Junk market remains muted as stocks gain; Exodus slides

By Paul Deckelman and Paul A. Harris

New York, Sept. 25 - The equity markets made it two straight days of gains in a row Tuesday, although the day's advance was modest compared with Monday's roaring bounceback from recent lows. In the junk bond trading pits, however, there was still a sense of skepticism, traders said - a feeling that they wanted to know which way the wind was blowing before deciding that the revival is real. New-deal activity remained likewise held in check. Another of the few prospective issuers on the forward calendar, energy operator EEX, was heard to have put its planned new deal on hold until conditions improve.

"Today started out a little like yesterday," a trader said. "There was a little pop early on, but the market couldn't sustain it."

For instance, he said, Adelphia Communications Corp.'s 10.875% notes due 2010, which had opened in the 91-92 bid range "evaporated" down to around the 88-90 level by day's end.

"It was a relatively slow day today, which was surprising," another trader said. "Things seemed pretty quiet, with people waiting on the sidelines to see where equities were going."

Where equities were going was up but on a more modest scale than the burst of buying seen on Monday, when the bellwether Dow Jones Industrial Average had zoomed some 368 points in the first rally since the Sept. 11 terrorist attack threw the U.S. financial markets into disarray. On Tuesday, the DJIA was up 56.11, as market sentiment to extend Monday's rally ran up against tepid consumer sentiment numbers and concerns about imminent military action; the indexes closed below their highs, but still in the black.

One issue definitely not in the black Tuesday on either the equity or the debt side was Exodus Communications, whose bonds traded down about four points, into the mid-teens, and were heard trading flat, or without accrued interest (an effective loss of another several points beyond the nominal price change) as rumors swirled through the market that the troubled Santa Clara, Calif.-based web hosting company might soon declare bankruptcy.

The scuttlebutt was given legs by a Wall Street Journal story to that effect, which projected that a filing could come "as early as this week." Exodus itself refused to comment, but investors voted with their feet.

Exodus' 11.625% notes due 2010 were heard languishing in a range around 15-17, down about three or four points on the session, and trading flat. It shares meanwhile lost a whopping two-thirds of their value, dropping 33 cents to end at 17. Exodus was the easily the most active issue on the Nasdaq, its 193.4 million-share turnover eclipsing its usual 32 million-share daily handle.

Exodus angst spread to other sectors of the telecom sphere; Global Crossing Holdings Ltd.'s bonds, such as its 9.5% and 9.125% notes were heard quoted in the mid-50s, while its stock was down 15 cents to $2.95, on the news that Global Crossing plans to take a non-cash third quarter charge reflecting its 20% stake in the beleaguered Internet hosting company.

The troubles of Exodus seemed to take some of the spotlight off the airline sector, which had notched a strong rally in both equity and debt on Monday. The sector's bonds "caught a pretty good bid Monday but softened up today," a trader said, estimating the group down about a point to a point-and-a-half.

But while a trader saw Northwest Airlines Inc's 8.52% notes losing two points to around 73 bid/75 offered, he saw its 7.875% notes due 2008 trading up two points around 64 bid, "with no rhyme or reason," given the daunting challenges which Northwest and its fellow carriers still face.

By now, it may be an old story, but investors are watching the securities of hotel and lodging companies with the same trepidation they scrutinize the air carriers, since both groups are very vacation-dependent and could be hurt badly by either more terrorist attacks and/or an economic downturn. There seemed to be some belated response to Friday's news that FelCor Lodging Trust and MeriStar Hospitality Corp., the nation's second- and third-largest lodging based real estate investment trusts (REITs), had called off their planned merger; Meristar's 9.125% notes due 2011 were quoted at least 20 points below prior levels, at 74 bid, and its 8.75% notes due 2007 were also pegged down 20 points to the mid-60s, although little real trading was seen.

American Standard's 7.375% notes due 2008 were seen down about two to three points on the session to around 97, after the maker of plumbing products and air conditioning equipment said third-quarter earnings should total $1.23, unchanged from a year ago and well down from the $1.37 to $1.44 per share analysts had been anticipating. The company cited the weakening economy, including the impact of the recent terrorist attacks.

Another trader, however, said the afternoon news really had come too late to have much impact, in his view, but added that "it doesn't bode well for Wednesday."

In the high yield primary market, meantime, uncertainty in the wake of the Sept. 11 calamity continued to hold sway.

"There are no immediate high yield issues coming to market that I have seen, since Sept. 11," Margaret Patel, manager of the Pioneer High Yield Fund, commented.

"I think there is a handful of issues are on the back burner, waiting for market conditions to return to normal," she added.

The high yield market needs to stabilize, Patel said. "We need to see a stopping of redemptions; high yield funds had heavy redemptions last week," when $685 million more left the funds than came into them, the largest decline so far this year.

"And, frankly," she continued, "the yield levels that it would take to sell a new deal are so high, now, that there are very few companies that would care to raise money at these levels. The only issuers that might be inclined to raise money are those that are very, very well-regarded, that can bring levels at very narrow spreads.

"That's why you're going to see very limited activity."

EEX Corp., a Houston-based oil and natural gas exploration and production company, likely focused on the same market dynamics Patel discussed, as it was said to have decided to await more favorable market conditions to price $350 million of seven-year senior unsecured notes, via J.P. Morgan.

"It's currently postponed, as is everything else, until further notice," a source close to the deal said.

Originally slated to priced during September, the deal will hopefully reach the market during October, the source said. Proceeds will be used to repay outstanding borrowings under the company's senior revolving credit facility, to pay for the termination of certain forward-gas sale obligations and for general corporate purposes.

The only deal currently with a schedule is $275 million for Sweetheart Cup Co., which is on a roadshow through Friday. Jefferies & Co. is the lead manager.

End

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