Junk gets no boost from Fed; E*Trade up on 'insider' stock buys; Trump active on Mohegan interest report

By Paul Deckelman and Paul A. Harris

New York, Jan. 30 - The Federal Reserve, as expected, cut its key interest rates by another 50 basis points. However, the high yield bond market - which like other financial markets had widely anticipated such a step - was essentially unchanged in Wednesday's trading, although several participants opined that it could be a factor in Thursday's activity.

Among specific issues, E*Trade Financial Corp.'s bonds were seen better, in line with a jump in the New York-based on-line financial services company's shares, given a boost on the news that company officers and other "insiders" were making large stock buys - an apparent expression of their confidence in the recently troubled company's prospects.

There was active trading in Trump Entertainment Resorts Inc.'s bonds, helped by news stories indicating that the Mohegan Tribal Gaming Authority - operator of the wildly successful Mohegan Sun gaming palace in Connecticut - is in talks with Trump about the possible purchase of the latter's Trump Marina property. However, despite some volatile gyrations, the bonds were seen pretty much unchanged, price-wise, on the session,

Lin TV Corp.'s bonds were seen up about anywhere from 2 to 4 points, but traders were unaware of any news that might explain that upside motion.

On the downside, Quebecor World Inc.'s bonds were seen to have slid anywhere from 5 points to 7 points, although there were no fresh developments in the Montreal-based commercial printing company's recently filed bankruptcy case.

Primary market dealings, meantime, remained quiet.

Market measures send mixed signals

A trader saw the widely followed CDX index of junk bond performance off by 1/8 point on the session at 92 1/8 bid, 92 3/8 offered. The KDP High Yield Daily Index was up 0.12 on the day at 76.07, while its yield narrowed by 3 basis points to 9.08%. In the broader market, advancing issues led decliners by a not quite three-to-two ratio, while overall market activity, reflected in dollar volumes, was up about 6% from Tuesday's busy level.

The trader said that generally, "things sold off" in the junk market, in line with a late downturn in shares that wiped out what was up till then a solid rally generated in reaction to the Fed's 50 bps rate cut, which brought the Federal funds rate target down to 3%, a level unseen since about mid-2005.

It was "a weird day," another trader said, "even after the rate cut. He noted that the Fed action was announced during the afternoon, and speculated that after market participants had a night to sleep on the Fed action and the accompanying language in its communiqué, "it may spur things [Thursday]. Hopefully, it will be busier than [Wednesday]. We haven't had much to go on in the last couple of days."

E*Trade up on 'insider' buying

E*Trade Financial's 7 3/8% notes due 2013 were seen by a market source to have moved up to about 78 bid, a 2½ point gain on the day in active trading, some of it involving large blocks.

The company's other bonds were also seen better, its 8% notes due 2011 up about ½ point at 86.5 bid, while its 7 7/8% notes due 2015 moved up nearly 76, a gain of more than a point, though both on less activity than the '13s.

E*Trade's Nasdaq-traded shares jumped 10.14%, or 42 cents, to $4.56. Volume of 83 million shares was about 1½ times the norm.

The shares and bonds rose after the company revealed in a Securities and Exchange Commission filing Wednesday that company executives and directors bought some $1.9 million of E*Trade stock in recent days - a move interpreted by the financial markets as a vote of confidence in the company's prospects by those in the know.

E*Trade last week disclosed details of what it termed a "turnaround" plan, including cost cutting aimed at reducing expenses by over $360 million in the coming year. E*Trade will also divest some businesses and investments that are not related to its core brokerage business

The insider buying comes after the stock had lost about 80% of its value in the past year, after the company booked large losses connected to its mortgage business, and had to line up a cash infusion late last year from an investor.

According to the SEC filing, the single biggest buyer was E*Trade's chairman, Donald Layton, who spent about $1 million to purchase 245,800 shares for about $4.07 each. Another big buyer was the acting chief executive officer, R. Jarrett Lilien, who purchased 7,376 shares for about $4.07 per share, or about $30,000 total.

Trump jumps around on Mohegan report

Elsewhere, traders saw Trump Entertainment Resorts 8½% notes due 2015 as one of the more active issues on the day, although it really didn't do much, price-wise.

A trader said the bonds were up ½ point on the day at 72 bid, 73 offered, while a market source at another desk saw the bonds little changed at the end of the day at 71.5, although they had at some points during the session gotten as high as a 73-74 context.

One of the traders attributed the enhanced activity level to a report in New Jersey's largest newspaper, The Star-Ledger, indicating that the operators of the Mohegan Sun casino are looking to possibly expand their operations into Atlantic City.

According to the paper's report, executives from the Uncasville, Conn.-based Native American tribal gaming operation have been in talks with Trump executives on possibly buying the smallest of Trump's three Atlantic City properties, the Trump Marina. The paper attributed its information to several "people familiar with the talks who asked not to be identified be cause the discussions are preliminary." There was no confirmation of the report from either Trump or Mohegan.

The latter - whose Connecticut casino is considered to be highly profitable - has publicly stated its interest in expanding into the seaside Jersey town for some time, and is looking into a possible purchase of the problem-plagued Tropicana hotel and casino, which was placed under the control of a court-appointed receiver last year after its parent company, Tropicana Entertainment LLC, was denied a license renewal by the state Casino Control Commission. However, it has yet to make a formal bid for the property.

According to the news report, analysts believe that the Marina might be a better investment for Mohegan than the Tropicana because of its far smaller likely price tag - estimated at about $350 million versus the $800 million to $1 billion the Tropicana might cost.

Trump, which emerged from Chapter 11 reorganization in 2005, has struggled ever since, and last year made several efforts to sell all or at least part of its Atlantic City holdings, with no success due to the impact of the credit crunch on big financial deals as well as the company's own particular problems that might turn off would-be buyers, including its big debt load - some $1.5 billion - and potentially expensive bond covenants.

LIN is well-liked

Traders saw sizable gains posted by LIN Television's 6½% notes due 2013, which were seen by a market source to have gained some 2½ points to finish at 96.25. Another trader, quoting those bonds at 95 bid, 96 offered, saw them even better - up 4 points.

He said that he did not "really understand" why the Providence, R.I.-based television station ownership group's bonds are so strong, given a dearth of any real recent news about the company. A headline search turned up only a SEC filing relating to changes in the company's board of directors and an agreement allowing the re-transmission of signals from a LIN station in New Mexico - hardly the stuff, he said, of a big move.

Still, he noted, "they are up 4 points."

Quebecor bonds fall

On the downside, a trader said that Quebecor World's bonds "went on a ride", with its short-dated paper like the 4 7/8% notes coming due in May and the 6 1/8% notes due 2013 at 44 bid, 45 offered, down 5 points and the longer paper like its 9¾% notes due 2015 and 8¾% notes due 2016 at 47.5 bid, 49.5 offered, also down 5 points. "Figure they were down 5 points across the board."

Another trader saw the 4 7/8s at 44 bid, 46 offered, which he called down 7 points on the day. He said that there was noting fundamental going on, but attributed the price gyrations over the past several sessions to "technical" factors, including the need for bonds related to credit-default swaps trading.

MBIA notes back on the slide

Another downsider was MBIA Inc.'s 14% surplus notes due 2032, which had priced at par on Jan. 11 but which have been bouncing crazily around ever since then on investor concerns about the prospects for bond-insurance companies like MBIA and rival Ambac Financial Group Inc.

Those bonds - nominally investment-grade instruments now trading off the junk desks at many shops - had fallen as low as around 70 around mid-month on investor worries about the monolines, but had recently come back up to around the 93 bid, 94 offered level.

However, on Wednesday, they dropped to 85 bid, 90 offered, hurt by the news that Fitch Ratings had downgraded sector peer FGIC, while hedge fund manager Bill Ackerman said MBIA and Ambac will likely lose $11.6 billion from their exposure to mortgage-related debt - well above the firms' forecasts.

Primary quiet

There was no news during Wednesday's primary market session.

A money manager, parsing news that the Federal Reserve Bank's Federal Open Market Committee decreased the benchmark Fed Funds interest rate by 50 basis points, suggested the cut stands to have negligible impact on junk, adding that presently, with the volatility in the credit markets, the buy-side remains hunkered down.

Wednesday's 50 basis points cut - which passed on a nine to one vote, with Dallas Fed President Richard Fisher voting for no cut - follows a 75 basis points cut on Jan. 22.

The combined 125 basis points of Fed Funds rate reduction over the course of eight days takes the benchmark to 3%, down from 5¼% in September 2007.

A mild positive

The money manager who spoke to Prospect News on Wednesday said that the Fed's rate cut will initially be a mild positive in the high quality end of the credit markets because it will allow borrowers with strong credit to borrow money more cheaply, and allow prime homeowners the possibility of lower adjustable rates on their mortgages.

"But that will take a while to feed over into the rest of the economy," the institutional investor cautioned.

Meanwhile, for the bottom tiers of the market, wherein reside junk bond issuers and subprime mortgage borrowers, there really won't any benefit from the Fed cut, especially in light of mounting data suggesting the U.S. economy has significantly slowed.

"The risk premium may narrow very slightly, but the market is going to remain very risk averse, especially with respect to the riskiest part of the market," the investor warned.

However, this buy-sider added that lately in conference calls companies with good balance sheets and credit ratings, and with reasonable prospects of weathering an economic downturn, have given guarded outlooks primarily because of uncertainties as to whether they will be able to raise capital in the credit markets.

"This [rate cut] removes some of the uncertainty there," the buy-sider said.

"It improves business psychology and consumer psychology."

Order in the ranks

Also on Wednesday, sources continued to parse recent developments in the Harrah's Entertainment Inc. LBO financing.

Harrah's priced a downsized $6.335 billion amount of senior notes (B3/B-) in two tranches on Monday, around the same time that sponsors Apollo Management LP and TPG Inc. announced that they had closed the $17.1 billion LBO of Las Vegas-based Harrah's.

The bond sale included approximately $4.9 billion of eight-year senior cash-pay notes which were priced at par to yield 10¾%.

Also included was an approximately $1.4 billion tranche of 10-year PIK toggle notes which were also priced at par to yield 10¾%, with a 75 basis points PIK toggle step up.

The financing also includes a three-tranche $7.25 billion term loan.

A syndicate of banks was attempting to syndicate a $3 billion tranche of that Libor plus 300 basis points term loan by discounting the price to 96.50.

On Wednesday one sell-side source, not in the Harrah's deal, told Prospect News that the Harrah's term loan broke at 94.00, and was trading at 92.00.

"The underwriters are on the hook for it," the source said.

"From what I understand they've broken ranks on the loan, and it's a free for all.

"On the bond side we hear that they are actually maintaining some discipline."

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