB- name," he said, adding that volume was a busy $16 million-plus, "so it was not like just one guy was getting out of it."

A trader saw Miamisburg, Ohio-based papermaker NewPage Corp.'s 11 3/8% first-lien senior secured notes due 2014 fall between 3 and 4 points on the session, to 82¾ bid.

He noted that some $32 million of the bonds had traded, putting the credit near the top of the most-actives list for Monday.

Market indicator mowed down

Market statistical indicators, which were down sharply on Thursday and remained down on Friday, took unprecedented losses on Monday.

A trader saw the CDX North American Series 16 HY Index nosedive by nearly 4 full points to end at a 92.87 midpoint. Several other traders called it the worst downturn in their memory - more than 7 points down from its week-ago level at 99.96 and a full 10 points below the 102.91 level at which it had begun the year.

The index's spread ballooned out by 104.8 bps on the session to end at 686.36 bps - 185.37 bps wider than its week-ago level of 500.93 bps and 256.24 bps wider than the 430.12 bps spread recorded as the year opened.

Among the other statistical measures, the KDP High Yield Daily Index plummeted by 52 basis points on Monday to a closing level of 73.46, after having swooned by 34 bps on Friday.

Its yield ballooned upward up by 22 bps on Monday, to 7.44%, after having moved up by 12 bps on Friday.

And the Merrill Lynch High Yield Master II Index showed its fifth consecutive daily loss, by far the largest downturn of the year and one of the largest declines ever in plunging by 1.664% on Monday. This compares to its fall of 0.715% on Friday, the previous biggest loss of the year.

That dropped its year-to-date return to 2.543%, well down from 4.279% on Friday and down even further from its peak level for the year so far, the 6.362% return seen on July 26.

Monday's close was the lowest since the 2.43% recorded on Feb. 3.

All in all, a trader said, "it was a nasty day. It's hard to spin this one any other way."

A second added, "A lot of good, stiff drinks are going to be sold tonight."

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