Bailout bill comes and goes, many names better; Wachovia wins among financials; funds lose $189 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 3 - The long-awaited and much-debated credit industry bailout bill finally came up for a re-vote Friday in the House of Representatives, and this time that body approved the bill, sending it on to president George Bush, who signed it into law.

Traders said that while many names were up by points, in contrast to the extreme weakness the market had shown earlier in the week, there was still no huge relief rally on the news - more like a quiet advance, with several participants saying the market was more exhausted from the week's gyrations than elated, and just glad to be able to go home for the weekend without the specter of a bailout bill failure - and another market meltdown - hanging over their collective heads.

Junk-traded financial issues were again strong, particularly Wachovia Corp., whose bonds and shares jumped when the Charlotte, N.C., bank holding company announced that it had agreed to be bought out in its entirety by Wells Fargo & Co - stunning Citigroup, which thought it had a deal ready to be signed, sealed and delivered, and which has threatened possible legal action to break up the new arrangements.

Junk primary market players remained pretty much on hiatus, waiting to see whether the bailout bill will create a new tone in the market that will encourage new issuance.

Funds fall by $189 million on week

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 $189.4 million more left the weekly-reporting funds than came into them. It was the third consecutive outflow, including the $277 million cash exodus seen the week before, ended Sept. 24.

Those three weeks, with outflows totaling $644.4 million, represent a sharp reversal of the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows had been seen in seven of those eight weeks, according to a Prospect News analysis of the AMG figures, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been evenly matched during the last 16 weeks, dating back to the week ended June 18, with eight apiece, the funds have still lost a net of $808.45 million during that time, according to the Prospect News analysis, mostly due to the massive $651.2 million outflow seen in the week ended June 25. 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 third quarter now over, inflows, after that slow start, remain solidly ahead, with 23 inflows versus 17 outflows seen in the 40 weeks since the start of 2008, according to the analysis.

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 $1.107 billion, down from around $1.297 billion the previous week, market sources said. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

Also in the latest week, a market source said that funds which report on a monthly basis, rather than weekly, showed a $293 million inflow in the latest week, and on a year-to-date basis, have a net inflow of $3.738 billion.

On an aggregate basis, consolidating the weekly- and monthly-reporting flow totals, the funds have seen a $4.845 billion net inflow for the year.

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 mostly easier

The widely followed CDX index of junk bond performance, after losing 1 point on Thursday, was unchanged Friday, a trader said, still quoting it at 88½ bid, 89 offered. The KDP High Yield Daily Index tumbled by 42 basis points to end at 61.44, as its yield ballooned out by 15 bps to 13.06%.

In the broader market, advancing issues trailed decliners by a margin of three-to-two. Activity, represented by dollar volume, fell 25% from the levels seen on Wednesday.

A trader said that overall, the market tone "was not much better than [Wednesday]," with certain barometers, like the CDX little changed.

Another trader said that from where he sat, things were "very quiet." with things feeling better in the morning, before the Congressional vote, on some dealer short-covering, "and maybe some account short-covering ahead of the vote.

He saw Harrah's Entertainment Inc., as one of the early gainers whose bonds had gotten oversold, but then rose in general with the firmer levels seen in the morning. He quoted the Las Vegas based gaming giant's 10¾% notes at 44.5 bid, up from 42 bid, 43 offered earlier.

He also saw "some GMAC [LLC] action right before the vote." At that point, he said, there were some buyers.

However, "after the vote, I think everyone kind of packed up and went home. I think the market is completely exhausted after the past three weeks, and everyone just wanted to realize that 'okay, the vote passed. We'll make it to market Monday and the world is not going to blow up this weekend. So it just felt exhausted at the end of the day."

He cautioned that "we're not out of the woods yet. On Monday, when we come back, on any kind of relative strength, we'll probably see better selling into that strength."

He further pointed out that YRC Worldwide Inc. tapped its credit facilities to retire its '08 and '09 maturities early. The Overland Park, Kan., freight transportation company's bonds "had been well offered over the past couple of days."

He said that he would "not be surprised to see more and more" companies tap into their credit lines to retire upcoming debt. "The ones that have availability under their facilities and have short-term maturities coming up - we're maybe seeing a trend there."

Refinancing under the regular market - i.e. issuing new junk bonds to pay off those maturing issues - "is not an option right now."

He said that "companies are going to have to really get creative" to deal with such pending maturities.

The bright side

The passage of the financial rescue package by the U.S. House of Representatives, and the acquisition of Wachovia Corp. by Wells Fargo & Co. without government assistance, were providing some comfort to investors during the middle part of the afternoon, according to an investment banker.

"The bailout will help, I think," added the source, who nevertheless expects the U.S. economy to go into recession, and doubts that the $700 billion financial rescue of Wall Street will translate into a stock market rebound.

Bailout priced in

"The CDX is better on the day by a point, but we're not seeing any movement higher in cash," said an investment banker who spoke just after mid-day, before those early gains were given back.

Noting that the Dow Jones Industrial Average rallied by slightly more than 300 points early in the day, this banker said that by the early afternoon equities were giving it all back (the Dow actually closed down 157 points, or 1½%, by Friday's close).

"The financial rescue package is already priced in, and people are selling into any kind of rally," the banker said.

Other sources touched on the same theme Friday: the government's Wall Street assistance package is already priced in.

The primary market saw no business during the September-October crossover week.

The most recent junk transaction was Perkins & Marie Callender's Inc.'s $132 million issue of 14% senior secured notes due May 31, 2013 which priced at 94.29 to yield 15¾% in an unrated quick-to-market transaction on Sept. 24 via Jefferies & Co.

"There's not much happening right now," one sell-sider commented Friday, in a remark that was characteristic of primary market color heard throughout the week.

"Right now the primary market is closed," said another sell-side source.

These sources doubted that the first full week of October will see any new issuance.

Finally, amid increased volatility in the junk bond market, and in the more deeply damaged bank loan market, the buy-side is perceived to be holding on to cash in anticipation of redemptions, sources said Friday.

"There is no question that people are hoarding cash," said a banker who noted that three-month Libor is 4.33% and one-month Libor is 4.11%.

"People will lend money overnight, but that's about as far as they want to go."

Wachovia leads financials higher

A trader said that most of Friday's activity was in the financials, which he said "were quoted up - but there was not a lot of trading follow-through."

He saw American International Group Inc.'s 6.90% notes due 2017 at 44 bid, up 2½ points on the day, while AIG's 5.65% notes due 2014 were quoted "better" at 66 bid, 68 offered, "but there was not a lot of activity."

However, he saw Washington Mutual Inc.'s 4% notes due 2009 "very active, with all kinds of quotes all day long." He saw a lot of size trading at 61.5 bid, 63 5 offered, where the bonds ended, but said that at the end of the day they were unchanged to down a point.

The big mover of the day in that sector - even though its bonds are nominally investment-grade - was Wachovia, whose 5½% bonds due 2013 were "hugely active" on the Wells Fargo news, said a trader, who saw big-block trades that brought the bonds up to 89.5 bid, a 6 point gain.

Citigroup howled in outrage at the prospect that Wells Fargo had stepped in and trumped the New York-based banking giant's offer for a piece of Wachovia with a much larger offer for the whole company - but Wachovia shareholders left no doubt whose side they will be on in what is expected to be a bitter legal battle between Citi and Wells Fargo. Wachovia's New York Stock Exchange-traded shares zoomed as much as 80% over Thursday's closing levels in intraday dealings Friday before finally settling up $2.30 - still better by 58.82% - at $6.21. Volume of 270.4 million was more than twice the usual level.

San Francisco-based Wells Fargo and Charlotte, N.C.-based Wachovia announced Friday morning that Wells Fargo had agreed to acquire Wachovia, lock, stock and barrel, for $15.4 billion. Wachovia shareholders will get $7 a share in stock. Based on Thursday's closing price, that is a 79% premium above where Wachovia shares had finished Thursday. Wells Fargo also will assume Wachovia's preferred stock and debt.

The deal was negotiated by executives of the two companies, with no assistance needed from government regulators, who had, on the other hand, brokered the previous deal with Citigroup, under which Citi would pay Wachovia approximately $2.16 billion in stock and assume Wachovia senior and subordinated debt, totaling some $53 billion. Citi's deal only calls for it to acquire the more than $700 billion of assets of Wachovia's banking subsidiaries, and related liabilities, with the rest of Wachovia's operations, including its A.G. Edwards retail brokerage unit and its Evergreen assets-management business, to remain independent as a considerably smaller public company.

The Federal Deposit Insurance Corp. agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets, with Citi to be responsible for the first $30 billion of losses on that portfolio, expecting to record those losses under purchase accounting upon closing of the transaction; Citi would also be responsible for the next $12 billion in losses up to a maximum of $4 billion per year for the next three years, with the feds on the hook for any further losses on the portfolio. Citi agreed to issue to the FDIC preferred stock and warrants with a combined value of approximately $12 billion.

Citi on Friday issued a scathing company announcement in which is demanded that Wachovia and Wells Fargo make no further efforts to advance their announced agreement. It accused Wachovia of breaching the terms of the memorandum of understanding which the two companies had signed the previous week, and charged Wells Fargo with tortious interference in attempting to supplant the Citi agreement with its own deal.

The anticipated legal battle will revolve around whether the promise of exclusivity in the memorandum or understanding - which theoretically barred Wachovia from trying to negotiate with any other party during the term of the MOU, which was slated to expire this Monday - trumps, or alternatively, is trumped by Wachovia's assertion that it has a fiduciary duty to its shareholders and debt holders to negotiate the best deal possible, even if it leaves the company legally vulnerable.

An important development in the case may occur on Monday when activist hedge fund operator William Ackman - whose Pershing Square Capital Management owns 7.8% of Wachovia - is expected to speak about the company at the Value Investing Conference in New York, weighing in on which deal is potentially better for shareholders in the long run, including factors other than just the higher acquisition price offered by Wells Fargo.

Lehman, WaMu steady

Also among the financials, a trader saw Lehman Brothers' bonds "level," with seniors like the 6 7/8% notes due 2018 at 12 bid, 14 offered, which he said was up ¼ point.

He meantime saw the WaMu 4% notes due 2009 unchanged on the day at 61 bid, 63 offered.

A trader saw Residential Capital LLC's 8½% notes due 2010 at 51 bid 55 offered, but said there was "not much activity" in the second-lien paper, while the company's unsecured bonds, like the 6½% notes due 2013 were at 19 bid, 22 offered, but "didn't have a lot of activity."

He saw Thornburg Mortgage Inc.'s 8% notes due 2013 at 45 bid, 50 offered, but "not much was traded."

And he saw bond insurer MBIA Inc.'s 14% surplus notes due 2033 at 52 bid, 58 offered, again on a "quiet " market with not a lot of activity.

GM, Ford lead autos higher

The prospect that the bailout bill will finally settle the markets helped the beleaguered bonds of the automakers, whose sales have taken it on the chin as the credit-crunch intensified.

A trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 up a point or 2 on the day at 35 bid, 37 offered, with a high quote of 36, "pretty close to where they went out."

He saw GMAC LLC's 8% bonds due 2031 at 36 bid, 37 offered, up 2 to 3 points from Thursday, while GMAC's 6 7/8% notes due 2011 were "up a couple of points" at 41 bid, 42 offered, on "definitely better buyers."

He also saw Ford Motor Co.'s 7.45% bonds due 2031 "up a couple of points, maybe 1 or 2," at 35.5 bid, 36.5 offered.

Another trader called the GM benchmarks 2 point winners at 34 bid, 36 offered, while Ford's bonds like its 7.45s were also 2 points higher at 36 bid, 38 offered.

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