Junk market ends off, but no rout; builders up as Standard Pacific gains; casinos a losing bet

By Paul Deckelman and Paul A. Harris

New York, Feb. 5 - The junk market was lower on Tuesday, in line with an equity slide, but traders said that while shares tumbled, bonds only slightly stumbled, and there were even pockets of strength, such as the homebuilders; encouraged by Standard Pacific' Corp.'s expectations of cash-flow generation and debt reduction, other sector names like KB Home and K. Hovnanian Enterprises Inc. were seen better as well.

But bonds were mostly lower, particularly such consumer-dependent sectors as retail, restaurants and gaming.

The primary market, meantime, remained quiet.

Market indicators point southward

A trader saw the widely followed CDX junk bond performance index down 7/8 point at 89 7/8 bid, 90¼ offered. The KDP High Yield Daily Index fell 0.38 to 75.93, while the yield widened 9 basis points to 9.16%.

Declining issues dominated advancers by about a five-to-three ratio, while overall activity, reflected in dollar volumes, nearly doubled from Monday's football hangover-induced levels.

A trader called Tuesday "a pretty lousy day," but at another desk, a trader said that "even with the Dow getting crushed the [junk] market kind of hung in there, maybe except for retailers and some restaurants. It really held in today."

For instance, he continued, at his shop, "we weren't able to buy anything," despite having put out "decent bids. I was trying to buy Peabody [Energy Corp.], nothing exciting, Noranda [Aluminum Inc.], Exopack [Holding Corp.]," but without much success.

Generally, he said, "it was a weaker day, but for the most part, except for the restaurants and retailers," things generally hung in.

Restaurants, retailers off

The trader saw restaurant names pushed downward, with Outback Steakhouse/OSI Restaurant Partners Inc.'s 10% notes due 2015 "probably a couple of points lower" at 65 bid, 67 offered.

Among the retailers, he saw Burlington Coat Factory's 11 1/8% bonds due 2014 at 77.5 bid, 78/5 offered, down from 80 bid, 81 offered.

Another trader saw Bon-Ton Stores Inc.'s 10¼% notes due 2014 down 1½ points at 68.5 bid, 69.5 offered. Rite Aid Corp.'s 8 5/8% notes due 2015 lost ½ point to end at 76, while Neiman Marcus' 9% notes due 2015 fell nearly a point to 99.5 bid.

"I would say the retailers and restaurants got hit by a couple of dollars each," the first trader said, "but other [paper] hung in there."

Casinos crap out

Not gaming, however, with the sector seen heavier pretty much across the board. A market source saw Harrah's Entertainment's new 10¾% cash-pays due 2016 at 89.75 bid, 90.25 offered, versus 91 bid on Monday.

Among the Las Vegas-based gaming giant's established bonds, its 5¾% notes due 2017 lost ½ point, ending just below the 60 mark. Its 7 7/8% notes due 2010 ended 2 points lower at 93 bid.

Station Casinos Inc.'s 6% notes due 2012 fell nearly a point to 87.5. Isle of Capri Casinos meantime were off a point, ending at 76.

Standard Pacific leads builders higher

On the upside, Standard Pacific bonds "had a [conference] call and did all right," a trader said, estimating its longer-dated issues, like the 6¼% notes due 2014 and the 7% notes due 2015 "held in" and ended up a point or so on the day, around 71 bid, 72 offered.

Another trader saw the company's bonds "up a bunch across the board, about 3 or 4 points" following the conference call, with its 9¼% notes due 2012 as much as 5 points better at 59 bid, 61 offered.

On the conference call, company executives said they anticipate that the builder will generate positive cash flow in 2008 while also paying off the balance of its 6½% senior notes slated to come due in October. They noted Standard Pacific's $251.1 million fourth-quarter reduction of homebuilding debt, through a $163 million reduction to the company's revolving credit facility, the purchase of $24 million of the $150 million of then-outstanding 6½% notes, and by paying down its trust deed notes payable by $66 million (see related story elsewhere in this issue).

In other housing names, KB Home's 6¼% notes due 2015 were seen up better than ½ point at nearly 92.

Hovnanaian's bonds were seen "all around 70-72ish," levels, one of the traders said. He saw the Red Bank, N.J.-based homebuilder's 8 5/8% notes due 2016 trading at 72, while other Hovnanian bonds around the similar long maturity, such as its 6½% notes and 6 3/8% notes due 2014, and its 6¼% notes due 2015 and 2016 traded closer to 70, "a little lower [than the 8 5/8s] because of the [smaller] coupons."

He pronounced Hovnanian bonds as having attracted "pretty decent-sized trading."

Another trader saw the 61/2s up 2 points on the day at 72 bid, 74 offered.

In other builder names, the first trader said that Beazer Homes USA Inc. "didn't have a [conference] call, but I didn't see much change" from levels on Monday, when the Atlanta-based homebuilder's 6 7/8% notes due 2015 rose a point to around the 73 bid area. The same held true of names like WCI Communities Inc. and Tousa Inc. The latter's 8¼% notes due 2011 and its 9% notes due 2010 around 55 bid, 57 offered on "not much activity."

Another market source saw Beazer's 8 3/8% notes due 2012 up more than ½ point around the 76 level.

ResCap, GMAC off on downgrade

A trader saw Residential Capital LLC's bonds, like its 6½% notes due 2012 trading in a 60 bid, 62 offered context, a bit weaker on the day, following Moody's Investors Services' downgrade of the Minneapolis-based mortgage lender's ratings, and those of its corporate parent, GMAC LLC.

Another saw ResCap's 8 3/8% notes due 2015 first rise as high as 64 bid early in the session, before coming off that peak to end down 2½ points at 61.

"They dropped GMAC and ResCap by a notch, so that's probably why there's some added activity," the first trader said, adding that "it was just a notch," with GMAC going to B1 and ResCap to B2, both from Ba3 previously. "It was not exactly a big deal, double-B to single-B. But it was just a notch."

He estimated that GMAC was "a point or two lower," quoting its widely followed 8% notes due 2031 around 83, which he called down a point - but added that "they've been bouncing around 83-84 all week," so the downgrade may not have been the proximate cause of the easing. A second trader saw the 8s down a point at 82.5 bid, 83.5 offered.

Another source saw GMAC's 7¾% notes due 2010 off nearly a point at just below 98.

The ratings agency said it was cutting ResCap because of "1) a decline in the company's liquidity profile, 2) the risk that ResCap's net worth could fall below its minimum net worth covenant in the absence of support from its parent, which support is not assured and 3) Moody's belief that ResCap's franchise is impaired."

The agency said in general, "the company's liquidity is weak due to its high concentration of secured market funding and therefore very low level of unencumbered assets."

As for parent GMAC, Moody's noted the support it gave to ResCap late last year, spending some $750 million to buy back ResCap debt and contributing it to ResCap so the unit could avoid breaching its minimum tangible net worth financial covenant. "In Moody's view, GMAC's willingness to use its cash and capital for this purpose diluted its own liquidity and capital positions. "

The agency projected that GMAC "will likely continue to provide capital support to ResCap in the near term, primarily through similar open-market debt repurchases." While it held out the possibility that GMAC "may have a limited tolerance for supporting ResCap if ResCap's performance and condition fail to meet management expectations for improvement" during the first half, it warned that GMAC's further support of ResCap "could result in additional strains on its capital and liquidity positions. In relation to this, creditors' appetite to extend credit to GMAC beyond current commitments could be affected by GMAC's continued willingness to provide support to ResCap"

In that same sector, a trader saw Thornburg Mortgage's 8% notes due 2013 up about a point at 86 bid, 88 offered, citing the impact of better quarterly results for the mortgage lender.

Also seen better was Countrywide Financial Corp.'s 6¼% notes due 2016 up a point at 85 bid, 86 offered, while its 3¼% notes coming due this May were ½ point better at 97 bid, 98 offered.

Axcan roadshow

The primary market failed to generate any news on Tuesday.

Axcan Pharma Inc. is on the road with a $240 million offering of eight-year senior unsecured notes (B3/B-).

The deal is expected to price toward the middle of next week.

A market source said that 35 accounts turned up on Monday ("the day after the Super Bowl!") for Axcan's New York roadshow and heard a strong presentation from the management of the Mont-Saint-Hilaire, Quebec-based specialty pharmaceutical company which focuses on gastroenterology.

Axcan is an LBO deal. However it differs from the LBO-related risk backlog of bonds and loans which underwriters have been laboring to move off their balance sheets because the Axcan merger agreement came in late November 2007, well after the mid-summer market correction.

Hence, according to sources, the expectation is that the terms of the financing will more closely align with the realities of the debt markets, post-sell off, unlike most of the backlog which is predicated upon underwriter commitments at rates conceived in the red hot debt market conditions of 2006 and early 2007.

A market source told Prospect News that the pro forma on Axcan's proposed eight-year senior notes is 11½%.

Banc of America Securities LLC is the left lead bookrunner. HSBC and RBC Capital Markets are joint bookrunners.

The sponsor for the Axcan deal is TPG Capital.

Problem solving time

The portfolio manager from the high yield mutual fund noted on Tuesday that, generally, the capital markets have tended to rally at the mere suggestion that there might be a solution at hand for one or more of the problems which beset the credit markets.

"Every time you hear there is a solution to the 'monolines' problem or the 'subprime' problem or the hung LBO risk, the markets take off," the investor said.

"The high yield should be taking off, too, but we're just sitting here waiting for all of these problems to be fixed."

Prospect News recounted that since before the beginning of the new year the high yield mutual funds have reported seven consecutive negative weekly flows, generating net redemptions during that period in excess of $1.1 billion.

The buy-sider commented that these outflows, in their totality, "really aren't that bad.

"The buy-side has cash, but no incentive to spend it right now.

"If you're looking at a market that is going down every day, you have no incentive to get in.

"Instead you might be looking for short paper that will hold in and outperform, and give you some yield that is better than cash."

This investor also said that in the present interest rate environment no one cares to own bank debt, or floating-rate debt of any kind, because Libor keeps going down.

The buy-sider spotted three-month Libor at 3.16% on Tuesday afternoon, down approximately 17 basis points since Jan. 23 when Libor was just slightly above 3.33%.

"That's a huge move," the investor said.

Defensive plays

The buy-sider also noted that amid the overall quiet which looms over the high yield primary market one sector has been conspicuously active: the energy sector.

Since the beginning of 2008 all new issuance not related to the hung LBO-backlog has emanated from the energy sector.

On Jan. 11 Southwestern Energy Co. priced a $600 million issue of senior notes due Feb. 1, 2018 (Ba2/BB+) at par to yield 7½%.

On Jan. 17 Atlas Energy Operating Co. and Atlas Energy Finance priced a $250 million issue of senior notes due Feb. 1, 2018 (B3/B) at par to yield 10¾%.

And on Feb. 1 Petroleum Development Corp. priced a $203 million issue of 12% 10-year senior unsecured notes (B3) at 98.572 to yield 12¼%.

"Everybody is looking at the energy deals as being defensive," said the portfolio manager, noting that against the backdrop of weak high yield market conditions the notes in all three of 2008's new energy issues continue to hang in above their respective issue prices.

The investor spotted the new Southwestern Energy 7½% senior notes due 2018 at 103 bid, 104 offered, late Tuesday.

The Atlas Energy 10¾% senior notes due 2018, meanwhile, were holding in at 101½ bid.

The Petroleum Development 12% senior notes due 2018, which priced at 98.572, also remained above issue price late Tuesday, at 99½ bid, 100½ offered.

"If energy prices go down they might not be so resilient," the buy-sider warned.

"They will probably continue to outperform, but they will likely go down."

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