Junk jumps even as stocks slump - but GMAC skids as Pimco balks at debt swap; funds gain $86 million on week

By Paul Deckelman and Paul A. Harris

New York, Dec. 18 - High yield bonds firmed solidly across a broad range of issues on Thursday - as the junk market turned its collective back on a suddenly queasy equities market which saw stock investors continuing to fret about the economy, which overshadowed players' earlier hopes for a big stimulus package.

Among the gainers, up multiple points in busy trading, were such names as Community Health Systems Inc., Freeport McMoRan Copper & Gold Inc., Sprint Nextel Corp. and Charter Communications Inc.

Even Rite Aid Corp.'s bonds were seen doing well -- despite a sharply wider quarterly loss and bearish guidance from the Camp Hill, Pa.-based drugstore chain operator.

But a major exception to the rule was GMAC LLC, whose bonds had been steadily climbing since Friday as it offered amended terms for its pending debt-exchange offer, increasing the chances of the offer's success. However, that rise came to an abrupt halt Thursday on the news that one of its big bondholders - namely, Pacific Investment Management Co., operator of the world's biggest bond fund - had balked at going along with the exchange, even on the amended terms, jeopardizing GMAC's efforts to convert to a commercial bank.

In the primary market, there was a little talk that that might still be one more deal to come this year, for an as-yet unidentified 4-B credit - even though some observers had written the new-deal arena off as done for the year, given the usual year-end seasonal lassitude, compounded this time around by atrocious market conditions that have required recent issuers to price new bonds carrying already-fat coupons well below par to entice buyers to play in their deals.

Funds up by $86 million on week

And as trading was winding down for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday, $85.7 million more came into the weekly-reporting funds than left them.

It was the third consecutive inflow, following the $127.1 million cash infusion seen in previous week, ended Dec. 10; over those three weeks, net inflows have totaled $398.1 million, according to a Prospect News analysis of the AMG figures.

Even so, the recent trend of junk fund flows remains negative, since in the last 14 weeks, including the latest results, there have been eight outflows - including at one point in September-October, six straight losses totaling $1.706 billion - against just six inflows in that time. Net outflows in that 14-week period have totaled $1.049 billion, according to that analysis. The recent run of largely outflows stands in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10, when inflows were seen in seven of those eight weeks, according to the analysis, totaling $632 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 27 weeks, dating back to the week end June 18, with 14 inflows and 13 outflows seen, the funds have still lost a net of $1.212 billion during that time, according to the analysis, mostly due to large cash losses in October -- $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 -- and the massive $651.2 million outflow seen in the week ended June 25, which was the biggest single cash hemorrhage of the year. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter and the year itself now entering its final days, inflows, after that slow start, remain ahead, with 29 inflows versus 22 outflows seen in the 51 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $702.5 million, up from $616.8 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the aforementioned 11-week run of straight inflows.

A market source meantime said that the funds which report on a monthly basis rather than reporting weekly were unchanged, versus the previous week's $154.2 million inflow. That kept the net inflow for such funds at about $2.726 billion.

Year-to-date aggregate flows - consolidating the cumulative net inflows of the weekly- and monthly-reporting funds - stood at a net inflow of $3.429 billion, versus $3.343 billion the week before .

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Market indicators climb again

The widely followed CDX High Yield 11 index of junk bond performance, which jumped 2 full points on Wednesday, added another 1 point on Thursday, with a trader quoting it at 76 bid, 77 offered. The KDP High Yield Daily Index meantime zoomed by 89 basis points to 48.61, while its yield tightened by an eye-popping 63 bps to 16.49%.

In the broader market, advancing issues held their lead over decliners, beating them by a nearly five-to-three margin. Overall market activity, reflected in dollar volumes, was down 29% from the pace seen in Wednesday's session.

A trader declared that "it was really quiet today." Although the market "firmed up a little bit, it was very quiet all around. There was not a ton of people in."

He projected that it would likely be "the same way" on Friday, "especially with the weather" - a nasty winter storm was forecast to be rolling into the Northeast after having battered the Midwest - "and the next couple of weeks are going to be quiet."

Interestingly, he said that normally, the junk market right around this time would be seeing an end-of-year selloff, with accounts looking to dump their losers and clean up their books ahead of the end of the quarter and the calendar year. This year, however, with high yield having already been pounded down by around 30% on the year according to most major indexes, "there probably is not going to be any selloff - everyone who's going to take tax losses already took them, so there are not too many people who have to worry about that right now, or who are doing anything about it. So I think it's going to be considerably [more] quiet over the last two weeks - no bumps or pushes anywhere."

Another trader marveled at the day's upside push - particularly coming as it did against a backdrop of lower stocks, which lost ground pretty much all day, but especially after Standard & Poor's warned that there was a one-in-three chance that the mighty General Electric Co. and its General Electric Capital Corp. financial arm could see their vaunted AAA ratings cut within the next two years. The bellwether Dow Jones Industrial Average -- of which GE is major component - in fact, it is the only stock to have been in the Dow for all of the index's 112 years of existence -- fell 219.35 points, or 2.49%, to end at 8,604.99. Other, broader indexes did a little better, with the S&P 500 off by 2.12% and the Nasdaq composite down only 1.71%.

But while stocks were stumbling, junk was doing anything but tumbling.

The trader said that there was "an upward bias in high yield, without a doubt," although he suggested the rally seemed to tire a little as the day wore on. He said that as of mid-afternoon, there was "definitely a sense" in the market that the AMG number, a gauge of overall market liquidity trends and thus, an indicator of a key facet of junk market health, was going to be up - a prediction which in fact did come true, as noted, although its actual rise was considerably less than the "hundreds of millions" of dollars which he speculated might be possible. This felling that AMG would be up was "based on the way I saw some offerings being lifted and some paper moving" earlier in the session.

He also took note of the 3 point rise in the CDX over two sessions - an usually strong performance for a market measure which generally moves no more than ¼ to ½ in either direction on most days, but which soared a full 2 points Wednesday and another point Thursday.

"Something triggered [Wednesday], there's no question about it." He suggested that "it may be fast money coming into the hedge funds," with equities temporarily out of favor.

The result was that a number of issues went up "multiple points, on good volume."

A high-yield syndicate source noted late Thursday that for a second consecutive day junk had outperformed the stock market.

Spotting the CDX High-Yield 11 index at 76¼ bid, the official said that there was possibly some short covering at play in the 1 point-plus positive move.

"Whatever the reason, some of the bonds we saw are trading at better prices than we've seen in quite a while," the official commented.

The MGM Mirage 13% senior secured notes due 2013 (Ba1/BB), which priced at 93.132 in late October to yield 15% in a $750 million issue, were trading above the issue price on Thursday at 95¼ bid, sources said. One source recollected that those bonds had traded as low as 80 bid on Nov. 24.

However the positive price move had one high-yield mutual fund manager, a self-professed "agnostic" of the new issue market, mystified.

"A lot of mutual fund managers can't resist shiny new bonds, I guess," the investor reasoned.

"Why would you want to buy anything at 93 cents on the dollar when the rest of the market is at 70?

"If the market goes up my 70 cent bond goes to 90.

"These new bonds that priced at 90 might go to 105."

Barometer bond mirrors market rise

Meanwhile the trader quoted above saw Community Health Systems Inc.'s 8 7/8% notes due 2015 -- sometimes considered a proxy for overall market movements due to its relatively large size, widespread distribution and easy tradability - mirroring the overall junk market's decidedly better tone, rising 5 points to 84.5 bid, "quite a pop" for the Franklin, Tenn.-based hospital operator's bonds. With over $18 million of the bonds traded, it was one of the most active issues on the day.

Also among the healthcare names, HCA Corp.'s 9¼% notes due 2016 - which had risen by 2 points on Wednesday - tacked on another 3½ points Thursday to end at 80.75 bid, on volume of $16 million.

At another desk, those bonds were seen up as much as 4 points-plus, at that same 80 level.

Iasis Healthcare's 8¾% notes due 2014 closed at 78 bid, up more than 2 points, while DaVita Inc.'s 7¼% notes due 2015 also gained more than 2 points to end around 90.

But Vanguard Health Holding II's 9% notes due 2014 were more sickly, down nearly 2 points to the 81 area.

Freeport McMoRan rises again

Freeport McMoRan "continues to rebound" a trader said, pegging its 8 3/8% notes due 2017 at 77 bid, up 1½ points on the day, with $14 million traded. "These movers have decent volume."

The Phoenix-based metals mining company's bonds had been hurt badly several weeks ago when it warned that it would have to curtail its copper mining activities and anticipated sales revenues over the next two years because of a slide in prices for the metal, which has fallen by two-thirds from the prices seen over the summer.

However, the bonds got back on the winning side on expectations that the incoming Obama administration's planned infrastructure stimulus spending package would boost industrial demand for the metal for such things as pipes, wire and electronic circuits.

It also get a boost from the recent recovery in gold prices, which rose to nine-week highs this week on the decline in the U.S. dollar, although New York-traded January gold futures actually fell by $7.90 Thursday to $860.60 per ounce.

Sprint 'active and up'

Sprint Nextel's bonds were definitely better, with a trader seeing its 6.90% notes due 2019 push up by 5 points to 64 bid, while its 7 3/8% notes due 2015 were seen a point better at 38.

The Overland Park, Kan.-based wireless telecommunications operator's bonds were "active and up," another trader said. "Every time I saw something over the counter, it looked like it was up points."

He quoted the 7 3/8s get as good as 40.75, which he called up 1½ points on the day, on volume of $13 million. Meanwhile, its 8 3/8% notes due 2012 were 2 points better at 72 bid.

"No question, the whole Sprint complex [of issues] is up."

Charter gains continue

Charter Communications Inc.'s 8¾% notes due 2013 moved up nearly two points, to 54.5 bid, on more than $18 million traded, continuing the rise over the last few days in the St. Louis-based cable company's paper; the company's bonds had fallen badly a week ago on the news that it had asked financial advisor Lazard LLC to initiate discussions with its bondholders about financial alternatives to improve its balance sheet, but then recovered strongly this week on the revelations that the company has ample levels of cash and equivalents on hand - over $900 million earlier this month, more than enough to run its activities in the coming year - and so is not likely to be pushed into a bankruptcy situation, as some investors had feared.

Charter's 8% notes due 2012 were seen up as much as 9 points on the day at 75 bid, a market source said.

Bonds of Charter's rivals, satellite broadcasters Echostar DBS and DirecTV, were also gaining altitude, with the Echostar 7 1/8% notes due 2016 up 4 points at 77 bid and DirecTV's 6 3/8% notes due 2015 up over 3 points at 89. The latter's 7 5/8% notes due 2016 were up half-a-dozen points to the 93 level.

Rite Aid rises despite results

A trader said that Rite Aid Corp. was "a surprise big mover," its 8 5/8% notes due 2015 up 4½ points to 32.5 bid, on volume of $10 million, despite a wider quarterly loss and bearish guidance.

Another market source saw those same bonds up nearly 4 points at 31.5 bid.

Rite Aid's 9½% notes due 2017 were meantime up more than 2 points at 33 bid, with more than $11 million traded.

However, Rite Aid's New York Stock Exchange-traded shares were off by 4 cents, or 7.84%, to end at 47 cents, on normal volume of about 6 million shares.

The stock fizzled - although the bonds sizzled - after the company said that in the fiscal third-quarter ended Nov. 29, its loss nearly tripled to $248.7 million, or 30 cents per share, excluding stock dividends and accretion, from its year-ago red ink of $93 million, or 12 cents per share. Excluding special items, Rite Aid lost $130.1 million, or 15 cents per share, slightly less than the 17 cents analysts expected.

But Rite Aid also widened its estimates of likely 2009 losses and cut its anticipated same-store sales forecasts, versus prior levels.

However, bond investors likely looked past that bearish news to focus on the 8.5% rise in adjusted EBITDA for the quarter, and company expectations of positive cash flow in the year ahead.

GMAC stalls out

A trader called GMAC LLC's bonds "the only active downsiders."

He saw its most actively traded issue, the 5 5/8% notes coming due next May 15, down 4¼ points at 67.25, on $20 million of turnover.

He also saw GMAC's 6 7/8% notes due 2011 tumble to 39 from 45.5, with $6 million traded, while its 8% bonds due 2031 slid to 31 bid from 36.5, on $5 million trading.

"It definitely feels like people have thrown in the towel" on GMAC, he opined.

Another trader saw the '31s down 4 points on the session at 28 bid, 30 offered.

A market source at another desk estimated the 5.85% notes maturing on Jan. 14 down a full seven points, to below 80.

News reports said that GMAC's efforts to line up enough of its bondholders behind a big debt-exchange deal - required if it is to be allowed to convert itself to a bank and get federal bank bailout help - hit a roadblock, as

Pacific Investment Management Co. failed to tender its holdings under the offer, according to news reports - even though Pimco had previously agreed to participate once GMAC sweetened its original offer terms.

GMAC said Thursday that holders of some 58% of the roughly $38 billion of GMAC and Residential Capital LLC bonds covered under the offer had tendered them - leaving it still well short of the 75% threshold. The early-tender deadline by which most holders will have tendered by, since those terms are a little better, is scheduled to expire Friday afternoon, although GMAC could still extend it, again.

Elsewhere among the automotives, a trader saw GMAC parent General Motors Corp.'s 8 3/8% bonds due 2033 at 14.5 bid, 15.5 offered, while Ford Motor Co.'s 7.45% bonds due 2031 were at 24.5 bid, 25.5 offered, both up a point.

A second trader, however, saw GM'S 8 3/8s dip to 15.5 bid from 16.75 on Wednesday, and saw its 7.20% notes due 2011 down ¼ point at 17.75, while its 7.70% notes due 2016 were down a deuce at just under 14. He saw the Ford long bonds off a point at 25 bid.

Trouble for GMAC exchange?

But the Wall Street Journal report that Pimco would opt not to tender its bonds in GMAC LLC's massive $38 billion exchange deal had some high-yield market sources scratching their heads Thursday afternoon.

"If this deal falls through now, the next deal, three months from now, is going to be so much more detrimental to bondholders that people will likely end up wishing they'd have taken this deal," said a banker who is not involved in the exchange but is watching it closely.

"This is a good deal," the banker insisted.

"You're not taking a haircut to face value like you did with ResCap in May, where you got 40 to 60 cents on the dollar, and the rest you just gave up."

Pimco was believed at one point to be part of the ad hoc committee of GMAC bondholders which, with the help of its counsel, Paul, Weiss, Rifkind, Wharton & Garrison LLP, won significant concessions in the exchange deal from Cerberus Capital, which has a controlling stake in GMAC, the banker said.

However based on the Wall Street Journal report, Pimco subsequently disengaged from the committee, the banker reckoned.

"There's a huge benefit to getting this deal done," the banker contended.

"You are probably going to be made whole on your preferreds in most circumstances if [GMAC] has bank holding company status.

"This company has $11 billion of debt coming due in 2009. The bonds are trading anywhere from the 40s to the high 60s. And they don't have access to the market.

"If this is a negotiating tactic, it's an aggressive one. "And there was a pretty good deal in hand."

Ultimately this banker sees the GMAC exchange getting done.

Meanwhile from the buy-side, a junk bond investor, also not in the deal, said that the GMAC exchange wasn't so bad.

"They're trying to pay you a little bit of cash. They're giving you enough of a new note and a preferred.

"The point of the deal is to get bank holding company status for GMAC, which would benefit you.

"This deal isn't coercive like the Stations Casinos exchange deal.

"The GMAC deal needs to capture some discount to get the ratios in line. That's not hard to understand. If they get bank holding company status, the bondholders would benefit."

Thursday's news from the exchange front seemed uniformly bad.

Realogy pulls exchange

Realogy Corp. announced that it is immediately terminating its offer to exchange existing bondholders into $500 second lien incremental term loans.

The Court of Chancery of Delaware ruled that the proposed deal would breach Realogy's senior toggle notes indenture.

Another possible deal

No hard news surfaced on the new issue front on Thursday.

However the 2008 primary market may have a little space left to run.

Sources on both the buy-side and the sell-side said that a benchmark-sized deal from a double-B rated issuer is expected to surface on Monday, led by Goldman Sachs. Only one source, a high-yield mutual fund manager, claimed to know an issuer name, but declined to furnish it.

It may be worth recalling that December's two drive-by deals to date, from El Paso Corp. and Kansas City Southern Railway Co., came with significant reverse inquiry, according to informed sources.

Sources reasoned that even though it's late in the season, with Monday possibly being the last possible day to get a deal done, sufficient reverse inquiry could once again be at play.

Elsewhere, Thursday, there was significant play among high-yield accounts in Altria Group, Inc.'s $775 million offering of 7 1/8% 18-month senior unsecured notes (Baa1/BBB/BBB+), according to an informed source.

Perhaps because it is a short-duration bond, last Monday's decision by the U.S. Supreme Court that tobacco firms can be sued under state law for deceptive advertising of "light" cigarettes, a ruling against Altria's Philip Morris USA unit, did not appear to have gotten traction among investors, the source added. He noted that the deal was significantly driven by reverse inquiry.

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