Junk ends volatile week on up note; new Cablevisions add to gains; Elan, Lyondell up again

By Paul Deckelman and Paul A. Harris

New York, Jan. 9 - The high yield market wrapped up a topsy-turvy first full trading week of 2009 by nosing back upward, after the two-day midweek lull that had many players convinced that the hoped-for Great Junk Bond Rebound of 2009 was over almost before it had even really begun. Actively traded issues were seen up by multiple points in some cases as investors took heart from the strong fund-flows influx reported Thursday.

Among the larger gainers were Ford Motor Credit Corp. and HCA Inc.

Also seen better was Elan Corp plc - whose bonds had jumped on Thursday on speculation that the Irish drugmaker might be acquired by pharmaceuticals giant Pfizer. The bonds were up again on Friday, even though Elan's chief executive officer said that his company had not been in merger talks with Pfizer, or any other drug company. Elan also got some mildly positive news on the medical front about its sometimes-troubled multiple sclerosis drug Tysabri.

Bankrupt Lyondell Chemical Co.'s bonds continued to rise, as investors accumulated the Houston-based company's bonds to, in the words of one, "jockey for position" in the eventual reorganization.

Among the downsiders, however, were such gaming names as MGM Mirage, Station Casinos Inc. and Boyd Gaming Corp.

On the new-deal front, traders saw CSC Holdings Inc.'s freshly priced issue of five-year non-callable notes open a little below the strong levels to which they had moved after pricing Thursday, but by the end of the day they were back on the upside to register additional games. With the ice having been broken on 2009 issuance, primaryside players meantime were looking forward to additional deals.

Market indicators turn back up

The widely followed CDX High Yield 11 index of junk bond performance, which had fallen 1 1/8 point on Thursday, was up ¼ point on Friday, a trader said, quoting it at 79 5/8 bid, 79 7/8 offered. The KDP High Yield Daily Index rose by 22 basis points to 55.83, while its yield tightened by 9 bps to 13.56%.

In the broader market, advancing issues fattened their lead over decliners to more than five to four. Overall market activity, reflected in dollar volumes, fell 8% from the pace seen in Thursday's session.

"We've seen generally better buying today - the market was a little bit firmer," a trader said. "The employment report that came out [Friday morning], as bad as it was, wasn't as bad as people were anticipating."

The Labor Department reported that unemployment hit a 16-year high of 7.2% in December - with analysts warning of further increases - while the number of jobs fell by 540,000. That was enough to send stocks plummeting, with the bellwether Dow Jones Industrial Average dropping 143.28 points, or 1.64%, to end at 8,599.18, while the broader indexes did even worse - the Standard & Poor's 500 index slid 2.13% and the Nasdaq composite retreated 2.81%.

Even so, the trader said, the junk market "was kind of stable."

Another trader agreed that "our market held in, despite stocks being down well over a hundred points" - a strength that he termed "surprising," especially coming on right after two straight sessions in which the junk market had stumbled after its fast start earlier in the week, leading some in the market to contend that the nascent rally seen on Monday and Tuesday, when junk bonds had blasted upward right out of the box both days as participants returned from the New Year's break with a desire to break with the troubles of the previous year and get 2009 off to a good start.

With things seemingly back on track Friday, the second trader said, "the majority of the very active names were positive." He attributed the gains to the positive impact of the huge mutual fund inflow reported Thursday.

Hospital issues' health improves

A case in point - a "perfect example," he called it - was the activity in Community Health Systems Inc.'s 8 7/8% notes due 2015. The Franklin, Tenn.-based hospital operator's bonds, sometimes considered something of a market benchmark, had soared early in the week into the mid-90s, but then lost anywhere from 3 to 5 points at mid-week, in line with the general market downturn.

On Friday, they recovered, moving back up to 94.25 bid from 91.75 on Thursday.

Out of that same sector, the trader noted the upturn in Nashville-based HCA's bonds. Its 9¼% notes due 2016 shot up to 93.25 bid from 89.75 on Thursday, and was one of the most busily traded bonds of the day, with over $32 million having changed hands by mid-afternoon.

The company's 5¾% notes due 2014 likewise improved to 69.75 from 68.875, though on considerably lesser volume of about $6 million.

Lingering in the healthcare sector, hospital operator Iasis Healthcare's 8¾% notes due 2014 were 2 points better at 88, while Healthsouth Corp.'s 10¾% notes due 2016 were up about 3 points at 97.25.

Market seen stabilizing

A trader remarked that apart from the excitement generated in the market by the Cablevision deal and its subsequent surge in the aftermarket, "it's been dribs and drabs, stuff here and there. Our market feels like it's firmer."

With a massive cash inflow having taken place over the previous several weeks - the upshot of the AMG figures, "obviously, technicals are very strong - there's a lot of cash that's been coming into the market, and a lot of cash on the sidelines, so it continues to march on. We're doing better."

He took issue with those who said that the mid-week downturn marked the end of the fledgling rally of the previous few sessions.

"I don't think so," he said. "It [the market] traded off, it was off several points, but then it came right back. So I think we're going to continue to see volatility like this - which is good. It gets bonds trading and stuff moving around."

He pointed out that "it seems like a lot of guys are trying to buy the same issues - everyone is trying to buy very stable, solid, middle-of-the-road type credits, and we're not seeing a lot of bottom-fishing."

He called it "interesting that on the way up, with the herd-mentality guys, nobody was a seller, and [now], as soon as the thing turns, nobody's a buyer. You've got to get these days where the markets are stabilized. When it's bid-without, there was nothing trading for those few days."

Elan elevation continues

A trader said that Elan Corp.'s 7¾% notes due 2011 "did pick up" on Friday, building on the gains seen Thursday, when they had risen to around 71-72 from the mid 60s on market speculation that pharmaceutical giant Pfizer Inc. might buy the Irish drugmaker. He pegged them at 79 bid, 81 offered.

Another trader called Elan's rise "amazing," pegging it at "20 points in two days."

Elan's floating-rate notes due 2011 firmed to 72.875 from 69.25 on Thursday and from around 63 bid, 64 offered on Wednesday, before the takeover talk began.

However, that speculative frenzy was undermined Friday; Elan's American depositary receipts, which had shot up nearly 15% in trading on the New York Stock Exchange on Thursday on the buyout buzz, fell 31 cents, or 3.56%, to $8.39 on Friday. Some market observers dismissed the notion that any kind of deal is afoot.

"I don't think this one really sits that well with Pfizer," said Jon Lecroy, an analyst with Natixis Bleichroeder. "Elan has their own program that's targeting a similar product and Elan has a lot of debt, so I don't think this one's going to happen."

As if to underscore his point, the company's CEO, Kelly Martin, flatly said that Elan isn't negotiating to sell the company to Pfizer or any other drugmaker.

He did say in a published interview that the company plans to raise as much as $500 million by licensing out its experimental cancer drugs. It plans to use some of the proceeds to reduce its $1.7 billion debt, of which some $1.1 billion is the bonds coming due in 2011. Some of the proceeds will also be used to fund the last stage of trials for Elan and Wyeth's experimental Alzheimer's therapy, bapineuzumab.

Elan has been troubled over the past several years by problems with its leading drug, the MS medication Tysabri, which it has jointly developed with Biogen Idec Inc. It discovered in 2005 that some patients taking Tysabri have had disastrous side effects - they developed a rare, severe disorder of the brain and nervous system, progressive multifocal leukoencephalopathy, or PML, which under some circumstances can be fatal. Elan and Biogen pulled the drug from the market in early 2005, and relaunched it a year and a half later, with special warnings on its packaging aimed at discouraging patients who might have a natural propensity for developing PML from taking it. Since that relaunch, four new cases of Tysabri-linked PML have surfaced, all of them confirmed last year, and one patient died of it.

Biogen said that it would post regular weekly Tysabri news updates on its website, and the first one went up on Friday. The Cambridge, Mass.-based drugmaker said that no new PML cases had turned up since the most recent case was confirmed, on Dec. 10. It said that 48,000 patients have been treated with Tysabri since its introduction.

Lyondell Chemical attracts 'accumulators'

A trader saw Lyondell Chemicals' bonds continuing higher, an upturn that began following its Chapter 11 filing last Monday. He had the 10¼% notes due 2010 in a 27-32 range, saying the 32 quote was 'points higher" and estimating the bonds up 4 to 5 points on the day.

He also saw the company's 9.80% notes due 2020 "active" and trading up to 31.5 bid, noting that the bonds had jumped to a 30-32 context from pre-bankruptcy levels around 10-12. "People are accumulating the bonds," he said, figuring them up 4 points on the day on "decent volume."

At another desk, a trader saw the 9.80s up 6 points on the day at 29 bid, 31 offered, while its 8 3/8% notes due 2015 at 10.5 bid, 11.5 offered.

He noted that the 9.80s had been trading at 11 bid, 13 offered before the bankruptcy, while the 8 3/8s were at 2 bid, 3 offered - but now that the company is in restructuring, "people are accumulating them and jockeying for position" during the coming reorganization proceedings.

Gaming sector luck runs out

On the downside, gaming names - which had initially joined in the broad junk rally earlier in the week, even though the sector's fundamentals are decidedly unfavorable in the current recessionary economy - reverted to its more familiar recent form Friday, even though most other junkers were better.

Observers said the proximate cause for the downturn was the release of bearish monthly revenue numbers from the two biggest gaming jurisdictions, Nevada and New Jersey.

One trader saw Wynn Las Vegas LLC's 6 5/8% notes due 2014 trade at 79.5, with about $10 million trading. He also saw MGM Grand's 6% notes due 2009 at 96.25. At another desk, MGM's 6 5/8% notes due 2015 dropped 2½ points to 68 bid.

Station Casinos' 6% notes due 2012 were likewise lower at 23 bid, while Boyd Gaming's 7¾% notes due 2012 were also off more than 2 points at 93 bid.

Nevada's revenue numbers for November came in at $836.8 million, down from $982 million the year before. In Atlantic City, casino wins fell 18.7% to $302 million in December.

New Cablevision bonds stay strong

On the new deal front, a trader saw active dealings in the new 8½% notes due 2014 issued by CSC Holdings, a unit of Bethpage, N.Y.-based cable system operator and sports team and arena owner Cablevision Systems Corp. The company sold a $750 million issue of those bonds on Thursday, upsized from the $500 million originally shopped around the market. The bonds priced at 88.885, to yield 11.375%, and those bonds promptly moved up to around the 92 bid, 93 offered level later in that session.

In Friday's dealings, he said, "it came off the highs," opening at 90.5 bid, 90.75 offered, but then it "traded right up." He said that the new bonds gradually moved up during the day to 92.5 bid, 93 offered at the close.

Another trader saw the at 92.5 bid, 92.75 offered, while yet a third pegged them at 92.75 bid, 93.5 offered.

The first trader said that allocations for the deal among would-be buyers at the pricing "were skinny. We're hearing that a lot of people were very upset about the allocations" and thus, turned to the secondary market to get the bonds which they were not allocated by the underwriters when the bonds first priced. "They're not really looking to necessarily add 4 or 5 points, but I think they're going to be forced to."

He was of the opinion that anyone who wants new Cablevision debt, probably does not have to wait too long - because the company will likely come back to the junk market fairly soon and issue new bonds. The company has some $1.5 billion of debt maturing this year and will need to tap the market to refinance that.

"They're going to be taking out the [2009] floaters, that's $500 million and that's coming out, and they're going to have to do something with the July and August 2009 8 1/8s [about $900 million combined], so my guess is you'll get another shot at buying these things over the next couple of months."

The trader said that the new issue was "a perfect kind of bond - an 8½% coupon trading at [a yield of over] 11%, obviously you're getting them at a big discount. It's a double-B cable company - right in the sweet spot. A lot of people wanted to buy it."

Cablevision raises primary hopes

As well as boosting the market overall, the Cablevision offering also lifted spirits on primary market desks, who have seen little busy in recent months.

"The Cablevision deal was a shot in the arm," the official said.

"It proves that the market is deep, and that the new issue concession can be tight for the right credit," the source added, referring to the new notes' pricing an estimated 0.875% behind Cablevision's existing paper, whereas heading into the new year market watchers had been anticipating new issue concessions of 1% to 1.5%.

The new Cablevision 8½% notes due April 2014 were at 92¼ bid going out on Friday, said the syndicate official who calculated the resulting yield at 10½%.

Biggest inflow streak since Spring 2003

The $988.3 million of inflows to the high-yield mutual funds reported by AMG Data Services on Thursday night is the biggest single inflow since the week ending Sept. 4, 2003, and caps the biggest three week period of inflows into the asset class since the three weeks that ended June 19, 2003, according to a high-yield syndicate source.

The most recent inflow follows the $691 million reported for the final week of 2008 and the $729.3 million inflow seen in the week leading up to Christmas.

Meanwhile funds that report to AMG on a monthly basis saw slightly less than $1.075 billion of inflows during the most recent period.

Hence year-to-date aggregate flows, including both the weekly and monthly reporters, were just under $2.063 billion at the end of the first week of 2009.

The conspicuous burst of cash - the biggest in any comparable time period in over half a decade - is a leading indicator of future primary market activity, according to the syndicate source who expects to see another handful of deals during January.

"It's also a reaction to the late-December rally in high-yield," the source added.

Biggest week in six months

The Cablevision deal, which generated just over $750 million of proceeds, rendered the opening week of 2009 the biggest for U.S. corporate issuance (i.e. issuance unrelated to the LBO backlog) in well over six months, according to the reckoning of one syndicate official.

The week beginning June 23, 2008 was the last bigger week, with B/E Aerospace Inc., Quicksilver Resources, Inc. and Linn Energy, LLC combining to raise just under $1.32 billion of proceeds.

The first week of 2009 began with a massive rally on Monday and Tuesday, sources said, adding that the rally tapered off somewhat toward the end of the week.

Late Friday the CDX High-Yield 11 was at 79 3/16 bid, 79 7/16 offered, and flat on the day, the official said, noting that the CDX was well off the week's high mark of 81 7/8 bid, spotted early Wednesday morning.

Speaking of '03

The year 2003 came up frequently during the past week's conversations with high-yield market sources on both the buy-side and sell-side.

That was because junk returned nearly 29% in 2003, trailing a dismal 2002 in which the high-yield generated a negative 1% return.

With the above-mentioned inflows into the high-yield mutual funds, and the late December-early January rally in both the cash bonds and the index, junk investors appear to be "piling in," sources say.

"Even though we're going to have higher defaults over the course of the year you're going to see spreads narrow across the board in corporates," said one money manager whose portfolio includes both junk bonds and stocks.

"In the top tier of the market - and I'm talking about almost anything that doesn't go bankrupt - yield spreads are going to narrow because Treasuries are going to remain low," the investor added.

"We know that because the Treasury has basically telegraphed it. And even if Treasuries back up 100 or 200 basis points you still have a lot of room for high-yield spreads to come down, because you aren't going to have any issuance at these levels other than 'Hail Mary' issuance until spreads become much narrower.

"Once spreads stabilize, which they have been doing, we are going to see money come into this sector, which we have already seen, and that will force spreads a lot narrower.

"Only when spreads go a lot narrower will you see a meaningful pick-up in issuance."

Cristal Cody and Stephanie N. Rotondo contributed to this report

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.