Junk easier in pre-holiday trade; builders steady before downgrade; Nuveen easier on monoline turmoil

By Paul Deckelman and Paul A. Harris

New York, Feb. 15 - High yield bonds were seen little traded during Friday's abbreviated pre-holiday session, with most of the dealings that did take place seen on the downside.

One particular loser was Nuveen Investments Inc., whose bonds were seen clinging to the lower levels they hit late Thursday in the wake of the latest bad news shaking the financial industry, the ratings downgrade which Moody's Investors Service laid on Financial Guaranty Insurance Co., and the bond insurer's subsequent proposal to split itself in half to survive.

Standard & Poor's was meantime downgrading ratings of such homebuilders as Hovnanian Enterprises Inc. and Beazer Homes USA Inc. - however, news of that downgrade did not hit the market until after the more-or-less official 2 p.m. ET close ahead of the Presidents Day holiday weekend and thus had no impact on Friday's dealings. Builders' bonds were seen before the downgrade hanging in around the levels they had held on Thursday.

MediaNews Group Inc.'s bonds fell after the Denver-based newspaper chain reported fiscal second-quarter earnings; while they were up by more than one third from a year ago, most of that gain was due to one-time special items. Revenues slid as advertising volume declined.

Axcan Pharma Inc.'s recently priced bonds were finally seen trading around a little bit, a trader said, after having not been seen following their pricing on Wednesday.

Meanwhile a senior high yield syndicate official marked junk 1/8 to ¼ point lower on the day.

New primary dealings were seen virtually non-existent on Friday, with just a small deal announced by Ainsworth Lumber Co. Ltd.

Market indicators head downward

A trader said that the widely followed CDX index of junk market performance eased by ½ point on the day Friday to 87 3/8 bid, 87 7/8 offered. Meanwhile, the KDP High Yield Daily Index lost 0.21 as it moved down to 74.04, while its yield widened by 6 basis points to 9.63%.

In the broader market, declining issues led advancers by a small margin. Overall activity, reflected in dollar volumes, slid by 37% from Thursday's levels.

Activity stills before holiday break

There was not a lot happening, the trader said, "nada."

A second trader facetiously announced the creation of a new market activity indicator - "the parking lot indicator," based on the number of cars in his company's parking lot when he got to work at 6:30 a.m. ET. He said that "gauge" indicated that it would be a very quiet day - and so it was, with most issues that he saw unchanged.

Yet another trader agreed that the market was "very quiet" ahead of the holiday, which saw U.S. debt markets close in the afternoon Friday, ahead of Monday's full-day holiday shutdown.

He said the market was "a little bit softer at the open, following stocks down." He said that even though they are not high-yield names, junk players took note of "all the jawing back and forth about FGIC getting downgraded [Thursday], and people were talking about whether MBIA [Inc.] will get their bailout before they get downgraded. So there were a lot of headlines" affecting market sentiment.

On top of that, he said that as is customary in a pre-holiday session, "it was a thin day. There's not a lot of people in. So the market was off maybe ½ to ¾ point - but very light trading."

Nuveen turns negative

He said that a particular loser seemed to be Chicago-based financial services concern Nuveen. He said that the company's 10½% notes due 2015 "traded off probably 5 or 6 points" late Thursday after Moody's downgraded FGIC, lowering the bond insurer's financial strength rating to A3 from AAA previously. But despite that scary initial drop, the trader said that the 101/2s carry "a big coupon, and a lot of mutual fund customers that we talk to are big holders of it, and I think that's sort of an industry and a name that they probably understand better than most."

It was his understanding that "there are some Street shorts in it, they've been trying to force it down, but there's nothing but buyers at lower levels. It's a little bit frustrating for the shorts, because while the bonds are quoted lower, there's been no trading [Friday] - no sellers." He pegged the bonds at 90 bid, 92 offered.

He said that the company's 5½% notes due 2015 saw "some high-grade selling in that issue [despite its nominal B3/B- ratings], and at the height of the downdraft" Thursday, they were about 55 bid, 57 offered, although he saw a few trades come off at progressively higher levels - at 56.5, at 59, at 60, "so they're inching back up. But I think people are cautious and wary."

He reiterated that "again, there were no real sellers and I think there are very few people that would be shorting this big coupon [i.e. the 10½%] down in the 80s."

Another market source actually saw the 51/2s push back up to 62 bid after having fallen to 59. But Nuveen's 5% notes due 2010 were seen having fallen back in thin trading on Friday to around the 87 area, down about 4 points from its recent levels.

In downgrading FGIC on Thursday, Moody's said that the bond insurer needs $9 billion of capital to keep its coveted AAA rating - but in the throes of the current credit crunch, the company has claims-paying ability of around $5 billion. FGIC on Friday proposed essentially splitting its business and separating its municipal bond business from more troubled exposures that have been hit hard by the mortgage crisis. It said in a letter to state regulators in New York that it would want to organize a new domestic financial guarantee insurer that would continue to have AAA ratings, supporting the issues previously insured by FGIC and writing new municipal market business.

Homebuilders steady ahead of downgrade

Besides the bond insurers, another victim of the continuing mortgage-centered credit crunch has been the homebuilders, since available credit is the lifeblood of the residential construction industry, and things got worse on Friday as Standard & Poor's downgraded several of those companies, including long-time high yielders Hovnanian and Beazer and recent fallen angel Centex Corp.

However, a trader saw the sector mostly unchanged, since trading had already wound down by the time S&P announced its ratings cuts.

He called Standard Pacific Corp.'s 7% notes due 2015 steady at 70 bid, 71 offered, said that Beazer's 6 7/8% notes due 2015 held in at 71 bid, 73 offered, and saw only "very light trading" in Hovnanian's 7½% notes due 2016, which were unchanged at 70 bid, 72 offered. He said that even the traders in credit-default swaps linked to the latter company's bonds as a debt-protection hedge - recently fairly actively traded - were saying Friday's dealings were light.

Another trader said the S&P action came too late to affect Friday's market but opined that the downgrade "will probably show up [in price levels when the market returns from its holiday break] on Tuesday." He said that troubled homebuilder Tousa Inc.'s bonds senior bonds still languished around the mid-50s, while its subordinated notes remained mired at 8 bid, 10 offered.

He said that builders' bonds would "probably drop a little more" when trading resumes Tuesday - "but not very much - since [at current levels], some of them don't have very far to go."

Mortgage names mixed

A trader saw Residential Capital LLC's 6½% notes due 2013 up 2 points on the day at 63 bid, 65 offered.

However, another saw the bonds trading in the 60.5 bid, 61.5 offered area, unchanged, and saw ResCap parent GMAC LLC's benchmark 8% bonds due 2031 still around a 79-80 context and said that he had seen "no cash trading" on the 8s, which he called "amazing for a $4 billion issue." He saw GMAC's debt-protection CDS costs 15 basis points wider at 905 bps bid, 915 bps offered.

While there was little activity in the usually widely traded '31s, he said that the lender's shorter-dated paper maturing between this year and 2012 "was for sale," with what he termed "a decent amount of trades" in its 6 7/8% notes due 2011. He saw the bonds trading within an 85.5-87 range, "pretty much where they were [Thursday]. So there was some activity but no change in price."

He said that "there was" activity in Countrywide Financial Corp.'s 6¼% notes due 2016, which he quoted at 85.5 bid, 86 offered in "good-sized trading." However, the price level was "pretty much where they've been for the last few days."

Another trader saw those bonds down a point at 85.5 bid, 87.5 offered, but said Countrywide's 3¼% notes coming due in May were unchanged at 97 bid, 97.75 offered.

Allied Waste lower on soft forecast

A market source saw Allied Waste North America's 6 7/8% notes due 2017 down as much as 4 points in fairly active trading before coming to rest around the 95 level, likely pushed down by the Scottsdale, Ariz.-based waste-disposal company's less than thrilling revenue projections for the coming year.

Parent Allied Waste Industries Inc. said on a conference call Thursday that it expects to post revenue gains of 1.5% to 3% this year, which would put its projections at $6.16 billion to $6.25 billion - below average Wall Street expectations of slightly under $6.3 billion of revenues.

Allied Waste also reported fourth-quarter numbers Thursday, and while earnings surged to $115.3 million, or 26 cents per share, versus just $9.8 million, or less than a penny per share, a year earlier, it should be noted that the year-earlier results were dragged down by a number of one-time charges, making for easier comps.

MediaNews bonds off despite profit gain

Also on the earnings front, MediaNews Group's 6 7/8% notes due 2013 and 6 3/8% notes due 2014 were each seen down around 2 points to levels in the mid-50s, in brisk trading Friday.

That followed release of the newspaper publisher's fiscal second-quarter results - and while those results initially seemed impressive, closer examination found a little less than meets the eye.

The privately held publisher of the Detroit News, the Denver Post and about 50 other newspapers said in a Securities and Exchange Commission filing that for the quarter that ended Dec. 31, net income grew to $17.4 million from $12.96 million as year earlier. However, much of those gains resulted from one-time special items, including a $3.8 million gain for legal fees stemming from a lawsuit against the former publisher of the St. Paul Pioneer Press and a $12 million pretax non-monetary gain on the sale of its 13% interest in two Connecticut papers, among other items.

The filing also showed that in line with a general slowdown in the newspaper industry as a whole, revenue dropped to $345.2 million from $372.5 million, as advertising sales fell off. Excluding transactions made during the quarter, ad revenue fell 14% from the prior year, including a 30% drop in classified ads.

Circulation revenues were meantime off 6.5% from year-earlier levels.

Ainsworth plans secured deal

No issues were priced during the final session of the pre-Presidents Day week, ahead of the three-day holiday weekend.

The day's only primary market news came from Ainsworth Lumber Co. Ltd., which is expected to price a $50 million to $75 million offering of six-year senior secured first-lien notes late in the week of Feb. 25.

Barclays Capital has the books for the general corporate purposes deal which is coming concurrent with an exchange offer, and is being marketed without an investor roadshow.

The new notes offer is backstopped by certain holders of the existing notes in return for warrants to purchase up to 7,887,998 of the company's common shares, representing approximately 35% of the currently outstanding shares.

The kitchen sink

As it happens, during the week to Friday all of the Rule 144A issuance came in the form of secured notes.

In a restructured LBO financing which was completed on Wednesday Axcan Intermediate Holdings Inc. priced $225 million proceeds of 9½% senior secured notes due 2015 (Ba2/BB-) at 98.737 to yield 9½% via Banc of America Securities LLC, HSBC and RBC Capital Markets.

A $235 million tranche of senior unsecured notes went unplaced, and remained on the books of the underwriters.

On Thursday Elyria Foundry Co. LLC and EH Acquisition, Inc. priced a restructured $100 million issue of 13% senior secured notes due 2013 (B3/B) with warrants for 15% of the company's equity.

The notes priced at 96.46 to yield 14%.

Jefferies & Co. ran the books.

With the above-mentioned Ainsworth Lumber secured notes deal being announced on Friday Prospect News quizzed its sources in the primary market as to whether a "secured notes" trend might be taking shape.

None were willing to go so far as to call it a trend.

However one high yield syndicate official said: "You're going to see higher-rated stuff, and in some cases that will translate into secured notes.

"The loan market is having difficulty, so it might make more sense right now to come with first-lien notes instead of a first-lien loan, but it will depend upon the situation. In some cases loan investors will know a credit well, in which case you would go to the loan market.

"In this market you have to optimize."

Another official from a different high yield syndicate said that with market conditions the way they presently are there is essentially no limit on the concessions issuers and underwriters will contemplate if they really intend to get the deal done.

"There are some markets where you bring everything but the kitchen sink, but in this market you bring the kitchen sink," the banker quipped.

Week sees $321 million issuance

The week to Feb. 15 saw $321 million of issuance in two tranches, bumping the year-to-date issuance total to $7.9 billion in eight tranches.

However if issuance related to the backlog of hung-up LBO risk is removed from tally it falls dramatically to just $1.57 billion in six tranches.

Apart from the backlog, just half a dozen tranches of notes have priced thus far in 2008.

By way of comparison, 2007 issuance to the Feb. 15 close was just under $21 billion in 68 dollar-denominated tranches.

Trading, not credit

The Prospect News High Yield Daily forward calendar contains no deals for the week ahead; the Ainsworth Lumber deal is set to price during the final week of February.

Sell-side sources pressed for information late in the week to Feb. 15 all said that new deal announcements were not likely to be heard during the post-Presidents Day week.

One sell-sider commented that what is hampering the primary market most right now is falling prices in the secondary market.

The source said that underwriters are taking care to bring only credits that will pass muster.

"Right now it's a trading issue, not a credit issue," the sell-sider asserted, adding that presently "there is just no price point."

More than one source advised Prospect News that the news earlier in the week that the above-mentioned Axcan senior unsecured notes ended up as part of the hung risk was particularly unwelcome, especially given that the Axcan LBO is a "post-crunch deal," put together well after the mid-summer credit market meltdown.

In order for there to be a meaningful regeneration of new issue activity existing bonds are going to have to gain some traction in the secondary market, sources say.

"People have cash," one syndicate official said. "But no one wants to jump in."

Axcan Pharma appears in aftermarket

As the week drew to a close there was one bright spot, however. The Axcan 9¼% senior secured notes due 2015 were trading at the new issue levels (they priced at 98.737) at Friday's early close.

One source close to the deal said that there was no trading activity, and added that the Axcan secureds were well placed.

Meanwhile a trader said that the recently priced Axcan 9¼% senior secured notes due 2015 that priced on Wednesday finally showed up in the aftermarket on Friday. The bonds were trading Friday at 98.5, off slightly from the 98.373 at which they had priced.

Up until now, he said, "there's been no trading," and the underwriters, led by Banc of America Securities, HSBC and RBC Capital Markets, the joint bookrunners on the $228 million deal "were quoting them at 99-99.5, but not making a market in them. We traded bonds about a point below that."

© 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.