Ford bonds gyrate on contract news; more E*Trade volatility; United Test talk emerges

By Paul Deckelman and Paul A. Harris

New York, Nov. 5 - Ford Motor Co.'s bonds gyrated around at mostly higher levels Monday, given a boost by news of successful resolution of the carmaker's contract talks, before they came off their highs late in the session and ended pretty much unchanged on the day.

One of the most actively traded issues of the session was Buffets Inc., whose bonds fell sharply on what one trader described as "bad numbers, and a bad conference call after that" for the Eagan, Minn.-based operator of serve-yourself restaurants. Sector peer Sbarro's Inc.'s bonds were seen also lower as they followed Buffets bonds down.

It was another volatile day for E*Trade Financial Corp., whose bonds had swung wildly on Friday; a trader described the session as "just like Friday's" for that particular name.

Trump Entertainment Resorts Inc.'s bonds, which had given up several points Friday on a news report indicating talks to find a buyer for the company had failed, were seen continuing to retreat on Monday.

In the primary market, things were pretty quiet. Price talk was heard emerging on United Test & Assembly Center/Global A&T Electronics Ltd.'s upcoming issue of eight-year second-lien notes.

A mostly down day

Traders saw bonds mostly easier on the session, as junk seemed to take its cues from the equity markets, which were pushed lower by investor jitters over the deteriorating financial picture for the once seemingly mighty and invincible U.S. banking industry leader, Citigroup. Declining issues led advancers by about a five-to-three margin.

A trader saw the widely followed CDX index of junk bond performance down 1/8 point at 96 5/8 bid, 96¾ offered. Among market barometers, the KDP High Yield Daily Index retreated 0.22 to finish at 79.34, while its yield widened by 4 basis points to 8.14%.

Ford rise proves short-lived

Among specific issues, Ford's flagship 7.45% notes due 2031, which had closed out Friday's session hovering just below 77 bid, opened about a point higher Monday, apparently helped by good news on the labor front, and clung to those higher levels in a 78-79 context for much of the session. While the bonds at one point dropped as low the 75-76 area, a source indicated, they came right back up, with several sizable trades actually boosting them to their high prints of the day, around 83-84. But those gains proved to be short-lived, and by the end of the day, the bonds had tumbled back down to around the same 77 level at which they had begun the day.

A trader at another desk saw the Ford bonds pretty much unchanged around 77.75 bid, 78.25 offered, noting that Ford's New York Stock Exchange-traded shares, after having started the day off a little above Friday's finish at $8.95, "got hit a little bit" and ended the session at $8.67, down 28 cents, or 3.13%, on volume of 46 million shares, just a little more than the usual turnover.

Investors were apparently not much moved by the early-morning news that the Number-Two domestic carmaker and the United Auto Workers union had reached agreement on a new labor pact for some 54,000 Ford hourly workers nationwide. Local union officials have unanimously recommended that their rank-and-file membership approve the four-year deal, which includes signing bonuses for the employees and company promises not to close any more plants beyond three factories previously identified for closing. Two of those three were given one-year extensions.

Ford - like rivals General Motors Corp. and Chrysler LLC, both of which recently inked new pacts with the UAW - gets to drastically cut its retiree healthcare costs going forward by setting up a voluntary employee benefits association (VEBA) trust fund, to be administered by the union. The carmaker will kick in an initial $13.2 billion to the trust, which will pick up much of the company's $22 billion in retiree health care liabilities. Ford will also pay $2.2 billion for retiree health care until the trust takes effect in January 2010.

"People's enthusiasm" for the apparently good news "became a little muted," the second trader said.

Ford "needed concessions even more than GM did since the gap between its EBITDA and its interest expense and capex is much wider," noted analyst Shelly Lombard of the Gimme Credit financial research service, adding that Ford also "needs more labor savings than GM and Chrysler got since a VEBA alone will save only about $1.5 billion of health care expense - not enough to close the gap." A clearer picture is expected as more deal details are released.

Lombard said that "Ford has bought itself more time to restructure" and to proceed with its much-touted "Way Forward" turnaround plan for its North American operations, but now, "it needs to execute - which isn't easy in what is a highly competitive market." However, the analyst further added that even though poor operating results had been expected "for the next few years at least . . . recent results have been surprisingly strong."

The trader meantime saw GM's benchmark 8 3/8% notes due 2033 down ¼ point on the session at 88.75 bid, 89.25 offered. Another market source pegged the bonds of GM's 49%-owned financing unit GMAC LLC lower, with its generally heavily traded 8% notes due 2031 down some 1½ points at around 90.5, and its 6 7/8% notes due 2012 half a point lower at 89.5. Ford Motor Credit Co.'s 7% notes due 2013 lost ¼ point to end around 90.

Buffets bonds belched up by market

Elsewhere, restaurateur Buffets' 12½% bonds due 2014 were seen being sliced and diced like the contents of the salad bars at the company's nearly 400 serve-yourself eateries, after it served up a wider fiscal first-quarter net loss of $5.3 million, versus $1.1 million of red ink a year earlier - this despite a 76% year-over-year sales increase. The company blamed the bigger loss on an increase in interest expenses, merger integration costs related to its acquisition late last year of rival buffeteer Ryan's Restaurant Group, and higher restaurant costs.

A trader saw the bonds drop to 43 bid, 45 offered from prior levels around 65, while at another shop, a trader called it a 15 point loss to 45 bid, 47 offered. Another source called the bonds 18 point losers, finishing around 46 bid.

"People didn't like what they heard" on the company's conference call, another trader said, alluding to an apparent failure on the part of company executives to assure investors that the company would be able to abide by its financial covenants or make its coupon payments.

Investor indigestion was not limited top those bonds only. One of the other traders, noting that "misery loves company," said that the 10 3/8% notes due 2015 of Melville, N.Y.-based casual Italian-style restaurant chain Sbarro were down about 4 points on the day at 87 bid, 88 offered, as they "traded down along with Buffets."

E*Trade continues wild ride

The trader saw continued volatility in E*Trade Financial's 7 5/8% notes due 2015, which on Friday had bounced around crazily between lows in the 78-79 area and high prints in the mid-90s, before finally coming to rest at around 81 bid, down 15 points on the session.

In Monday's dealings, he said, the bonds were not quite "as all over the place" as they had been on Friday, but it was still "kind tough" getting a real level on them, since the market in them was "pretty wide," around 85-90, "but just like on Friday, we have a print on them at 90 - and we also have a print on them at 80, and everything in between."

Another trader said "I haven't seen a lot in them today," although he did see the bonds trading in a "wide range." No specific news was seen out on the bonds that might adequately explain their volatile movements over the two sessions.

More lumps for Trump

Trump Entertainment Resorts' 8½% notes due 2015, which had lost around 2½ points in market-leading heavy trading on Friday, were seen down another 1 to 1½ points Monday - again on active trading - to around the 81 bid level. Its Nasdaq-traded shares, which on Friday had swooned nearly 17% in active dealings, lost an additional 58 cents, or 8.54% on Monday to finish at $6.21. Volume was again heavy at 1.4 million shares, nearly twice the norm.

The bonds and shares have been reeling in the wake of a report in Friday's editions of the Star-Ledger newspaper, New Jersey's largest, that sale talks between the underperforming Atlantic City, N.J.-based casino company and Baltimore-based real estate developer Cordish Co. had collapsed.

Primary mostly quiet

With no North American or European issuers pricing junk bonds, Monday's primary market produced a scant trickle of news, all of which came with one foot planted in the emerging markets.

Rio de Janeiro, Brazil-based BR Malls Participacoes SA priced a $175 million issue of senior unsecured perpetual notes (/BB-/) at par to yield 9¾% in a Rule 144A/Regulation S issue via Citigroup and UBS.

And in a deal that some U.S. high yield observers are watching closely, Singapore-based United Test & Assembly Center (UTAC) and Global A&T Electronics Ltd. set price talk on Monday for a restructured $475 million two-part offering of eight-year senior second-lien notes (B1/B+).

UTAC is talking a $275 million tranche of cash-pay notes at 11% to 11¼%.

Meanwhile a $200 million tranche of PIK toggle notes is talked to price 150 basis points behind the cash-pay notes.

Pricing is set for Wednesday.

JP Morgan, Merrill Lynch & Co. and ABN Amro are leading the LBO deal.

A proposed euro-denominated tranche of PIK toggle notes has been withdrawn.

UTAC is a semiconductor testing and assembly company.

Signals from Europe

The withdrawal of the UTAC euro-denominated PIK toggle notes is the second negative piece of euro-related news heard in the primary market in as many sessions.

Last Friday Edinburgh, U.K.-based oil and gas exploration and development company, Melrose Resources plc, postponed its planned €250 million offering of eight-year senior subordinated notes (CCC+) because of market conditions.

Market sources said that although Melrose was talked at 10% to 10¼% investors wanted 11% to get into the deal.

On Monday a sell-side source in the United States. told Prospect News that, the recent run of negative news notwithstanding, some European issues are expected to appear in the near- to intermediate term.

The run to Thanksgiving

This sell-sider, an official on a high yield syndicate desk, said that the primary market is going to be busy right through Thanksgiving.

This source has visibility on a "a couple of corporate-type deals" - not LBOs but transactions that will "address balance sheets and fund tenders" - which are expected to appear soon.

However the official declined to furnish any names.

"Right now the market seems pretty good," the sell-sider commented.

The overhang

With respect to the overhang of high yield bridge loans, once estimated to be as high as $116 billion but lately believed to have been whittled down to around $80 billion, this sell-side official commented that all eyes are presently focused on Alltel Communications and Alltel Communications Finance, Inc., now marketing a portion of their LBO-related cash-pay notes, the size of which remains to be determined.

All told, the unsecured cash-pay portion of the Alltel deal comes to $5.2 billion. However an informed source told Prospect News that underwriters were keen not to flood the market, and would likely bring a lesser amount.

Citigroup, Goldman Sachs, Barclays and RBS are leading the deal, which is expected to price by the end of the week.

The sell-sider said that, given Alltel goes smoothly, Laureate Education Inc. is expected to turn up soon with some or all of its $995 million notes backing the LBO. The Baltimore-based company is expected to offer $685 million of senior unsecured notes and $310 million of senior subordinated notes in a deal led by Goldman Sachs and Citigroup.

Also expected to appear soon, the official added, is Mylan Inc., with $2.85 billion of senior notes. That LBO financing is underwritten by Merrill Lynch, Citigroup and Goldman Sachs.

Meanwhile, the source added, underwriters are believed to be quietly marketing the Avaya Inc. $1.45 billion of senior unsecured notes (CCC+). All told, that deal is expected to involve $700 million of cash-pay notes and $750 million PIK toggle notes. Morgan Stanley, Citigroup and JP Morgan have the reins.

In the "not too far off" category is Sequa Corp.'s $700 million of senior unsecured notes which could be issued as PIK notes at the issuer's discretion. Lehman Brothers, Citigroup and JP Morgan are leading that deal.

And in the same category, perhaps, is Harrah's Entertainment Inc. The LBO financing, via Bank of America, Deutsche Bank, Citigroup, Credit Suisse, JP Morgan and Merrill Lynch, included a $6.025 billion senior unsecured bridge loan.

© 2015 Prospect News.
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